Triumph Bancorp, Inc. — Q2 2017 Form 10-Q
Filing identity and period: The submitted filing names Triumph Bancorp, Inc. as the registrant (not Triumph Financial, Inc.). It is an unaudited quarterly report for the three and six months ended June 30, 2017. The company is a Dallas-based financial holding company with community banking, commercial finance and factoring businesses. Its 2016 comparison is affected by the August 2016 ColoEast acquisition.
Financial performance
Dollar figures below are in millions except per-share amounts and ratios.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $38.6 | $25.9 | $70.4 | $48.4 |
| Provision for loan losses | $1.4 | $1.9 | $9.1 | $1.4 |
| Noninterest income | $5.2 | $3.7 | $32.5 | $8.6 |
| Noninterest expense | $27.3 | $20.3 | $62.2 | $40.4 |
| Net income | $9.7 | $4.6 | $20.1 | $9.6 |
| Net income available to common stockholders | $9.5 | $4.4 | $19.7 | $9.2 |
| Diluted earnings per common share | $0.51 | $0.25 | $1.07 | $0.51 |
| Net interest margin | 6.16% | 6.53% | 5.78% | 6.22% |
- Q2 net income available to common stockholders more than doubled year over year, supported by higher net interest income and lower loan-loss provision, partly offset by higher operating expenses and taxes. Q2 return on average assets was 1.42%; return on average common equity was 12.75%.
- Reported first-half earnings included a $20.9 million pretax gain from selling Triumph Capital Advisors (TCA). The sale also involved $4.8 million of incremental bonus expense and about $0.3 million of indirect transaction costs. Management reported adjusted first-half net income available to common stockholders of $9.8 million, or $0.54 per diluted share, excluding specified transaction-related items.
- Net interest margin declined year over year, reflecting lower asset yields and higher funding costs. Management cited a shift toward lower-yielding community bank loans, increased use of higher-cost certificates of deposit and borrowings, and the 2016 subordinated-note issuance. Q2 reported loan yield was 7.79%, versus 8.50%; management’s adjusted measure excluding acquired-loan discount accretion was 7.25%, versus 7.81%.
Financial position, cash flow and credit
- At June 30, total assets were $2.837 billion, up $196 million from year-end 2016. Gross loans were $2.295 billion, up $267.5 million, including $267 million of organic loan growth reported by management. Deposits were $2.072 billion, up $56 million; stockholders’ equity was $310.5 million, up $21.1 million.
- Cash and cash equivalents were $117.5 million. For the first half, operating cash flow was $20.4 million; investing activities used $187.9 million, principally reflecting $265.8 million of net loan growth, while financing activities provided $170.4 million, including $110 million of increased FHLB advances and $56.4 million of deposit growth. Cash increased $3.0 million over the period.
- Funding included $340 million of FHLB advances, $48.8 million of subordinated notes and $32.9 million of junior subordinated debentures. The company reported $145.8 million of unused FHLB borrowing capacity and $137.5 million of unsecured federal funds lines, with none drawn. Management said liquidity was adequate for current and future needs.
- The allowance for loan and lease losses was $19.8 million, or 0.86% of loans, compared with $15.4 million, or 0.76%, at year-end. First-half net charge-offs were $4.7 million, versus $0.2 million a year earlier; approximately $3.1 million related to two loan relationships, including one healthcare finance relationship and one acquired with ColoEast.
- Nonperforming loans were $31.1 million, down from $45.3 million at year-end; nonperforming assets were $42.5 million, or 1.50% of assets, versus $52.2 million, or 1.98%. OREO rose to $10.7 million from $6.1 million. Potential problem loans graded substandard totaled $24.8 million, up from $20.1 million.
- Regulatory capital remained above stated minimums. The company reported total risk-based capital of 13.9% and Tier 1 risk-based capital of 11.3%; TBK Bank was categorized as well capitalized.
Material changes, outlook and risks
- On March 31, the company sold TCA, ending its asset-management operations. The sale consideration included $10.6 million cash, a $10.5 million seller-financed loan and a revenue-share interest initially valued at $1.6 million. Management cited shareholder value and reduced exposure to regulations applicable to depository institutions as reasons for the sale.
- On June 23, the company agreed to acquire nine Colorado branches from Independent Bank. The proposed transaction includes about $100 million of loans and $168 million of deposits, with an estimated $7 million deposit premium. Closing was expected in Q4 2017, subject to regulatory approval and other conditions.
- Management anticipated that acquired-loan discount accretion would decline over time, while expecting growth in specialized commercial finance products to offset some resulting yield pressure. The filing gives no specific earnings or revenue guidance.
- Key risks include credit deterioration and charge-offs, loan-loss estimate uncertainty, interest-rate and funding-cost sensitivity, competition and pricing pressure in factoring, and exposure to the transportation industry. Loans excluding factored receivables were concentrated in Texas, Illinois, Colorado and Iowa; 77% of factored receivables were transportation-related. The filing also identifies acquisition integration, liquidity, regulatory, cybersecurity and other risks.
- Management reported no material effect expected from routine legal claims, no material change in risk factors other than the TCA divestiture update, and effective disclosure controls as of quarter-end. The filing states that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether core earnings growth persists after excluding the one-time TCA sale gain and related expenses; compare reported and adjusted figures and their definitions.
- Whether the elevated first-half loan-loss provision, charge-offs and allowance growth signal broader credit deterioration, particularly in commercial and healthcare finance.
- Whether loan growth can continue without further margin compression as funding costs rise and acquired-loan accretion runs off.
- Whether the Colorado branch acquisition closes on expected terms and how its deposit premium, integration costs and acquired balances affect returns and liquidity.
- Whether reported liquidity capacity, capital ratios and asset-quality trends remain adequate as loans and funding needs expand.