Triumph Bancorp, Inc. (TBK) — 2020 Form 10-K Summary
Period and scope: Fiscal year ended December 31, 2020; the filing also provides unaudited quarterly results. The registrant is named Triumph Bancorp, Inc. in this filing. It is a Dallas-based financial holding company with banking, factoring and national lending operations. Banking generated 65% of 2020 revenue, Factoring 34%, and Corporate 1%.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $284.7 million | $255.9 million |
| Noninterest income | $60.4 million | $31.6 million |
| Net income | $64.0 million | $58.5 million |
| Net income available to common stockholders | $62.3 million | $58.5 million |
| Diluted earnings per common share | $2.53 | $2.25 |
| Net interest margin | 5.71% | 5.92% |
| Return on average assets | 1.18% | 1.23% |
| Return on average common equity | 9.77% | 9.04% |
| Cash provided by operating activities | $97.3 million | $72.5 million |
- Reported operating revenue, defined as net interest income plus noninterest income, was $345.1 million, up 20.1%. Net income available to common stockholders, adjusted by management for specified transaction and divestiture items, was $55.6 million, or $2.26 per diluted share, versus $58.5 million and $2.25 in 2019. These are non-GAAP measures.
- Credit loss expense rose to $38.3 million from $7.9 million. The year-end allowance for credit losses on loans was $95.7 million, or 1.92% of loans, versus $29.1 million, or 0.69%, a year earlier. Net charge-offs declined to $4.6 million from $6.4 million.
- At year-end, total assets were $5.936 billion, gross loans held for investment were $4.997 billion, deposits were $4.717 billion, and stockholders’ equity was $726.8 million. Loans grew $802.3 million, while deposits grew $926.7 million.
- Cash and cash equivalents were $314.4 million. Investing activities used $774.7 million, principally reflecting loan growth and acquisitions; financing activities provided $793.9 million. These cash-flow totals reflect the company’s banking and lending activity and should be read alongside its balance sheet and liquidity disclosures.
- Year-end borrowings included $105.0 million of Federal Home Loan Bank advances, $191.9 million under the PPP Liquidity Facility, $87.5 million of subordinated notes, and $40.1 million of junior subordinated debentures. The company reported $1.247 billion of unused FHLB capacity, $523.9 million of Federal Reserve discount-window capacity, and $227.5 million of unsecured federal funds lines.
- Regulatory capital ratios remained above well-capitalized thresholds: the company reported 13.0% total risk-based capital, 10.6% Tier 1 risk-based capital, and 9.0% common equity Tier 1; TBK Bank also exceeded its applicable well-capitalized requirements.
- Fourth-quarter net income available to common stockholders was $31.3 million, or $1.25 diluted per share, compared with $22.0 million, or $0.89, in the third quarter. First-quarter 2020 included a $4.5 million common-stockholder loss.
Material changes versus 2019
- Net interest income increased 11.3%, helped by asset growth and sharply lower funding costs, but net interest margin fell 21 basis points to 5.71%. Lower asset yields and changes in loan mix—including low-rate PPP loans and increased mortgage warehouse balances—offset some funding-cost benefits.
- Noninterest income rose substantially, mainly reflecting the $9.8 million gain on the sale of Triumph Premium Finance and other TFS-related income. Excluding the premium finance sale gain, adjusted noninterest income increased $19.0 million.
- Loan portfolio composition shifted: commercial finance loans rose 49.9% to $1.874 billion, national lending rose 43.7% to $1.222 billion, and community banking loans declined 9.2% to $1.901 billion. Factored receivables increased 80.8%, including acquired TFS assets.
- Nonperforming assets increased to $68.5 million, or 1.15% of assets, from $44.1 million, or 0.87%. Past-due loans increased to 3.22% of loans from 1.74%, notably due to the acquired TFS advances and the USPS receivable described below.
- Deposits grew, including noninterest-bearing balances and wholesale brokered funding. FHLB advances fell from $430.0 million to $105.0 million. The company issued $45.0 million of Series C preferred stock (net proceeds $42.4 million) and repurchased $35.6 million of common stock.
Outlook, commentary, risks and unusual items
- No formal earnings or financial guidance is provided. Management said 2021 transportation performance could be strong if stimulus and vaccinations support the economy, but warned that unsuccessful efforts to contain COVID-19 could renew the disruption experienced in the first half of 2020.
- Management attributed the increase in credit loss expense primarily to COVID-related economic forecasts and reserves on TFS-acquired over-formula advances. It reported no significant COVID-related charge-offs to date, but cautioned that asset quality and required reserves could worsen. At year-end, 59 COVID-related payment deferrals covered $104.6 million of loans; $189.9 million of PPP loans were outstanding.
- The TFS acquisition included $62.2 million of over-formula advances to three large clients. Covenant agreed to indemnify the company for 100% of the first $30 million of losses and 50% of the next $30 million, subject to a $45 million maximum; the obligation is secured by equipment collateral. The year-end loan allowance included $49.0 million for acquired PCD assets, and the indemnification asset was $36.2 million.
- A separate $19.6 million receivable relates to USPS payments made to a factoring customer rather than to Triumph. USPS disputes its obligation to pay Triumph. The company had filed suit, considered recovery probable, and recorded no reserve; the entire balance was more than 90 days past due by the report’s issuance date. A loss could be material.
- Transportation is a significant concentration: management estimated approximately 40% of 2020 revenue came from the transportation industry, and 90% of year-end factored receivables were transportation-related. Risks include freight-market volatility, client credit deterioration, fraud, and operational or competitive risks affecting TriumphPay.
- Other considerations include interest-rate sensitivity, the LIBOR transition, deposit and wholesale-funding costs, cyber and payment-fraud risks, and regulatory requirements. The company reported $7.9 million of junior CLO notes as nonaccrual at year-end with a $2.0 million allowance. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; the allowance for credit losses and TFS accounting were identified as critical audit matters.
Most important facts for investors to verify
- Whether the $19.6 million USPS receivable is recovered, and the outcome and timing of the litigation.
- Collections on the TFS over-formula advance portfolio, the adequacy and collectability of Covenant’s indemnification, and any further allowance or income adjustments.
- Whether the $95.7 million loan allowance adequately reflects COVID-related borrower risk, deferred-loan performance, and the unusually high past-due and nonperforming balances.
- Whether margin pressure persists as loan yields, funding costs, PPP balances, mortgage warehouse utilization, and loan mix change.
- The sustainability of deposit growth and access to wholesale funding, and whether transportation and TriumphPay growth can be maintained without a material rise in credit, fraud, or operational losses.
- The treatment of reported versus adjusted earnings, including the effect of the premium finance sale, TFS-related income, and other unusual items.