Triumph Financial, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Triumph Financial is a Dallas-based financial holding company providing banking, trucking-focused factoring, and payments services through its Banking, Factoring, Payments, and Corporate segments. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022.
Financial performance and condition
- Q3 earnings: Net income was $12.8 million, down 21.2% from $16.2 million; net income available to common shareholders was $12.0 million, or $0.51 diluted EPS, versus $15.4 million and $0.62. Operating revenue (net interest income plus noninterest income) was $104.7 million, down 5.6%.
- Nine-month earnings: Net income was $31.5 million, down 62.9%; common earnings were $29.1 million, or $1.23 diluted EPS, versus $82.3 million and $3.28. Operating revenue was $312.1 million, down 16.0%.
- Net interest and margins: Q3 net interest income declined 7.1% to $91.3 million; net interest margin was 7.48%, down 23 basis points year over year. For the nine months, net interest income fell 7.9% to $276.2 million, while margin was broadly flat at 7.70%. Higher deposit and borrowing costs more than offset improved asset yields.
- Other income and expenses: Q3 noninterest income rose 5.9% to $13.4 million, including higher Payments fees; noninterest expense was nearly flat at $86.3 million. Nine-month noninterest income fell 50.0% to $35.9 million, largely because prior-year loan and securities sale gains and other unusual gains did not recur. Expenses rose 4.8% to $265.9 million.
- Balance sheet: Total assets were $5.60 billion, up from $5.33 billion; loans held for investment, net, were $4.34 billion, versus $4.08 billion. Deposits increased 7.6% to $4.49 billion. Noninterest-bearing deposits declined to $1.63 billion from $1.76 billion, while brokered deposits increased substantially.
- Credit quality: Allowance for credit losses on loans was $34.8 million, or 0.80% of loans, versus $42.8 million and 1.04% at year-end. Nine-month net charge-offs were $14.2 million, compared with $4.2 million a year earlier. Nonperforming loans were $53.3 million, or 1.22% of loans, versus $48.2 million and 1.17% at year-end.
- Cash flow and capital: For the nine months, operating cash flow was $18.0 million, investing cash outflow was $321.7 million, and financing cash inflow was $233.1 million. Cash and equivalents declined $70.6 million to $337.6 million. Equity was $850.4 million, down from $889.0 million, primarily reflecting treasury-stock purchases. TBK Bank’s capital ratios exceeded regulatory “well capitalized” thresholds.
- Debt and liquidity: Period-end borrowings included $30.0 million of FHLB advances, $108.5 million of subordinated notes, and $41.6 million of junior subordinated debentures. The company reported $843.4 million of unused FHLB capacity, $560.9 million of unused Federal Reserve discount-window capacity, and $227.5 million of unsecured federal funds lines, with none drawn on the latter lines.
Material changes and segment trends
- Banking loans grew 9.5% to $3.16 billion, including growth in commercial real estate, construction, and mortgage warehouse lending. Factoring balances fell 9.6% to $1.04 billion amid lower invoice volumes and smaller average invoices in a soft freight market.
- Factoring’s Q3 pretax income fell to $8.6 million from $22.3 million; its nine-month pretax income fell to $22.8 million from $99.8 million. The prior-year comparison included $14.2 million of factoring portfolio sale gains for the nine-month period.
- Payments’ Q3 pretax loss narrowed to $3.7 million from $7.4 million. In the quarter it processed 5.0 million invoices, up 7.7%, while payment volume declined 10.5% to $5.33 billion. Network invoice volume more than doubled year over year. Its nine-month pretax loss widened slightly to $18.3 million from $17.5 million.
- Management changed shared-cost and intersegment-interest allocation methods in 2023 and transferred certain broker factoring transactions to Payments beginning June 1. Prior segment periods were revised for comparability; reported segment results may not be comparable with other institutions.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management described continued softness in trucking, with low spot rates, reduced freight volumes, and excess carrier capacity. It warned that persistently high interest rates could increase carrier costs and contribute to business failures, pressuring Factoring revenue.
- USPS misdirected payments: A $19.4 million receivable, entirely more than 90 days past due, arose after the USPS paid a customer instead of Triumph. The USPS disputes liability. The company believes recovery is probable and has recorded no reserve, but an adverse court ruling could expose it to a loss up to the full amount; management notes the legal issues are novel and there is no assurance of success.
- Surge bankruptcy: Following Surge Transportation’s Chapter 11 filing, claimants allege rights to amounts Triumph received on purchased receivables. An adverse ruling could require repayment of some or all amounts collected. The company says the potential loss cannot currently be estimated and has not stated a reserve amount.
- Other credit exposures: Remaining acquired Over-Formula Advances were $3.6 million and fully reserved. A $3.3 million charge-off in the portfolio was covered by prior reserves; Covenant reimbursed $1.7 million. Management’s credit-loss estimates depend on economic forecasts and other judgments.
- Funding and rate sensitivity: Interest-bearing deposit costs rose materially, and the share of brokered deposits increased. The filing’s modeled 12-month net interest income rises 3.9% under a 100-basis-point increase and falls 4.1% under a 100-basis-point decrease; outcomes may differ from these simulations.
- Unusual comparisons: Prior-year results included gains from factoring and equipment-loan sales, securities sales, and termination of an interest-rate swap. In 2023, the company recorded a $1.9 million write-down of its revenue-share asset and made a $9.7 million minority investment in Trax.
Important facts for investors to verify
- Developments, legal rulings, and potential recovery or impairment relating to the $19.4 million USPS receivable and the unreserved exposure.
- Exposure and possible repayment obligations arising from the Surge bankruptcy proceedings.
- Factoring volumes, spot freight rates, carrier failures, charge-offs, and the performance of the fully reserved Over-Formula Advances.
- Deposit mix, brokered funding dependence, deposit pricing, and the effect of higher funding costs on net interest margin and liquidity.
- Nonperforming and past-due loan trends, charge-offs, reserve coverage, and concentrations in trucking, commercial real estate, and other lending portfolios.
- Payments network growth and monetization, including whether higher invoice counts translate into higher payment volume and reduced segment losses.