Triumph Bancorp, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2015. The filing identifies the registrant as Triumph Bancorp, Inc. (the company specified in the request as Triumph Financial). Its businesses include community banking, commercial finance and factoring, and CLO asset management. On October 1, 2015, after quarter-end, its two subsidiary banks merged into TBK Bank, SSB.
Financial performance and position
- Q3 earnings: Net income was $5.9 million, down from $10.3 million a year earlier; net income available to common stockholders was $5.7 million versus $9.5 million. Diluted EPS was $0.32 versus $0.91. The comparison is materially affected by a $12.6 million branch-sale gain recorded in Q3 2014.
- Nine-month earnings: Net income was $24.6 million versus $17.0 million, and common-stockholder income was $24.0 million versus $14.9 million. Diluted EPS was $1.33 versus $1.47. Adjusted diluted EPS, excluding specified acquisition/divestiture and other discrete items, was $0.61 versus $0.71.
- Interest income and margins: Q3 net interest income rose 13.7% to $23.2 million; nine-month net interest income rose 14.4% to $67.6 million. Net interest margin was 6.45% for Q3 and 6.59% for nine months, down 24 and 12 basis points, respectively, year over year. Nine-month adjusted margin, excluding acquired-loan discount accretion, improved to 6.23% from 5.89%.
- Costs and credit: Noninterest expense increased 11.3% to $20.5 million in Q3 and 23.1% to $61.0 million for nine months, with growth, staffing, infrastructure and public-company costs among the cited drivers. Loan-loss provision was $0.2 million in Q3 and $3.4 million for nine months. Nine-month net charge-offs were $0.7 million versus $0.4 million.
- Balance sheet at September 30: Assets were $1.581 billion, up from $1.448 billion at year-end 2014. Loans held for investment, net, were $1.174 billion (gross loans $1.185 billion), compared with $997.0 million net; deposits were $1.200 billion versus $1.165 billion; and stockholders’ equity was $263.9 million versus $237.5 million.
- Asset quality: Nonperforming assets were $17.7 million, or 1.12% of assets, versus $25.1 million and 1.73% at year-end. Nonperforming loans were 0.97% of loans versus 1.66%. The allowance for loan and lease losses was $11.5 million, or 0.97% of loans, compared with $8.8 million, or 0.88%.
- Cash flow and liquidity: For nine months, operating cash flow was $21.0 million, investing cash flow was negative $263.1 million and financing cash flow was $197.1 million. Cash and equivalents declined to $115.8 million from $160.9 million. The filing cites $126.3 million of unused FHLB borrowing capacity and $99.5 million of available unsecured federal-funds lines at the two banks at September 30; management said liquidity was adequate.
- Funding and capital: FHLB advances rose to $61.0 million from $3.0 million; $16.0 million matured within one month and $45.0 million after one but within three years. Junior subordinated debentures had a $24.6 million carrying value. The banks exceeded “well capitalized” regulatory thresholds; the consolidated company’s total risk-based capital ratio was 20.2%.
Material changes and unusual items
- The March 2015 Doral Money acquisition added CLO management contracts associated with approximately $700 million in assets under management. The $135.9 million cash consideration generated a $14.2 million nontaxable bargain-purchase gain, including a $1.7 million Q3 measurement-period adjustment. The acquired loans were sold at acquisition-date fair value.
- Reported nine-month earnings include the bargain-purchase gain; excluding the Doral acquisition’s specified gain and related items, management reported net income of $11.5 million. The prior-year comparison includes the $12.6 million pre-tax gain on the Pewaukee branch sale.
- Loan growth was driven particularly by commercial lending and mortgage warehouse activity. Commercial loans increased to $468.1 million from $364.6 million, and mortgage warehouse loans to $102.4 million from $55.1 million. The company noted pricing pressure in community-market commercial real estate lending.
- Management attributed margin pressure to lower acquired-loan discount accretion, cash balances, and a funding mix shifting toward higher-cost certificates of deposit and brokered funds. It expects discount accretion to decline over time and said specialized commercial finance growth could partly offset that effect; no specific earnings guidance was provided.
Outlook, risks and contingencies
- Management described continued growth in commercial finance and CLO management as strategic priorities, while cautioning that operating results are not necessarily indicative of full-year results. Forward-looking statements are subject to risks including credit quality, interest rates, liquidity, acquisition integration, transportation-industry concentration in factoring, competition, regulation and internal controls.
- A trademark infringement lawsuit filed in February 2015 seeks damages and an injunction concerning the company’s use of “Triumph.” The company disputes the allegations and plans to defend itself; management did not anticipate material losses from legal claims or commitments generally.
- Off-balance-sheet commitments totaled $270.7 million, including $245.5 million of unused credit lines, $21.8 million of commitments to make loans and $3.3 million of standby letters of credit. These amounts are not necessarily expected future cash requirements.
- The filing reports effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile reported earnings with the $14.2 million bargain-purchase gain and prior-year branch-sale gain; assess adjusted earnings and EPS alongside reported results.
- Review whether loan growth, especially commercial finance and mortgage warehouse lending, is keeping pace with credit quality, provisioning and funding costs.
- Track net interest margin, deposit mix and pricing as acquired-loan discount accretion declines.
- Confirm the impact and completion of the October 1 bank merger, and monitor the trademark litigation and remaining Doral acquisition accounting.
- Assess liquidity and funding needs in light of lower cash balances, increased FHLB advances, upcoming deposit maturities and unfunded credit commitments.