Business Context and Reporting Period
Triumph Bancorp, Inc. (the registrant named in this filing; now identified in the request as Triumph Financial, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2014. It operates community banks and nationwide commercial finance businesses, including factoring, asset-based, equipment and healthcare lending, as well as CLO asset management. The filing also provides unaudited fourth-quarter results.
Comparisons with 2013 are materially affected by the October 2013 acquisition of Triumph Community Bank: 2014 includes a full year of its operations, while 2013 includes it only from October 15.
Key Financial Metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets, year-end | $1.448 billion | $1.288 billion |
| Loans held for investment, gross, year-end | $1.006 billion | $881.1 million |
| Deposits, year-end | $1.165 billion | $1.045 billion |
| Net interest income | $80.5 million | $38.7 million |
| Net income | $19.8 million | $13.4 million |
| Net income available to common shareholders | $16.9 million | $11.8 million |
| Basic / diluted EPS | $1.55 / $1.52 | $1.40 / $1.39 |
| Net interest margin | 6.67% | 7.77% |
| Adjusted net interest margin, excluding acquired-loan discount accretion | 5.93% | 6.85% |
| Noninterest expense | $69.2 million | $32.7 million |
- Revenue and one-time items: Net interest income plus noninterest income was $105.2 million. Noninterest income included a $12.6 million pretax gain on the Pewaukee branch sale; excluding that gain, operating revenue was $92.6 million. The 2013 comparison included a $9.0 million bargain-purchase gain. Adjusted net income available to common shareholders, excluding specified non-routine items, was $9.1 million in 2014 versus $4.3 million in 2013.
- Profitability and costs: Return on average assets was 1.46% (2.40% in 2013); return on average tangible common equity was 14.51% (14.50%). The efficiency ratio was 74.73% versus 73.11%. Management attributed the substantial expense increase to the acquired bank’s full-year costs, commercial-finance growth, rebranding and public-company readiness.
- Credit quality: Nonperforming loans were $16.7 million, or 1.66% of loans, versus $12.4 million and 1.41%. Nonperforming assets were $25.1 million, or 1.73% of assets, down from $26.2 million and 2.03%; OREO declined to $8.4 million from $13.8 million. The allowance for loan losses was $8.8 million, 0.88% of loans and 53.0% of nonperforming loans. Net charge-offs were $0.7 million, or 0.07% of average loans.
- Cash flow and liquidity: Operating cash flow was $20.1 million; investing cash flow was negative $122.5 million; financing cash flow was $177.5 million. Cash and cash equivalents rose $75.1 million to $160.9 million. Available FHLB borrowing capacity was $104.4 million, and unused bank federal-funds lines totaled $99.5 million.
- Debt and capital: The $11.3 million senior secured note was repaid after the IPO. Year-end borrowings included $24.4 million of junior subordinated debentures and $3.0 million of FHLB advances; customer repurchase agreements were $9.3 million. Stockholders’ equity was $237.5 million. The company reported a 19.6% Tier 1 risk-based capital ratio; both subsidiary banks were classified as well capitalized.
- Fourth quarter: Net income was $2.8 million and diluted EPS was $0.14, compared with $11.7 million and $1.12 in fourth-quarter 2013. The prior-year quarter included the $9.0 million bargain-purchase gain.
Material Changes, Outlook and Risks
- Commercial-finance balances rose to $375.4 million from $197.2 million, including factoring receivables of $180.9 million, TCF equipment loans of $106.4 million, TCF asset-based loans of $46.4 million and healthcare asset-based loans of $41.8 million. Management said these markets remained favorable but competition and pricing pressure were increasing.
- The company raised $83.8 million net in its November 2014 IPO, repaid the senior secured note, and redeemed $26.2 million of TARP preferred stock. It said remaining proceeds would support general corporate purposes and growth, including targeted acquisitions. The filing does not provide earnings or financial guidance.
- Management anticipated two to three CLO offerings annually if market conditions remained similar. In March 2015, after year-end, Triumph Capital Advisors acquired two CLO management contracts with approximately $703 million of assets under management and paid net consideration of about $33 million.
- Management highlighted risks from interest-rate and margin compression, credit deterioration and relatively unseasoned loan portfolios, fraud in factoring and asset-based lending, and the transportation-industry concentration of factoring. Approximately 91% of factoring receivables were linked to trucking clients. Geographic and industry exposures include Illinois, Texas and Iowa, and transportation, construction and energy services.
- Other risks include regulatory and capital requirements, acquisition integration and execution, liquidity and deposit competition, CLO-market conditions and risk-retention rules. On February 18, 2015, the company and subsidiaries were sued over alleged trademark infringement involving “Triumph”; they disputed the allegations and intended to defend the case. Management said ordinary-course litigation was not expected to have a material effect.
- The independent auditor issued an unqualified opinion on the financial statements. The filing did not include management’s assessment or auditor attestation of internal control over financial reporting because of the transition period for newly public companies; management reported disclosure controls were effective.
Important Facts for Investors to Verify
- Assess underlying earnings after excluding the branch-sale gain and compare periods on a basis that accounts for the Triumph Community Bank acquisition and purchase-accounting accretion.
- Track net interest margin, loan yields, deposit costs and the sustainability of growth in commercial finance as acquired-loan accretion declines.
- Review credit trends, allowance adequacy, nonperforming loans and collateral concentrations, particularly in trucking and the company’s core states and industries.
- Confirm current liquidity, deposit mix, borrowing availability, regulatory capital and the effect of planned acquisitions or CLO-related risk-retention requirements.
- Monitor the trademark litigation, the March 2015 Doral Money acquisition’s results and integration, and continuing public-company and incentive-compensation costs.