Business context and reporting period
Registrant: Triumph Bancorp, Inc. (the filing’s name; the request metadata says Triumph Financial, Inc.). This Form 10-K covers the fiscal year ended December 31, 2015, with unaudited quarterly data, including Q4. The company was a Dallas-based financial holding company operating community banking, nationwide commercial finance and factoring, and CLO asset management businesses. At year-end, it reported $1.691 billion of assets, $1.292 billion of loans held for investment, $1.249 billion of deposits and $268.0 million of stockholders’ equity. Revenue mix, excluding the bargain purchase gain, was 65% Banking, 29% Factoring, 5% Asset Management and 1% Corporate.
Financial and operating metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Interest income | $98.8 million | $87.2 million |
| Net interest income | $90.7 million | $80.5 million |
| Provision for loan losses | $4.5 million | $5.9 million |
| Noninterest income | $33.3 million | $24.8 million |
| Noninterest expense | $81.9 million | $69.2 million |
| Net income | $29.1 million | $19.8 million |
| Net income available to common stockholders | $28.4 million | $16.9 million |
| Diluted EPS | $1.57 | $1.52 |
| Adjusted diluted EPS (non-GAAP) | $0.80 | $0.82 |
| Net interest margin | 6.49% | 6.67% |
| Adjusted net interest margin (non-GAAP) | 6.16% | 5.93% |
| Efficiency ratio (non-GAAP) | 73.59% | 74.73% |
Net income rose 47%, but included a $15.1 million nontaxable bargain purchase gain from the Doral Money acquisition. The prior year included a $12.6 million pre-tax gain on the sale of the Pewaukee branch. Management’s non-GAAP adjusted net income available to common shareholders was $14.3 million in 2015 versus $9.1 million in 2014; adjusted diluted EPS declined to $0.80 from $0.82. These adjustments exclude specified acquisition-related and other discrete items and are not GAAP measures.
- Growth and returns: Total assets increased 16.8% and loans held for investment increased 28.4% year over year. Return on average assets was 1.89% versus 1.46%; return on average common equity was 11.44% versus 11.61%.
- Commercial finance: Balances grew 39% to $521.0 million, about 40% of the loan portfolio. Factored receivables were $215.1 million; equipment loans $149.0 million; commercial asset-based loans $75.1 million; healthcare asset-based loans $80.2 million; and premium finance loans $1.6 million.
- Asset management: CLO assets managed were $1.880 billion at year-end; 2015 asset management fees were $5.6 million versus $1.0 million. The company acquired management contracts for two CLOs with approximately $700 million of assets and closed another CLO offering of approximately $409 million.
- Credit quality: Nonperforming loans fell to $13.4 million (1.03% of loans) from $16.7 million (1.66%); nonperforming assets declined to $18.5 million (1.10% of assets) from $25.1 million (1.73%). The allowance for loan and lease losses was $12.6 million, or 0.97% of loans and 94.1% of nonperforming loans. Potential problem loans rose to $13.9 million from $2.2 million.
- Liquidity, funding and debt: Cash and cash equivalents fell to $105.3 million from $160.9 million; deposits grew to $1.249 billion from $1.165 billion. FHLB advances rose to $130.0 million from $3.0 million. Junior subordinated debentures had a $24.7 million carrying value ($33.0 million face value); customer repurchase agreements were $9.3 million. The company disclosed $150.3 million of unused FHLB capacity and $107.5 million in unsecured federal funds lines, with none drawn.
- Cash flow: Operating activities provided $25.3 million; investing activities used $389.1 million, including loan growth and the Doral acquisition; financing activities provided $308.2 million. Cash declined by $55.6 million during the year.
- Capital: TBK Bank’s regulatory ratios exceeded “well-capitalized” thresholds: total capital 14.8%, Tier 1 risk-based capital 13.9%, common equity Tier 1 13.9% and Tier 1 leverage 12.7%.
Material changes versus the prior comparable period
- Net interest income increased 12.7%, mainly from higher average earning assets and growth in commercial finance and mortgage warehouse lending. Net interest margin contracted 18 basis points as asset yields declined and funding costs rose; adjusted margin, excluding acquired-loan discount accretion, improved 23 basis points.
- Noninterest income increased 34.4%, driven in part by the Doral bargain gain and higher CLO management fees. Noninterest expense rose 18.3%, reflecting growth investments, staffing, public-company costs and bank-system conversion expenses.
- Commercial finance growth was organic. Lower oil and freight prices reduced average transportation invoice size, although client counts and factoring balances increased.
- On October 1, 2015, the company merged its two subsidiary banks into TBK Bank, SSB. It also exited residential mortgage production in Q4, citing compliance and operational risks relative to profitability.
- Q4 2015 net income was $4.5 million and diluted EPS was $0.24; Q4 included a $0.9 million bargain purchase gain. Quarterly results are unaudited.
Outlook, commentary, risks and unusual items
- Management said it saw continued opportunity to grow commercial finance and CLO-related fee income, but also noted increased competition and pricing pressure. It expected acquired-loan discount accretion to decline over time and anticipated commercial finance growth could partly offset that effect. The filing gives no quantified earnings or revenue guidance.
- Key exposures include transportation factoring concentration (82% of factoring receivables were tied to trucking clients), fraud risk in factoring and asset-based lending, relatively unseasoned loan portfolios, geographic and industry concentrations, and sensitivity to interest rates and economic conditions. Texas, Illinois and Iowa represented 75% of non-factored gross loans.
- CLO growth faces risk-retention requirements expected to apply from December 24, 2016, potentially requiring a 5% retained interest; management described a planned services relationship with Trinitas Capital Management and possible minority investment. The company had $21.3 million invested in CLO warehouses at year-end, versus $2.5 million a year earlier.
- A trademark infringement suit filed in February 2015 sought damages and an injunction affecting use of “Triumph”; trial was scheduled for October 2016. Management said it did not believe ordinary-course legal matters would materially affect the company.
- The company reported no common-stock cash dividends and said it did not expect to pay them in the foreseeable future. The financial statements received an unmodified independent audit opinion; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not attest to internal control, citing the company’s emerging-growth-company transition relief.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS to adjusted results, especially the Doral bargain gain and the prior-year branch-sale gain.
- Track performance and reserve adequacy in factoring and other commercial finance portfolios, including the increase in potential problem loans and transportation-industry exposure.
- Assess the impact of higher FHLB borrowings, deposit mix and maturities, and CLO warehouse investments on liquidity and funding costs.
- Review CLO fee sustainability, warehouse exposure, risk-retention implementation and the proposed Trinitas relationship for execution, regulatory and conflict-of-interest risks.
- Monitor the trademark litigation and the company’s progress after exiting residential mortgage production and merging its banks.