Triumph Bancorp, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this is an annual filing, not a standalone fourth-quarter report. The filing registrant is Triumph Bancorp, Inc. The company operated through community banking and nationwide commercial finance businesses, including factoring, asset-based lending, equipment lending and premium finance.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income | $155.7 million | $112.4 million |
| Net income | $36.2 million | $20.7 million |
| Net income available to common stockholders | $35.4 million | $19.8 million |
| Diluted earnings per common share | $1.81 | $1.10 |
| Adjusted diluted earnings per share | $1.37 | $1.17 |
| Net interest margin | 5.92% | 5.91% |
| Adjusted net interest margin | 5.65% | 5.52% |
| Provision for loan losses | $11.6 million | $6.7 million |
- Year-end assets were $3.499 billion, gross loans held for investment were $2.811 billion, deposits were $2.621 billion, and stockholders’ equity was $391.7 million.
- Cash and cash equivalents were $134.1 million. Operating cash flow was $47.3 million; investing cash flow was negative $379.8 million and financing cash flow was positive $352.1 million. Cash increased $19.6 million during the year.
- Borrowings included $365.0 million of FHLB advances, $48.8 million of subordinated notes and $38.6 million of junior subordinated debentures. FHLB advances rose from $230.0 million; $335.0 million of year-end advances matured within one year. Available FHLB capacity was $231.2 million, with $137.5 million of additional unsecured federal funds lines undrawn.
- Regulatory capital remained above well-capitalized thresholds: TBK Bank’s total risk-based capital ratio was 11.4%, Tier 1 ratio 10.8%, CET1 ratio 10.8%, and leverage ratio 11.1%. Consolidated total risk-based and CET1 ratios were 13.2% and 9.7%, respectively.
- Return on average assets was 1.27%; return on average common equity was 10.73%. The reported efficiency ratio was 62.96%, while the adjusted ratio was 66.55%.
Material changes versus 2016
- Assets increased $858 million and deposits $605 million, reflecting acquisitions and organic growth. The company acquired nine Colorado branches in October and Valley Bancorp in December; together these transactions added $454.1 million of deposits and approximately $267.0 million of loans.
- Management reported $587 million of organic loan growth. Commercial finance loans increased 29% to $897.5 million, including factored receivables growth of $136.2 million. Factoring segment operating income increased to $15.2 million from $10.5 million.
- Reported net income included a $20.9 million pretax gain on the March sale of Triumph Capital Advisors (TCA). After associated transaction and bonus costs, management estimated the sale contributed $15.7 million pretax, or about $10.0 million after tax. Adjusted common earnings, excluding specified transaction and divestiture items, rose 25% to $26.6 million.
- Noninterest expense increased 32.8% to $123.6 million, largely from added staff and infrastructure, acquisitions, and $4.8 million of incremental TCA-sale bonus expense. Loan-loss provision increased 73.7% to $11.6 million; net charge-offs rose to $6.2 million from $3.9 million.
- Asset quality ratios improved: nonperforming assets were 1.39% of assets versus 1.98%, and nonperforming loans were 1.38% of loans versus 2.23%. The allowance for loan and lease losses was $18.7 million, or 0.67% of loans, down from 0.76%.
Outlook, commentary, risks and unusual items
- Management estimated a 2018 effective tax rate of approximately 23%, subject to change as guidance on the Tax Cuts and Jobs Act developed. The 2017 tax expense included a $3.0 million charge from remeasuring deferred taxes.
- No formal revenue, earnings or loan-growth guidance is provided. Management described commercial finance market fundamentals as favorable and planned continued growth, while noting increased competition and pricing pressure. It also expected acquired-loan discount accretion to decline over time, with potential offset from growth in higher-yielding commercial finance products.
- On January 19, 2018, the company agreed to sell its healthcare asset-based lending business and exit that line. At year-end, $71.4 million of related assets were classified as held for sale, including loans net of a $2.1 million allowance. Completion was anticipated in the first quarter of 2018.
- Key risks include transportation-industry concentration in factoring (77% of factoring receivables were from trucking fleets and owner-operators), fraud in factoring and asset-based lending, credit and geographic concentrations, loan-portfolio seasoning, interest-rate and funding-cost changes, acquisition integration, and regulatory and compliance burdens.
- The company stated that it did not expect to pay common dividends in the foreseeable future. Its common stock is subordinate to preferred stock, and dividend capacity depends in part on subsidiary-bank distributions and regulatory limits.
- Fourth-quarter 2017 net income was $6.3 million and diluted EPS was $0.29, compared with $6.3 million and $0.33 in fourth-quarter 2016. Fourth-quarter 2017 included no TCA sale gain; that gain was recorded in the first quarter.
- The financial statements received an unqualified audit opinion. The auditor did not provide an internal-control effectiveness opinion because the company was an emerging growth company; management concluded internal controls were effective.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the TCA gain and other transaction-related items, and how will the TCA sale-related loan and revenue-share earn-out perform?
- Whether the healthcare portfolio sale closed as anticipated, and the final proceeds, credit exposure and earnings impact.
- Credit performance and reserve adequacy amid higher 2017 charge-offs, particularly in commercial lending, factoring and farmland; also monitor the disclosed borrower relationship downgrade and potential problem loans.
- Funding mix, deposit retention and refinancing needs, including the $335.0 million of FHLB advances due within one year and the cost of deposits and borrowings.
- Whether commercial finance growth can offset competitive pricing pressure and rising operating costs without weakening underwriting standards or margins.