Triumph Bancorp, Inc. (now identified in the request as Triumph Financial, Inc.) — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; year-to-date comparisons are for the nine months ended September 30, 2019. The filing registrant is named Triumph Bancorp, Inc. and reports Banking, Factoring, and Corporate segments. Unless stated otherwise, dollar amounts below are in millions.
Business context
The company is a Dallas-based financial holding company operating through TBK Bank and subsidiaries. Its activities include community banking, commercial finance and factoring—principally transportation receivables—and national lending products such as mortgage warehouse, liquid credit, and premium finance. The filing attributes growth to organic lending and the prior-year acquisitions of First Bancorp of Durango, Southern Colorado Corp., and Interstate Capital; the healthcare finance business was sold in 2018.
Financial results and position
- Q3 earnings: Net income was $14.3 million, versus $9.2 million in Q3 2018; diluted EPS was $0.56 versus $0.34. Q3 2018 included $5.9 million of acquisition-related transaction costs. On the company’s non-GAAP adjusted basis, diluted EPS was $0.56 in Q3 2019 versus $0.51 in Q3 2018.
- Year-to-date earnings: Net income was $41.8 million versus $33.6 million; diluted EPS was $1.59 versus $1.35. Adjusted diluted EPS was $1.59 versus $1.53, excluding specified prior-year acquisition costs and the healthcare finance sale gain.
- Revenue and credit costs: Q3 net interest income rose 4.9% to $64.8 million; provision for loan losses fell to $2.9 million from $6.8 million. Q3 noninterest income was $7.7 million, up 27.8%, and noninterest expense was $52.2 million, up 6.6% as reported. For the first nine months, net interest income rose 16.8% to $189.5 million, provision declined to $7.6 million from $14.3 million, noninterest income increased 41.6% to $22.9 million, and noninterest expense increased 25.8% to $151.4 million.
- Margins and returns: Q3 net interest margin was 5.85%, down 74 basis points year over year; year-to-date margin was 5.99%, down 36 basis points. Management cited lower loan yields and higher deposit and borrowing costs. Q3 return on average assets was 1.17% and return on average common equity was 8.79%.
- Balance-sheet growth: Total assets were $5.040 billion, up $479.9 million from year-end 2018. Loans held for investment were $4.209 billion, up $600.8 million (16.6%); deposits were $3.698 billion, up $247.5 million (7.2%). Mortgage warehouse loans grew 87.4% to $587.7 million, partly reflecting seasonal client utilization.
- Liquidity and cash flow: Cash and cash equivalents were $115.0 million, down from $234.9 million at year-end. For the first nine months, operating cash flow was $56.5 million; investing cash outflow was $583.4 million, mainly reflecting $603.7 million of net loan growth; financing cash inflow was $407.0 million, including deposit growth and $200.0 million of additional FHLB advances.
- Funding and debt: FHLB advances increased to $530.0 million from $330.0 million; subordinated notes were $49.0 million and junior subordinated debentures $39.4 million. Interest-bearing deposit cost rose to 1.49% in Q3 from 1.08% a year earlier. The company reported $619.2 million of unused FHLB borrowing capacity and $137.5 million of unsecured federal funds lines, with none drawn.
- Capital: Stockholders’ equity was $633.7 million, down $2.9 million from year-end, primarily due to $49.9 million of share repurchases, partly offset by earnings. At September 30, the company reported total risk-based capital of 11.79%, Tier 1 risk-based capital of 10.08%, and common equity Tier 1 of 9.26%; TBK Bank exceeded the regulatory “well capitalized” thresholds.
Material changes, outlook, and risks
- Loan growth was broad, while factoring balances were lower at period-end than year-end 2018. Management said transportation demand had moderated from the unusually strong 2018 market and invoice sizes had declined; factoring still had an 83% transportation concentration.
- Asset quality showed some deterioration in selected measures: nonperforming assets rose to $45.9 million from $38.3 million, and the nonperforming-assets-to-total-assets ratio increased to 0.91% from 0.84%. Nonperforming loans were 1.00% of loans at both dates; past-due loans were 2.47% versus 2.41%. The allowance was $31.9 million, or 0.76% of loans. Management reported $26.7 million of potential problem loans outside nonperforming categories.
- The prior-year comparison includes a $4.0 million charge-off on a single asset-based lending relationship, which management attributed to suspected borrower-employee fraud. The filing also reports higher specific reserves during 2019 and identifies loan-loss estimation as a critical accounting judgment.
- Management provided no specific earnings or financial guidance. It described liquidity as adequate and stated that the company and bank met capital requirements. Interest-rate sensitivity modeling showed estimated net interest income rising 3.4% over the following 12 months under a +100-basis-point shock and falling 4.4% under a -100-basis-point shock; management cautioned that actual results can differ from model assumptions.
- CECL was scheduled for adoption January 1, 2020. Management expected no material change to allowance or retained earnings at adoption, with a slight increase expected for real estate portfolios and slight reductions for commercial and factored receivables; the ultimate effect remained dependent on portfolio composition and economic forecasts.
- Subsequent to quarter-end, the board authorized up to $50 million in additional stock repurchases, and TBK Bank signed an agreement to invest $8 million in Warehouse Solutions, Inc. The ICC acquisition-related contingent consideration had a fair value of $21.4 million at September 30, with a contractual payout range of $0–$22 million.
- Key disclosed risks include credit quality and loan concentrations, transportation-sector exposure, interest-rate and funding-cost changes, liquidity, acquisition integration, competition, cybersecurity and systems, and regulatory or capital requirements. Management reported no material change to the risk factors in its 2018 Form 10-K, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth and the expansion in mortgage warehouse balances persist, and how much is seasonal versus sustained.
- Trends in nonperforming and past-due loans, specific reserves, charge-offs, and the $26.7 million of potential problem loans.
- Whether deposit pricing and borrowing costs continue to pressure net interest margin, particularly as certificates of deposit mature.
- Factoring performance amid more normalized transportation demand, including receivables quality, client activity, and transportation concentration.
- The eventual CECL adoption impact, ICC contingent consideration settlement, and execution of the newly authorized repurchase program and WSI investment.