Triumph Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are against December 31, 2016. The unaudited filing is by Triumph Bancorp, Inc. (the company identified in the request as Triumph Financial, Inc.). Amounts below are in U.S. dollars.
Business context and key financial results
The Dallas-based financial holding company provides community banking and nationwide commercial finance, including factoring, asset-based lending, equipment finance, healthcare lending, and insurance premium finance. On March 31, 2017, it sold Triumph Capital Advisors, LLC (TCA), ending its asset-management operations.
| Metric | Q1 2017 | Comparable period / prior date |
|---|---|---|
| Interest income | $36.3 million | $24.9 million in Q1 2016 |
| Net interest income | $31.8 million | $22.5 million in Q1 2016 |
| Net interest margin | 5.37% | 5.90% in Q1 2016; adjusted for acquired-loan discount accretion, 5.19% vs. 5.61% |
| Provision for loan losses | $7.7 million | $0.5 million reversal in Q1 2016 |
| Net income | $10.5 million | $5.0 million in Q1 2016 |
| Net income available to common stockholders; diluted EPS | $10.3 million; $0.55 | $4.8 million; $0.27 in Q1 2016 |
| Operating cash flow | $3.6 million provided | $6.3 million provided in Q1 2016 |
| Total assets | $2.635 billion | $2.641 billion at Dec. 31, 2016 |
| Loans, net of allowance | $2.016 billion | $2.012 billion at Dec. 31, 2016 |
| Deposits | $2.024 billion | $2.016 billion at Dec. 31, 2016 |
| Cash and cash equivalents | $126.1 million | $114.5 million at Dec. 31, 2016 |
| Stockholders’ equity | $300.4 million | $289.3 million at Dec. 31, 2016 |
Material changes and unusual items
- TCA divestiture: Consideration had a stated fair value of $22.7 million: $10.6 million cash, a $10.5 million seller-financed loan, and a $1.6 million estimated earn-out asset. The company recorded a $20.9 million gain after $0.4 million of direct transaction costs. It also recorded $4.8 million of incremental transaction-related bonuses and about $0.3 million of other indirect transaction costs. Management estimated the sale’s net pre-tax contribution to Q1 earnings at $15.7 million, or about $10.0 million after tax.
- Earnings excluding sale-related items: The company’s non-GAAP reconciliation reports adjusted net income available to common stockholders of $0.314 million and adjusted diluted EPS of $0.02, versus $4.812 million and $0.27 in Q1 2016. These adjustments exclude the sale gain and specified transaction expenses; reported earnings therefore substantially overstate recurring-period performance. The discussion also cites adjusted net income of $0.5 million, so investors should use the reconciliation and confirm the differing measure.
- Acquisition comparability: Q1 2017 results include the expanded business following the August 2016 ColoEast acquisition. Management attributes much of the year-over-year growth in average assets, loans, deposits, staffing, and expenses to that acquisition.
- Credit costs and problem assets: Q1 net charge-offs were $4.0 million, compared with net recoveries of about $0.04 million in Q1 2016. The allowance rose to $19.1 million, or 0.94% of loans, from $15.4 million, or 0.76%, at year-end. Management linked significant charge-offs and specific reserves to five loan relationships, including two healthcare-finance relationships and three acquired in ColoEast. Nonperforming loans declined to $36.6 million from $45.3 million, but OREO increased to $11.6 million from $6.1 million and other repossessed assets to $2.4 million from $0.8 million.
- Margins and costs: Net interest margin fell 53 basis points year over year, reflecting lower asset yields and funding costs that rose as the company used more higher-cost certificates of deposit, borrowings, and subordinated debt. Factoring growth faced pricing pressure and a shift toward lower-yield non-transportation business. Adjusted noninterest expense rose 47.9% year over year, reflecting acquisition-related scale, business growth, and investment in staff and infrastructure.
Liquidity, debt, capital, and outlook
- Total liabilities were $2.335 billion. At March 31, debt and funding balances included $200.0 million of FHLB advances, $48.8 million of subordinated notes, $32.8 million of junior subordinated debentures, and $10.5 million of customer repurchase agreements. FHLB advances fell $30 million during the quarter.
- Management reported $250.2 million of unused FHLB borrowing capacity and $137.5 million in unsecured federal-funds lines, with none drawn. Certificates of deposit, IRAs, and brokered deposits totaling $936.1 million had stated maturities, including $678.4 million within one year. Management said liquidity was adequate for current and future needs.
- TBK Bank’s capital ratios exceeded regulatory “well capitalized” thresholds. At March 31, its total risk-based capital ratio was 12.9%, Tier 1 risk-based ratio 12.1%, common equity Tier 1 ratio 12.1%, and Tier 1 leverage ratio 11.0%. The company reported consolidated total capital of 14.9% and Tier 1 capital of 12.0% relative to risk-weighted assets.
- No numerical earnings guidance was provided. Management expected acquired-loan discount accretion to decline over time, with continued growth in higher-yielding specialized commercial finance products expected to offset some of the impact. It also described plans to grow transactional deposits and invest in a common operating platform.
- Key stated risks include credit quality and charge-offs, interest-rate exposure, funding and liquidity, competition and pricing, concentration in transportation factoring and certain geographic markets, acquisition integration, and dependence on estimates used for loan-loss reserves. Management reported effective disclosure controls and no material change in internal control during the quarter. It said ordinary-course legal claims were not expected to materially affect the company.
Important facts for investors to verify
- Reconcile the $0.314 million adjusted common income in the non-GAAP table with the $0.5 million adjusted-income figure in the discussion, and assess whether sale-related adjustments capture all relevant costs.
- Track subsequent charge-offs, reserve coverage, the five identified loan relationships, potential problem loans of $23.7 million, and the increase in OREO and repossessed assets.
- Assess whether core earnings, net interest margin, and funding costs stabilize after the TCA sale and the ColoEast integration; the asset-management segment has no ongoing operations after the sale.
- Review the seller-financed $10.5 million loan and contingent earn-out valuation, as well as the company’s remaining CLO investments and warehouse exposure.
- Monitor deposit mix and near-term maturities, available borrowing capacity, capital-buffer requirements, and sensitivity to changes in interest rates.