Triumph Financial, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparative income-statement periods ended June 30, 2022. Financial amounts below are in U.S. dollars.
Business context and reporting period
Triumph Financial is a Dallas-based financial holding company providing banking, transportation factoring and payments services. Its reportable segments are Banking, Factoring, Payments and Corporate. TriumphPay operates a payments network for the trucking industry. The statements are unaudited.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $91.5 million | $101.4 million | $184.8 million | $201.5 million |
| Noninterest income | $11.5 million | $48.2 million | $22.5 million | $59.3 million |
| Noninterest expense | $90.4 million | $88.6 million | $179.7 million | $167.2 million |
| Net income | $7.7 million | $44.2 million | $18.7 million | $68.5 million |
| Diluted EPS | $0.29 | $1.74 | $0.72 | $2.66 |
| Net interest margin | 7.57% | 7.68% | 7.82% | 7.68% |
| Efficiency ratio | 87.80% | 59.23% | 86.65% | 64.10% |
Q2 operating revenue, defined as net interest income plus noninterest income, was $103.0 million versus $149.6 million. Return on average assets was 0.56% for Q2 and 0.70% for the first half. The company reported a 3.45% Q2 return on average common equity.
At June 30, 2023, total assets were $5.653 billion, loans held for investment were $4.325 billion gross ($4.290 billion net), deposits were $4.293 billion, and stockholders’ equity was $833.5 million. Loans increased $204.5 million and deposits increased $122.1 million from December 31, 2022. Cash and cash equivalents were $417.4 million.
Debt included $280.0 million of FHLB advances, $108.2 million of subordinated notes and $41.4 million of junior subordinated debentures. FHLB advances rose from $30.0 million at year-end. The company reported $613.1 million of unused FHLB capacity, $549.1 million of Federal Reserve discount-window borrowing capacity and $227.5 million of unsecured federal-funds lines, with none drawn on the latter lines.
For the first half, operating cash flow was $9.0 million versus $14.1 million; investing activities used $289.3 million versus providing $402.0 million; financing activities provided $289.5 million versus using $75.1 million. Ending cash and cash equivalents were $417.4 million.
At June 30, the loan allowance for credit losses was $35.0 million, or 0.81% of loans, compared with $42.8 million, or 1.04%, at year-end. First-half net charge-offs were $13.0 million versus $1.7 million a year earlier. Nonperforming loans were $32.0 million, or 0.74% of loans, versus $48.2 million and 1.17% at year-end. Regulatory capital ratios included 12.68% Tier 1 and 15.59% total capital to risk-weighted assets.
Material changes versus the prior comparable period
- Q2 net income available to common stockholders fell to $6.8 million from $43.4 million. The year-ago quarter included material gains that did not recur: loan-sale gains, a securities gain, and gains related to the interest-rate swap termination and WSI investment. Q2 2023 also included a $1.2 million write-down of the revenue-share asset.
- Q2 net interest income declined 9.8%, primarily as average loans and interest-earning assets fell, including lower Factoring balances. Interest expense rose 187.7% as deposit and borrowing costs increased. Average cost of interest-bearing deposits rose to 1.13% from 0.41%.
- Factoring was affected by a soft freight market: Q2 invoice purchases fell to $2.733 billion from $4.024 billion, and Factoring segment pretax income declined to $6.2 million from $43.9 million. Management said spot rates remained near 2019 lows, with some smaller trucking companies leaving the market.
- Payments processed 4.5 million invoices in Q2, up 3.0%, while payment volume declined 18.1% to $4.940 billion. The segment reported a $7.4 million pretax loss, compared with a $3.4 million loss. TriumphPay fee income increased, but payment volume and prior-year one-time gains affected the comparison.
- Banking loans grew 9.3% from year-end, including increased mortgage warehouse balances. Factoring receivables declined 13.4%; Payments receivables increased, partly reflecting a transfer of freight-broker factoring transactions to Payments beginning June 1, 2023.
- Noninterest expense rose 2.0% in Q2 and 7.5% in the first half. First-half increases included salaries and benefits, technology and occupancy costs. Equity declined $55.5 million from year-end, primarily due to share repurchases, partly offset by earnings.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management described the freight market as soft, with lower volumes and excess capacity; it noted rates began to level off in Q2 but remained low.
- A $19.4 million factored-receivable claim concerns payments the USPS made to a customer rather than Triumph. The USPS disputes its obligation, and the matter is in litigation. The company has not reserved for the receivable because management believes recovery is probable; the filing cautions that the legal issues are novel and an adverse ruling could result in losses up to the full amount.
- One acquired Over-Formula Advance client exposure was charged off, resulting in a $3.3 million net charge-off that had been fully reserved previously. Covenant is expected to reimburse $1.7 million. The remaining Over-Formula Advance balance was $4.0 million and fully reserved.
- Available-for-sale securities had $7.1 million of gross unrealized losses at quarter-end, which management attributed to noncredit factors and did not reserve. Held-to-maturity CLO subordinated notes had a $2.9 million credit-loss allowance; some were nonaccrual.
- Deposits increased overall, but noninterest-bearing deposits fell $148.3 million from year-end and brokered time deposits increased $374.1 million. Management characterized runoff as continuation of normalization of pandemic-era balances and movement of rate-sensitive funds.
- The company completed a $70 million accelerated share repurchase in April and authorized an additional $50 million repurchase program in May; no shares had been repurchased under the new program by June 30. It also invested $9.7 million in Trax Group in June.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter. It noted interest-rate, credit, liquidity, trucking-industry concentration, litigation, technology and cybersecurity risks.
Most important facts for investors to verify
- Progress, legal developments and potential recoverability of the $19.4 million USPS Misdirected Payments receivable.
- Factoring portfolio performance, freight-market conditions, invoice volumes and charge-offs, including any further developments in Over-Formula Advances.
- Deposit mix and pricing, use and cost of brokered deposits and FHLB funding, and liquidity capacity as rates change.
- Underlying earnings excluding prior-year asset-sale and investment-related gains, and whether Payments fee growth can improve segment profitability.
- Credit quality, reserve adequacy and the performance of commercial loans and CLO securities, alongside the effects of continued share repurchases on capital and tangible book value.