Triumph Financial(TFIN) - 2019 Q4 - Annual Report

Part I Business Triumph Bancorp, Inc. is a Dallas-based financial holding company with $5.06 billion in assets as of December 31, 2019, operating through its bank subsidiary, TBK Bank, across banking, factoring, and corporate segments, subject to extensive federal and state regulation Key Financial Metrics as of December 31, 2019 | Metric | Value (USD) | | :--- | :--- | | Consolidated Total Assets | $5.060 billion | | Total Loans Held for Investment | $4.195 billion | | Total Deposits | $3.790 billion | | Total Stockholders' Equity | $636.6 million | - The company operates through three reportable segments: Banking (69% of total revenue), Factoring (30%), and Corporate (1%) for the year ended December 31, 2019[10] - The company's business model integrates traditional community banking, national commercial finance (with a focus on the transportation industry), and national lending lines like mortgage warehouse and premium finance[9] - As of December 31, 2019, the company had 1,107 full-time equivalent employees[94] Principal Products and Services The company offers community banking, specialized commercial finance for the transportation sector, and national lending products - Community banking services are offered through a network of retail branches in Illinois, Iowa, Colorado, Kansas, and New Mexico, with a corporate office and deposit-gathering branch in Dallas, Texas[12] - The Commercial Finance division has a significant focus on the transportation industry, with transportation factoring constituting approximately 77% of the total factoring portfolio and equipment lending to transportation clients being 75% of the total equipment lending portfolio as of December 31, 2019[21][23] - The TriumphPay platform, a proprietary payment solution for the freight industry, generates fee income and additional factored receivables through its "Quick Pay" option[25] - National Lending includes mortgage warehouse facilities, which had an outstanding balance of $668 million as of December 31, 2019, across 17 customers[31] Credit Risk Management Triumph manages credit risk through disciplined underwriting, tiered loan authorities, and proprietary scoring models - The underwriting process involves a tiered system of loan authorities, with larger transactions requiring approval from management-level or executive loan committees[38] - For factoring, the company uses a proprietary web-based application and scoring model to manage high volumes of invoice purchase requests and monitors concentration limits for individual account debtors[37] - A proprietary risk management program assigns a daily risk score to each factoring client to determine monitoring levels and servicing protocols, aiming to control fraud and credit risk[41] Supervision and Regulation Triumph, as a financial holding company, is extensively regulated by federal and state authorities, adhering to capital and consumer protection laws - The company has elected to be a financial holding company (FHC), allowing it to engage in a broader range of financial activities, contingent on maintaining "well-capitalized" and "well-managed" status[50] - The company and its bank subsidiary are subject to Basel III capital rules, requiring minimum ratios for CET1, Tier 1, and Total Capital, plus a capital conservation buffer, with both entities exceeding "well-capitalized" levels as of year-end 2019[57][60] - TBK Bank, a Texas state savings bank, is regulated by the FDIC and the Texas Department of Savings and Mortgage Lending (TDSML), which restricts its ability to pay dividends and enforces safety and soundness standards[71][73] Risk Factors The company faces diverse risks including interest rate volatility, credit defaults, transportation industry concentration, operational challenges, and regulatory changes - A substantial portion of revenues (estimated at 30-35% in 2019) is derived from the transportation industry, making the company vulnerable to economic downturns, regulatory changes, or other negative factors impacting this sector[107] - The upcoming transition from LIBOR to alternative reference rates presents considerable risk and cost, as it will affect pricing models, valuation tools, and contracts for numerous financial instruments[102][104] - The adoption of the new CECL accounting standard (ASU 2016-13) effective January 1, 2020, will require estimating credit losses over the life of financial instruments and may increase the volatility of the allowance for loan losses[125] - The company is subject to extensive regulation, and changes in laws or their interpretation by agencies like the Federal Reserve, FDIC, and CFPB could significantly increase costs and limit business opportunities[162][165][166] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[195] Properties The company's corporate office is in Dallas, Texas, with its TBK Bank subsidiary operating 65 owned and leased branches and loan offices across six states - The corporate headquarters is located at 12700 Park Central Drive, Suite 1700, Dallas, Texas 75251[196] - As of year-end 2019, TBK Bank operated ten branches in the Quad Cities area (Iowa/Illinois), eight in northern/central Illinois, seven in Colorado and three in New Mexico (Mountain Division), and thirty in Colorado and two in Kansas (Western Division), plus several loan production offices[197] Legal Proceedings The company is party to various litigation matters incidental to its business but does not believe any current proceedings will have a material adverse effect - The company is not presently party to any legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations[199] Mine Safety Disclosures This item is not applicable to the company - Not applicable[200] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "TBK"; it retains earnings for growth, not paying dividends, and actively repurchased over 2 million shares in 2019 - The company's common stock is listed on the NASDAQ Global Select Market under the symbol "TBK", with 24,605,453 shares outstanding and 366 stockholders of record as of February 6, 2020[203] - The company does not intend to pay cash dividends on its common stock in the foreseeable future, planning to retain all earnings to support operations and finance growth[204] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Purchased | Average Price Paid per Share (USD) | Total Shares Purchased as Part of Program | Maximum Dollar Value that May Yet Be Purchased (USD) | | :--- | :--- | :--- | :--- | :--- | | Oct 2019 | — | $— | — | $50,000,000 | | Nov 2019 | 114,344 | $35.81 | 114,344 | $45,902,000 | | Dec 2019 | 278,213 | $37.05 | 278,213 | $35,586,000 | | Total | 392,557 | $36.69 | 392,557 | $35,586,000 | Selected Financial Data This section summarizes five years of historical consolidated financial data, including income statement, balance sheet, per-share metrics, and non-GAAP reconciliations for operational performance insights Selected Historical Financial Data (2017-2019) | (In thousands, except per share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Income Statement Data | | | | | Net Interest Income | $255,903 | $227,050 | $155,684 | | Provision for Loan Losses | $7,942 | $16,167 | $11,628 | | Noninterest Income | $31,569 | $22,970 | $40,656 | | Noninterest Expense | $204,084 | $167,353 | $123,614 | | Net Income | $58,544 | $51,708 | $36,220 | | Balance Sheet Data (End of Period) | | | | | Total Assets | $5,060,297 | $4,559,779 | $3,499,033 | | Loans Held for Investment, net | $4,165,420 | $3,581,073 | $2,792,108 | | Total Deposits | $3,789,906 | $3,450,349 | $2,621,348 | | Total Stockholders' Equity | $636,590 | $636,607 | $391,698 | | Per Share Data | | | | | Diluted EPS | $2.25 | $2.03 | $1.81 | | Book Value per Share | $25.50 | $23.62 | $18.35 | | Tangible Book Value per Share (Non-GAAP) | $17.88 | $16.22 | $15.29 | - The company utilizes non-GAAP financial measures such as 'Tangible common stockholders' equity', 'Adjusted diluted earnings per common share', and 'Adjusted efficiency ratio' to supplement its GAAP reporting and provide a clearer understanding of core operational performance, excluding items like M&A costs[218] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net income rose to $58.5 million, driven by strong loan growth and increased net interest income, despite net interest margin compression due to higher funding costs, with total assets reaching $5.06 billion 2019 vs. 2018 Performance | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income to Common Stockholders | $58.5 million | $51.1 million | | Diluted EPS | $2.25 | $2.03 | | Return on Average Assets | 1.23% | 1.33% | | Return on Average Common Equity | 9.04% | 9.27% | - Organic loan growth totaled $585.9 million in 2019, with significant increases in national lending lines (up 119.8%) and commercial finance loans (up 5.6%)[230] - The TriumphPay platform processed $975.1 million in payments in 2019, a significant increase from $328.4 million in 2018[113][233] - The company repurchased 2,080,791 shares of its common stock for a total of $64.4 million during 2019[237] Results of Operations In 2019, net interest income increased 12.7% to $255.9 million, despite a 43 bps net interest margin decline, while noninterest income grew 37.4% and noninterest expense rose 21.9% due to growth Net Interest Income and Margin Analysis (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $255.9M | $227.1M | +12.7% | | Net Interest Margin | 5.92% | 6.35% | -43 bps | | Yield on Earning Assets | 7.20% | 7.35% | -15 bps | | Cost of Interest-Bearing Liabilities | 1.66% | 1.33% | +33 bps | - The provision for loan losses decreased by $8.3 million to $7.9 million in 2019, attributed to lower net charge-offs, reduced specific reserves, and a shift in the loan portfolio mix toward products with lower reserve requirements[259][260] - Noninterest expense increased by $36.7 million, primarily due to a $22.7 million rise in salaries and benefits and a $4.2 million increase in occupancy costs, reflecting a larger workforce and infrastructure from recent acquisitions and organic growth[264][265] Financial Condition As of December 31, 2019, total assets grew to $5.06 billion, driven by a $585.9 million increase in loans to $4.195 billion, while asset quality remained stable, deposits rose to $3.79 billion, and borrowings increased Loan Portfolio Composition (December 31, 2019) | Loan Category | Balance (in millions) | % of Total | | :--- | :--- | :--- | | Commercial Real Estate | $1,047.0 | 25% | | Commercial | $1,342.7 | 31% | | Mortgage Warehouse | $668.0 | 16% | | Factored Receivables | $620.0 | 15% | | Other | $516.8 | 13% | | Total Loans | $4,194.5 | 100% | Asset Quality Ratios (As of Dec 31) | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Nonperforming Assets to Total Assets | 0.87% | 0.84% | | Nonperforming Loans to Total Loans | 0.97% | 1.00% | | ALLL to Total Loans | 0.69% | 0.76% | - Total deposits increased by $339.6 million to $3.790 billion, with growth primarily in certificates of deposit and non-interest bearing demand deposits[322] - Total borrowings increased, driven by a $100 million increase in FHLB advances to $430 million and the issuance of $39.5 million in new subordinated notes[325][327] Critical Accounting Policies and Estimates The Allowance for Loan and Lease Losses (ALLL) is the most critical accounting estimate, involving significant judgment; CECL adoption on January 1, 2020, is expected to reduce retained earnings by $1.5 million - The Allowance for Loan and Lease Losses (ALLL) is considered the most critical accounting policy, requiring complex and subjective judgments about probable incurred credit losses[342][344] - Upon adopting the CECL standard on Jan 1, 2020, the company anticipates a combined increase of approximately $1.9 million to its allowance for credit losses and reserve for unfunded commitments, leading to an expected after-tax reduction in retained earnings of about $1.5 million[347][349] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, managed by balance sheet structuring; sensitivity analysis indicates asset-sensitivity, with a +100 bps rate shock projected to increase NII by 3.1% and EVE by 7.5% Simulated Change in Net Interest Income (NII) | Rate Shock | Change in NII (Next 12 Months) | | :--- | :--- | | +400 bps | +12.5% | | +200 bps | +6.3% | | +100 bps | +3.1% | | -100 bps | -3.3% | Simulated Change in Economic Value of Equity (EVE) | Rate Shock | Change in EVE (%) | | :--- | :--- | | +400 bps | +22.4% | | +200 bps | +13.4% | | +100 bps | +7.5% | | -100 bps | -9.9% | Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019, with Crowe LLP issuing an unqualified opinion, noting ALLL qualitative loss factors as a Critical Audit Matter due to subjective judgments - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2019[360] - The auditor identified the 'Allowance for Loan and Lease Losses – Qualitative Loss Factors' as a Critical Audit Matter due to the high degree of management judgment and subjectivity involved in its determination[366][369] Note 2 — Business Combinations and Divestitures In 2018, the company completed three significant acquisitions, including FBD, SCC, and ICC's factoring business, adding substantial loans, deposits, and goodwill, while also divesting THF and TCA - Acquired FBD and SCC effective September 8, 2018, adding a combined $287.8 million in loans, $674.7 million in deposits, and recording $72.1 million in goodwill[476][477] - Acquired the factoring business of ICC on June 2, 2018, adding $131.0 million in factored receivables and recording $43.0 million in goodwill, with the deal including contingent consideration valued at $20.0 million initially[485][487] - Sold the assets of Triumph Healthcare Finance on March 16, 2018, resulting in a net pre-tax gain of $1.1 million[490][492] Note 4 — Loans and Allowance for Loan and Lease Losses At year-end 2019, gross loans totaled $4.195 billion, diversified across commercial, real estate, and mortgage warehouse, with ALLL at $29.1 million and nonperforming loans at $40.6 million, actively managed through risk rating systems Allowance for Loan and Lease Losses (ALLL) Activity - 2019 | (In thousands) | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2019) | $27,571 | | Provision for Loan Losses | $7,942 | | Gross Charge-offs | ($7,484) | | Gross Recoveries | $1,063 | | Ending Balance (Dec 31, 2019) | $29,092 | Credit Quality Indicators (as of Dec 31, 2019) | Metric | Amount (in thousands) | % of Total Loans | | :--- | :--- | :--- | | Nonaccrual Loans | $36,054 | 0.86% | | Total Nonperforming Loans | $40,613 | 0.97% | | Loans Past Due 30-89 Days | $51,589 | 1.23% | - The loan portfolio has geographic concentrations, with 70% of gross loans (excluding factored receivables) located in Texas (27%), Colorado (23%), Illinois (13%), and Iowa (7%)[521] Note 18 — Regulatory Matters The company and TBK Bank are subject to regulatory capital requirements and were categorized as "well capitalized" as of December 31, 2019, exceeding all minimum capital ratios including the conservation buffer Triumph Bancorp, Inc. Capital Ratios (as of Dec 31, 2019) | Ratio | Actual | Minimum for Adequacy | | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 12.8% | 8.0% | | Tier 1 Capital (to risk-weighted assets) | 10.3% | 6.0% | | Common Equity Tier 1 Capital | 9.5% | 4.5% | | Tier 1 Capital (to average assets) | 10.0% | 4.0% | - TBK Bank, SSB, the subsidiary bank, exceeded all thresholds to be categorized as "well capitalized" under the prompt corrective action provisions[647] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[693] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes in Q4 2019 - Based on an evaluation as of the end of the period, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[694] - Management determined that the company maintained effective internal control over financial reporting as of December 31, 2019[697] Other Information The company reports no other information for this item - None[698] Part III Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14, covering governance, compensation, security ownership, and related party transactions, is incorporated by reference from the 2020 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[701][702][703][704][705] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the annual report, including consolidated financial statements from Item 8, a comprehensive list of exhibits, and required SEC certifications - The financial statements listed in Item 8 are filed as part of this report[709] - A list of 30+ exhibits is provided, including key agreements related to M&A, debt issuance, and executive compensation plans[710][712][713] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[713]