Triumph Bancorp, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is for Triumph Bancorp, Inc. (now identified in the request metadata as Triumph Financial); it reports annual results and unaudited quarterly results, including Q4 2018.
Business context
Triumph is a Dallas-based financial holding company operating through TBK Bank. Its Banking business provides community banking and commercial lending; Factoring provides receivables factoring, predominantly for transportation clients; Corporate includes holding-company activities. Banking generated 66% and Factoring 33% of 2018 revenue as defined by the company; Corporate contributed 1%.
Financial performance and position
| Metric | FY 2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Interest income | $263.0 million | $177.2 million in 2017 |
| Net interest income | $227.1 million | $155.7 million in 2017 |
| Net interest margin | 6.35% | 5.92% in 2017 |
| Noninterest income | $23.0 million | $40.7 million in 2017 |
| Net income | $51.7 million; $51.1 million available to common stockholders | $36.2 million; $35.4 million available to common stockholders |
| Diluted earnings per share | $2.03 reported; $2.21 adjusted | $1.81 reported; $1.37 adjusted |
| Net interest income after provision | $210.9 million | $144.1 million in 2017 |
| Noninterest expense | $167.4 million | $123.6 million in 2017 |
| Return on average assets | 1.33% | 1.27% in 2017 |
| Efficiency ratio | 66.94%; adjusted 64.43% | 62.96%; adjusted 66.55% in 2017 |
Operating revenue—net interest income plus noninterest income—was $250.0 million, versus $196.3 million in 2017. Reported noninterest income fell mainly because 2017 included a $20.9 million gain on the sale of Triumph Capital Advisors (TCA); 2018 included a $1.1 million gain on the sale of Triumph Healthcare Finance (THF). Adjusted net income and adjusted diluted EPS are non-GAAP measures defined by the company.
For Q4 2018, net income was $18.1 million and diluted EPS was $0.67. Q4 provision for loan losses was $1.9 million, compared with $6.8 million in Q3 2018.
At year-end, total assets were $4.560 billion, gross loans held for investment $3.609 billion, deposits $3.450 billion, and stockholders’ equity $636.6 million. Cash and cash equivalents were $234.9 million. Loans grew 28.4% year over year; deposits increased $829.0 million. Commercial finance loans reached $1.256 billion, up 40.0%.
Provision for loan losses was $16.2 million, up from $11.6 million. The allowance for loan and lease losses was $27.6 million, or 0.76% of loans. Net charge-offs were $7.3 million, or 0.23% of average loans. Nonperforming assets were $38.3 million (0.84% of assets), down from $48.5 million (1.39%) in 2017; past-due loans were 2.41% of loans, up from 2.33%.
Cash flow from operating activities was $73.8 million; investing activities used $268.3 million, including net loan growth and acquisitions; financing activities provided $295.3 million. Cash increased $100.8 million during the year. Funding included $3.450 billion of deposits, $330.0 million of FHLB advances, $48.9 million of subordinated notes, and $39.1 million of junior subordinated debentures. FHLB unused borrowing capacity was $516.4 million, and unused unsecured federal funds lines totaled $137.5 million.
Regulatory capital ratios remained above well-capitalized thresholds: at the holding company, CET1 was 10.55% and total risk-based capital 13.35%; at TBK Bank, CET1 was 11.7% and total risk-based capital 12.4%.
Material changes and notable transactions
- Acquired Interstate Capital Corporation’s factoring business in June for $180.3 million of total consideration, including $20.0 million of contingent consideration. The acquired business added $131.0 million of factored receivables and $43.0 million of goodwill.
- Acquired First Bancorp of Durango and Southern Colorado Corp. in September for $148.0 million cash consideration combined. The acquisitions added $287.8 million of loans and $674.7 million of deposits and generated $72.1 million of goodwill.
- Issued 5.405 million common shares in April for $192.1 million of net proceeds; a significant portion funded acquisitions and general corporate purposes. Stockholders’ equity rose $244.9 million.
- Sold THF and exited healthcare asset-based lending in March, recording a $1.1 million net pretax gain.
- Factoring segment operating income rose 71.7% to $26.1 million; Banking segment operating income rose 33.7% to $49.0 million. Corporate reported an $8.6 million operating loss, reflecting the absence of TCA and CLO warehouse income.
Outlook, commentary and risks
- Management described long-term markets for commercial finance as attractive and reported growth in factoring clients and invoice volumes. It also noted increased competition and pricing pressure, while saying it intended to maintain disciplined underwriting.
- Management expected the 2019 effective tax rate to be approximately 23%. No company-wide earnings or revenue guidance is provided in the supplied filing text.
- The company planned a new full-service Dallas branch for 2019. It authorized up to $25 million in share repurchases; none occurred in 2018. After year-end, it repurchased 247,312 shares at an average $30.51.
- Key risks include exposure to transportation factoring (79% of factoring receivables were transportation-related), fraud and credit losses, loan portfolio seasoning, geographic and borrower concentrations, interest-rate and funding-cost pressure, acquisition integration and execution, and regulatory and compliance costs.
- The allowance for credit losses was based on the incurred-loss model in 2018. The company planned to adopt CECL on January 1, 2020 and stated that its impact remained under evaluation. Adoption of the new lease standard on January 1, 2019 was expected to add $21–$23 million each of lease liabilities and right-of-use assets.
- Management and the auditor concluded internal control over financial reporting was effective as of year-end; the auditor’s opinion on the financial statements was unqualified. The audit excluded the acquired First National Bank of Durango from the internal-control audit scope.
Important facts for investors to verify
- Reconcile reported earnings with adjusted earnings, including acquisition costs, the THF gain, and the prior-year TCA gain; assess the sustainability of adjusted results.
- Track deposit mix, brokered deposits, certificate maturities, funding costs, FHLB borrowing use, and the ability of deposits to keep pace with loan growth.
- Review commercial finance and factoring growth, transportation concentration, invoice-credit controls, fraud experience, and the contingent consideration tied to the ICC acquisition.
- Examine the $4.8 million charge-off on a single asset-based lending relationship, changes in specific reserves, delinquency trends, and allowance coverage as the portfolio seasons.
- Assess acquisition integration, goodwill and intangible balances, and the final purchase accounting for the 2018 acquisitions; the filing states that purchase accounting for FBD and SCC and ICC was not complete.
- Monitor the effect of interest-rate changes on net interest margin, deposit pricing, and the company’s interest-rate sensitivity; confirm the subsequent share repurchases and capital impact.