Triumph Bancorp, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The filing identifies the registrant as Triumph Bancorp, Inc. (now referenced in the request as Triumph Financial, Inc.). Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and financial performance
- The company operates Banking, Factoring, Asset Management, and Corporate segments. Banking accounted for 64% of reported revenue, Factoring 26%, Asset Management 6%, and Corporate 4%.
- Net interest income rose 14% to $22.5 million from $19.7 million. Interest income increased to $24.9 million, while interest expense rose to $2.4 million.
- Net interest margin was 5.90%, down from 6.11%; adjusted net interest margin, excluding acquired-loan discount accretion, was 5.61% versus 5.76%. The reported loan yield declined to 7.84% from 8.50%.
- Noninterest income was $5.0 million versus $16.7 million. The prior-year period included a $12.5 million nontaxable bargain-purchase gain from the Doral Money acquisition.
- Noninterest expense decreased 3% to $20.1 million. The efficiency ratio improved to 73.09% from 79.70%.
- Net income was $5.0 million, down from $14.0 million; net income available to common stockholders was $4.8 million versus $13.9 million. Diluted EPS was $0.27 versus $0.76. The filing says 2015 net income excluding the Doral-related items was $2.6 million.
- The company recorded a $0.5 million negative provision (reversal) for loan losses, versus a $0.6 million provision in Q1 2015. Net recoveries were $0.04 million, compared with net charge-offs of $0.20 million.
- Operating cash flow was $6.3 million, investing cash flow was positive $20.5 million, and financing cash flow was negative $8.4 million. Cash and cash equivalents ended the quarter at $123.7 million, up from $105.3 million at year-end.
Balance sheet, funding, and capital
- Total assets were $1.688 billion, down slightly from $1.691 billion. Loans held for investment were $1.246 billion, down from $1.292 billion; deposits were $1.260 billion, up from $1.249 billion.
- Available-for-sale securities were $161.5 million, and the company added $25.8 million of held-to-maturity CLO securities. Total investment securities were $187.3 million.
- Federal Home Loan Bank advances declined to $110.0 million from $130.0 million. Junior subordinated debentures had a $24.8 million carrying value and $33.0 million face value. Customer repurchase agreements were $9.6 million.
- Stockholders’ equity was $274.1 million. The company reported a 16.6% common equity Tier 1 ratio and 19.7% total capital ratio; TBK Bank’s ratios exceeded “well capitalized” thresholds. The filing states the company and bank met applicable capital requirements.
- Management described liquidity as adequate. TBK Bank had $153.7 million of unused FHLB advances and $122.5 million of unsecured federal funds lines, with none drawn.
Material changes, outlook, and risks
- Earnings comparison: The year-over-year net income decline principally reflects the absence of the $12.5 million Doral Money bargain-purchase gain recorded in Q1 2015. Excluding that gain, the prior period also included acquisition-related bonus and transaction costs. Net interest income improved, supported by growth in average earning assets, while reported margin narrowed.
- Asset quality: Nonperforming loans increased to $21.2 million from $13.4 million, and nonperforming assets rose to $29.1 million from $18.5 million. The company attributed the increase mainly to three commercial finance loans totaling $6.8 million. Past-due loans were 3.61% of loans versus 2.41%; a $10.5 million commercial relationship delinquent at quarter-end subsequently returned to current status. OREO increased to $7.5 million, partly due to two former branch properties.
- Funding and concentration: Higher use of certificates of deposit contributed to increased deposit costs. The company identified geographic concentrations in Texas, Illinois, and Iowa and substantial factoring exposure to transportation. It also cited competitive pricing pressure in factoring and mortgage warehouse lending.
- Acquisition: On March 6, 2016, the company agreed to acquire ColoEast Bankshares for $70 million cash, potentially reduced to $69 million if certain targets are not met. Closing was expected in Q3 2016, subject to shareholder and regulatory approvals and other customary conditions.
- Business changes: The company exited residential mortgage production in Q4 2015 and expects related loan balances to run off. It said acquired-loan discount accretion should continue to decline, with growth in specialized commercial finance expected to partly offset the effect.
- Interest-rate exposure: The company reported modeled net interest income sensitivity of +1.7% for a +100 basis-point shock over the following 12 months and -2.2% for a -100 basis-point shock. These estimates depend on assumptions and may differ from actual outcomes.
- Contingency: A trademark infringement lawsuit seeks damages and an injunction concerning use of “Triumph”; trial was set for October 2016. Management did not anticipate material losses from legal claims or contingencies. The filing reported no material change in risk factors from the 2015 Form 10-K.
- Guidance: No quantified earnings or financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results. Forward-looking statements are subject to credit, economic, interest-rate, liquidity, acquisition-integration, regulatory, litigation, and other risks.
Important facts for investors to verify
- Whether the deterioration in nonperforming loans and assets persists, and how subsequent performance of the $6.8 million of new problem loans develops.
- Whether the ColoEast acquisition closes on expected terms and timing, and its effect on capital, funding, integration costs, and earnings.
- Whether loan growth can offset declining acquired-loan accretion and pressure on yields and net interest margin.
- Deposit pricing, certificate-of-deposit maturities, and the company’s ability to maintain liquidity while funding growth.
- The status and potential outcome of the trademark litigation and the company’s transportation and geographic credit concentrations.