Luke Wyse - VP, Finance & IR Aaron Graft - Vice Chairman and CEO Bryce Fowler - Executive Vice President and CFO Dan Karas - Chief Lending Officer

Jared Shaw - Wells Fargo Brad Milsaps - Sandler O'Neill Christopher Nolan - FBR Jefferson Harralson - KBW

Good day, ladies and gentlemen, and welcome to the Triumph Bancorp Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host for today's conference Mr. Luke Wyse, Vice President, Finance and Investor Relations. Sir, you may begin.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our fourth quarter and 2016 annual financial results. I am Luke Wyse, and I would like to thank you for joining us this morning. I will go over a few housekeeping items and then hand it over to Aaron Graft, our CEO, to lead the presentation. Triumph Bancorp filed its fourth quarter and 2016 annual earnings release last evening as well as a slide deck and these items will form the substance of our call this morning. If needed, copies of the earnings release and slide deck are available on the Investor Relations section of our website at www.triumphbancorp.com or by calling our Investor Relations department at 214-365-6936. To begin, I would like to offer a few reminders. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Act. We caution you that forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although, we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results or events may differ materially from those expressed in or suggested by the forward-looking statements. Any forward-looking statement made by Triumph on this conference call speaks only as of the date hereof, new risks and uncertainties come up from time to time and it is impossible for Triumph to predict these events or how they may affect it. Triumph has no obligation and does not intend to update forward-looking statements after the date hereof except as required by applicable law. On this call we may discuss a number of financial results -- a number of financial results measures considered to be non-GAAP under SEC rules. Reconciliations of these financial measures with GAAP are included in the earnings release and slide deck filed last evening. At the conclusion of our remarks we will open the telephone lines for Q&A. With those reminders, I would like to turn the call over to Aaron. Aaron?

Thank you, Luke. We are pleased to report on our 2016 year-end and more specifically our fourth quarter results. I will give you some general thoughts, hit five specific things I think are relevant to our investors and then talk about our M&A activities as well as our thoughts about 2017. Bryce will cover the financial results more in depth and then we are happy to take your questions. So, without further ado, my general assessment is that the fourth quarter represents another step in our journey forward. Our earnings grew and our asset quality improved. This is always a positive, but we have many steps yet to go-forward in our journey and we want to take bigger and bigger step. That is our goal for 2017 to go father faster. And I believe the ground work for that has been laid. Now onto the five specific points I think investors should care about. First, the Colo East transaction has performed in line with our financial and operational expectations. We are realizing the expecting cost savings in this transaction. The operational integration is going as expected and we successfully completed the Colo East core system conversion during the fourth quarter. Second, total loan growth is in line with our expectations. Our loan portfolio grew organically by $68 million in the fourth quarter, representing an annual growth rate of just under 14%. Of this growth, approximately $24 million was in our higher yielding purchased factored receivable. Our loan portfolio has now surpassed the $2 billion level and we remain optimistic about our further growth opportunities. I think we will see continuing loan opportunities in 2017. Of specific note is the opportunity to grow our CRE portfolio. We are well below the regulatory concentrating guidance in this area and we have seen other lenders pullback as they have come up against that threshold which is slightly tipped the scale back in our favor on the terms we are able to achieve. Third, factoring a still fun. Triumph Business Capital, our factoring subsidiary, continued to perform well. The dollar value of invoices purchased the Triumph Business Capital this quarter increased $36 million over the prior quarter to $524 million. And we continue to gain market share as we have added 76 net new clients in the fourth quarter and 330 net new clients for the year. We are also starting to see other positive trends as the average invoice size purchase this quarter increased to $1,366 versus $1,291 in the prior quarter, an increase of nearly 6%. And the number of invoices purchased increased from 378,000 to 384,000 in the current quarter. For the year 2016, we purchased over 1.4 million invoices. Total factoring revenue at Triumph Business Capital increased this quarter by $723,000 or 8% over the previous quarter to $9.9 million and with $35.1 million for the year. Consistent with prior experience, we expect a seasonal decrease in Q1 of 2017 in this business. But we are optimistic that the absolute dollar effect on the business will be mitigated by an increase in average invoice size and by a marginally stronger economy. Fourth, our margins remain in line with our long term goal. If you have followed Triumph for any period of time you know that we consistently produced margins at the top of our industry. Our adjusted yield bond loans and adjusted net interest margin which excludes the impact of purchased loan discount accretion decline slightly quarter-over-quarter due to the full quarter effect of a shift in our loan mix from the Colo East acquisition. As we discussed last quarter a result of that transaction was a decrease in the percentage of commercial finance loans to total loans down to 33%, even though the actual balances of our commercial finance portfolio increased. Our commercial finance portfolio is up $56 million in the fourth quarter to 34% of total loans at December 31, 2018. For the year, we grew our commercial finance portfolio $173 million or 33% year-over-year. Fifth, credit quality has improved. It is still not where we wanted to be, but it has improved. Our ratios of past due loans, non-performing and non-performing assets all experienced positive movement in the fourth quarter. That being said, we still have work to do in the area as our provision for loan loss was $2.4 million in the fourth quarter and we reported $2 million of net charge-offs or 10% basis point of average loans for the quarter. Part of our provision was due to the loan growth we experienced during the quarter and of the quarter $2 million in charge-offs approximately $1 million of the losses were previously reserved for. We also recorded a net increase in some of our ALLL factors to reflect recent asset quality trend that increase the provision by about $500,000. Our agricultural customers are still experiencing headwinds, but we know that as long as people eat food grown by farmers this will be a core part of our economy, and we remain committed to it. The same holds true for energy, transportation, commercial real estate, et cetera. All these markets will experience volatility. The key for us is to have the credit discipline in the diversity of business line, so that we are profitable through the cycles. So those are my five specific points. Now onto M&A opportunity. On the acquisition front, we continue to be in search of opportunities that we believe would enhance our franchise values. These include infill acquisitions within or adjacent to our current branch footprint. This includes Iowa, Illinois, Colorado, Kansas and adjacent markets. We are looking for depository institutions or branch acquisitions that will improve our retail funding and elevator our position within these markets. We also expect these transactions to improve our overall operational efficiency. Second, we continue to evaluate expansion in the Texas market, specifically West Texas. We have been fans of West Texas for several years and have come close in the past. Almost 40% of our investors have West Texas roots. Contrary to popular sentiment, we like energy exposure and expected to be a growing portion of our portfolio. While it will never be our primary business, we think West Texas energy producers are the best house in the energy neighborhood and if there is an opportunity especially with our factoring and commercial finance discipline to fill the vacuum and use our currency to create shareholder value. We also continue to evaluate retail expansion into our DFW market. We have a significant commercial loan portfolio in the DFW market due to the depth of our relationships here. We also have commercial deposit customers in this market. We do not have a full service retail operation in Dallas, but it is something we continue to evaluate. Lastly, we always evaluate bolt-on acquisitions for our commercial finance lines of business. In closing, we are excited about 20170. We expect our core earnings to continue to grow. We hope to announce and possibly close multiple acquisitions. Our recent stock appreciation has made those opportunities far more compelling. We also cross our figures for corporate tax reform given our high marginal rate, but we stopped short of holding our breath. We look at every new every new opportunity through the lens of achieving our long term goal of being a geographically diversified community of bank and achieving a core return on assets of 1.5% or better. We are committed to serving our community banking customers in a nationwide network of small businesses focused on the transportation, healthcare, manufacturing, distribution, agriculture, and staffing industries. At this point, I would like to turn the call over to Bryce to provide his thoughts on our financial performance in the fourth quarter. Bryce?

Thank you, Aaron. For the year ended December 2016, net income to common stockholders was $19.8 million or $1.10 per diluted share, adjusted to exclude approximately $1.4 million of tax affected Colo East acquisition cost expense during the year our 2016 diluted earnings per share were $1.17. For the fourth quarter of 2016, we earned net income to common stockholders of $6.1 million or $0.33 per diluted share. Net income to common shareholders improved from the third quarter by $1.6 million or $0.8 per share. As a reminder comparisons the fourth quarter versus third quarter results on the statement of income are significantly impacted by the acquisition of Colo East which closed on August 1. So, third quarter operating results include the acquired Colo East operations for only two months and also include $1.4 million of tax affected acquisition cost. Net interest income for the fourth quarter increased $3.1 million or 10% over the prior quarter. The yield on loans this quarter was 7.36%, a decrease of six basis points from the third quarter. The adjusted yield on loans which excludes the impact of approximately $2.6 million of purchase loan discount accretion recorded in the fourth quarter was down 28 basis points to 6.82%. These declines are largely attributable to the inclusion of Colo East for the full fourth quarter. As of December 31, we had $16 million remaining loan purchase discount of which we currently expect $12.2 million to accrete into income over the remaining life of the acquired loans. Of this accretable amount $5.5 million is expected to accrete by the end of 2017. Regarding interest expense, the cost to total deposits improved decreasing by three basis points this quarter to 54 basis points. Our total cost of funds increased by 12 basis points in the fourth quarter primarily due to the interest cost incurred on the $50 million of subordinated notes we issued on September 30. We earned non-interest income of $6.2 million for the fourth quarter. In addition to Colo East we experienced a $330,000 increase in insurance commission revenue as a result of the Southern Transportation Insurance Agency acquisition on September 1. Non-interest expense increased $1.1 million from prior quarter to $26.9 million. Third quarter expenses included $1.6 million of pretax cost associated with closing the Colo East transaction. Items included in the overall quarter-over-quarter increase in expense include approximately $600,000 in rebranding conversion and integration related cost of Colo East, about $5.5 million in loan legal cost incurred on problem credits, a $300.000 increase associated with the Southern Transportation Insurance Agency acquisition and, of course, inclusion of Colo East for full quarter. With respect to the cost savings expected from the Colo East acquisition, we have realized anticipated staffing reductions, the last of which was completed in December. I estimate about 75% of total -- expected total cost savings have been realized as of the end of December. With that, I would like to turn the call back over to Aaron.

Thank you, Bryce. At this time we will turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Jared Shaw with Wells Fargo. Your line is open.

Hi. Good morning.

Good morning, Jared.

Could you just give an update on sort the outlook? I know on the CLOs, I know there is an arm's length relationship, but sort of your thoughts on how things are going over there in terms of growth.

Sure. I suspect that CLO issuance will -- the market as a whole will do well this year. I believe that Trinitas will be in line to benefit from that. So hopeful that will -- the Trinitas will issue a couple of deals this year and hopeful that we will be retained the staff and services provider for those deals should that happen.

Okay. All right. Thanks. And then on your comments on the M&A side, specifically looking at the comments around the bolt-on deals for commercial lines, as we look in the past why really -- what is holding up factoring M&A sort of in the space overall? You have mentioned in the past how fragmented the market is. It seems like it would be a really ripe market to just be able to have a couple acquirers go in and pick up some smaller players. Is there any -- can you give a little discussion around the background on some of the deals -- or the opportunity for deals there?

Sure. Sure. A couple of things. Number one, just know that until recently we have been believers that our stock price has been undervalued and so we have a great deal of hesitancy using as it currently for a transaction where we think that -- when we think it’s not value where we would value it. So that is something that's changed. Speaking the factoring specifically, it is an incredible fragmented industry. And I think Jared, we are probably number three in the country right now, probably the third largest when you focus on transportation exclusively. So, if you look at the top seven or eight companies out there, after you get pass those, it fall off pretty dramatically. So, there are opportunities to -- obviously if you could do a transaction with one of the larger players out there, it would be pretty dramatic growth. If you talk about the remainder of the universe which might include up to 100 active factors if you are talking -- or 200 active factors if you are talking about transportation specifically, there is a lot of small ones. And so what we have been able to do thus far is achieve our growth just to, in my view, building a better mousetrap. And some of the technology things that we have just began to rollout like Triumph PayMy Triumph, providing a mobile app to our truckers that those things -- we're taking market share organically as it is. So, it’s not that we cannot do deals in that space, it’s just that we have wanted the way until our stock price appreciated, we wanted it to be big enough to make sense. I don’t know if it make sense for us to go buy a $5 million or $10 million book of business, given the size of our business now, just the integration and operational and credit risk you would take to under-write that probably doesn’t move the needle. So if we are going to do something in the commercial finance space, it’s going to be need to be large enough to matter.

Okay. Great. That's good color. Thanks. And then just finally, when you talk about the opportunity for CRE growth, are you positioned -- are you sort of staffed up to start seeing that growth and would that be self originated CRE or are you talking more an opportunity to participate in shared CRE credits?

Definitely not talking about shared credit. Dan -- I am going to have Dan Karas, our Chief Lending Officer, speak to our staffing and ability to grow that portfolio organically and what we have even done in the past.

Good morning. As Aaron mentioned previously we have not found opportunities that met our risk return profile and have been cautious in pursuit. But over the past six months we have found some terrific opportunities in multi-family, in some acquisition construction development and we have staffed appropriately. So, we are not inclined to look to buy participations and other deals, but originate an agent and hold ourselves, but feel we are comfortable where market has moved and the staff we have to execute.

Okay. Thank you.

Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.

Hi. Good morning, guys.

Good morning, Brad.

Good morning.

Hey, Aaron, could you talk a little bit about the growth in asset based lending this quarter? It was up quite a bit from September 30 and certainly on a year-over-year basis. Just what are you seeing there, any bigger credits or just -- is that just more a function of your team really starting to gain traction there and pushing some relationships across the finish line?

Good morning, Brad. It’s Dan. It’s a little bit of both. We have the team and the profile is better established. We have seen an increase in number of clients, slight increase in size of relationship. One of the benefits of having some history at this point as we have current relationships that have grown and so facility size has increased which drives growth as well. So, it’s been a nice balanced approach and we feel pretty comfortable that we are achieving the yields that we have been for in the past and those have not changed either.

Okay. And then maybe on the other side of the balance sheet, there was a fair amount of growth in non-interest bearing demand. Curious if that was more kind of a year-end run up or are you guys finding new sources of low cost deposits that you have been able to add to the balance sheet?

Hey, Brad. It’s Bryce. I will take that one. There is -- that's really a function kind of seasonal factor, mostly around municipal deposit, those types of things. It would not be fair to say that like we have found a better mousetrap all of a sudden in consumer checking growth there.

Okay. Great. That's helpful. And then Bryce, just may be sticking with you for a second, I think and I heard your comments around expenses, there were several, maybe -- and I don't think you called them out in the release, but in your commentary some acquisition related costs, some restructuring costs that maybe totaled up $900,000 and then there was maybe $500,000 of additional kind of workout expense related to some of the problem credits. Do I have that correct for the fourth quarter or did I mishear that?

Yeah. You got it about right. Let me kind of recount that. We have got in total about $600,000 of cost kind of rebranding conversion integrated related cost on Colo East. We also had an increase quarter-over-quarter the operating cost associated with Southern Transportation Insurance Agency that we have acquired September 1. And then you did hear it right…

…which was about $300,000.

About $300,000. Excuse me, I forgot the number there. But about $0.5 million in legal cost. There is always a little bit of that. But that's unusual number for us there.

Okay. It sounds like the 300 from the -- would -- that is ongoing costs, right? But the other might -- certainly the 600,000 would reverse out and then some portion of the 500,000?

Yes.

Okay.

Yeah. So maybe that the way to look at it would be to say there was $617,000 that you would almost think of as part of the acquisition, but it was more about integration and conversion. The $0.5 million in legal expenses from problem credits we don’t expect to run at that rate consistently. There will always be some, but that -- it just as also a lot of that expense ended up in this quarter.

Great. That's helpful. And maybe just one final one. Dan, any update on the three larger credits that got added in non-accrual last quarter?

Great question. The -- two of those are foundry related. One has the CRO in place and its operations are improving, so we are cautiously optimistic. We are happy with the progress. The second foundry is in liquidating Chapter 11. We expect to have resolution by the end of the quarter. On that situation feel pretty comfortable with the outlook at this point. And then the other is healthcare related and part of the charge-off in Q4 is related to that, but we are at this point feel like we are properly reserved and working out of that situation. So, hope that helps Brad.

Yeah. Thank you, guys.

[Operator Instructions] Our next question comes from the line of Christopher Nolan with FBR. Your line is open.

Hi. Thanks for taking my questions. On the net charge-offs, is that a different credit from last quarter or is this the same credit?

A part of the charge-offs one in particular was a healthcare client that we had identified as a problem, but felt we need to take the charge-off in the quarter. And the others are just sort of ongoing normal client challenges.

And how big was the healthcare charge-off?

About $887,000, a $300,000 that have been reserved in the prior on exclusive [indiscernible], but charge-off close to about 80.

Got you. And Bryce, did I hear -- understand correctly that the adjusted loan yields decreased 28 bps. That is really just the inclusion of Colo East?

Yeah, just math aside that portfolio was $490 million or so and is coming on at still net coupon rate as lower than our average before. So including it for full three months and so just two months in prior quarter diluted that the overall yield down.

Okay.

Hey, Chris, before you transition on it -- this is Aaron. Free transition I think we did not accurately answer your question about the healthcare credit and when those charges we're taking. So, Dan, can we clean that up?

Well, the charge-off in the fourth quarter that I referenced is $887,000 and that is the healthcare relationship I mentioned. And we had about 300 reserved in the third quarter and that was unrelated healthcare relationship and that charge-off was $1.4 million. I hope that answers the question.

Yeah. Okay. Great. Thank you very much. And I guess Aaron, strategically, I mean, I know you guys are looking for deals and so forth. Has the expectations for sellers really changed? Are they looking for more cash or are they more inclined to take stock? I mean what sort of -- how would you characterize the sellers' expectations and deal that you are looking at?

Yeah. I think from the sellers we are talking to, it is entirely dependent upon what their desires are. We have some sellers where there is strong demand for cash, maybe they have been in the deal long time, there are others who really like our stock and want to ride along. As you might expect, we are probably not looking at publicly traded acquisition targets that themselves traded two time book. So I would say that the expectation of the sellers we talked to is a little bit muted maybe from what you heard other potential acquirers talk about in the marketplace, because maybe we look at location, they don’t look at or we pursue less well known opportunities. But certainly they know that we've experienced appreciation in our stock. They are least like to see a percentage of that. I do think the run up in our stock probably has made our currency in an interesting way more appealing to some of them as we have approached to $500 million market cap and the liquidity you have seen in the last 60, 90 days and the shares trading, those have all been viewed positively by the people that we are having discussions with.

And I guess as a follow-up, I mean given where you are looking at the M&A picture right now and given where your loan to deposit ratio is close to 100 and so forth. Are we -- do you anticipate any slowdown in terms of your balance sheet growth in 2017 or are you anticipating a fairly steady percentage growth rate as you saw in 2016?

No, I don’t anticipate any slowdown.

Okay. Thank you very much for taking my question.

You are welcome.

[Operator Instructions] Our next question comes from the line of Jefferson Harralson with KBW. Your line is open.

Hi. Thanks. Good morning. I wanted to ask you about the average invoice….

Good morning.

I wanted to ask you about the average invoice size on the trucking invoices. Is it up this quarter? Were gas prices on the diesel side up enough to move that invoice size?

Yeah, the function of that moving up is a correlation between freight rates being slightly higher and then diesel prices being higher.

And how much was the average invoice? I may have missed it.

For the quarter, it was…

$1,366.

Okay.

And Jefferson, just some commentary around that, $1,366 for the quarter. Right now invoices are running about $1,415 since the beginning of the year. If you were to look back a year ago at this time, invoices were running about $1,324. So you can just see -- and we have no predictions what will happen through the end of 2017. But the invoice size has strengthened from this time last year and continue to strengthened even after the fourth quarter.

Okay. And a lot of predictions you would expect invoice for, I guess, a number of invoices to grow too in 2017 versus 2016?

Absolutely. Unequivocally, yes.

Okay. Okay. And again, I came on a little late. I may have missed this, too. A big picture question. You have been talking about getting to $0.50 in the fourth quarter of next year. In the quarter, I need to go back and back out some of these one-time costs, but on the surface it looked a little soft. Do you still think you can get to the $0.50 number next year?

Yes. Now, there are a lot of things we don’t control. But if that -- if we didn’t believe that were the case I would be the first to tell you. I mean, here is what I would say. In the fourth quarter there are some unique things that flown through. There are still some synergies yet to achieve with Colorado East. We had some other interesting things as we change the factors around some of our reserving methodology and we did so appropriately. But I don’t know that we will see those in this coming year. For us, my view of our provision expense for this quarter while it was in line with the previous quarter and where I believe the analyst model have us, it is way higher than we are used to running this institution or where we believe we will run it in 2017. The loan growth pipeline looks very strong. We expect -- we don’t know what will happen and, of course, we might be one tweet away from some economic disaster. But assuming that doesn't happen things pretty good for us. And I suspect Jefferson that along that path there is some M&A deals included in there. And given where our stock price trades, they should be pretty accretive. So we know we have got a long way from where we sit right now, the $0.50 a share, but that is the goal and we're running hard and still under the belief that we are going to get there.

All right. Outstanding. And one last one is on the share count. It jumped up, just because the stock price is higher. You also had some preferred dividend expense that was coming through. Can you just talk about the -- that sensitivity there? And I suppose if the share price stays here, then the stock price and the share count stays up here, too and that is factored into the thoughts you were just talking to as well.

This is Bryce. Let me attempt to address. I think you had it right there that the diluted earnings per share of the denominator for the number of shares certainly with the earnings that they are at, the biggest impact is under the -- as converted method there. I think basically the math becomes when our ROE, return on common equity goes above the 8% coupon rate on the preferred, a shorthand accounting, but basically those will be dilutive in that calculation, and so that thus push those over. And the other items that are listed out, that is why we put that EPS table in the release. So, you can see that. The other items are largely driven by the stock price appreciation that causes those to jump into there. The preferred dividend let me address that, so that's really not a deferred dividend. It is just the dividend that was paid on the preferred, it’s been paid every quarter you see it on the face of the income statement coming down to net income to common. It is just that when you do the diluted calculation, you add back that to earnings to do the diluted EPS count, because it as they had converted and didn’t exist, right? That's good old GAAP accounting stuff.

Got it. Thank you, guys.

You bet.

Thank you. And I am showing no further questions at this time. I would like turn the call back to Mr. Graft for closing remarks.

Yes. Thank you all for joining us. We look forward to 2017 and hope you have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.