Triumph Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; comparisons are with the quarter and nine months ended September 30, 2016 unless otherwise noted. The filing registrant was Triumph Bancorp, Inc. (now identified in the request as Triumph Financial, Inc.). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
The Dallas-based financial holding company operated through community banking and nationwide commercial finance businesses, including factoring, asset-based lending, equipment finance, healthcare lending, and premium finance. It reported Banking, Factoring, Asset Management, and Corporate segments. Triumph sold its Asset Management subsidiary, Triumph Capital Advisors (TCA), on March 31, 2017; that segment had no operations after the sale.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $45.1 | $33.5 | $125.0 | $86.7 |
| Net interest income | $39.5 | $30.4 | $109.9 | $78.8 |
| Provision for loan losses | $0.6 | $2.8 | $9.7 | $4.2 |
| Noninterest income | $4.2 | $6.1 | $36.7 | $14.7 |
| Noninterest expense | $28.2 | $25.8 | $90.4 | $66.2 |
| Net income | $9.8 | $4.8 | $29.9 | $14.4 |
| Net income available to common shareholders | $9.6 | $4.5 | $29.3 | $13.7 |
| Diluted earnings per share | $0.47 | $0.25 | $1.53 | $0.76 |
| Net interest margin | 5.90% | 5.79% | 5.82% | 6.05% |
- Adjusted diluted EPS (non-GAAP): $0.47 for Q3 2017 versus $0.32 in Q3 2016; $1.02 for the first nine months of 2017 versus $0.84 in 2016. The nine-month 2017 adjustment removes the TCA sale gain and related costs.
- Profitability: Q3 2017 return on average assets was 1.36% and return on average common equity was 10.79%. For the nine-month period, the respective measures were 1.46% and 12.58%.
- Balance sheet at September 30, 2017: Assets $2.906 billion; gross loans $2.425 billion; deposits $2.013 billion; stockholders’ equity $386.1 million. At December 31, 2016, assets were $2.641 billion, gross loans $2.028 billion, deposits $2.016 billion, and equity $289.3 million.
- Loan growth and credit: Loans grew about $397.8 million from year-end, which management described as organic growth. Commercial finance balances rose 28%, to $886.9 million, or 37% of the loan portfolio. The allowance for loan and lease losses was $20.4 million, or 0.84% of loans, versus $15.4 million, or 0.76%, at year-end.
- Asset quality: Nonperforming loans were $30.2 million (1.25% of loans), down from $45.3 million (2.23%) at year-end. Nonperforming assets were $41.2 million, or 1.42% of assets, versus $52.2 million, or 1.98%. Net charge-offs were $4.7 million for the nine months, compared with $1.9 million in 2016; the 2017 total included roughly $3.1 million from two loan relationships.
- Cash flow: Operating activities provided $33.0 million over nine months, investing activities used $293.0 million, and financing activities provided $226.0 million. Cash and cash equivalents ended at $80.6 million, down from $114.5 million at year-end. Investing cash use primarily reflected $394.9 million of net loan growth.
- Debt and funding: FHLB advances were $385.0 million, up from $230.0 million at year-end; $120.1 million of additional FHLB advances were available. Subordinated notes were $48.8 million and junior subordinated debentures $33.0 million. Deposits were nearly flat; the company reported a $3.2 million decline.
- Capital and liquidity: The August common-stock offering generated $65.5 million in net proceeds. At September 30, the company’s total risk-based capital ratio was 15.9% and common equity Tier 1 ratio 12.0%; TBK Bank’s respective ratios were 12.4% and 11.6%. Management said the bank exceeded “well capitalized” thresholds and believed liquidity was adequate; the bank also had $137.5 million in unused unsecured federal funds lines.
Material changes versus comparable periods
- Q3 net income available to common shareholders more than doubled year over year, supported by a $9.1 million increase in net interest income and a $2.2 million lower loan-loss provision. Adjusted Q3 net income available to common shareholders was $9.6 million versus $5.9 million in 2016.
- For the first nine months, reported net income increased to $29.9 million, including a $20.9 million gain on the TCA sale. Excluding the sale and specified transaction-related items, adjusted net income available to common shareholders was $19.4 million versus $15.1 million in 2016.
- Net interest income increased with portfolio and balance-sheet growth, including the full-period impact of the 2016 ColoEast acquisition and organic lending growth. The nine-month net interest margin declined 23 basis points, reflecting lower average asset yields, increased funding costs, and reduced purchase-accounting accretion; Q3 margin increased 11 basis points.
- Reported noninterest income for the nine months included the TCA gain. Excluding it, noninterest income rose modestly. In Q3, noninterest income fell year over year, partly because TCA asset-management fees and CLO warehouse income ceased or declined.
- Loan-loss provision rose for the nine months amid higher charge-offs and loan growth, although Q3 provision was lower than in 2016. Nonperforming loans declined, while other real estate owned increased to $10.8 million from $6.1 million at year-end.
- Equity increased primarily from the stock offering and period earnings. Interest-bearing deposit costs and overall funding costs rose year over year.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management expected acquired-loan discount accretion to decline over time, while anticipating that growth in higher-yielding commercial finance products could partly offset the effect. At September 30, about $9.4 million of the remaining $10.8 million loan purchase discount was expected to accrete over the remaining lives of acquired loans.
- Transactions: A $39 million all-cash acquisition of Valley Bancorp was pending, subject to closing conditions and regulatory approval, and expected to close in Q4 2017. Separately, the acquisition of nine Colorado branches from Independent Bank closed October 6, 2017; Triumph acquired about $99 million in loans and assumed $162 million in deposits, paying a deposit premium of about $6.8 million (4.2%).
- TCA sale: Consideration included cash, a $10.5 million seller-financed loan, and a revenue-share asset. The reported $20.9 million gain was offset by $4.8 million in bonus expense and about $0.3 million of indirect transaction costs; management described a net pretax earnings contribution of $15.7 million.
- Risks: The company highlighted credit and loan concentration risk, factoring exposure to transportation, interest-rate sensitivity, competition and pricing pressure, acquisition integration and approval risk, liquidity, and operational, cyber, regulatory, and litigation risks. It noted that 71% of non-factoring loans were concentrated in Texas, Illinois, Colorado, and Iowa. Factoring competition and a lower transportation share of that portfolio pressured yields.
- Contingencies and controls: Management said ordinary-course legal claims were not expected to materially affect the company. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Accounting changes: Early adoption of the callable-debt premium amortization standard and adoption of the share-based compensation standard had no material impact. The company did not expect the forthcoming revenue recognition, financial instruments, or lease standards to have a significant or material impact, respectively; it was assessing the expected impact of the credit-loss standard.
Investor verification priorities
- Reconcile reported nine-month earnings with adjusted results and verify the TCA sale gain, bonus expense, transaction costs, and tax effects.
- Assess sustainability of loan growth and margins, including funding-cost increases, purchase-discount accretion, and commercial finance pricing pressure.
- Review charge-offs, allowance coverage, criticized and potential problem loans, nonperforming assets, and the increase in OREO.
- Confirm the final terms, regulatory approvals, closing status, integration costs, and financing of the Valley transaction and the post-quarter branch acquisition.
- Monitor deposit composition and maturities, FHLB borrowing capacity, liquidity, capital buffers, and the effect of the stock offering and share dilution.