Triumph Financial, Inc. quarterly report, Q3 FY2022

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Triumph Bancorp, Inc. (now identified in the request as Triumph Financial, Inc.) — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The filing registrant name is Triumph Bancorp, Inc.

Business context

The company provides banking, factoring, and payments services, with significant exposure to the U.S. trucking and transportation sector. Its reportable segments are Banking, Factoring, Payments, and Corporate. Management described TriumphPay’s strategy as building an open-loop trucking payments network, emphasizing fee revenue rather than balance-sheet lending.

Financial performance and condition

  • Q3 earnings: Net income was $16.2 million, down from $24.4 million; net income available to common shareholders was $15.4 million, or $0.62 diluted EPS, versus $23.6 million, or $0.94.
  • Nine-month earnings: Net income was $84.8 million versus $86.3 million; diluted EPS was $3.28 versus $3.33. Prior-year adjusted diluted EPS, excluding HubTran acquisition transaction costs, was $3.42.
  • Revenue and costs: Q3 net interest income rose 7.1% to $98.3 million and noninterest income rose 5.1% to $12.7 million. Noninterest expense increased 19.1% to $86.7 million, including higher employee, professional, and technology costs. Q3 pretax income fell to $21.6 million from $32.2 million.
  • Margins and returns: Q3 net interest margin increased to 7.71% from 6.69%; the efficiency ratio worsened to 78.14% from 70.13%. Nine-month net interest margin was 7.69% versus 6.41%. Q3 return on average assets was 1.13% versus 1.61%.
  • Credit costs: Q3 credit loss expense was $2.6 million, compared with a $1.2 million benefit a year earlier. Nine-month expense was $6.0 million, versus a $10.8 million benefit. The loan allowance was $44.1 million, or 0.99% of loans, compared with $42.2 million, or 0.87%, at year-end 2021.
  • Balance sheet: Assets were $5.64 billion, down from $5.96 billion at year-end 2021. Loans held for investment were $4.43 billion, down 8.9%; deposits were $4.44 billion, down 4.4%. Stockholders’ equity was $891.2 million.
  • Debt and liquidity: At September 30, FHLB advances were $30.0 million, subordinated notes $107.6 million, and junior subordinated debentures $41.0 million; the PPPLF balance was zero. Cash and cash equivalents were $421.7 million. Management said liquidity was adequate and reported $518.1 million of unused Federal Reserve discount-window capacity and $227.5 million in unsecured federal-funds lines, with no advances outstanding.
  • Cash flows: Nine-month operating cash flow was $63.5 million, investing cash flow was $388.2 million, and financing cash flow was negative $413.2 million. Cash increased $38.6 million during the period to $421.7 million.
  • Capital: Company total capital to risk-weighted assets was 16.6%; TBK Bank’s capital ratios exceeded well-capitalized thresholds. The company repurchased $50.0 million of shares under its first 2022 authorization; a subsequent $75.0 million authorization had no repurchases by quarter-end.

Material changes and unusual items

  • Q3 earnings declined mainly because noninterest expense increased $13.9 million and credit loss expense increased $3.8 million year over year, partly offset by higher net interest income.
  • The company sold equipment loans with a carrying amount of approximately $191.2 million, recognizing a $3.9 million gain. It also sold factored-receivable portfolios totaling $88.0 million, recognizing $14.2 million of gains across the two transactions. The sales reduced period-end loan balances.
  • It terminated a $200 million interest-rate swap and recognized an $8.9 million gain in noninterest income, alongside a $0.7 million termination fee in interest expense. It also recorded a $10.2 million gain from remeasurement of its WSI investment and a $3.2 million warrant impairment.
  • Q3 Payments processed 4.7 million invoices totaling $5.95 billion, up from 3.8 million invoices and $4.19 billion a year earlier. The segment nevertheless reported a $7.2 million pretax loss for the quarter as investment and operating costs remained substantial.
  • Transportation factoring markets softened during Q3: management cited slower freight volume and declining spot rates, while noting rates remained above 2019 levels. Management also described shifts in carrier activity amid elevated diesel prices.

Outlook, risks, and contingencies

  • The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
  • Management’s credit-loss forecasts assumed rising unemployment and weakening retail sales, home prices, and GDP indicators; it also slowed assumed loan prepayment speeds in response to higher interest rates.
  • A $19.4 million receivable tied to misdirected USPS payments remained more than 90 days past due and unreserved. The company is litigating against the USPS and believes recovery is probable, but disclosed that the legal issues are novel, outcomes are uncertain, and a loss could be material.
  • The remaining $8.8 million TFS over-formula advance balance was fully reserved. The related indemnification asset was $4.2 million. These exposures and the company’s transportation concentration remain relevant credit risks.
  • Available-for-sale securities had $11.4 million of gross unrealized losses, which management attributed to noncredit factors, principally market conditions and interest rates; no credit-loss allowance was recorded on those securities.
  • Other stated risks include interest-rate and liquidity risk, borrower credit deterioration, freight-market exposure, execution of the TriumphPay strategy, technology and cybersecurity risks, and acquisition integration. Management reported disclosure controls were effective and no material change in internal control during the quarter.

Important facts for investors to verify

  • Progress and economics of TriumphPay’s payment network, including fee growth, processing volumes, and the path toward segment profitability.
  • Whether freight-market weakening, lower spot rates, and carrier stress affect factoring yields, receivable balances, and credit losses.
  • Developments in the USPS litigation and recoverability of the $19.4 million misdirected-payment receivable.
  • Trends in criticized and nonperforming loans, the fully reserved TFS advances, and the adequacy of the $44.1 million loan allowance under management’s economic forecasts.
  • Deposit stability and funding costs as interest rates change, along with continued capital distributions and the status of the additional $75 million repurchase authorization.
  • The sustainability of reported earnings after considering the loan-sale gains, securities and investment marks, and swap-termination gain.