Triumph Financial, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are to December 31, 2022. Triumph Financial provides banking, transportation factoring and payments services through its Banking, Factoring, Payments and Corporate segments.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $100.7 million | $103.4 million in Q1 2022 |
| Net interest income | $93.4 million | $100.1 million in Q1 2022 |
| Net interest margin | 8.08% | 7.68% in Q1 2022 |
| Noninterest income | $11.0 million | $11.1 million in Q1 2022 |
| Noninterest expense | $89.3 million | $78.6 million in Q1 2022 |
| Net income | $11.0 million; $10.2 million available to common stockholders | $24.3 million; $23.5 million available to common stockholders in Q1 2022 |
| Diluted EPS | $0.43 | $0.93 in Q1 2022 |
| Efficiency ratio | 85.52% | 70.65% in Q1 2022 |
| Cash and cash equivalents | $417.7 million | $408.2 million at December 31, 2022 |
| Total assets / loans held for investment | $5.628 billion / $4.310 billion gross | $5.334 billion / $4.120 billion at December 31, 2022 |
| Deposits | $4.039 billion | $4.171 billion at December 31, 2022 |
| FHLB advances | $530.0 million | $30.0 million at December 31, 2022 |
| Stockholders’ equity | $827.2 million | $889.0 million at December 31, 2022 |
Operating revenue, defined by the company as net interest income plus noninterest income, was $104.4 million versus $111.2 million in Q1 2022. Return on average assets was 0.84%, versus 1.69%; return on average common equity was 5.09%, versus 11.41%. The allowance for credit losses on loans was $42.2 million, or 0.98% of loans, compared with $42.8 million, or 1.04%, at year-end. Net charge-offs were $2.2 million, versus $1.5 million.
Cash flow from operating activities was $1.0 million, investing activities used $285.0 million, and financing activities provided $293.5 million. Net cash increased $9.5 million during the quarter.
Material changes and segment trends
- Net income fell $13.3 million year over year. Management attributed the decline primarily to a $10.7 million rise in noninterest expense, a $6.7 million reduction in net interest income and a $2.1 million increase in credit loss expense; lower income tax expense partly offset these effects.
- Interest expense rose to $7.3 million from $3.4 million, reflecting higher rates paid on deposits and borrowings. The higher yield on interest-earning assets lifted net interest margin, but did not offset lower average loan balances and higher funding costs.
- Factoring pretax income declined to $8.0 million from $33.6 million. Factored receivables purchased were $2.927 billion versus $4.042 billion, and average invoice size fell to $1,962 from $2,520, amid a weaker freight market.
- Banking pretax income increased to $33.9 million from $21.4 million. Banking loans grew 8.6% from year-end, including a $231.1 million increase in mortgage warehouse balances.
- Payments reported a $7.2 million pretax loss, compared with a $6.7 million loss. Invoices processed rose 7% to 4.26 million, while payments processed declined to $5.03 billion from $5.70 billion. Network payment volume increased to $289.7 million from $129.6 million.
- Deposits declined $132.3 million, or 3.2%, during the quarter. Management reported no material deposit withdrawals following March 2023 bank failures and characterized the runoff as a continuation of normalization of pandemic-era balances and movement of rate-sensitive funds.
Outlook, risks and unusual items
- Outlook: Management expected freight-market softness, including low spot rates and reduced volumes, to continue into Q2 2023. It also cited potential opportunities to win TriumphPay prospects and pursue accretive acquisitions. The filing provides no quantified earnings or revenue guidance.
- Liquidity: The company added $500 million of FHLB advances during Q1 as a precaution amid banking-sector uncertainty. It reported $311.3 million of unused FHLB capacity, $527.2 million of Federal Reserve discount-window capacity and $202.5 million of unsecured federal funds lines, with no advances against the latter lines. Management stated liquidity was adequate.
- USPS litigation: A $19.4 million receivable for misdirected payments is more than 90 days past due and included in nonperforming factored receivables, with no allowance recorded. Triumph believes it is probable it will prevail, but disclosed novel legal issues and no assurance of success; an adverse ruling could result in loss of up to the receivable amount.
- Credit and market risks: The company’s transportation-industry concentration exposes factoring results to freight conditions. Its allowance estimates depend on economic forecasts and other judgments. Available-for-sale securities had $7.7 million of unrealized losses, which management attributed to noncredit factors; no credit allowance was recorded for those securities.
- Capital return: A $70 million accelerated share repurchase began in February; the company received 961,373 shares initially, with final settlement expected in Q2. Equity declined primarily because of treasury-stock purchases.
- Related-party agreement: In April 2023, TriumphPay entered an agreement with Highway App, founded and majority-owned by the CEO’s brother, to integrate carrier onboarding and share fees from fraud-mitigation services. The company could not estimate potential fees; its governance committee approved the arrangement and determined its terms were no less favorable than arm’s-length terms.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Progress and recoverability of the $19.4 million USPS receivable, and any resulting change in its reserve or nonperforming status.
- Whether deposits stabilize, and the cost, maturities and use of the $500 million in added FHLB funding.
- Factoring volume, freight-market conditions, charge-offs and allowance adequacy as the downturn continues.
- Whether Payments network growth translates into higher fee revenue and improved segment economics.
- Q2 settlement of the accelerated share repurchase and the resulting share count, equity and capital ratios.
- Potential revenue, execution and related-party governance implications of the Highway agreement.