Triumph Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited consolidated results. The filing identifies the registrant as Triumph Bancorp, Inc. (NASDAQ: TBK).
Business context and financial performance
The company is a Dallas-based financial holding company with Banking, Factoring and Corporate segments. Its activities include community banking, transportation factoring, commercial finance, mortgage warehouse lending and liquid credit. It sold Triumph Premium Finance in June 2020 and acquired transportation factoring assets from Transport Financial Solutions (TFS) in July.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $82.4 million | $79.4 million | $232.2 million | $230.0 million |
| Net interest income | $74.4 million | $64.8 million | $201.1 million | $189.5 million |
| Credit loss expense (benefit) | $(0.3) million | $2.9 million | $33.6 million | $7.6 million |
| Noninterest income | $10.5 million | $7.7 million | $38.0 million | $22.9 million |
| Noninterest expense | $55.3 million | $52.2 million | $162.8 million | $151.4 million |
| Net income | $22.9 million | $14.3 million | $31.9 million | $41.8 million |
| Diluted EPS | $0.89 | $0.56 | $1.27 | $1.59 |
| Net interest margin | 5.83% | 5.85% | 5.52% | 5.99% |
Q3 net income available to common shareholders was $22.0 million after $0.9 million of preferred dividends. Management reported adjusted diluted EPS of $0.91 for Q3 and $0.99 year to date, excluding specified acquisition/divestiture items; these are non-GAAP measures.
Balance sheet at September 30, 2020: Assets were $5.84 billion, up from $5.06 billion at year-end 2019; loans held for investment, net, were $4.76 billion; deposits were $4.25 billion; and stockholders’ equity was $693.8 million. Cash and cash equivalents were $288.3 million. The allowance for credit losses on loans was $91.0 million, or 1.88% of loans, versus $29.1 million, or 0.69%, at year-end.
Cash flow, nine months: Operating cash flow was $60.3 million versus $56.5 million in 2019; investing cash flow was $(669.1) million versus $(583.4) million; financing cash flow was $699.1 million versus $407.0 million. Ending cash and cash equivalents were $288.3 million, compared with $115.0 million a year earlier.
Funding and capital: Period-end borrowings included $435.0 million of FHLB advances, $223.7 million under the Paycheck Protection Program Liquidity Facility (PPPLF), $87.5 million of subordinated notes and $39.9 million of junior subordinated debentures. The bank reported unused FHLB capacity of $888.9 million, Federal Reserve discount-window capacity of $467.3 million and $227.5 million of unsecured federal funds lines. TBK Bank’s total risk-based capital ratio was 11.9%; its common equity Tier 1 ratio was 10.9%. The company issued $45 million of Series C preferred stock, with $42.4 million net proceeds and a 7.125% noncumulative dividend rate.
Material changes versus comparable periods
- Q3 net income increased from $14.3 million to $22.9 million, supported by $9.6 million higher net interest income, lower credit loss expense and higher noninterest income. Net interest margin was nearly unchanged year over year.
- Nine-month net income fell to $31.9 million from $41.8 million. Credit loss expense rose by $26.1 million, while margin contracted 47 basis points. The $9.8 million net gain on the TPF sale partly offset the decline; adjusted year-to-date net income was $24.3 million.
- Loans grew $658.4 million from year-end, including growth in factored receivables, mortgage warehouse lending and PPP loans. Noninterest-bearing deposits increased $506.2 million; total deposits rose 12.1%.
- Nonperforming assets increased to $88.7 million, or 1.52% of assets, from $44.1 million, or 0.87%, at year-end. Nonperforming loans were $57.0 million, including $18.7 million of nonperforming factored receivables.
- Operating efficiency improved in Q3: the reported efficiency ratio was 65.15% versus 71.93% a year earlier. For the nine months, it was 68.07% versus 71.29%.
Outlook, management commentary and risks
- COVID-19 and credit: Management attributed much of the year-to-date reserve increase to deteriorated economic forecasts. The loan allowance included $23.3 million of additional provision associated with forecast assumptions and a $37.4 million purchase-accounting allowance for TFS acquired advances. Management cautioned that prolonged economic weakness could require further provision and worsen asset quality.
- Borrower accommodations: At quarter-end, 77 loans with balances of $103.0 million remained in COVID-related deferral, down from 1,320 loans totaling $572.0 million at June 30. Accrued interest and fees on outstanding deferrals were $0.7 million. Management noted that future charge-offs or reversals of accrued interest remain possible.
- TFS acquisition exposure: The acquired portfolio included $62.2 million of advances against future client payments, with $38.5 million past due 30–59 days at quarter-end. 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, secured by equipment collateral. The bank also provided Covenant a $45 million line of credit secured by that collateral. The company recorded a $37.4 million allowance on the advances; collection and indemnity recovery remain important uncertainties.
- Transportation outlook: Management said high freight volumes and capacity constraints lifted spot rates and factoring purchases in Q3, and expected capacity problems and higher rates to extend through Q4 and perhaps into fiscal 2021. This is commentary, not formal earnings guidance.
- Other unusual items: The company recorded $3.1 million of Q3 gains on securities sales, $2.0 million of income from remeasuring the TFS-related receivable, and $0.8 million of TFS transaction costs. The TPF disposal generated a $9.8 million net gain year to date. The company’s three held-to-maturity CLO subordinated notes were classified as nonaccrual; two investments breached overcollateralization triggers, and the related allowance was $2.0 million.
- Liquidity, rates and operations: Management said liquidity sources remained available, but short-term wholesale funding rates were volatile and extended deposit outflows could increase reliance on more expensive funding. The filing’s interest-rate model showed projected 12-month net interest income increasing 2.2% under a +100 basis-point shock and decreasing 3.2% under a −100 basis-point shock; the company cautioned that actual results may differ.
- Management reported no material adverse legal proceedings, no material change in internal controls, and no goodwill impairment at September 30. It identified COVID-19-related credit, transportation concentration, cybersecurity, operational continuity, liquidity and valuation risks.
Most important facts for investors to verify
- Performance and recoverability of the $62.2 million TFS over-formula advance portfolio, including Covenant’s ability to meet indemnity obligations and the value and availability of pledged collateral.
- Whether the $91.0 million loan allowance and $6.4 million off-balance-sheet allowance adequately cover future losses, particularly if COVID-19 conditions or borrower deferrals worsen.
- Trends in nonperforming assets, past-due loans and transportation factoring charge-offs; the acquired advances account for a significant portion of factoring-related credit exposure.
- Sustainability of earnings excluding the TPF gain and other transaction-related or valuation items, given lower year-to-date net income and net interest margin.
- Funding mix, deposit stability, unused borrowing capacity and sensitivity to interest-rate changes, as well as the effect of preferred dividends and other debt costs on common-shareholder returns.