Triumph Financial, Inc. quarterly report, Q3 FY2018

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Triumph Bancorp, Inc. — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2018; comparative results are for the three and nine months ended September 30, 2017. The filing identifies the registrant as Triumph Bancorp, Inc. (the request metadata names Triumph Financial, Inc.). Amounts below are in U.S. dollars; financial statement amounts are generally in millions.

Business context

Triumph is a Dallas-based financial holding company operating through Banking, Factoring, and Corporate segments. Its activities include community banking and specialized commercial finance, including factoring, asset-based lending, equipment finance, and premium finance. For the first nine months of 2018, Banking generated 67% and Factoring 32% of total revenue.

Financial performance and position

  • Third-quarter results: Net interest income was $61.8 million, up 56.5% year over year. Net income was $9.2 million versus $9.8 million; net income available to common stockholders was $9.0 million versus $9.6 million. Diluted EPS was $0.34 versus $0.47. Management-reported adjusted diluted EPS was $0.51, excluding specified acquisition-related items.
  • Nine-month results: Net interest income was $162.2 million versus $109.9 million. Net income was $33.6 million versus $29.9 million; diluted EPS was $1.35 versus $1.53. Adjusted diluted EPS was $1.53 versus $1.02, excluding specified transaction and divestiture items. These adjusted measures are non-GAAP.
  • Margins and returns: Third-quarter net interest margin was 6.59% versus 5.90%; nine-month margin was 6.35% versus 5.82%. Adjusted margins, excluding acquired-loan discount accretion, were 6.45% and 6.08%, respectively. Third-quarter return on average assets was 0.90% and return on average common equity was 5.85%.
  • Costs and credit provision: Third-quarter provision for loan losses rose to $6.8 million from $0.6 million; nine-month provision increased to $14.3 million from $9.7 million. Third-quarter noninterest expense increased 73.4% to $48.9 million, including $5.9 million of FBD/SCC transaction costs. The reported efficiency ratio was 72.15% for the quarter; adjusted was 63.49%.
  • Balance sheet at September 30: Assets were $4.537 billion, gross loans $3.512 billion, deposits $3.439 billion, and stockholders’ equity $616.6 million. Since year-end 2017, assets rose $1.038 billion, gross loans $701.3 million, and deposits $817.7 million.
  • Liquidity and funding: Cash and cash equivalents were $282.4 million, up from $134.1 million at year-end. Nine-month operating cash flow was $53.1 million; cash increased $148.3 million, supported by $292.8 million in financing cash flow, including $192.1 million net proceeds from a common-stock offering. TBK Bank had $349.6 million of unused FHLB advance capacity and $137.5 million in unsecured federal-funds lines, with none drawn.
  • Debt and capital: FHLB advances were $330.0 million, down from $365.0 million. Subordinated notes were $48.9 million and junior subordinated debentures $39.0 million. TBK Bank’s total risk-based capital ratio was 12.0%; its common equity Tier 1 ratio was 11.3%. Management said the bank remained well capitalized.
  • Asset quality: Allowance for loan and lease losses was $27.3 million, or 0.78% of loans, versus $18.7 million, or 0.67%, at year-end. Nonperforming assets were $42.2 million, or 0.93% of assets, compared with $48.5 million, or 1.39%. Nonperforming loans were $39.6 million; past-due loans were 2.23% of loans.

Material changes and significant transactions

  • On September 8, 2018, Triumph acquired First Bancorp of Durango and Southern Colorado Corp. for total cash consideration of $148.0 million, assuming $674.7 million of deposits and acquiring $287.8 million of loans. The acquisitions generated $72.1 million of goodwill; results were included from the acquisition date.
  • On June 2, 2018, Triumph acquired Interstate Capital’s factoring business for $180.3 million, including $20.0 million of initial contingent consideration. It acquired $131.0 million of factored receivables and recorded $43.0 million of goodwill. The contingent payout can range from zero to $22.0 million; its liability was $20.5 million at September 30, 2018.
  • Triumph sold Triumph Healthcare Finance on March 16, 2018, exiting healthcare asset-based lending; the sale produced a $1.1 million net pretax gain.
  • A $202.7 million gross common-stock offering in April generated $192.1 million net proceeds, a significant portion of which funded acquisitions. Shares outstanding increased to 26.28 million from 20.82 million at year-end.
  • Factored receivables increased 63.3% to $611.3 million, primarily reflecting the Interstate Capital acquisition and business growth. Total commercial finance balances increased 43.0% to $1.284 billion.

Management commentary, risks, and contingencies

  • Management attributed stronger net interest income and margin mainly to loan growth, acquisitions, and a greater mix of higher-yielding commercial finance products. It expects acquired-loan discount accretion to decline over time, with specialized commercial finance growth expected to partly offset the effect. The filing provides no formal earnings or revenue guidance.
  • Credit costs included a $4.0 million charge-off on one asset-based lending relationship after suspected borrower-employee fraud involving false borrowing-base certificates and advances exceeding available collateral. A notice of default was issued and the facility was being liquidated; the event also increased loss factors applied to the remaining asset-based lending portfolio.
  • Other notable items included a $0.4 million debit-card incentive payment, which management said was not expected to recur, and a $0.3 million write-down of signage and other assets associated with rebranding. Acquisition-related technology deconversion and termination fees were also recorded.
  • Key risks identified include acquisition integration and forecasting uncertainty, credit quality and loan-loss estimates, transportation-industry concentration in factoring, interest-rate and funding-cost changes, liquidity, competition, cybersecurity and systems, and regulatory or tax changes. The filing states that risk factors had no other material changes from the 2017 Form 10-K.
  • Off-balance-sheet commitments included $497.0 million of unused lines of credit, $305.1 million of mortgage warehouse commitments, and $7.8 million of standby letters of credit. Management said routine legal claims were not expected to have a material effect. Operating lease commitments were approximately $21.9 million.
  • Management reported disclosure controls and procedures were effective at quarter-end and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether the large acquisitions are integrated as planned and produce durable earnings sufficient to justify goodwill and acquired intangible assets.
  2. Subsequent performance, recovery, and collateral liquidation in the asset-based lending fraud loss, and whether loss rates or provisions rise further.
  3. Factoring portfolio credit performance and concentration in transportation, alongside growth following the Interstate Capital acquisition.
  4. Deposit mix, brokered-deposit reliance, funding costs, and sensitivity of margins and earnings to interest-rate changes.
  5. Reconciliation of reported to adjusted earnings, including transaction costs and divestiture gains, and the expected decline in acquired-loan discount accretion.
  6. Final acquisition accounting and the remeasurement and eventual settlement of Interstate Capital’s contingent consideration.