Triumph Bancorp, Inc. (now identified in the request as Triumph Financial, Inc.) — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019 unless otherwise noted. The filing’s registrant name is Triumph Bancorp, Inc.
Business context and financial performance
The company is a Dallas-based financial holding company operating Banking, Factoring and Corporate segments. Its businesses include community banking, commercial finance, transportation-focused factoring and national lending. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Interest income | $75.4 | $73.3 in Q1 2019 |
| Net interest income | $62.5 | $61.3 in Q1 2019 |
| Credit loss expense | $17.4 | $1.0 in Q1 2019 |
| Noninterest income | $7.5 | $7.5 in Q1 2019 |
| Noninterest expense | $57.7 | $48.6 in Q1 2019 |
| Net income (loss) | $(4.5); $(0.18) per diluted share | $14.8; $0.55 per diluted share in Q1 2019 |
| Net interest margin | 5.63% | 6.15% in Q1 2019 |
| Efficiency ratio | 82.44% | 70.54% in Q1 2019 |
| Operating cash flow | $14.1 | $20.8 in Q1 2019 |
The $19.3 million year-over-year decline in earnings primarily reflected a $16.4 million increase in credit loss expense and a $9.1 million increase in noninterest expense, partly offset by $1.2 million of additional net interest income and a $5.1 million reduction in income tax expense. Annualized return on average assets was (0.36%) and return on average equity was (2.85%).
Balance sheet, liquidity and capital
- Total assets were $5.354 billion, up $293.4 million from year-end. Loans held for investment were $4.321 billion, up $126.0 million; deposits were $3.682 billion, down $107.9 million.
- Cash and cash equivalents totaled $208.4 million. Federal Home Loan Bank advances rose to $850.0 million from $430.0 million; the company reported $432.0 million of unused FHLB capacity and $137.5 million of available unsecured federal funds lines.
- Other reported borrowings included $87.3 million of subordinated notes and $39.7 million of junior subordinated debentures. Stockholders’ equity was $589.3 million, down $47.3 million; tangible book value per share was $16.64 versus $17.88 at year-end.
- Bank capital ratios remained above regulatory requirements. At March 31, TBK Bank’s total risk-based capital ratio was 11.3%, common equity Tier 1 ratio 10.4%, and Tier 1 leverage ratio 10.9%. The company reported that both it and the bank exceeded applicable capital requirements.
- Investing activities used $281.7 million of cash, including net loan growth and securities purchases; financing activities provided $278.2 million, mainly through increased FHLB advances. Cash increased $10.5 million during the quarter.
Material changes and unusual items
- The allowance for credit losses on loans increased to $44.7 million from $29.1 million at year-end; allowance coverage rose to 1.04% of loans from 0.69%. Management attributed the reserve build principally to deteriorating COVID-19 economic forecasts, which it said required approximately $10.5 million of additional allowance. Net charge-offs were $1.5 million.
- Nonperforming loans increased to $54.3 million from $40.6 million; nonperforming assets were $58.2 million, or 1.09% of assets, versus $44.1 million, or 0.87%, at year-end. The filing identifies several additions to nonperforming loans, including hotel-secured and commercial credits.
- The company adopted CECL on January 1, 2020, recording a $1.8 million net reduction to retained earnings. The adoption and the new forward-looking credit-loss estimates make direct comparison with prior-period allowance measures less straightforward.
- The company repurchased 871,319 shares for $35.6 million at an average $40.81 per share, completing its $50 million repurchase authorization. Equity also fell due to the quarterly loss and a $6.6 million decline in accumulated other comprehensive income.
- On April 20, 2020, the company agreed to sell Triumph Premium Finance and exit that business. At March 31, $97.9 million of related assets, predominantly loans, was classified as held for sale.
- Operating cash flow was positive, but investing cash use was substantially greater than in Q1 2019, largely reflecting loan and securities activity. The filing reports no formal earnings or financial guidance.
Outlook, management commentary and risks
- Management said COVID-19 could weaken borrowers’ ability to repay and lead to further credit-loss provisions, lower fee and interest income, weaker asset quality, and pressure on capital, liquidity and funding costs. The ultimate effects were described as uncertain and not quantifiable.
- As of April 15, the company had executed 404 payment deferrals on $233 million of loan balances, with 397 further requests covering $276 million in process. As of April 17, it had closed or received SBA approval for 732 PPP loans totaling $158 million. These figures are subsequent to quarter-end.
- Management said freight volumes could face material pressure in Q2 from business closures, supply-chain disruption, lower demand and low oil prices. Its cited market outlook anticipated roughly a 20% decline in East and West Coast volumes and recovery in the first half of 2021, absent an earlier return to full U.S. production. These are expectations, not company guidance.
- Transportation, hospitality, retail, restaurants and energy exposures were identified as vulnerable areas. The company reported $133.1 million of energy exposure, $128.9 million of hospitality exposure, $55.1 million of restaurant exposure and $195.5 million of retail exposure at quarter-end.
- Management reported that its remote-work response was operating effectively, with no material operational or internal-control challenges identified to date. It also warned that sustained share-price weakness could prompt goodwill or intangible-asset impairment testing; no impairment was recorded at March 31.
- The company held $8.3 million of junior CLO subordinated notes that could be exposed to suspended distributions if underlying loan credit deteriorates. It recorded a $126,000 allowance on these held-to-maturity securities.
Most important facts for investors to verify
- Whether COVID-related borrower stress, payment deferrals and sector exposures result in further provisions, charge-offs or deteriorating nonperforming-asset trends.
- Whether deposits, FHLB borrowing and other liquidity sources remain adequate and affordable as loan demand, deposit flows and funding-market conditions change.
- The final terms, proceeds and completion of the Triumph Premium Finance asset sale, and the resulting effects on loan growth and earnings.
- Whether factoring yields, freight volumes and collection times track management’s expectations, particularly given transportation concentration and the stated potential for weaker Q2 activity.
- How ongoing share repurchases, market-value changes in securities and any future impairment charges affect tangible book value and capital.