Seeking Alpha

Triumph Bancorp: A New 7.125% Preferred Stock IPO From This Small Texas Bank

|
About: Triumph Bancorp, Inc. (TBK)
by: Ilia Iliev
Summary

Triumph Bancorp, Inc.'s new preferred stock, TBKCP, is trading 4% below its par value.

Triumph Bancorp is a small Texas-based bank with a market cap of $565M.

TBKCP has the highest Yield-to-Worst when compared to the other fixed-rate preferred stocks, issued by a regional bank.

TBKCP market capitalization is not enough for the preferred stock to be included in the largest fixed-income ETF's holdings.

Introduction

In terms of the US regional banks, we are in a real boom after the COVID-19 crisis, as from a total of 18 preferred stocks issued since May, 12 are offered by a regional bank. In this article, we will present the newest fixed-rate Preferred Stock IPO, issued by the Texas-based Triumph Bancorp, Inc. (TBK).

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B5 Filing by Triumph Bancorp, Inc. - the prospectus.

Source: SEC.gov

For a total of 1.8M shares issued, the total gross proceeds to the company are $45M. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

Triumph Bancorp, Inc. 7.125% Series C Fixed Rate Non-Cumulative Perpetual Preferred Stock (TBKCP) pays a qualified fixed dividend at a rate of 7.125%. The new preferred stock has no Standard & Poor's rating and is callable as of 06/30/2025. TBKCP is currently trading below its par value at a price of $24.01. This translates into a 7.42% Current Yield and a YTC of 8.09%.

Here's how the stock's YTC curve looks right now:

Source: Author's spreadsheet

The Company

Triumph Bancorp, Inc. (TBK) is a financial holding company headquartered in Dallas, Texas, with a diversified line of community banking and commercial finance activities. Our bank subsidiary, TBK Bank, SSB, is a Texas-state savings bank offering commercial and consumer banking products focused on meeting client needs in Texas, Colorado, Kansas, Iowa and Illinois. We also serve a national client base through our Triumph Commercial Finance division, which offers factoring, equipment lending, asset based lending, and premium finance solutions for independent insurance agents. We also offer discount factoring through Advance Business Capital LLC, d/b/a Triumph Business Capital and insurance through Triumph Insurance Group, Inc.

Company's website | Corporate Profile

Below, you can see a price chart of the common stock, TBK:

Source: Tradingview.com

We have not historically declared or paid any cash dividends on our common stock since inception. Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on common stock will depend upon our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by the board of directors. Furthermore, consistent with our business plans, growth initiatives, capital availability, projected liquidity needs and other factors, we have made and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our common stockholders.

Source: Company's 2019 Annual Report

In addition, with a market capitalization of around $565M, Triumph Bancorp takes place as one of the smallest 'Regional Banks' (according to Finviz.com).

Capital Structure

Below, you can see a snapshot of Triumph Bancorp Inc.'s capital structure as of its Quarterly Report in March 2020. You can also see how the capital structure evolved historically.

Source: Marketwatch.com | Company's Balance Sheet

As of Q1, TBK had a total debt of $980M ranking senior to the newly issued preferred stock. The new Series C preferred stock rank is junior to all outstanding debt and equal to other future preferred stocks of the company. At this point, TBKCP is the only outstanding preferred stock.

The Ratios Of Which We Should Care About

Our purpose today is not to make an investment decision regarding the common stock of TBK but to find out if its new preferred stock has the need quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.

  • Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.
  • Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.

Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:

  • Market Cap/(Long-term debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 565/(980 + 45) = 0.55. The company is very highly leveraged as the company's debt is twice its equity, which from a preferred stockholder point of view the ratio is poor.
  • Earnings/(Debt and Preferred Payments). This is also quite an easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM results is 39.31/(14.52 + 3.21) = 2.22, which looks better against the background of the high leverage. In the following table, we can also see historically how the company performs with respect to its debt payments coverage for the last 5 financial years.

Source: Marketwatch.com | Company's Income Statement

Sector Comparison

In this section, I'll compare the newly issued preferred stock with all other $25 fixed-rate preferred stocks issued by any regional banks, with a positive Yield-to-Call. Note that all of these preferred stocks are eligible for the 15% to 20% federal tax rate.

  • By % of PAR and Current Yield

Source: Author's database

With its current yield of 7.42%, TBKCP is the highest yielding preferred stock in this group, returning slightly higher than the second-highest BANC-D, but note that BANC-D can be called for redemption at any time from Bank of California. Due to the fact TBKCP is trading 4% below its par value, this 7.42% Current Yield is, in fact, its YTW, and when compared to the other issues' YTW, the new IPO also has the highest return.

  • Take a look at the full list:

Source: Author's spreadsheet

The Banking Preferreds

This section contains all preferred stocks, issued by a bank company, that pay a fixed-rate dividend, have a par value of $25, and a positive Yield-to-Call. Again, all of these preferred stocks are eligible for the preferential federal tax rate.

  • By % of PAR and Current Yield

Source: Author's database

  • By Years-to-Call and Yield-to-Call

Source: Author's database

In the second chart, the logic is the same. To have a better idea of the YTC curve, I'm excluding all callable issues.

Redemption Following a Regulatory Capital Treatment Event

The Preferred Stock will be redeemable, in whole but not in part, within 90 days following a regulatory capital treatment event at a redemption price equal to the liquidation preference, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. A "regulatory capital treatment event" means our good-faith determination that, as a result of ('I') any amendment to, or change in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of any share of Preferred Stock; ('II') any proposed change in those laws or regulations that is announced after the initial issuance of any share of Preferred Stock; or ('III') any official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after the initial issuance of any share of Preferred Stock, there is more than an insubstantial risk that we will not be entitled to treat the full liquidation value of the shares of Preferred Stock then outstanding as "Additional Tier 1 Capital" (or its equivalent) for purposes of the capital adequacy standards of Federal Reserve Regulation Q, 12 C.F.R. Part 217 (or, as and if applicable, the successor capital adequacy guidelines or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Preferred Stock is outstanding.

Source: 424B5 Filing by Triumph Bancorp, Inc.

Use Of Proceeds

We expect to receive net proceeds from this offering of approximately $43.1 million (or approximately $49.6 million if the underwriters exercise in full their over-allotment option to purchase additional depositary shares), after the deduction of the underwriting discount and estimated expenses payable by us (but excluding the Structuring Fee as defined in "Underwriting"), and assuming none of our directors and officers participates in the offering (see "Underwriting"). We intend to use the net proceeds of the offering for general corporate purposes, which may include working capital and the funding of organic growth or potential acquisitions.

Source: 424B5 Filing by Triumph Bancorp, Inc.

Addition to the iShares Preferred and Income Securities ETF

With the current market capitalization of only $45M, TBKCP cannot be an addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index, thus it will not be included in the holdings of the main benchmark, the iShares Preferred and Income Securities ETF (PFF), which is important to us due to its influence on the behavior of all fixed-income securities.

Conclusion

TBKCP is currently the only outstanding preferred stock of Triumph Bancorp. It is trading 4% below its $25 par value and it gives a 7.42% Current yield, which is also its Yield-to-Worst. When compared to the sector or all other fixed-rate preferred stocks, issued by a bank, the new IPO has the highest Current yield and also one of the highest YTW. By returns, it gives around 0.50% higher than the other recently issued "regional bank" issues FMBIP, UCBIO, AUBAP, and PNFPP. As for the company, despite it seems it handles well with the interest expenses on the debt, it is quite high leveraged, as its debt is twice its market capitalization. Moreover, Triumph Bancorp common stock is not paying dividends and it has never paid such, which if it did, that would mean some buffer in favor of the preferred stockholders. Also, with its insufficient market capitalization, it cannot be added to the largest exchange-traded fixed-income ETF, PFF. Generally, I would proceed cautiously with this one and would monitor its common stock closely to be able to react if necessary.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.