Triumph Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing registrant is Triumph Bancorp, Inc. (now identified in the request as Triumph Financial). Unless otherwise indicated, amounts below are in millions of dollars.
Business context and financial position
The company is a Dallas-based financial holding company operating through community banking and nationwide commercial finance businesses. Its reportable segments are Banking, Factoring and Corporate. Factoring is concentrated in transportation receivables.
- At June 30, 2018, total assets were $3,794.6, gross loans $3,196.5, deposits $2,624.9 and stockholders’ equity $607.2.
- Loans grew 13.7% from year-end 2017; management reported $254.6 of organic loan growth for the first half. Commercial finance loans reached $1,207.0, up 34.5%, and represented 38% of the loan portfolio.
- Deposits were up $3.6 from year-end. Brokered deposits increased to $345.2 from $188.7, while certificates of deposit declined to $751.3 from $837.4.
Results and key metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net interest income | $53.3 | $38.6 | $100.4 | $70.4 |
| Provision for loan losses | $4.9 | $1.4 | $7.5 | $9.1 |
| Noninterest income | $4.9 | $5.2 | $10.1 | $32.5 |
| Noninterest expense | $37.4 | $27.3 | $71.4 | $62.2 |
| Net income | $12.4 | $9.7 | $24.5 | $20.1 |
| Net income available to common shareholders | $12.2 | $9.5 | $24.1 | $19.7 |
| Diluted EPS | $0.47 | $0.51 | $1.02 | $1.07 |
- Q2 net income available to common shareholders rose about 29%, while diluted EPS fell about 8%. For the first half, common income rose about 22%, while diluted EPS fell about 5%; the larger share count following the April offering contributed to the per-share decline.
- Net interest margin was 6.36% in Q2 versus 6.16% a year earlier, and 6.21% for the first half versus 5.78%. Adjusted margins excluding acquired-loan discount accretion were 5.92% and 5.87%, respectively. Management said higher asset yields and loan growth drove the improvement, while funding costs also rose.
- For the first half, operating cash flow was $30.0; investing cash flow was negative $272.2, including $160.2 paid for acquisitions and increased lending; financing cash flow was positive $241.5, including $192.1 net proceeds from the stock offering and $55.0 of additional FHLB advances. Cash and equivalents ended at $133.4, down $0.8 from year-end.
- FHLB advances were $420.0; subordinated notes were $48.9 and junior subordinated debentures $38.8. The bank reported $353.4 of unused available FHLB advances and $137.5 of unsecured federal funds lines, none drawn.
- At June 30, TBK Bank’s total risk-based capital ratio was 11.7%, and common equity Tier 1 was 11.0%; the company reported total risk-based capital of 16.7% and common equity Tier 1 of 13.3%. Management said the bank exceeded “well capitalized” thresholds.
Material changes, outlook and risks
- ICC acquisition: Acquired substantially all operating assets of Interstate Capital Corporation’s factoring business on June 2 for $160.3 cash plus contingent consideration initially valued at $20.0. The acquired portfolio included $131.0 of factored receivables; the company recorded $43.0 of goodwill and $13.9 of intangible assets. Contingent cash consideration can range from $0 to $22.0 and will be remeasured each reporting period through earnings.
- Pending bank acquisitions: Agreements to acquire First Bancorp of Durango and Southern Colorado Corp. for approximately $147.5 cash were expected to close in Q3 2018, subject to customary conditions and regulatory approval. The targets had combined year-end 2017 assets of $734, loans of $308 and deposits of $653.
- Divestiture: The company sold Triumph Healthcare Finance on March 16 and exited healthcare asset-based lending, recording a $1.1 pretax gain net of transaction costs. In 2017, the TCA sale generated a $20.9 gain, making reported first-half noninterest income comparisons unusually high in the prior period.
- Equity financing: The April public offering issued 5.405 million shares at $37.50, producing $192.1 net proceeds. Management said proceeds funded ICC and would help fund the pending acquisitions, with the remainder for general corporate purposes.
- Q2 acquisition transaction costs were $1.1. Management’s adjusted Q2 net income available to common shareholders was $13.0, or $0.50 diluted EPS; first-half adjusted figures were $24.1 and $1.02. These are non-GAAP measures and exclude specified transaction-related items.
- Credit indicators were mixed: allowance for loan and lease losses rose to $24.5 (0.77% of loans) from $18.7 (0.67%); nonperforming loans increased to $45.8 from $38.7, or 1.43% of loans versus 1.38%. Nonperforming assets were nearly unchanged at $48.5 as lower OREO offset higher nonperforming loans. Management attributed the loan increase partly to newly nonperforming commercial real estate and agricultural relationships.
- Management expects acquired-loan discount accretion to decline over time, with continued growth in specialized commercial finance potentially offsetting some impact. It provided no specific earnings or revenue guidance. It cited acquisition completion and integration, credit quality, transportation-sector concentration, interest rates, funding costs and liquidity as risks. Rate simulations showed net interest income sensitivity of +1.5% under a 100-basis-point rise and -1.3% under a 100-basis-point decline over the following 12 months; actual outcomes may differ.
- The filing says ordinary-course legal claims are not expected to have a material effect, reports no material risk-factor changes from the 2017 Form 10-K, and states disclosure controls were effective.
Important facts for investors to verify
- Whether the Durango and Southern Colorado acquisitions closed as planned, their final purchase accounting, integration costs and realized benefits.
- Subsequent changes in ICC factoring performance, credit losses and the $0–$22.0 contingent consideration liability.
- Trends in nonperforming loans, past-due receivables, specific reserves, charge-offs and allowance coverage as the loan portfolio expands.
- Deposit mix and pricing—particularly brokered deposits and certificates of deposit—and the effect of rising funding costs on margin and liquidity.
- Reported versus adjusted earnings, including the impact of acquisition-related costs, acquired-loan accretion and the increased share count.