Business context and reporting period
Triumph Bancorp, Inc. (now identified in the request as Triumph Financial, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company is a financial holding company with Banking, Factoring and Corporate segments, including transportation factoring, commercial finance and mortgage warehouse lending. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $64.3 | $63.4 | $126.8 | $124.7 |
| Noninterest income | $20.0 | $7.6 | $27.5 | $15.2 |
| Credit loss expense | $13.6 | $3.7 | $33.9 | $4.7 |
| Noninterest expense | $52.7 | $50.7 | $107.5 | $99.3 |
| Net income | $13.4 | $12.7 | $9.0 | $27.5 |
| Diluted EPS | $0.56 | $0.48 | $0.37 | $1.03 |
- Q2 net income included a $9.8 million after-transaction-cost gain on the sale of Triumph Premium Finance (TPF). Excluding the gain after tax, adjusted net income was $6.1 million and adjusted diluted EPS was $0.25, versus $12.7 million and $0.48 in Q2 2019.
- For the first half, adjusted net income excluding the TPF gain after tax was $1.7 million and adjusted diluted EPS was $0.07, compared with $27.5 million and $1.03 in 2019.
- Net interest margin was 5.11% in Q2 (5.99% prior year) and 5.36% for the first half (6.07% prior year). Q2 loan yield was 6.52%, down from 7.95%. Management cited lower market rates, product mix, factoring yields and low-rate PPP loans.
- Q2 efficiency ratio was 62.56%, but 70.75% excluding the TPF gain; first-half ratios were 69.68% and 74.38%, respectively. These are company-presented measures; adjusted figures are non-GAAP.
- Six-month cash flows: operating activities provided $20.6 million, investing activities used $313.9 million and financing activities provided $532.5 million. Cash and cash equivalents increased $239.2 million to $437.1 million.
- At June 30, assets were $5.62 billion, loans held for investment net of allowance were $4.34 billion, deposits were $4.06 billion and stockholders’ equity was $656.9 million. Deposits increased $272.4 million from year-end 2019.
- Loan allowance was $54.6 million, or 1.24% of loans, versus $29.1 million, or 0.69%, at year-end. Nonperforming loans were 1.27% of loans versus 0.97%; nonperforming assets were 1.20% of assets versus 0.87%.
- Regulatory capital at June 30 included company total capital of 13.4% and Tier 1 capital of 10.6% of risk-weighted assets. TBK Bank exceeded regulatory “well capitalized” thresholds.
Material changes versus the prior comparable period
- Reported Q2 net income rose $0.7 million year over year, but the TPF sale gain masked weaker underlying earnings: adjusted net income declined $6.6 million. First-half reported net income fell $18.5 million, and adjusted net income fell $25.8 million.
- Credit loss expense rose sharply amid COVID-19 forecasts and CECL adoption: $33.9 million for the first half versus $4.7 million a year earlier. The company attributed approximately $22.7 million of additional loan allowance to projected economic deterioration; net new specific loan allowances were $4.8 million.
- Interest expense fell, supporting net interest income, but lower asset yields and a greater share of lower-yielding lending reduced net interest margin. Factoring segment operating income declined 23.7% in Q2 and 16.1% for the first half.
- Total assets rose $557.2 million from year-end. Gross loans increased $198.8 million; PPP lending accounted for $219.1 million, while excluding PPP loans, overall loans declined during the first half. Mortgage warehouse balances also increased, while factored receivables contracted.
- The company issued $45 million of Series C preferred stock in June, receiving $42.4 million net, and repurchased $35.6 million of common stock in Q1, completing its $50 million repurchase authorization.
Outlook, commentary, risks and unusual items
- COVID-19 and credit: At June 30, 1,320 borrower payment deferrals covered approximately $572 million of outstanding loans; about 13% of the loan portfolio was currently in deferral, with $6.0 million of accrued interest and fees on those loans. Management warned that extensions, future charge-offs, reversals of accrued interest and further allowance increases were possible; amounts and timing were uncertain.
- PPP: The company held 1,937 PPP loans with a book value of approximately $219 million. It received about $7.3 million in SBA fees, of which $1.4 million was recognized in first-half interest income. PPP loans were treated as fully government-guaranteed and carried no allowance at quarter-end.
- Transportation and industry exposure: Management described weak freight activity in April and May, with volumes and spot rates improving in June. COVID-19, low oil prices, slower customer payments, bankruptcies and freight-volume changes could affect factoring and transportation lending. The ultimate impact remained uncertain.
- CLO securities: Two of three subordinated CLO investments triggered overcollateralization tests following pandemic-related downgrades and defaults. The $8.1 million portfolio was classified as nonaccrual, with a $1.9 million allowance and $1.7 million of first-half credit loss expense; additional losses or reduced distributions remained possible.
- TPF divestiture: The company exited premium finance on June 30, selling assets with $84.6 million carrying value for $94.5 million consideration and recording a $9.8 million net gain.
- Subsequent TFS acquisition: On July 8, the factoring subsidiary acquired Transport Financial Solutions assets for $108.4 million cash, 630,268 shares valued at about $13.9 million and potential contingent consideration of up to $9.9 million. After closing, the company identified approximately $66 million of advances tied to future services for three large clients. Reserves, charge-offs and transaction accounting had not been determined; the company said it had claims against the seller and was discussing resolution.
- Liquidity and funding risks: Management reported access to $878.1 million of unused FHLB capacity, $460.0 million of unused Federal Reserve discount-window capacity and $227.5 million of unsecured federal funds lines, in addition to cash. It cautioned that volatile or higher wholesale funding costs and deposit withdrawals could pressure liquidity and net interest margin. It relies partly on subsidiary-bank dividends to service holding-company debt.
- Other outlook: No formal earnings or revenue guidance was provided. Management expected the effective tax rate to return to approximately 24% in future periods. It reported no goodwill or intangible impairment at June 30 but identified potential impairment as a risk if adverse conditions persisted.
Most important facts for investors to verify
- Whether deferred borrowers resume payments and whether the $54.6 million loan allowance adequately reflects eventual losses, especially in hospitality, retail, energy, restaurants and transportation.
- The subsequent resolution and accounting for the TFS acquisition’s approximately $66 million of identified advances, including any reserve, charge-off, recovery or seller settlement.
- How recurring earnings compare with reported earnings after excluding the TPF gain and other discrete items, and whether margins stabilize as loan and deposit mix changes.
- Whether the subordinated CLO investments produce expected cash flows and whether further allowance expense or nonaccrual effects arise.
- Whether deposit growth, borrowing capacity and regulatory capital remain sufficient if recessionary conditions, funding costs or credit losses worsen.