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Triumph Financial, Inc. - Quarter Report: 2023 June (Form 10-Q)

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 10-Q
___________________________________________________________
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-36722
___________________________________________________________
TRIUMPH FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________
Texas20-0477066
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
12700 Park Central Drive, Suite 1700
Dallas, Texas 75251
(Address of principal executive offices)
(214) 365-6900
(Registrant’s telephone number, including area code)
___________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock — $0.01 par value, 23,275,655 shares, as of July 17, 2023.
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)		Name of each exchange on which registered
Common stock, par value $0.01 per shareTFIN
NASDAQ Global Select Market
Depositary Shares Each Representing a 1/40th Interest in a Share of 7.125% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share
TFINP
NASDAQ Global Select Market

Table of Contents
TRIUMPH FINANCIAL, INC.
FORM 10-Q
June 30, 2023
TABLE OF CONTENTS
i
Table of Contents
PART I – FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
1
Table of Contents
TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2023 and December 31, 2022
(Dollar amounts in thousands)
June 30,
2023		December 31,
2022
(Unaudited)
ASSETS
Cash and due from banks$78,270 $133,889 
Interest bearing deposits with other banks339,105 274,293 
Total cash and cash equivalents417,375 408,182 
Securities - equity investments with readily determinable fair values4,426 5,191 
Securities - available for sale303,779 254,504 
Securities - held to maturity, net of allowance for credit losses of $2,876 and $2,444, respectively, fair value of $4,750 and $5,476, respectively
3,380 4,077 
Loans held for sale95 5,641 
Loans, net of allowance for credit losses of $34,970 and $42,807, respectively
4,289,788 4,077,484 
Federal Home Loan Bank and other restricted stock20,099 6,252 
Premises and equipment, net114,673 103,339 
Goodwill233,709 233,709 
Intangible assets, net29,249 32,058 
Bank-owned life insurance41,702 41,493 
Deferred tax asset, net7,306 16,473 
Other assets187,140 145,380 
Total assets$5,652,721 $5,333,783 
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing$1,608,411 $1,756,680 
Interest bearing2,685,055 2,414,656 
Total deposits4,293,466 4,171,336 
Customer repurchase agreements— 340 
Federal Home Loan Bank advances280,000 30,000 
Subordinated notes108,234 107,800 
Junior subordinated debentures41,444 41,158 
Other liabilities96,111 94,178 
Total liabilities4,819,255 4,444,812 
Commitments and contingencies - See Note 8 and Note 9
Stockholders' equity - See Note 12
Preferred stock45,000 45,000 
Common stock, 23,269,885 and 24,053,585 shares outstanding, respectively
289 283 
Additional paid-in-capital542,565 534,790 
Treasury stock, at cost(264,916)(182,658)
Retained earnings515,513 498,456 
Accumulated other comprehensive income (loss)(4,985)(6,900)
Total stockholders’ equity833,466 888,971 
Total liabilities and stockholders' equity$5,652,721 $5,333,783 
See accompanying condensed notes to consolidated financial statements.
2
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2023 and 2022
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Interest and dividend income:
Loans, including fees$57,258 $44,131 $109,796 $84,978 
Factored receivables, including fees39,819 60,026 80,723 121,232 
Securities5,234 1,329 9,347 2,507 
FHLB and other restricted stock219 34 344 110 
Cash deposits2,956 787 5,950 915 
Total interest income105,486 106,307 206,160 209,742 
Interest expense:
Deposits6,877 2,706 10,079 4,267 
Subordinated notes1,312 1,302 2,621 2,601 
Junior subordinated debentures1,090 556 2,124 1,010 
Other borrowings4,756 315 6,503 357 
Total interest expense14,035 4,879 21,327 8,235 
Net interest income91,451 101,428 184,833 201,507 
Credit loss expense (benefit)2,643 2,901 5,256 3,402 
Net interest income after credit loss expense (benefit)88,808 98,527 179,577 198,105 
Noninterest income:
Service charges on deposits1,769 1,664 3,482 3,627 
Card income2,119 2,080 4,087 4,091 
Net OREO gains (losses) and valuation adjustments— 18 — (114)
Net gains (losses) on sale or call of securities— 2,514 — 2,514 
Net gains (losses) on sale of loans87 17,269 3 17,203 
Fee income7,462 6,273 13,612 11,976 
Insurance commissions1,303 1,346 2,896 3,018 
Other(1,229)16,996 (1,547)16,966 
Total noninterest income11,511 48,160 22,533 59,281 
Noninterest expense:
Salaries and employee benefits54,219 54,257 108,905 100,541 
Occupancy, furniture and equipment7,292 6,507 13,995 12,943 
FDIC insurance and other regulatory assessments796 382 1,141 793 
Professional fees3,035 3,607 6,120 7,266 
Amortization of intangible assets3,001 3,064 5,851 6,172 
Advertising and promotion1,577 1,785 2,921 2,987 
Communications and technology11,397 9,820 22,249 18,932 
Other9,079 9,185 18,495 17,537 
Total noninterest expense90,396 88,607 179,677 167,171 
Net income before income tax expense9,923 58,080 22,433 90,215 
Income tax expense 2,273 13,888 3,773 21,694 
Net income $7,650 $44,192 $18,660 $68,521 
Dividends on preferred stock(802)(802)(1,603)(1,603)
Net income available to common stockholders$6,848 $43,390 $17,057 $66,918 
Earnings per common share
Basic$0.30 $1.78 $0.73 $2.72 
Diluted$0.29 $1.74 $0.72 $2.66 
See accompanying condensed notes to consolidated financial statements.
3
Table of Contents
TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Six Months Ended June 30, 2023 and 2022
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Net income$7,650 $44,192 $18,660 $68,521 
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period608 (5,457)2,354 (8,358)
Tax effect(69)1,251 (439)1,941 
Unrealized holding gains (losses) arising during the period, net of taxes539 (4,206)1,915 (6,417)
Reclassification of amount realized through sale or call of securities— (2,514)— (2,514)
Tax effect— 619 — 619 
Reclassification of amount realized through sale or call of securities, net of taxes— (1,895)— (1,895)
Change in unrealized gains (losses) on securities, net of tax539 (6,101)1,915 (8,312)
Unrealized gains (losses) on derivative financial instruments:
Unrealized holding gains (losses) arising during the period— — — 3,152 
Tax effect— — — (754)
Unrealized holding gains (losses) arising during the period, net of taxes— — — 2,398 
Reclassification of amount of (gains) losses recognized into income— (9,083)— (9,316)
Tax effect— 2,144 — 2,213 
Reclassification of amount of (gains) losses recognized into income, net of taxes— (6,939)— (7,103)
Change in unrealized gains (losses) on derivative financial instruments— (6,939)— (4,705)
Total other comprehensive income (loss)539 (13,040)1,915 (13,017)
Comprehensive income$8,189 $31,152 $20,575 $55,504 
See accompanying condensed notes to consolidated financial statements.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended June 30, 2023 and 2022
(Dollar amounts in thousands)
(Unaudited)
Preferred StockCommon StockAdditional
Paid-in-
Capital		Treasury StockRetained
Earnings		AccumulatedTotal
Stockholders'
Equity
Liquidation
Preference
Amount		Shares
Outstanding		Par
Amount		Shares
Outstanding		CostOther
Comprehensive
Income (Loss)
Balance, January 1, 2023$45,000 24,053,585 $283 $534,790 4,268,131 $(182,658)$498,456 $(6,900)$888,971 
Issuance of restricted stock awards— 6,852 — — — — — — — 
Vesting of restricted stock and performance stock units— 366,892 4 (4)— — — — — 
Stock option exercises, net— 758 — (33)— — — — (33)
Issuance of common stock pursuant to the Employee Stock Purchase Plan— 21,057 — 997 — — — — 997 
Stock based compensation— — — 2,881 — — — — 2,881 
Forfeiture of restricted stock awards— (10,961)— 610 10,961 (610)— — — 
Purchase of treasury stock, net— (1,067,668)— — 1,067,668 (77,185)— — (77,185)
Dividends on preferred stock— — — — — — (801)— (801)
Net income— — — — — — 11,010 — 11,010 
Other comprehensive income (loss)— — — — — — — 1,376 1,376 
Balance, March 31, 2023$45,000 23,370,515 $287 $539,241 5,346,760 $(260,453)$508,665 $(5,524)$827,216 
Vesting of restricted stock and performance stock units— 233,728 2 (2)— — — — — 
Stock option exercises, net— 829 — (19)— — — — (19)
Stock based compensation— — — 3,320 — — — — 3,320 
Forfeiture of restricted stock awards— (451)— 25 451 (25)— — — 
Purchase of treasury stock, net— (334,736)— — 334,736 (4,438)— — (4,438)
Dividends on preferred stock— — — — — — (802)— (802)
Net income— — — — — — 7,650 — 7,650 
Other comprehensive income (loss)— — — — — — — 539 539 
Balance, June 30, 2023$45,000 23,269,885 $289 $542,565 5,681,947 $(264,916)$515,513 $(4,985)833,466 
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Table of Contents
Preferred StockCommon StockAdditional
Paid-in-
Capital		Treasury StockRetained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Stockholders'
Equity
Liquidation
Preference
Amount		Shares
Outstanding		Par
Amount		Shares
Outstanding		Cost
Balance, January 1, 2022$45,000 25,158,879 $283 $510,939 3,102,801 $(104,743)$399,351 $8,034 $858,864 
Issuance of restricted stock awards— 5,502 — — — — — — — 
Stock option exercises, net— 2,021 — (74)— — — — (74)
Stock based compensation— — — 4,952 — — — — 4,952 
Forfeiture of restricted stock awards— (487)— 46 487 (46)— — — 
Issuance of common stock pursuant to the Employee Stock Purchase Plan— 10,585 — 688 — — — — 688 
Purchase of treasury stock, net— (14,810)— — 14,810 (1,316)— — (1,316)
Dividends on preferred stock— — — — — — (801)— (801)
Net income— — — — — — 24,329 — 24,329 
Other comprehensive income (loss)— — — — — — —23 23 
Balance, March 31, 2022$45,000 25,161,690 $283 $516,551 3,118,098 $(106,105)$422,879 $8,057 $886,665 
Vesting of restricted stock and performance stock units— 20,996 — — — — — — — 
Stock option exercises, net— 32 — — — — — — — 
Stock based compensation— — — 7,880 — — — — 7,880 
Forfeiture of restricted stock awards— (2,417)— 205 2,417 (205)— — — 
Purchase of treasury stock, net— (722,524)— — 722,524 (50,614)— — (50,614)
Dividends on preferred stock— — — — — — (802)— (802)
Net income— — — — — — 44,192 — 44,192 
Other comprehensive income (loss)— — — — — — — (13,040)(13,040)
Balance, June 30, 2022$45,000 24,457,777 $283 $524,636 3,843,039 $(156,924)$466,269 $(4,983)$874,281 
See accompanying condensed notes to consolidated financial statements.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2023 and 2022
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended June 30,
20232022
Cash flows from operating activities:
Net income$18,660 $68,521 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation6,567 6,044 
Net accretion on loans(2,800)(5,092)
Amortization of subordinated notes issuance costs434 420 
Amortization of junior subordinated debentures286 274 
Net (accretion) amortization on securities(435)(398)
Amortization of intangible assets5,851 6,172 
Deferred taxes8,727 943 
Credit loss expense (benefit)5,256 3,402 
Stock based compensation6,201 12,832 
Net (gains) losses on sale or call of debt securities— (2,514)
Net (gains) losses on equity securities(18)(9,709)
Net OREO (gains) losses and valuation adjustments— 114 
Origination of loans held for sale(1,392)(6,873)
Purchases of loans held for sale— (6,913)
Proceeds from sale of loans originated or purchased for sale1,320 14,145 
Net (gains) losses on sale of loans(3)(17,203)
Net change in operating leases(154)555 
(Increase) decrease in other assets(41,010)(38,471)
Increase (decrease) in other liabilities1,472 (12,122)
Net cash provided by (used in) operating activities8,962 14,127 
Cash flows from investing activities:
Proceeds from sales of equity securities783 — 
Purchases of securities available for sale(69,484)(79,119)
Proceeds from sales of securities available for sale4,000 40,163 
Proceeds from maturities, calls, and pay downs of securities available for sale18,911 20,798 
Proceeds from maturities, calls, and pay downs of securities held to maturity352 424 
Purchases of loans held for investment(18,842)(68,908)
Proceeds from sale of loans43,950 207,405 
Net change in loans(234,158)215,676 
Purchases of premises and equipment, net(17,901)(5,608)
Net proceeds from sale of OREO— 289 
(Purchases) redemptions of FHLB and other restricted stock, net(13,847)3,977 
Acquired intangible assets(3,042)— 
Proceeds from sale of disposal group— 66,918 
Net cash provided by (used in) investing activities(289,278)402,015 
Cash flows from financing activities:
Net increase (decrease) in deposits122,130 145,337 
Increase (decrease) in customer repurchase agreements(340)9,643 
Increase (decrease) in Federal Home Loan Bank advances250,000 (150,000)
Repayment of other borrowings— (27,144)
Preferred dividends(1,603)(1,603)
Stock option exercises, net(52)(74)
Proceeds from employee stock purchase plan common stock issuance997 688 
Purchase of treasury stock, net(81,623)(51,930)
Net cash provided by (used in) financing activities289,509 (75,083)
Net increase (decrease) in cash and cash equivalents9,193 341,059 
Cash and cash equivalents at beginning of period408,182 383,178 
Cash and cash equivalents at end of period417,375 724,237 
See accompanying condensed notes to consolidated financial statements.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2023 and 2022
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended June 30,
20232022
Supplemental cash flow information:
Interest paid$18,924 $7,296 
Income taxes paid, net$13,979 $45,035 
Cash paid for operating lease liabilities$2,763 $1,903 
Supplemental noncash disclosures:
Loans transferred to OREO$— $47 
Loans held for investment transferred to loans held for sale$38,389 $197,899 
Assets transferred to assets held for sale$— $80,819 
Deposits transferred to deposits held for sale$— $10,434 
Lease liabilities arising from obtaining right-of-use assets$3,228 $5,267 
Securities available for sale purchased, not settled$— $23,370 
Non-cash consideration received from sale of loan portfolio or disposal group$— $4,502 
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Triumph Financial, Inc. (collectively with its subsidiaries, “Triumph Financial”, or the “Company” as applicable) is a financial holding company headquartered in Dallas, Texas, offering a diversified line of payments, factoring and banking services. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Triumph CRA Holdings, LLC (“TCRA”), TBK Bank, SSB (“TBK Bank”), TBK Bank’s wholly owned factoring subsidiary Triumph Financial Services LLC ("Triumph Financial Services"), and TBK Bank’s wholly owned subsidiary Triumph Insurance Group, Inc. (“TIG”). TriumphPay operates as a division of TBK Bank, SSB.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission (“SEC”). Accordingly, the condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Operating Segments
The Company’s reportable segments are comprised of strategic business units primarily based upon industry categories and, to a lesser extent, the core competencies relating to product origination, distribution methods, operations and servicing. Segment determination also considers organizational structure and is consistent with the presentation of financial information to the chief operating decision maker to evaluate segment performance, develop strategy, and allocate resources. The Company's chief operating decision maker is the Chief Executive Officer of Triumph Financial, Inc. Management has determined that the Company has four reportable segments consisting of Banking, Factoring, Payments, and Corporate.
The Banking segment includes the operations of TBK Bank. The Banking segment derives its revenue principally from investments in interest-earning assets as well as noninterest income typical for the banking industry.
The Factoring segment includes the operations of Triumph Financial Services with revenue derived from factoring services.
The Payments segment includes the operations of the TBK Bank's TriumphPay division, which is the payments network for presentment, audit, and payment of over-the-road trucking invoices. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of (i) invoices where we offer a carrier a quickpay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us, (ii) offering freight brokers the ability to settle their invoices with us on an extended term following our payment to their carriers as an additional liquidity option for such freight brokers, and (iii) factoring transactions where we purchase receivables payable to such freight brokers from their shipper clients.
The Corporate segment includes holding company financing and investment activities as well as management and administrative expenses that support the overall operations of the Company such as human resources, accounting, finance, risk management and information technology expense.
For further discussion of management's operating segments and allocation methodology, see Note 16 – Business Segment Information.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Adoption of New Accounting Standards
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-02, "Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss ("CECL") model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13"). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost".
The Company adopted ASU 2022-02 effective January 1, 2023 on a prospective basis. Adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.
NOTE 2 — ACQUISITIONS AND DIVESTITURES
Equipment Loan Sale
During the quarter ended June 30, 2022, the Company made the decision to sell a portfolio of equipment loans for cash consideration. The sale closed on June 23, 2022. A summary of the carrying amount of the assets sold and the gain on sale is as follows:
(Dollars in thousands)
Equipment loans$191,167 
Accrued interest receivable1,587 
Assets sold192,754 
Cash consideration197,454 
Return of premium liability(708)
Total consideration196,746 
Transaction costs73 
Gain on sale, net of transaction costs$3,919 
The associated agreement contains a provision that in the event that a sold loan is prepaid in full prior to the due date of the final scheduled contractual payment, the Company will return a pro-rata portion of the premium calculated as of the date of such prepayment in full. As this transaction qualified as a sale of a group of entire financial assets, management must recognize, as proceeds, any assets obtained and liabilities incurred. Thus, management recorded a $708,000 liability for the potential return of premium measured at fair value as of the date of close. Management has elected the fair value option to account for the liability. It is recorded in other liabilities in the Company's Consolidated Balance Sheet and is marked to fair value through earnings at each reporting period. For further discussion of changes in the fair value of the return of premium liability and the period end balance, see Note 10 – Fair Value Disclosures.
The gain on sale, net of transaction costs, was included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income during the three months ended June 30, 2022 and was allocated to the Banking segment.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Factored Receivable Disposal Group
On June 30, 2022 and September 6, 2022, the Company entered into and closed two separate agreements to sell two separate portfolios of factored receivables. A summary of the carrying amounts of the assets and liabilities sold and the gains on sale are as follows:
(Dollars in thousands)June 30, 2022September 6, 2022Total
Factored receivables$67,888 $20,131 $88,019 
Accrued interest and fee income— 17 17 
Assets held for sale67,888 20,148 88,036 
Customer reserve noninterest bearing deposits9,682 1,149 10,831 
Liabilities held for sale9,682 1,149 10,831 
Net assets sold58,206 18,999 77,205 
Cash consideration66,292 19,054 85,346 
Revenue share asset5,210 1,027 6,237 
Total consideration71,502 20,081 91,583 
Transaction costs82 49 131 
Gain on sale, net of transaction costs$13,214 $1,033 $14,247 
The June 30, 2022 and September 6, 2022 agreements contain revenue share provisions that entitle the Company to amounts equal to fifteen percent and a range of fifteen to twenty percent, depending on client, respectively, of the future gross monthly revenue of the clients associated with the sold factored receivable portfolios. As these transactions qualified as sales of a group of entire financial assets, management recognized, as proceeds, the assets obtained and liabilities incurred. Thus, management recorded revenue share assets for the contractual right to receive future cash flows from a third party measured at fair value as of the date of close for the June 30, 2022 and September 6, 2022 agreements totaling $5,210,000 and $1,027,000, respectively. These are financial assets for which management elected the fair value option. They are recorded in other assets in the Company's Consolidated Balance Sheet and are marked to fair value through earnings at each reporting period.
For further discussion of changes in the fair value of the revenue share provisions and the period end balance, see Note 10 – Fair Value Disclosures.
The gains on sale, net of transaction costs, were included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income during the three months ended June 30, 2022 and September 30, 2022, respectively, and were allocated to the Factoring segment.
NOTE 3 — SECURITIES
Equity Securities With Readily Determinable Fair Values
The Company held equity securities with readily determinable fair values of $4,426,000 and $5,191,000 at June 30, 2023 and December 31, 2022, respectively. The gross realized and unrealized gains and losses recognized on equity securities with readily determinable fair values in noninterest income in the Company’s consolidated statements of income were as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Unrealized gains (losses) on equity securities held at the reporting date$(72)$(35)$— $(454)
Realized gains (losses) on equity securities sold during the period— — 18 — 
$(72)$(35)$18 $(454)
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Equity Securities Without Readily Determinable Fair Values
The following table summarizes the Company's investments in equity securities without readily determinable fair values:
(Dollars in thousands)June 30, 2023December 31, 2022
Equity Securities without readily determinable fair value, at cost
$64,282 $39,019 
Upward adjustments based on observable price changes, cumulative
10,163 10,163 
Equity Securities without readily determinable fair value, carrying value$74,445 $49,182 
Equity securities without readily determinable fair values include Federal Home Loan Bank and other restricted stock, which are reported separately in the Company's consolidated balance sheets. Equity securities without readily determinable fair values also include the Company's investments in the common stock of Trax Group, Inc. and Warehouse Solutions Inc., discussed below, and other investments, which are included in other assets in the Company's consolidated balance sheets.
The gross realized and unrealized gains (losses) recognized on equity securities without readily determinable fair values in noninterest income in the Company’s consolidated statements of income were as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Unrealized gains (losses) on equity securities still held at the reporting date$— $10,163 $— $10,163 
Realized gains (losses) on equity securities sold during the period— — — — 
$— $10,163 $— $10,163 
Trax Group, Inc.
On June 22, 2023, the Company made a $9,700,000 minority investment in Trax Group, Inc. ("Trax"), a leader in transportation spend management solutions. The investment in Trax is accounted for as an equity investment without a readily determinable fair value measured under the measurement alternative and is included in other assets in the Company's consolidated balance sheets.
Warehouse Solutions Inc.
On October 17, 2019, the Company made a minority equity investment of $8,000,000 in Warehouse Solutions Inc. (“WSI”), purchasing 8% of the common stock of WSI and receiving warrants to purchase an additional 10% of the common stock of WSI upon exercise of the warrants at a later date. WSI provides technology solutions to help reduce supply chain costs for a global client base across multiple industries.
Although the Company held less than 20% of the voting stock of WSI, the investment in common stock was initially accounted for using the equity method as the Company’s representation on WSI’s board of directors, which was disproportionately larger in size than the common stock investment held, demonstrated that it had significant influence over the investee.
On June 10, 2022, the Company entered into two separate agreements with WSI. First, the Company entered into an Affiliate Agreement. The Affiliate Agreement canceled the Company’s outstanding warrants and modified the structure of the existing operating agreement to be consistent with TriumphPay operating as an open loop payments network. By modifying the operating agreement, the Company’s Payments segment operations now have greater ability to operate in the freight shipper audit space. As a result of the Affiliate Agreement, the Company recognized a total loss on impairment of the warrants of $3,224,000, which represented the full book balance of the warrants on the date the Affiliate Agreement was executed. The impairment loss was included in other noninterest income on the Company's consolidated statements of income during the three months ended June 30, 2022.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Separately, the Company also entered into an Amended and Restated Investor Rights Agreement (the “Investor Rights Agreement”). The Investor Rights Agreement eliminated the Company’s representation on WSI’s board of directors making the Company a completely passive investor. The Investor Rights Agreement also provided for the Company’s purchase of an additional 10% of WSI’s common stock for $23,000,000 raising the Company’s ownership of WSI’s common stock to 18%. As a passive investor, the Company no longer holds significant influence over the investee and the investment in WSI’s common stock no longer qualifies for equity method accounting. The investment in WSI’s common stock is now accounted for as an equity investment without a readily determinable fair value measured under the measurement alternative. The measurement alternative requires the Company to remeasure its investment in the common stock of WSI only upon the execution of an orderly and observable transaction in an identical or similar instrument.
The Company's additional investment in WSI under the Investor Rights Agreement qualified as an orderly and observable transaction for an identical investment in WSI, therefore the fair value of the Company's original 8% common stock investment was required to be adjusted from $4,925,000 at March 31, 2022 to $15,088,000, resulting in a gain of $10,163,000 that was recorded in other noninterest income on the Company's consolidated statements of income during the three months ended June 30, 2022. The Company's investment in WSI totaled $38,088,000 at June 30, 2023 and December 31, 2022 and has been allocated to the Payments segment.
Debt Securities
Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, fair value, and allowance for credit losses of debt securities and the corresponding amounts of gross unrealized gains and losses of available for sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities:
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance
for Credit
Losses		Fair
Value
June 30, 2023
Available for sale securities:
Mortgage-backed securities, residential$51,069 $— $(5,240)$— $45,829 
Asset-backed securities1,286 — (34)— 1,252 
State and municipal5,283 — (88)— 5,195 
CLO securities250,260 481 (1,662)— 249,079 
Corporate bonds769 — (9)— 760 
SBA pooled securities1,773 5 (114)— 1,664 
Total available for sale securities$310,440 $486 $(7,147)$— $303,779 
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrecognized
Losses		Fair
Value
June 30, 2023
Held to maturity securities:
CLO securities$6,256 $284 $(1,790)$4,750 
Allowance for credit losses(2,876)
Total held to maturity securities, net of ACL$3,380 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance for Credit LossesFair
Value
December 31, 2022
Available for sale securities:
Mortgage-backed securities, residential$55,329 $235 $(4,931)$— $50,633 
Asset-backed securities6,389 — (58)— 6,331 
State and municipal13,553 1 (116)— 13,438 
CLO Securities185,068 161 (4,218)— 181,011 
Corporate bonds1,270 1 (8)— 1,263 
SBA pooled securities1,910 29 (111)— 1,828 
Total available for sale securities$263,519 $427 $(9,442)$— $254,504 
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrecognized
Losses		Fair
Value
December 31, 2022
Held to maturity securities:
CLO securities$6,521 $458 $(1,503)$5,476 
Allowance for credit losses(2,444)
Total held to maturity securities, net of ACL$4,077 
The amortized cost and estimated fair value of securities at June 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale SecuritiesHeld to Maturity Securities
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Due in one year or less$1,224 $1,220 $— $— 
Due from one year to five years2,213 2,175 1,913 2,106 
Due from five years to ten years73,022 72,397 4,343 2,644 
Due after ten years179,853 179,242 — — 
256,312 255,034 6,256 4,750 
Mortgage-backed securities, residential51,069 45,829 — — 
Asset-backed securities1,286 1,252 — — 
SBA pooled securities1,773 1,664 — — 
$310,440 $303,779 $6,256 $4,750 
Proceeds from sales of debt securities and the associated gross gains and losses as well as net gains and losses from calls of debt securities are as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Proceeds$4,000 $40,163 $4,000 $40,163 
Gross gains— 2,512 — 2,512 
Gross losses— — — — 
Net gains and losses from calls of securities— 2 — 2 
Debt securities with a carrying amount of approximately $35,749,000 and $93,813,000 at June 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accrued interest on available for sale securities totaled $4,299,000 and $2,593,000 at June 30, 2023 and December 31, 2022, respectively, and was included in other assets on the Company's consolidated balance sheets. There was no accrued interest related to debt securities reversed against interest income for the three and six months ended June 30, 2023 and 2022.
The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
June 30, 2023
Available for sale securities:
Mortgage-backed securities, residential$18,822 $(574)$26,886 $(4,666)$45,708 $(5,240)
Asset-backed securities— — 1,252 (34)1,252 (34)
State and municipal4,134 (57)471 (31)4,605 (88)
CLO securities23,028 (49)107,197 (1,613)130,225 (1,662)
Corporate bonds759 (9)— — 759 (9)
SBA pooled securities223 (3)1,133 (111)1,356 (114)
$46,966 $(692)$136,939 $(6,455)$183,905 $(7,147)
Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
December 31, 2022
Available for sale securities:
Mortgage-backed securities, residential$26,030 $(1,507)$15,828 $(3,424)$41,858 $(4,931)
Asset-backed securities1,337 (52)4,994 (6)6,331 (58)
State and municipal12,680 (116)— — 12,680 (116)
CLO Securities151,572 (3,407)19,439 (811)171,011 (4,218)
Corporate bonds261 (8)— — 261 (8)
SBA pooled securities1,262 (111)— — 1,262 (111)
$193,142 $(5,201)$40,261 $(4,241)$233,403 $(9,442)
Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
At June 30, 2023, the Company had 137 available for sale debt securities in an unrealized loss position without an allowance for credit losses. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of June 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore the Company carried no allowance for credit losses on available for sale debt securities at June 30, 2023.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the activity in the allowance for credit losses for held to maturity debt securities:
(Dollars in thousands)Three Months Ended June 30,Six Months Ended June 30,
Held to Maturity CLO Securities2023202220232022
Allowance for credit losses:
Beginning balance$2,585 $2,455 $2,444 $2,082 
Credit loss expense291 (100)432 273 
Allowance for credit losses ending balance$2,876 $2,355 $2,876 $2,355 
The Company’s held to maturity securities are investments in the unrated subordinated notes of collateralized loan obligation funds. These securities are the junior-most in securitization capital structures, and are subject to suspension of distributions if the credit of the underlying loan portfolios deteriorates materially. The ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At June 30, 2023 and December 31, 2022, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call. At June 30, 2023, $4,778,000 of the Company’s held to maturity securities were classified as nonaccrual.
NOTE 4 — LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans Held for Sale
The following table presents loans held for sale:
(Dollars in thousands)June 30, 2023December 31, 2022
1-4 family residential$89 $— 
Commercial6 5,641 
Total loans held for sale$95 $5,641 
Loans Held for Investment
Loans
The following table presents the amortized cost and unpaid principal balance of loans held for investment:
June 30, 2023December 31, 2022
(Dollars in thousands)Amortized
Cost		Unpaid
Principal		DifferenceAmortized
Cost		Unpaid
Principal		Difference
Commercial real estate$768,711 $769,682 $(971)$678,144 $679,239 $(1,095)
Construction, land development, land110,071 110,456 (385)90,976 91,147 (171)
1-4 family residential130,628 130,830 (202)125,981 126,185 (204)
Farmland67,913 68,090 (177)68,934 69,185 (251)
Commercial1,218,892 1,227,039 (8,147)1,251,110 1,262,493 (11,383)
Factored receivables1,173,794 1,177,702 (3,908)1,237,449 1,241,032 (3,583)
Consumer8,409 8,411 (2)8,868 8,871 (3)
Mortgage warehouse846,340 846,340 — 658,829 658,829 — 
Total loans held for investment4,324,758 $4,338,550 $(13,792)4,120,291 $4,136,981 $(16,690)
Allowance for credit losses(34,970)(42,807)
$4,289,788 $4,077,484 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The difference between the amortized cost and the unpaid principal is due to (1) premiums and discounts associated with acquired loans totaling $9,848,000 and $13,383,000 at June 30, 2023 and December 31, 2022, respectively, and (2) net deferred origination and factoring fees totaling $3,944,000 and $3,307,000 at June 30, 2023 and December 31, 2022, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $23,230,000 and $19,279,000 at June 30, 2023 and December 31, 2022, respectively, and was included in other assets on the Company's consolidated balance sheets.
At June 30, 2023 and December 31, 2022, the Company had $198,960,000 and $249,288,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.
At June 30, 2023 and December 31, 2022 the balance of the Over-Formula Advance Portfolio, acquired from Transport Financial Solutions during 2020, included in factored receivables was $4,011,000 and $8,202,000, respectively. These balances were fully reserved as of those respective dates. During the six months ended June 30, 2023, new adverse developments with one of the two remaining Over-Formula Advance clients caused us to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $3,330,000; however, this net charge-off had no impact on credit loss expense as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant will reimburse us for $1,665,000 of this charge-off which is reflected as a receivable in other assets on our June 30, 2023 Consolidated Balance Sheet.
At June 30, 2023 the Company carried a separate $19,361,000 receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest Over-Formula Advance Portfolio carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. We are a party to litigation in the United States Court of Federal Claims against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of June 30, 2023.
Loans with carrying amounts of $1,598,726,000 and $1,356,922,000 at June 30, 2023 and December 31, 2022, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity, Paycheck Protection Program Liquidity Facility borrowings and Federal Reserve Bank discount window borrowing capacity.
Allowance for Credit Losses
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The activity in the allowance for credit losses (“ACL”) related to loans held for investment is as follows:
(Dollars in thousands)Beginning
Balance		Credit Loss
Expense		Charge-offsRecoveriesEnding
Balance
Three months ended June 30, 2023
Commercial real estate$4,292 $491 $— $— $4,783 
Construction, land development, land1,139 95 — 1 1,235 
1-4 family residential1,004 34 — 8 1,046 
Farmland472 4 — — 476 
Commercial16,683 1,368 (5,124)50 12,977 
Factored receivables17,581 1,521 (5,820)159 13,441 
Consumer185 44 (133)70 166 
Mortgage warehouse889 (43)— — 846 
$42,245 $3,514 $(11,077)$288 $34,970 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)Beginning
Balance		Credit Loss
Expense		Charge-offsRecoveriesEnding
Balance
Three months ended June 30, 2022
Commercial real estate$3,527 $1,594 $— $46 $5,167 
Construction, land development, land901 290 — 1 1,192 
1-4 family residential450 305 — 2 757 
Farmland121 369 — — 490 
Commercial13,215 (407)(260)190 12,738 
Factored receivables22,471 (120)(712)573 22,212 
Consumer175 77 (96)41 197 
Mortgage warehouse693 (39)— — 654 
$41,553 $2,069 $(1,068)$853 $43,407 
(Dollars in thousands)Beginning
Balance		Credit Loss
Expense		Charge-offsRecoveriesEnding
Balance
Six Months Ended June 30, 2023
Commercial real estate$4,459 $254 $— $70 $4,783 
Construction, land development, land1,155 78 — 2 1,235 
1-4 family residential838 203 (5)10 1,046 
Farmland483 (7)— — 476 
Commercial15,918 2,315 (5,346)90 12,977 
Factored receivables19,121 2,071 (8,113)362 13,441 
Consumer175 65 (271)197 166 
Mortgage warehouse658 188 — — 846 
$42,807 $5,167 $(13,735)$731 $34,970 
(Dollars in thousands)Beginning
Balance		Credit Loss
Expense		Charge-offsRecoveriesEnding
Balance
Six months ended June 30, 2022
Commercial real estate$3,961 $1,254 $(108)$60 $5,167 
Construction, land development, land827 363 — 2 1,192 
1-4 family residential468 284 — 5 757 
Farmland562 (72)— — 490 
Commercial14,485 (1,014)(984)251 12,738 
Factored receivables20,915 2,115 (1,420)602 22,212 
Consumer226 118 (207)60 197 
Mortgage warehouse769 (115)— — 654 
$42,213 $2,933 $(2,719)$980 $43,407 
The decrease in required ACL during the three months ended June 30, 2023 is a function of net charge-offs of $10,789,000 and credit loss expense of $3,514,000.
The decrease in required ACL during the six months ended June 30, 2023 is a function of net charge-offs of $13,004,000 and credit loss expense of $5,167,000.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit and PPP), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. The Company also forecasts prepayments speeds for use in the DCF models with higher prepayment speeds resulting in lower required ACL levels and vice versa for shorter prepayment speeds. These assumed prepayment speeds are based upon our historical prepayment speeds by loan type adjusted for the expected impact of the future interest rate environment. The impact of these assumed prepayment speeds is lesser in magnitude than the aforementioned loss driver assumptions.
For all DCF models at June 30, 2023, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At June 30, 2023 as compared to December 31, 2022, the Company forecasted a slight decrease national unemployment, a steeper decrease in one-year percentage change in national retail sales, a decrease in one-year percentage change in the national home price index, and a minimal change in one-year percentage change in national gross domestic product. At June 30, 2023 for national unemployment, the Company projected a low percentage in the first quarter followed by a gradual rise in the following three quarters. For percentage change in national retail sales, the Company projected a near-zero level in the first projected quarter followed by a decline to negative levels over the last three projected quarters to a level below recent actual periods. For percentage change in national home price index, the Company projected a negative levels for all four quarters with such negative levels peaking in the third projected quarter. For percentage change in national gross domestic product, management projected near-zero growth for each projected quarter. At June 30, 2023, the Company slowed its historical prepayment speeds in response to the expected interest rate environment in the macro economy.
The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.
For the three months ended June 30, 2023, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period did not have a meaningful impact on the required ACL. Likewise, changes in loan volume and mix did not have a meaningful impact on the ACL during the period. Decreases in required specific reserves decreased the required ACL by $7,108,000. Net charge-offs during the period were $10,789,000.
For the three months ended June 30, 2022, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period increased the required ACL by $2,558,000. Changes in loan volume and mix decreased the required ACL by $1,624,000. Increases in required specific reserves increased the required ACL by $919,000. Net charge-offs during the period were $215,000.
For the six months ended June 30, 2023, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period did not have a meaningful impact on the required ACL. Likewise, changes in loan volume and mix did not have a meaningful impact on the ACL during the period. Decreases in required specific reserves decreased the required ACL by $8,019,000. Net charge-offs during the period were $13,004,000.
For the six months ended June 30, 2022, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period increased the required ACL by $1,541,000. Changes in loan volume and mix decreased the required ACL by $2,146,000. Increases in required specific reserves increased the required ACL by $1,798,000. Net charge-offs during the period were $1,739,000.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
(Dollars in thousands)Real EstateAccounts
Receivable		EquipmentOtherTotalACL
Allocation
June 30, 2023
Commercial real estate$1,209 $— $179 $803 $2,191 $32 
Construction, land development, land— — — — — — 
1-4 family residential1,059 — — 26 1,085 126 
Farmland303 — — 92 395 — 
Commercial1,045 — 2,652 2,383 6,080 1,990 
Factored receivables— 36,951 — — 36,951 8,004 
Consumer— — — 180 180 — 
Mortgage warehouse— — — — — — 
Total$3,616 $36,951 $2,831 $3,484 $46,882 $10,152 
At June 30, 2023 the balance of the Over-Formula Advance Portfolio included in factored receivables was $4,011,000 and was fully reserved. At June 30, 2023 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.
(Dollars in thousands)Real EstateAccounts
Receivable		EquipmentOtherTotalACL
Allocation
December 31, 2022
Commercial real estate$1,003 $— $— $140 $1,143 $283 
Construction, land development, land150 — — — 150 — 
1-4 family residential1,342 — — 49 1,391 108 
Farmland196 — 108 96 400 — 
Commercial193 — 5,334 10,370 15,897 4,737 
Factored receivables— 42,409 — — 42,409 13,042 
Consumer— — — 91 91 — 
Mortgage warehouse— — — — — — 
Total$2,884 $42,409 $5,442 $10,746 $61,481 $18,170 
At December 31, 2022 the balance of the Over-Formula Advance Portfolio included in factored receivables was $8,202,000 and carried an ACL allocation of $8,202,000. At December 31, 2022 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.
Past Due and Nonaccrual Loans
The following tables present an aging of contractually past due loans:
(Dollars in thousands)Past Due
30-59 Days		Past Due
60-90 Days		Past Due 90
Days or More		Total
Past Due		CurrentTotalPast Due 90
Days or More
and Accruing
June 30, 2023
Commercial real estate$— $42 $16 $58 $768,653 $768,711 $— 
Construction, land development, land— — — — 110,071 110,071 — 
1-4 family residential783 157 431 1,371 129,257 130,628 — 
Farmland3,848 231 — 4,079 63,834 67,913 — 
Commercial4,277 5,242 3,773 13,292 1,205,600 1,218,892 — 
Factored receivables17,787 3,543 26,819 48,149 1,125,645 1,173,794 26,819 
Consumer13 91 108 212 8,197 8,409 — 
Mortgage warehouse— — — — 846,340 846,340 — 
Total$26,708 $9,306 $31,147 $67,161 $4,257,597 $4,324,758 $26,819 
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)Past Due
30-59 Days		Past Due
60-90 Days		Past Due 90
Days or More		Total
Past Due		CurrentTotalPast Due 90
Days or More
and Accruing
December 31, 2022
Commercial real estate$1,301 $— $455 $1,756 $676,388 $678,144 $— 
Construction, land development, land— — 145 145 90,831 90,976 — 
1-4 family residential936 531 776 2,243 123,738 125,981 — 
Farmland— — — — 68,934 68,934 — 
Commercial1,630 3,139 2,847 7,616 1,243,494 1,251,110 — 
Factored receivables42,797 12,651 37,142 92,590 1,144,859 1,237,449 37,142 
Consumer52 41 2 95 8,773 8,868 — 
Mortgage warehouse— — — — 658,829 658,829 — 
Total$46,716 $16,362 $41,367 $104,445 $4,015,846 $4,120,291 $37,142 
At June 30, 2023 and December 31, 2022, total past due Over-Formula Advances recorded in factored receivables was $4,011,000 and $8,202,000, respectively, all of which was considered past due 90 days or more. At June 30, 2023 and December 31, 2022, the Misdirected Payments totaled $19,361,000, all of which was considered past due 90 days or more. Given the nature of factored receivables, these assets are disclosed as past due 90 days or more still accruing; however, the Company is not recognizing income on the assets. Historically, any income recognized on factored receivables that are past due 90 days or more has not been material.
The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses:
June 30, 2023December 31, 2022
(Dollars in thousands)Total NonaccrualNonaccrual
With No ACL		Total NonaccrualNonaccrual
With No ACL
Commercial real estate$1,933 $1,818 $871 $319 
Construction, land development, land— — 150 150 
1-4 family residential1,085 881 1,391 1,238 
Farmland394 394 400 400 
Commercial5,501 1,813 15,393 3,662 
Factored receivables— — — — 
Consumer180 180 91 91 
Mortgage warehouse— — — — 
$9,093 $5,086 $18,296 $5,860 
The following table presents accrued interest on nonaccrual loans reversed through interest income:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Commercial real estate$— $— $16 $— 
Construction, land development, land— — — — 
1-4 family residential6 — 6 — 
Farmland— — 22 — 
Commercial1 2 8 6 
Factored receivables— — — — 
Consumer1 — 1 — 
Mortgage warehouse— — — — 
$8 $2 $53 $6 
There was no interest earned on nonaccrual loans during the three and six months ended June 30, 2023 and 2022.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents information regarding nonperforming loans:
(Dollars in thousands)June 30, 2023December 31, 2022
Nonaccrual loans$9,093 $18,296 
Factored receivables greater than 90 days past due22,808 28,940 
Other nonperforming factored receivables(1)
61 491 
Troubled debt restructurings accruing interest— 503 
$31,962 $48,230 
(1)Other nonperforming factored receivables represent the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification as well as other nonperforming factored receivables less than 90 days past due. This amount is also considered Classified from a risk rating perspective.
Credit Quality Information
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:
Pass – Pass rated loans have low to average risk and are not otherwise classified.
Classified – Classified loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Certain classified loans have the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of June 30, 2023 and December 31, 2022, based on the most recent analysis performed, the risk category of loans is as follows:
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revolving
Loans		Revolving
Loans
Converted
To Term
Loans		Total
(Dollars in thousands)Year of Origination
June 30, 202320232022202120202019Prior
Commercial real estate
Pass$81,407 $189,531 $155,250 $188,216 $24,049 $41,734 $80,562 $174 $760,923 
Classified872 3,177 732 2,953 38 16 — — 7,788 
Total commercial real estate$82,279 $192,708 $155,982 $191,169 $24,087 $41,750 $80,562 $174 $768,711 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction, land development, land
Pass$39,791 $54,122 $6,494 $3,361 $3,006 $392 $2,905 $— $110,071 
Classified— — — — — — — — — 
Total construction, land development, land$39,791 $54,122 $6,494 $3,361 $3,006 $392 $2,905 $— $110,071 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
1-4 family residential
Pass$14,577 $23,352 $20,376 $8,345 $2,639 $22,464 $37,263 $182 $129,198 
Classified317 23 127 5 53 789 116 — 1,430 
Total 1-4 family residential$14,894 $23,375 $20,503 $8,350 $2,692 $23,253 $37,379 $182 $130,628 
YTD gross charge-offs$— $— $— $— $— $5 $— $— $5 
Farmland
Pass$6,801 $14,731 $6,437 $8,275 $2,541 $21,301 $1,640 $172 $61,898 
Classified4,702 895 — 21 99 298 — — 6,015 
Total farmland$11,503 $15,626 $6,437 $8,296 $2,640 $21,599 $1,640 $172 $67,913 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial
Pass$191,873 $273,932 $112,284 $102,327 $35,368 $14,440 $467,359 $816 $1,198,399 
Classified1,069 9,873 6,490 1,977 33 168 883 — 20,493 
Total commercial$192,942 $283,805 $118,774 $104,304 $35,401 $14,608 $468,242 $816 $1,218,892 
YTD gross charge-offs$1 $598 $4,395 $342 $10 $— $— $— $5,346 
Factored receivables
Pass$1,138,485 $— $— $3,950 $— $— $— $— $1,142,435 
Classified11,937 — — 19,422 — — — — 31,359 
Total factored receivables$1,150,422 $— $— $23,372 $— $— $— $— $1,173,794 
YTD gross charge-offs$2,490 $2,293 $— $3,330 $— $— $— $— $8,113 
Consumer
Pass$2,277 $2,064 $920 $599 $209 $2,109 $61 $— $8,239 
Classified— — 99 — — 71 — — 170 
Total consumer$2,277 $2,064 $1,019 $599 $209 $2,180 $61 $— $8,409 
YTD gross charge-offs$242 $13 $11 $3 $— $2 $— $— $271 
Mortgage warehouse
Pass$846,340 $— $— $— $— $— $— $— $846,340 
Classified— — — — — — — — — 
Total mortgage warehouse$846,340 $— $— $— $— $— $— $— $846,340 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
Total loans
Pass$2,321,551 $557,732 $301,761 $315,073 $67,812 $102,440 $589,790 $1,344 $4,257,503 
Classified18,897 13,968 7,448 24,378 223 1,342 999 — 67,255 
Total loans$2,340,448 $571,700 $309,209 $339,451 $68,035 $103,782 $590,789 $1,344 $4,324,758 
YTD gross charge-offs$2,733 $2,904 $4,406 $3,675 $10 $7 $— $— $13,735 
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revolving
Loans		Revolving
Loans
Converted
To Term
Loans		Total
(Dollars in thousands)Year of Origination
December 31, 202220222021202020192018Prior
Commercial real estate
Pass$231,427 $156,895 $198,541 $28,033 $17,786 $35,658 $3,675 $— $672,015 
Classified3,668 551 1,855 39 — 16 — — 6,129 
Total commercial real estate$235,095 $157,446 $200,396 $28,072 $17,786 $35,674 $3,675 $— $678,144 
Construction, land development, land
Pass$71,236 $11,328 $4,535 $3,186 $35 $506 $— $— $90,826 
Classified— — 5 — — 145 — — 150 
Total construction, land development, land$71,236 $11,328 $4,540 $3,186 $35 $651 $— $— $90,976 
1-4 family residential
Pass$26,306 $22,639 $9,536 $2,929 $3,528 $20,910 $38,361 $300 $124,509 
Classified137 199 7 53 1 1,006 69 — 1,472 
Total 1-4 family residential$26,443 $22,838 $9,543 $2,982 $3,529 $21,916 $38,430 $300 $125,981 
Farmland
Pass$18,190 $7,291 $10,027 $2,699 $6,742 $18,569 $1,016 $204 $64,738 
Classified1,062 2,796 120 108 — 110 — — 4,196 
Total farmland$19,252 $10,087 $10,147 $2,807 $6,742 $18,679 $1,016 $204 $68,934 
Commercial
Pass$358,983 $181,933 $136,635 $41,912 $5,842 $12,145 $486,889 $161 $1,224,500 
Classified10,721 10,579 3,767 1,038 96 116 293 — 26,610 
Total commercial$369,704 $192,512 $140,402 $42,950 $5,938 $12,261 $487,182 $161 $1,251,110 
Factored receivables
Pass$1,196,912 $— $7,710 $— $— $— $— $— $1,204,622 
Classified12,974 — 19,853 — — — — — 32,827 
Total factored receivables$1,209,886 $— $27,563 $— $— $— $— $— $1,237,449 
Consumer
Pass$2,768 $1,981 $894 $304 $266 $2,418 $147 $— $8,778 
Classified— 1 2 — 8 79 — — 90 
Total consumer$2,768 $1,982 $896 $304 $274 $2,497 $147 $— $8,868 
Mortgage warehouse
Pass$658,829 $— $— $— $— $— $— $— $658,829 
Classified— — — — — — — — — 
Total mortgage warehouse$658,829 $— $— $— $— $— $— $— $658,829 
Total loans
Pass$2,564,651 $382,067 $367,878 $79,063 $34,199 $90,206 $530,088 $665 $4,048,817 
Classified28,562 14,126 25,609 1,238 105 1,472 362 — 71,474 
Total loans$2,593,213 $396,193 $393,487 $80,301 $34,304 $91,678 $530,450 $665 $4,120,291 

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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loan Modifications to Borrowers Experiencing Financial Difficulty
The following table presents the amortized cost basis at the end of the reporting period of the loans modifications to borrowers experiencing financial difficulty:
Term Extension
Three Months Ended June 30, 2023Six Months Ended June 30, 2023
(Dollars in thousands)Amortized Cost % of PortfolioAmortized Cost% of Portfolio
Commercial real estate$116 — %$116 — %
Commercial— — %1,218 0.1 %
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Term Extension
Three Months Ended June 30, 2023Six Months Ended June 30, 2023
Commercial real estate
Modification added a weighted average 0.3 years to the life of the modified loans, which did not have a material impact on cash flows.
Modification added a weighted average 0.3 years to the life of the modified loans, which did not have a material impact on cash flows.
CommercialN/A
Modification added a weighted average 0.3 years to the life of the modified loans, which did not have a material impact on cash flows.
Payment Delay
Three Months Ended June 30, 2023Six Months Ended June 30, 2023
(Dollars in thousands)Amortized Cost % of PortfolioAmortized Cost% of Portfolio
Commercial real estate$— — %$756 0.1 %
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Payment Delay
Six Months Ended June 30, 2023
Commercial real estate
Modification allowed for a weighted average 0.5 years of interest only payments with remaining balances due at maturity.
The following table presents the performance of loans that have been modified in the last twelve months:
June 30, 2023
(Dollars in thousands)CurrentPast Due
30-89 Days		Past Due
90 Days or More
Commercial real estate$872 $— $— 
Commercial1,218 — — 
$2,090 $— $— 
At June 30, 2023, the Company had no commitments to lend additional funds to borrowers experiencing financial difficulty for which the Company modified the terms of the loans in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension during the current period.
There were no loans to borrowers experiencing financial difficulty that had a payment default during the three and six months ended June 30, 2023 and were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Residential Real Estate Loans In Process of Foreclosure
At June 30, 2023 and December 31, 2022, the Company had $0 and $129,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.
NOTE 5 — GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
(Dollars in thousands)June 30, 2023December 31, 2022
Goodwill$233,709 $233,709 
June 30, 2023December 31, 2022
(Dollars in thousands)Gross Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount		Gross Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount
Core deposit intangibles$43,578 $(36,802)$6,776 $43,578 $(35,347)$8,231 
Software intangible assets16,932 (8,819)8,113 16,932 (6,702)10,230 
Other intangible assets33,452 (19,092)14,360 30,410 (16,813)13,597 
$93,962 $(64,713)$29,249 $90,920 $(58,862)$32,058 
The changes in goodwill and intangible assets during the three and six months ended June 30, 2023 and 2022 are as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Beginning balance$265,959 $269,119 $265,767 $276,856 
Acquired intangible assets— — 3,042 — 
Acquired goodwill - measurement period adjustment— — — (18)
Goodwill transferred to assets held for sale— 3,217 — (3,217)
Intangible assets transferred to assets held for sale— 1,394 — (1,394)
Goodwill transferred from assets held for sale— — — 3,217 
Intangible assets transferred from assets held for sale— — — 1,394 
Amortization of intangibles(3,001)(3,064)(5,851)(6,172)
Ending balance$262,958 $270,666 $262,958 $270,666 
NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s interest bearing deposits.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Beginning in June 2020, such derivatives were used to hedge the variable cash flows associated with interest bearing deposits.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminated, or treatment of the derivative as a hedge is no longer appropriate or intended. During the three months ended March 31, 2022, the Company terminated its single derivative with a notional value totaling $200,000,000, resulting in a termination value of $9,316,000. During the three months ended March 31, 2022 and June 30, 2022, the Company reclassified $233,000 and $232,000, respectively, into earnings through interest expense in the consolidated statements of income. During the three months ended June 30, 2022, the Company terminated the hedged funding, incurring a termination fee of $732,000, which was recognized through interest expense in the consolidated statements of income, and reclassified the remaining $8,851,000 unrealized gain on the terminated derivative into earnings through other noninterest income in the consolidated statements of income.
The following table presents the pre-tax impact of the terminated cash flow hedge on AOCI:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Unrealized gains on terminated hedges
Beginning Balance$— $9,083 $— $— 
Unrealized gains arising during the period— — — 9,316 
Reclassification adjustments for amortization of unrealized (gains) into net income— (9,083)— (9,316)
Ending Balance$— $— $— $— 
The Company did not have any derivative financial instruments at June 30, 2023 and December 31, 2022.
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income, net of tax:
Amount of
Gain or (Loss)
Recognized
in OCI on
Derivative		Amount of
Gain or (Loss)
Recognized in
OCI Included
Component		Location of
(Gain) or Loss
Recognized from
AOCI into
Income		Amount of
(Gain) or Loss
Reclassified
from AOCI
into Income		Amount of
(Gain) or Loss
Reclassified
from AOCI
into Income
Included
Component
(Dollars in thousands)
Three Months Ended June 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate swaps$— $— Interest Expense$(6,939)$(6,939)
Six Months Ended June 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate swaps$2,398 $2,398 Interest Expense$7,103 $7,103 
NOTE 7 — VARIABLE INTEREST ENTITIES
Collateralized Loan Obligation Funds – Closed
The Company holds investments in the subordinated notes of the following closed Collateralized Loan Obligation (“CLO”) funds:
(Dollars in thousands)Offering
Date		Offering
Amount
Trinitas CLO IV, LTD (Trinitas IV)June 2, 2016$406,650 
Trinitas CLO V, LTD (Trinitas V)September 22, 2016$409,000 
Trinitas CLO VI, LTD (Trinitas VI)June 20, 2017$717,100 
The net carrying amounts of the Company’s investments in the subordinated notes of the CLO funds, which represent the Company’s maximum exposure to loss as a result of its involvement with the CLO funds, totaled $3,380,000 and $4,077,000 at June 30, 2023 and December 31, 2022, respectively, and are classified as held to maturity securities within the Company’s consolidated balance sheets.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company performed a consolidation analysis to confirm whether the Company was required to consolidate the assets, liabilities, equity or operations of the closed CLO funds in its financial statements. The Company concluded that the closed CLO funds were variable interest entities and that the Company holds variable interests in the entities in the form of its investments in the subordinated notes of entities. However, the Company also concluded that the Company does not have the power to direct the activities that most significantly impact the entities’ economic performance. As a result, the Company was not the primary beneficiary and therefore was not required to consolidate the assets, liabilities, equity, or operations of the closed CLO funds in the Company’s financial statements.
NOTE 8 — LEGAL CONTINGENCIES
Various legal claims have arisen from time to time in the normal course of business which, in the opinion of management as of June 30, 2023, will have no material effect on the Company’s consolidated financial statements.
NOTE 9 — OFF-BALANCE SHEET LOAN COMMITMENTS
From time to time, the Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.
The contractual amounts of financial instruments with off-balance sheet risk were as follows:
June 30, 2023December 31, 2022
(Dollars in thousands)Fixed RateVariable RateTotalFixed RateVariable RateTotal
Unused lines of credit$6,064 $577,064 $583,128 $1,417 $487,965 $489,382 
Standby letters of credit$17,649 $8,398 $26,047 $12,309 $4,897 $17,206 
Commitments to purchase loans$— $37,321 $37,321 $— $53,572 $53,572 
Mortgage warehouse commitments$— $758,651 $758,651 $— $1,055,117 $1,055,117 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.
Commitments to purchase loans represent loans purchased by the Company that have not yet settled.
Mortgage warehouse commitments are unconditionally cancellable and represent the unused capacity on mortgage warehouse facilities the Company has approved. The Company reserves the right to refuse to buy any mortgage loans offered for sale by a customer, for any reason, at the Company’s sole and absolute discretion.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to credit loss expense on the Company’s consolidated statements of income. At June 30, 2023 and December 31, 2022, the allowance for credit losses on off-balance sheet credit exposures totaled $3,265,000 and $3,606,000, respectively, and was included in other liabilities on the Company’s consolidated balance sheets. The following table presents credit loss expense for off balance sheet credit exposures:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Credit loss expense (benefit)$(1,162)$932 $(343)$196 
NOTE 10 — FAIR VALUE DISCLOSURES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The methods of determining the fair value of assets and liabilities presented in this note are consistent with the methodologies disclosed in Note 17 of the Company’s 2022 Form 10-K.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets and liabilities measured at fair value on a recurring basis are summarized in the table below.
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
June 30, 2023Level 1Level 2Level 3
Assets measured at fair value on a recurring basis
Securities available for sale
Mortgage-backed securities, residential$— $45,829 $— $45,829 
Asset-backed securities— 1,252 — 1,252 
State and municipal— 5,195 — 5,195 
CLO securities— 249,079 — 249,079 
Corporate bonds— 760 — 760 
SBA pooled securities— 1,664 — 1,664 
$— $303,779 $— $303,779 
Equity securities with readily determinable fair values
Mutual fund$4,426 $— $— $4,426 
Loans held for sale$— $95 $— $95 
Indemnification asset$— $— $1,905 $1,905 
Revenue share asset$— $— $3,053 $3,053 
Liabilities measured at fair value on a recurring basis
Return of premium liability$— $— $376 $376 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
December 31, 2022Level 1Level 2Level 3
Assets measured at fair value on a recurring basis
Securities available for sale
Mortgage-backed securities, residential$— $50,633 $— $50,633 
Asset-backed securities— 6,331 — 6,331 
State and municipal— 13,438 — 13,438 
CLO Securities— 181,011 — 181,011 
Corporate bonds— 1,263 — 1,263 
SBA pooled securities— 1,828 — 1,828 
$— $254,504 $— $254,504 
Equity securities with readily determinable fair values
Mutual fund$5,191 $— $— $5,191 
Loans held for sale$— $5,641 $— $5,641 
Indemnification asset$— $— $3,896 $3,896 
Revenue share asset$— $— $5,515 $5,515 
Liabilities measured at fair value on a recurring basis
Return of premium liability$— $— $575 $575 
There were no transfers between levels during 2023 or 2022.
Indemnification Asset
The fair value of the indemnification asset is calculated as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio acquired during 2020. The cash flows are discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income or expense, as appropriate, within the Consolidated Statements of Income. The indemnification asset fair value is considered a Level 3 classification. At June 30, 2023 and December 31, 2022, the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio were approximately $2,006,000 and $4,101,000, respectively, and a discount rate of 5.0% and 5.0%, respectively, was applied to calculate the present value of the indemnification asset. A reconciliation of the opening balance to the closing balance of the fair value of the indemnification asset is as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Beginning balance$3,691 $4,582 $3,896 $4,786 
Indemnification asset recognized in business combination— — — — 
Change in fair value of indemnification asset recognized in earnings(121)(205)(326)(409)
Indemnification reduction(1,665)— (1,665)— 
Ending balance$1,905 $4,377 $1,905 $4,377 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Share Asset
On June 30, 2022 and September 6, 2022, the Company entered into and closed two separate agreements to sell two separate portfolios of factored receivables. The June 30, 2022 agreement contains revenue share provisions that entitles the Company to an amount equal to fifteen percent of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. The September 6, 2022 agreement contains revenue share provisions that entitles the Company to an amount ranging from fifteen to twenty percent, depending on the client, of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. The fair value of the revenue share assets is calculated each reporting period, and changes in the fair value of the revenue share assets are recorded in noninterest income in the consolidated statements of income. The revenue share asset fair value is considered a Level 3 classification.
At June 30, 2023 and December 31, 2022, the estimated cash payments expected to be received from the purchaser for the Company's share of future gross monthly revenue as $4,060,000 and $7,613,000, respectively, and a discount rate of 10.0% was applied to calculate the present value of the revenue share asset. A reconciliation of the opening balance to the closing balance of the fair value of the revenue share asset is as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Beginning balance$4,532 $— $5,515 $— 
Revenue share asset recognized — 5,210 — 5,210 
Change in fair value of revenue share asset recognized in earnings(1,169)— (1,789)— 
Revenue share payments received(310)— (673)— 
Ending balance$3,053 $5,210 $3,053 $5,210 
Return of Premium Liability
On June 23, 2022, the Company made the decision to sell and closed on the sale of a portfolio of equipment loans for cash consideration. The associated agreement contains a provision that in the event that a sold loan is prepaid in full prior to the due date of the final scheduled contractual payment, the Company will return a pro-rata portion of the premium calculated as of the date of such prepayment in full. The fair value of the return of premium liability is calculated each reporting period, and changes in the fair value of the return of premium liability are recorded in noninterest income in the consolidated statements of income. The return of premium liability is considered a Level 3 classification. At June 30, 2023 and December 31, 2022, the fair value of the estimated premium expected to be returned to the purchaser for sold loans prepaid in full was calculated as the difference between the discounted cash flows of each sold loan assuming no prepayments and the discounted cash flows of each sold loan assuming an 11.0% and 11.0% prepayment speed, respectively; consistent with management's expected prepayment speed. A reconciliation of the opening balance to the closing balance of the fair value of the return of premium liability is as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Beginning balance$476 $— $575 $— 
Return of premium liability recognized— 708 — 708 
Change in fair value of return of premium liability recognized in earnings(100)— (199)— 
Return of premium payments made— — — — 
Ending balance$376 $708 $376 $708 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2023 and December 31, 2022.
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
June 30, 2023Level 1Level 2Level 3
Collateral dependent loans
Commercial real estate$— $— $84 $84 
1-4 family residential— — 79 79 
Commercial— — 2,227 2,227 
Factored receivables— — 28,947 28,947 
$— $— $31,337 $31,337 
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
December 31, 2022Level 1Level 2Level 3
Collateral dependent loans
Commercial real estate$— $— $269 $269 
1-4 family residential— — 46 46 
Commercial— — 6,994 6,994 
Factored receivables— — 29,367 29,367 
Equity investment without readily determinable fair value38,088 — — 38,088 
$38,088 $— $36,676 $74,764 
Collateral Dependent Loans Specific Allocation of ACL:    A loan is considered to be a collateral dependent loan when, based on current information and events, the Company expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Company has determined that the borrower is experiencing financial difficulty as of the measurement date. The ACL is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at June 30, 2023 and December 31, 2022 were as follows:
(Dollars in thousands)Carrying
Amount		Fair Value Measurements UsingTotal
Fair Value
June 30, 2023Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$417,375 $417,375 $— $— $417,375 
Securities - held to maturity3,380 — — 4,750 4,750 
Loans not previously presented, gross4,293,421 146,940 — 4,069,012 4,215,952 
FHLB and other restricted stock20,099  N/A  N/A  N/A N/A
Accrued interest receivable27,619 27,619 — — 27,619 
Financial liabilities:
Deposits4,293,466 — 4,283,892 — 4,283,892 
Federal Home Loan Bank advances280,000 — 280,000 — 280,000 
Subordinated notes108,234 — 91,355 — 91,355 
Junior subordinated debentures41,444 — 43,151 — 43,151 
Accrued interest payable4,514 4,514 — — 4,514 

(Dollars in thousands)Carrying
Amount		Fair Value Measurements UsingTotal
Fair Value
December 31, 2022Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$408,182 $408,182 $— $— $408,182 
Securities - held to maturity4,077 — — 5,476 5,476 
Loans not previously presented, gross4,088,411 187,729 — 3,805,701 3,993,430 
FHLB and other restricted stock6,252 N/AN/AN/AN/A
Accrued interest receivable21,977 21,977 — — 21,977 
Financial liabilities:
Deposits4,171,336 — 4,159,695 — 4,159,695 
Customer repurchase agreements340 — 340 — 340 
Federal Home Loan Bank advances30,000 — 30,000 — 30,000 
Subordinated notes107,800 — 104,400 — 104,400 
Junior subordinated debentures41,158 — 42,721 — 42,721 
Accrued interest payable2,830 2,830 — — 2,830 
NOTE 11 — REGULATORY MATTERS
The Company (on a consolidated basis) and TBK Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and TBK Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Quantitative measures established by regulation to ensure capital adequacy require the Company and TBK Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity Tier 1, and Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Management believes, as of June 30, 2023 and December 31, 2022, the Company and TBK Bank meet all capital adequacy requirements to which they are subject.
As of June 30, 2023 and December 31, 2022, TBK Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” TBK Bank must maintain minimum total risk based, common equity Tier 1 risk based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since June 30, 2023 that management believes have changed TBK Bank’s category.
The actual capital amounts and ratios for the Company and TBK Bank are presented in the following table.
(Dollars in thousands)ActualMinimum for Capital
Adequacy Purposes		To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
June 30, 2023AmountRatioAmountRatioAmountRatio
Total capital (to risk weighted assets)
Triumph Financial, Inc.$769,846 15.6%$394,793 8.0% N/A N/A
TBK Bank, SSB$744,838 15.2%$392,020 8.0%$490,025 10.0%
Tier 1 capital (to risk weighted assets)
Triumph Financial, Inc.$626,451 12.7%$295,961 6.0% N/A N/A
TBK Bank, SSB$712,246 14.5%$294,722 6.0%$392,963 8.0%
Common equity Tier 1 capital (to risk weighted assets)
Triumph Financial, Inc.$540,007 10.9%$222,939 4.5% N/A N/A
TBK Bank, SSB$712,246 14.5%$221,042 4.5%$319,283 6.5%
Tier 1 capital (to average assets)
Triumph Financial, Inc.$626,451 12.0%$208,817 4.0% N/A N/A
TBK Bank, SSB$712,246 13.7%$207,955 4.0%$259,944 5.0%
As of December 31, 2022
Total capital (to risk weighted assets)
Triumph Financial, Inc.$829,928 17.7%$375,109 8.0%N/AN/A
TBK Bank, SSB$732,785 15.8%$371,030 8.0%$463,788 10.0%
Tier 1 capital (to risk weighted assets)
Triumph Financial, Inc.$684,381 14.6%$281,252 6.0%N/AN/A
TBK Bank, SSB$697,022 15.0%$278,809 6.0%$371,745 8.0%
Common equity Tier 1 capital (to risk weighted assets)
Triumph Financial, Inc.$598,223 12.7%$211,969 4.5%N/AN/A
TBK Bank, SSB$697,022 15.0%$209,107 4.5%$302,043 6.5%
Tier 1 capital (to average assets)
Triumph Financial, Inc.$684,381 13.0%$210,579 4.0%N/AN/A
TBK Bank, SSB$697,022 13.2%$211,219 4.0%$264,023 5.0%
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company elected the option to delay the estimated impact on regulatory capital of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13 as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”) was delayed for two years. After two years, the cumulative amount of the transition adjustments became fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.
Dividends paid by TBK Bank are limited to, without prior regulatory approval, current year earnings and earnings less dividends paid during the preceding two years.
The capital conservation buffer set forth by the Basel III regulatory capital framework was 2.5% at June 30, 2023 and December 31, 2022. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. At June 30, 2023 and December 31, 2022, the Company’s and TBK Bank’s risk based capital exceeded the required capital conservation buffer.
NOTE 12 — STOCKHOLDERS' EQUITY
The following summarizes the capital structure of Triumph Financial, Inc.
Preferred Stock Series C
(Dollars in thousands, except per share amounts)June 30, 2023December 31, 2022
Shares authorized51,750 51,750 
Shares issued45,000 45,000 
Shares outstanding45,000 45,000 
Par value per share$0.01 $0.01 
Liquidation preference per share$1,000 $1,000 
Liquidation preference amount$45,000 $45,000 
Dividend rate7.125 %7.125 %
Dividend payment dates Quarterly Quarterly
Common Stock
June 30, 2023December 31, 2022
Shares authorized50,000,000 50,000,000 
Shares issued28,951,832 28,321,716 
Treasury shares(5,681,947)(4,268,131)
Shares outstanding23,269,885 24,053,585 
Par value per share$0.01 $0.01 
Stock Repurchase Programs
On February 7, 2022, the Company announced that its board of directors had authorized the Company to repurchase up to $50,000,000 of its outstanding common stock. During the three months ended March 31, 2022, the Company repurchased 14,810 shares into treasury stock under the Company's stock repurchase program at an average price of $88.81, for a total of $1,316,000. During the three months ended June 30, 2022, the Company repurchased 694,985 shares into treasury stock under the Company's stock repurchase program at an average price of $70.02, for a total of $48,684,000, effectively completing the repurchase program.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 23, 2022, the Company announced that its board of directors had authorized the Company to repurchase up to an additional $75,000,000 of its outstanding common stock. On November 7, 2022, the repurchase authorization was increased to $100,000,000 in connection with the commencement of a modified "Dutch auction" tender offer (the "Tender Offer").
During the three months ended December 31, 2022, the Company repurchased 408,615 shares of its common stock in the Tender Offer at a price of $58.00 per share, for an aggregate cost of $24,772,000, including fees and expenses related to the tender offer of $1,072,000.
On February 1, 2023, the Company entered into an accelerated share repurchase (“ASR”) agreement to repurchase $70,000,000 of the Company’s common stock. The ASR is part of the Company’s previously announced plan to repurchase up to $100,000,000 of the Company’s common stock and is within the remaining amount authorized by the Company’s Board of Directors pursuant to such plan. Under the terms of the ASR agreement, the Company received an initial delivery of 961,373 common shares representing approximately 80% of the expected total to be repurchased. On April 28, 2023, the ASR was completed and the Company received an additional delivery of 247,954 common shares.
In connection with the completion of the ASR, on May 4, 2023, the Company announced that its board of directors had authorized the Company to repurchase up to an additional $50,000,000 of its outstanding common stock in open market transactions or through privately negotiated transactions at the Company's discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of the Company's common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. The repurchase program is authorized for a period of up to one year and does not require the Company to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time. The Company has not repurchased any shares under the new share repurchase program.
NOTE 13 — STOCK BASED COMPENSATION
Stock based compensation expense that has been charged against income was $3,320,000 and $7,880,000 for the three months ended June 30, 2023 and 2022, respectively, and $6,201,000 and $12,832,000 for the six months ended June 30, 2023 and 2022, respectively.
2014 Omnibus Incentive Plan
The Company’s 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”) provides for the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards that may be settled in, or based upon the value of, the Company’s common stock. The maximum number of shares of common stock available for issuance under the Omnibus Incentive Plan is 2,900,000 shares.
Restricted Stock Awards
A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the six months ended June 30, 2023 were as follows:
Nonvested RSAsSharesWeighted-Average
Grant-Date
Fair Value
Nonvested at January 1, 2023230,486 70.34 
Granted6,852 58.25 
Vested(101,101)60.28 
Forfeited(11,412)76.06 
Nonvested at June 30, 2023124,825 77.00 
RSAs granted to employees under the Omnibus Incentive Plan typically vest immediately or over four years. Compensation expense for the RSAs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of June 30, 2023, there was $3,177,000 of unrecognized compensation cost related to the nonvested RSAs. The cost is expected to be recognized over a remaining period of 1.80 years.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted Stock Units
A summary of changes in the Company’s nonvested Restricted Stock Units (“RSUs”) under the Omnibus Incentive Plan for the six months ended June 30, 2023 were as follows:
Nonvested RSUsSharesWeighted-Average
Grant-Date
Fair Value
Nonvested at January 1, 2023211,300 59.45 
Granted121,050 51.25 
Vested(114,509)43.19 
Forfeited(2,551)67.58 
Nonvested at June 30, 2023215,290 63.39 
RSUs granted to employees under the Omnibus Incentive Plan typically vest over four to five years. Compensation expense for the RSUs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of June 30, 2023, there was $9,930,000 of unrecognized compensation cost related to the nonvested RSUs. The cost is expected to be recognized over a remaining period of 3.18 years.
Market Based Performance Stock Units
A summary of changes in the Company’s nonvested Market Based Performance Stock Units (“Market Based PSUs”) under the Omnibus Incentive Plan for the six months ended June 30, 2023 were as follows:
Nonvested Market Based PSUsSharesWeighted-Average
Grant-Date
Fair Value
Nonvested at January 1, 2023112,486 $55.57 
Granted78,872 78.15 
Incremental shares earned52,694 N/A
Vested(122,969)36.10 
Forfeited(155)38.57 
Nonvested at June 30, 2023120,928 $81.63 
Market Based PSUs granted to employees under the Omnibus Incentive Plan vest after three to five years. The number of shares issued upon vesting will range from 0% to 175% of the Market Based PSUs granted based on the Company’s relative total shareholder return (“TSR”) as compared to the TSR of specified groups of peer banks and financial technology companies, and with respect to the Company's 2023 awards may include an additional multiplier of up to 200% of the otherwise earned award based on the Company's absolute TSR. Compensation expense for the Market Based PSUs will be recognized over the vesting period of the awards based on the fair value of the award at the grant date. The fair value of Market Based PSUs granted is estimated using a Monte Carlo simulation. Expected volatilities were determined based on the historical volatilities of the Company and the specified peer group. The risk-free interest rate for the performance period was derived from the Treasury constant maturities yield curve on the valuation dates.
The fair value of the Market Based PSUs granted was determined using the following weighted-average assumptions:
Six Months Ended June 30,
20232022
Grant dateMay 1, 2023May 1, 2022
Performance period3.00 years3.00 years
Stock price$51.25 $69.44 
Triumph Financial stock price volatility49.33 %55.17 %
Risk-free rate3.76 %2.84 %
As of June 30, 2023, there was $7,691,000 of unrecognized compensation cost related to the nonvested Market Based PSUs. The cost is expected to be recognized over a remaining period of 2.55 years.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Performance Based Performance Stock Units
A summary of changes in the Company’s nonvested Performance Based Performance Stock Units (“Performance Based PSUs”) under the Omnibus Incentive Plan for the six months ended June 30, 2023 were as follows:
Nonvested Performance Based PSUsSharesWeighted Average
Grant Date
Fair Value
Nonvested at January 1, 2023255,738 $39.57 
Granted— — 
Incremental shares earned107,404 N/A
Vested(363,142)40 
Forfeited— — 
Nonvested at June 30, 2023— $— 
The Performance Based PSUs granted to employees under the Omnibus Incentive Plan vested after a three year performance period. Under the terms of the award agreements, the number of shares issued upon vesting could range from 0% to 200% of the shares granted based on the Company’s cumulative diluted earnings per share over the performance period. The performance period for the outstanding Performance Based PSUs ended on December 31, 2022, and the awards subsequently vested at 142% of the target shares granted.
Compensation expense for the Performance Based PSUs was estimated during the performance period based on the fair value of the stock at the grant date and the most probable outcome of the performance condition at each period end, adjusted for the passage of time within the vesting period of the awards. There was no stock based compensation cost related to Performance Based PSUs during the three and six months ended June 30, 2023 and there is no remaining unrecognized compensation cost related to these awards. During the three and six months ended June 30, 2022, the Company recognized $4,328,000 and $5,135,000, respectively, of stock based compensation cost related to Performance Based PSUs.
Stock Options
A summary of the changes in the Company’s stock options under the Omnibus Incentive Plan for the six months ended June 30, 2023 were as follows:
Stock OptionsSharesWeighted-Average
Exercise Price		Weighted-Average
Remaining
Contractual Term
(In Years)		Aggregate
Intrinsic Value
(In Thousands)
Outstanding at January 1, 2023195,398 $39.48 
Granted57,930 51.25 
Exercised(6,023)31.61 
Forfeited or expired— — 
Outstanding at June 30, 2023247,305 $42.43 6.59$5,280 
Fully vested shares and shares expected to vest at June 30, 2023247,305 $42.43 6.59$5,280 
Shares exercisable at June 30, 2023148,332 $32.81 4.86$4,447 
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information related to the stock options for the six months ended June 30, 2023 and 2022 was as follows:
Six Months Ended June 30,
(Dollars in thousands, except per share amounts)20232022
Aggregate intrinsic value of options exercised$140 $280 
Cash received from option exercises, net(52)(74)
Tax benefit realized from option exercises29 59 
Weighted average fair value per share of options granted$25.20 $32.15 
Stock options awarded to employees under the Omnibus Incentive Plan are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant, vest over four years, and have ten year contractual terms. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. Expected volatilities are determined based on the Company’s historical volatility. The expected term of the options granted is determined based on the SEC simplified method, which calculates the expected term as the mid-point between the weighted average time to vesting and the contractual term. The risk-free interest rate for the expected term of the options is derived from the Treasury constant maturity yield curve on the valuation date.
The fair value of the stock options granted was determined using the following weighted-average assumptions:
Six Months Ended June 30,
20232022
Risk-free interest rate3.38 %2.77 %
Expected term6.25 years6.25 years
Expected stock price volatility45.65 %43.33 %
Dividend yield— — 
As of June 30, 2023, there was $1,828,000 of unrecognized compensation cost related to nonvested stock options granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 3.30 years.
Employee Stock Purchase Plan
During the year ended December 31, 2019, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the Company's 2019 Employee Stock Purchase Plan (“ESPP”). Under the ESPP, 2,500,000 shares of common stock were reserved for issuance. The ESPP enables eligible employees to purchase the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six month offering period. During the six months ended June 30, 2023 and 2022, 21,057 shares and 10,585 shares, respectively, were issued under the plan.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 — EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2023202220232022
Basic
Net income to common stockholders$6,848 $43,390 $17,057 $66,918 
Weighted average common shares outstanding23,138,835 24,427,270 23,249,668 24,612,988 
Basic earnings per common share$0.30 $1.78 $0.73 $2.72 
Diluted
Net income to common stockholders$6,848 $43,390 $17,057 $66,918 
Weighted average common shares outstanding23,138,835 24,427,270 23,249,668 24,612,988 
Dilutive effects of:
Assumed exercises of stock options71,658 89,443 73,884 99,402 
Restricted stock awards90,645 144,526 113,930 189,492 
Restricted stock units65,909 85,934 91,878 91,236 
Performance stock units - market based87,360 115,825 104,203 127,694 
Performance stock units - performance based— — — — 
Employee stock purchase program1,064 3,575 780 2,173 
Average shares and dilutive potential common shares23,455,471 24,866,573 23,634,343 25,122,985 
Diluted earnings per common share$0.29 $1.74 $0.72 $2.66 
Shares that were not considered in computing diluted earnings per common share because they were antidilutive are as follows:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Stock options107,309 52,878 107,309 52,878 
Restricted stock awards4,232 6,348 4,232 6,348 
Restricted stock units11,250 15,000 11,250 15,000 
Performance stock units - market based42,056 45,296 42,056 45,296 
Performance stock units - performance based— 254,832 — 254,832 
Employee stock purchase program— — — — 
NOTE 15 — REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. The Company presents disaggregated revenue from contracts with customers in the consolidated statements of income.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Descriptions of the Company's significant revenue-generating activities within the scope of Topic 606, which are included in non-interest income in the Company's consolidated statements of income, are as follows:
•Service charges on deposits. Service charges on deposits primarily consists of fees from the Company's deposit customers for account maintenance, account analysis, and overdraft services. Account maintenance fees and analysis fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
•Card income. Card income primarily consists of interchange fees. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized when the transaction processing services are provided to the cardholder.
•Net OREO gains (losses) and valuation adjustments. The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
•Fee income. Fee income for the Banking and Factoring segments primarily consists of transaction-based fees, including wire transfer fees, ACH and check fees, early termination fees, and other fees, earned from the Company's banking and factoring customers. Transaction based fees are recognized at the time the transaction is executed as that is the point in time the Company satisfies its performance obligations.
Fee income for the Payments segment primarily consists of TriumphPay payment and audit fees. TriumphPay fees included in the Consolidated Statements of Income totaled $4,089,000 and $3,381,000 for the three months ended June 30, 2023 and 2022, respectively, and $7,787,000 and $6,610,000 for the six months ended June 30, 2023 and 2022, respectively. These fees are generally transaction based and are recognized at the time the transaction is executed as that is the point in time that the Company satisfies its performance obligations.
•Insurance commissions. Insurance commissions are earned for brokering insurance policies. The Company's primary performance obligations for insurance commissions are satisfied and revenue is recognized when the brokered insurance policies are executed.
NOTE 16 — BUSINESS SEGMENT INFORMATION
The Company's reportable segments are Banking, Factoring, Payments, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. The Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Factoring segment includes the operations of Triumph Financial Services with revenue derived from factoring services. The Payments segment includes the operations of TBK Bank's TriumphPay division, which provides a presentment, audit, and payment solution to Shipper, Broker, and Factor clients in the trucking industry. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where Carriers are offered a quickpay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to the Company and from offering Brokers the ability to settle their invoices with the Company on an extended term following the Company's payment to their Carriers as an additional liquidity option for such Brokers.
Prior to March 31, 2023, the majority of salaries and benefits expense for the Company's executive leadership team, as well as other selling, general, and administrative shared services costs including human resources, accounting, finance, risk management and a significant amount of information technology expense, were allocated to the Banking segment. During the quarter ended March 31, 2023 management began allocating such shared service costs to its Corporate segment. The Company continues to make considerable investments in shared services that benefit the entire organization and by moving such expenses to the Corporate segment, the Company's chief operating decision maker and investors now have greater visibility into the operating performance of each reportable segment. Prior periods were revised to reflect such allocations and achieve appropriate comparability.
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Separately, prior to March 31, 2023, intersegment interest expense was allocated to the Factoring and Payments segments (when the Payments segment is not self-funded) based on a rolling average of Federal Home Loan Bank advance rates. When the Payments segment was self-funded with funding in excess of its factored receivables, intersegment interest income was allocated based on the Federal Funds effective rate. During the quarter ended March 31, 2023, the Company began allocating intersegment interest expense to the Factoring and Payments segments based on one-month term SOFR for their funding needs. When the Payments segment is self-funded, with funding in excess of its factored receivables, intersegment interest income will continue to be allocated based on the Federal Funds effective rate. Management believes that such intersegment interest allocations are more intuitive in the current interest rate environment. Prior periods were revised to reflect such allocations and achieve appropriate comparability.
Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Other than the changes to allocations discussed above, the accounting policies of the segments are substantially the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2022 Form 10-K.
Transactions between segments consist primarily of borrowed funds, payment network fees, and servicing fees. Intersegment interest expense is allocated to the Factoring and Payments segments as described above. Beginning January 1, 2023, payment network fees are paid by the Factoring segment to the Payments segment for use of the payments network. Beginning prospectively on June 1, 2023, factoring transactions with freight broker clients were transferred from our Factoring segment to our Payments segment to align with TriumphPay's supply chain finance product offerings. Credit loss expense is allocated based on the segment’s ACL determination. Noninterest income and expense directly attributable to a segment are assigned to it with various shared service costs such as human resources, accounting, finance, risk management and information technology expense assigned to the Corporate segment. Taxes are paid on a consolidated basis and are not allocated for segment purposes. The Factoring segment includes only factoring originated by Triumph Financial Services.
(Dollars in thousands)
Three months ended June 30, 2023BankingFactoringPaymentsCorporateConsolidated
Total interest income$65,624 $36,367 $3,451 $44 $105,486 
Intersegment interest allocations7,478 (9,358)1,880 — — 
Total interest expense11,634 — — 2,401 14,035 
Net interest income (expense)61,468 27,009 5,331 (2,357)91,451 
Credit loss expense (benefit)831 1,481 41 290 2,643 
Net interest income after credit loss expense60,637 25,528 5,290 (2,647)88,808 
Noninterest income6,347 980 4,119 65 11,511 
Intersegment noninterest income (expense)(1)
— (97)97 — — 
Noninterest expense31,934 20,218 16,939 21,305 90,396 
Net income (loss) before income tax expense$35,050 $6,193 $(7,433)$(23,887)$9,923 
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
Three months ended June 30, 2022BankingFactoringPaymentsCorporateConsolidated
Total interest income$46,239 $55,854 $4,172 $42 $106,307 
Intersegment interest allocations4,246 (3,878)(368)— — 
Total interest expense3,021 — — 1,858 4,879 
Net interest income (expense)47,464 51,976 3,804 (1,816)101,428 
Credit loss expense (benefit)3,120 64 (184)(99)2,901 
Net interest income after credit loss expense44,344 51,912 3,988 (1,717)98,527 
Noninterest income22,282 15,521 10,309 48 48,160 
Intersegment noninterest income (expense)(1)
— — — — — 
Noninterest expense31,205 23,512 17,663 16,227 88,607 
Net income (loss) before income tax expense$35,421 $43,921 $(3,366)$(17,896)$58,080 
(Dollars in thousands)
Six months ended June 30, 2023BankingFactoringPaymentsCorporateConsolidated
Total interest income$125,350 $74,524 $6,198 $88 $206,160 
Intersegment interest allocations15,090 (18,512)3,422 — — 
Total interest expense16,582 — — 4,745 21,327 
Net interest income (expense)123,858 56,012 9,620 (4,657)184,833 
Credit loss expense (benefit)2,754 2,030 41 431 5,256 
Net interest income after credit loss expense121,104 53,982 9,579 (5,088)179,577 
Noninterest income12,020 2,558 7,826 129 22,533 
Intersegment noninterest income (expense)(1)
— (362)362 — — 
Noninterest expense64,174 41,987 32,356 41,160 179,677 
Net income (loss) before income tax expense$68,950 $14,191 $(14,589)$(46,119)$22,433 
(Dollars in thousands)
Six months ended June 30, 2022BankingFactoringPaymentsCorporateConsolidated
Total interest income$88,422 $112,228 $9,004 $88 $209,742 
Intersegment interest allocations4,851 (4,430)(421)— — 
Total interest expense4,624 — — 3,611 8,235 
Net interest income (expense)88,649 107,798 8,583 (3,523)201,507 
Credit loss expense (benefit)250 2,013 170 969 3,402 
Net interest income after credit loss expense88,399 105,785 8,413 (4,492)198,105 
Noninterest income28,253 17,392 13,551 85 59,281 
Intersegment noninterest income (expense)(1)
— — — — — 
Noninterest expense59,817 45,643 31,996 29,715 167,171 
Net income (loss) before income tax expense$56,835 $77,534 $(10,032)$(34,122)$90,215 
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TRIUMPH FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Intersegment noninterest income (expense) includes:
(Dollars in thousands)FactoringPayments
Three Months Ended June 30, 2023
Factoring revenue received from Payments$170 $(170)
Payments revenue received from Factoring(267)267 
Intersegment noninterest income (expense)$(97)$97 
Three Months Ended June 30, 2022
Factoring revenue received from Payments$— $— 
Payments revenue received from Factoring— — 
Intersegment noninterest income (expense)$— $— 
Six months ended June 30, 2023
Factoring revenue received from Payments$170 $(170)
Payments revenue received from Factoring(532)532 
Intersegment noninterest income (expense)$(362)$362 
Six months ended June 30, 2022
Factoring revenue received from Payments$— $— 
Payments revenue received from Factoring— — 
Intersegment noninterest income (expense)$— $— 
Total assets and gross loans below include intersegment loans, which eliminate in consolidation.
(Dollars in thousands)
June 30, 2023BankingFactoringPaymentsCorporateEliminationsConsolidated
Total assets$5,161,837 $1,084,139 $447,935 $1,021,259 $(2,062,449)$5,652,721 
Gross loans$3,688,130 $997,842 $175,952 $— $(537,166)$4,324,758 
(Dollars in thousands)
December 31, 2022BankingFactoringPaymentsCorporateEliminationsConsolidated
Total assets$4,910,628 $1,260,209 $371,948 $1,061,662 $(2,270,664)$5,333,783 
Gross loans$3,572,716 $1,151,727 $85,722 $— $(689,874)$4,120,291 
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ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this discussion for further information on forward-looking statements.
Overview
We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act, offering a diversified line of payments, factoring and banking services. As of June 30, 2023, we had consolidated total assets of $5.653 billion, total loans held for investment of $4.325 billion, total deposits of $4.293 billion and total stockholders’ equity of $833.5 million.
Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services, commercial lending product lines focused on businesses that require specialized financial solutions and national lending product lines that further diversify our lending operations. Our banking operations commenced in 2010 and include a branch network developed through organic growth and acquisition, including concentrations the front range of Colorado, the Quad Cities market in Iowa and Illinois and a full-service branch in Dallas, Texas. Our traditional banking offerings include a full suite of lending and deposit products and services. These activities are focused on our local market areas and some products are offered on a nationwide basis. They generate a stable source of core deposits and a diverse asset base to support our overall operations. Our asset-based lending and equipment lending products are offered on a nationwide basis and generate attractive returns. Additionally, we offer mortgage warehouse and liquid credit lending products on a nationwide basis to provide further asset base diversification and stable deposits. Our Banking products and services share basic processes and have similar economic characteristics.
In addition to our traditional banking operations, we also operate a factoring business focused primarily on serving the over-the-road trucking industry. This business involves the provision of working capital to the trucking industry through the purchase of invoices generated by medium to large sized trucking fleets ("Carriers") at a discount to provide immediate working capital to such Carriers. We commenced these operations in 2012 through the acquisition of our factoring subsidiary, Triumph Financial Services. Triumph Financial Services operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products described above. Given its acquisition, this business has a legacy and structure as a standalone company.
Our payments business, TriumphPay, is a division of our wholly owned bank subsidiary, TBK Bank, and is a payments network for the over-the-road trucking industry. TriumphPay was originally designed as a platform to manage Carrier payments for third party logistics companies, or 3PLs ("Brokers") and the manufacturers and other businesses that contract directly for the shipment of goods (“Shippers”), with a focus on increasing on-balance sheet factored receivable transactions through the offering of quickpay transactions for Carriers receiving such payments through the TriumphPay platform. During 2021, TriumphPay acquired HubTran, Inc., a software platform that offers workflow solutions for the processing and approval of Carrier Invoices for approval by Brokers or purchase by the factoring businesses providing working capital to Carriers ("Factors"). Following such acquisition, the TriumphPay strategy shifted from a capital-intensive on-balance sheet product with a greater focus on interest income to a payments network for the trucking industry with a focus on fee revenue. TriumphPay connects Brokers, Shippers, Factors and Carriers through forward-thinking solutions that help each party successfully manage the life cycle of invoice presentment for services provided by Carrier through the processing and audit of such invoice to its ultimate payment to the Carrier or the Factor providing working capital to such Carrier. TriumphPay offers supply chain finance to Brokers, allowing them to pay their Carriers faster and drive Carrier loyalty. TriumphPay provides tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. TriumphPay also operates in a highly specialized niche with unique processes and key performance indicators.
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At June 30, 2023, our business is primarily focused on providing financial services to participants in the for-hire trucking ecosystem in the United States, including Brokers, Shippers, Factors and Carriers. Within such ecosystem, we operate our TriumphPay payments platform, which connects such parties to streamline and optimize the presentment, audit and payment of transportation invoices. We also act as capital provider to the Carrier industry through our factoring subsidiary, Triumph Financial Services. Our traditional banking operations provide stable, low cost deposits to support our operations, a diversified lending portfolio to add stability to our balance sheet, and a suite of traditional banking products and services to participants in the for-hire trucking ecosystem to deepen our relationship with such clients.
We have determined our reportable segments are Banking, Factoring, Payments and Corporate. For the six months ended June 30, 2023, our Banking segment generated 60% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 34% of our total revenue, our Payments segment generated 6% of our total revenue, and our Corporate segment generated less than 1% of our total revenue.
Second Quarter 2023 Overview
Net income available to common stockholders for the three months ended June 30, 2023 was $6.8 million, or $0.29 per diluted share, compared to net income to common stockholders for the three months ended June 30, 2022 of $43.4 million, or $1.74 per diluted share. For the three months ended June 30, 2023, our return on average common equity was 3.45% and our return on average assets was 0.56%.
Net income available to common stockholders for the six months ended June 30, 2023 was $17.1 million, or $0.72 per diluted share, compared to net income available to common stockholders for the six months ended June 30, 2022 of $66.9 million, or $2.66 per diluted share. For the six months ended June 30, 2023, our return on average common equity was 4.27% and our return on average assets was 0.70%.
At June 30, 2023, we had total assets of $5.653 billion, including gross loans held for investment of $4.325 billion, compared to $5.334 billion of total assets and $4.120 billion of gross loans held for investment at December 31, 2022. Total loans held for investment increased $204.5 million during the six months ended June 30, 2023. Our Banking loans, which constitute 73% of our total loan portfolio at June 30, 2023, increased from $2.883 billion in aggregate as of December 31, 2022 to $3.151 billion as of June 30, 2023, an increase of 9.3%. Our Factoring factored receivables, which constitute 23% of our total loan portfolio at June 30, 2023, decreased from $1.152 billion in aggregate as of December 31, 2022 to $0.998 billion as of June 30, 2023, a decrease of 13.4%. Our Payments factored receivables, which constitute 4% of our total loan portfolio at June 30, 2023, increased from $85.7 million in aggregate as of December 31, 2022 to $176.0 million as of June 30, 2023, an increase of 105.3%. Approximately $93.7 million of the increase in TriumphPay factored receivables was the result of transferring factoring transactions with freight broker clients from our Factoring segment to our Payments segment, thus aligning such services with TriumphPay's strength; serving freight brokers in the transportation industry.
At June 30, 2023, we had total liabilities of $4.819 billion, including total deposits of $4.293 billion, compared to $4.445 billion of total liabilities and $4.171 billion of total deposits at December 31, 2022. Deposits increased $122.1 million during the six months ended June 30, 2023.
At June 30, 2023, we had total stockholders' equity of $833.5 million. During the six months ended June 30, 2023, total stockholders’ equity decreased $55.5 million, primarily due to treasury stock purchases made under our accelerated share repurchase program, offset in part by our net income during the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 12.68% and 15.59%, respectively, at June 30, 2023.
The total dollar value of invoices purchased by Triumph Financial Services during the three months ended June 30, 2023 was $2.733 billion with an average invoice size of $1,828. The average transportation invoice size for the three months ended June 30, 2023 was $1,773. This compares to invoice purchase volume of $4.024 billion with an average invoice size of $2,332 and average transportation invoice size of $2,176 during the same period a year ago.
TriumphPay processed 4.5 million invoices paying Carriers a total of $4.940 billion during the three months ended June 30, 2023. This compares to processed volume of 4.4 million invoices for a total of $6.034 billion during the same period a year ago.
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2023 Items of Note
Equity Investment
On June 22, 2023 we made a $9.7 million minority investment in Trax Group, Inc. ("Trax"), a leader in transportation spend management solutions. The investment in Trax is accounted for as an equity investment without a readily determinable fair value measured under the measurement alternative and is included in other assets on our consolidated balance sheet.
Accelerated Share Repurchase and Stock Repurchase Program
On February 1, 2023, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $70.0 million of our common stock. The ASR is part of our previously announced plan to repurchase up to $100.0 million of our common stock and is within the remaining amount authorized by our Board of Directors pursuant to such plan. During the three months ended March 31, 2023, we received an initial delivery of 961,373 common shares representing approximately 80% of the expected total to be repurchased. On April 28, 2023, the ASR was completed and we received an additional delivery of 247,954 common shares.
In connection with the completion of the ASR, on May 4, 2023, we announced that our board of directors had authorized us to repurchase up to an additional $50.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions at our discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of our common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. The repurchase program is authorized for a period of up to one year and does not require us to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time. We have not repurchased any shares under the new share repurchase program.
Items related to our July 2020 acquisition of TFS
As disclosed on our SEC Forms 8-K filed on July 8, 2020 and September 23, 2020, we acquired the transportation factoring assets of TFS, a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), and subsequently amended the terms of that transaction. There were no material developments related to that transaction that impacted our operating results for the three months ended June 30, 2023.
During the second quarter, new adverse developments with one of the two remaining Over-Formula Advance clients caused us to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $3.3 million; however, this net charge-off had no impact on credit loss expense as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant will reimburse us for $1.7 million of this charge-off which is reflected as a receivable in other assets on our June 30,2023 Consolidated Balance Sheet. At June 30, 2023, the carrying value of the acquired over-formula advances was $4.0 million, the total reserve on acquired over-formula advances was $4.0 million and the balance of our indemnification asset, the value of the payment that would be due to us from CVLG in the event that these over-advances are charged off, was $1.9 million.
As of June 30, 2023 we carry a separate $19.4 million receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest over-formula advance carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. We are a party to litigation in the United States Court of Federal Claims against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of June 30, 2023. The full amount of such receivable is reflected in non-performing and past due factored receivables as of June 30, 2023 in accordance with our policy. As of June 30, 2023, the entire $19.4 million Misdirected Payments amount was greater than 90 days past due.
2022 Items of Note
Stock Repurchase Programs
On February 7, 2022, we announced that our board of directors had authorized us to repurchase up to $50.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions at our discretion. During the three months ended March 31, 2022, we repurchased 14,810 shares into treasury stock under our repurchase program at an average price of $88.81, for a total of $1.3 million. During the three months ended June 30, 2022, we repurchased 694,985 shares into treasury stock under our repurchase program at an average price of $70.02, for a total of $48.7 million, effectively completing the repurchase program.
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On May 23, 2022, we announced that our board of directors had authorized us to repurchase up to an additional $75.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions at our discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of our common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. The repurchase program is authorized for a period of up to one year and does not require us to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time, at our discretion.
On November 7, 2022, the repurchase authorization was increased to $100.0 million in connection with the commencement of a modified "Dutch auction" tender offer (the "Tender Offer"). During the three months ended December 31, 2022, we repurchased 408,615 shares of our common stock in the Tender Offer at a price of $58.00 per share, for an aggregate cost of $24.8 million, including fees and expenses related to the tender offer of $1.1 million.
Equipment Loan Sale
During the three months ended June 30, 2022, we made the decision to sell a portfolio of equipment loans. Equipment loans totaling $191.2 million were sold resulting in a gain on sale of loans of $3.9 million.
The gain on sale, net of transaction costs, was included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income and was allocated to the Banking segment.
Factored Receivable Disposal Group
During the three months ended June 30, 2022, Factored Receivable Disposal Group factored receivables totaling $67.9 million and customer reserves totaling $9.7 million were sold resulting in a gain on sale of loans of $13.2 million. During the three months ended September 30, 2022, Factored Receivable Disposal Group factored receivables totaling $20.1 million and customer reserves totaling $1.1 million were sold resulting in a gain on sale of loans of $1.0 million.
The gains on sale, net of transaction costs, totaling $14.2 million were included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income and were allocated to the Factoring segment.
For further information on the above transactions, see Note 2 – Acquisitions and Divestitures in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Interest rate swap termination
During the three months ended March 31, 2022, we terminated our single derivative with a notional value totaling $200.0 million, resulting in a termination value of $9.3 million. During the three months ended June 30, 2022, we terminated the associated hedged funding, incurring a termination fee of $0.7 million which was recognized through interest expense in the consolidated statements of income, and reclassified the remaining $8.9 million unrealized gain on the terminated derivative into earnings through other noninterest income in the consolidated statements of income.
The gains and losses associated with this transaction were allocated to the Banking segment.
For further information on the above transaction, see Note 6 – Derivative Financial Instruments in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Equity Method Investment
On October 17, 2019, we made a minority equity investment of $8.0 million in Warehouse Solutions Inc. (“WSI”), purchasing 8% of the common stock of WSI and receiving warrants to purchase an additional 10% of the common stock of WSI upon exercise of the warrants at a later date. WSI provides technology solutions to help reduce supply chain costs for a global client base across multiple industries.
Although we held less than 20% of the voting stock of WSI, the investment in common stock was initially accounted for using the equity method as our representation on WSI’s board of directors, which was disproportionately larger in size than the common stock investment held, demonstrated that we had significant influence over the investee.
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On June 10, 2022, we entered into two separate agreements with WSI. First, we entered into an Affiliate Agreement. The Affiliate Agreement canceled our outstanding warrants in exchange for cancellation of an exclusivity clause included in the original investment agreement executed during 2019. By cancelling the exclusivity clause, our Payments segment operations now have greater ability to operate in the freight shipper audit space. As a result of the Affiliate Agreement, we recognized a total loss on impairment of the warrants of $3.2 million, which represented the full book balance of the warrants on the date the Affiliate Agreement was executed. The impairment loss was included in other noninterest income in the consolidated statements of income during the three months ended June 30, 2022.
Separately, we also entered into an Amended and Restated Investor Rights Agreement (the “Investor Rights Agreement”). The Investor Rights Agreement eliminated our representation on WSI’s board of directors making us a completely passive investor. The Investor Rights Agreement also provided for our purchase of an additional 10% of WSI’s common stock for $23.0 million raising our ownership of WSI’s common stock to 18%. As a passive investor, we no longer hold significant influence over the investee and the investment in WSI’s common stock no longer qualifies for equity method accounting. The investment in WSI’s common stock is now accounted for as an equity investment without a readily determinable fair value measured under the measurement alternative. The measurement alternative requires us to remeasure our investment in the common stock of WSI only upon the execution of an orderly and observable transaction in an identical or similar instrument.
Our additional investment in WSI under the Investor Rights Agreement resulted in us discontinuing the equity method of accounting and qualified as an orderly and observable transaction for an identical investment in WSI, therefore the fair value of our original 8% common stock investment was required to be adjusted from $4.9 million at March 31, 2022 to $15.1 million, resulting in a gain of $10.2 million that was recorded in other noninterest income in the consolidated statements of income during the three months ended June 30, 2022.
The gains and losses associated with this transaction were allocated to the Payments segment.
For further information on the above transactions, see Note 3 – Securities in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Trucking transportation

The largest driver of changes in revenue at our Factoring segment is fluctuation in the freight markets, particularly in brokered freight, which is priced largely off the spot market (a reflection of real-time balance of carrier supply and shipper demand in the market) and subject to variability in diesel prices. The softness in freight is a combination of falling volumes and excess capacity. By the end of the first quarter of 2023, spot rates had fallen below the cost per mile to operate for many carriers. During the second quarter, average rates per mile began to level off, but spot rates remained at low levels last seen in 2019. As a result, we have observed a number of small and medium-sized trucking companies either leave the market by signing on with larger carriers or electing to sell their fleets or companies and move on to other endeavors.

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Financial Highlights
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands, except per share amounts)2023202220232022
Income Statement Data:
Interest income$105,486 $106,307 $206,160 $209,742 
Interest expense14,035 4,879 21,327 8,235 
Net interest income91,451 101,428 184,833 201,507 
Credit loss expense (benefit)2,643 2,901 5,256 3,402 
Net interest income after credit loss expense (benefit)88,808 98,527 179,577 198,105 
Noninterest income11,511 48,160 22,533 59,281 
Noninterest expense90,396 88,607 179,677 167,171 
Net income (loss) before income taxes9,923 58,080 22,433 90,215 
Income tax expense (benefit)2,273 13,888 3,773 21,694 
Net income (loss)$7,650 $44,192 $18,660 $68,521 
Dividends on preferred stock(802)(802)(1,603)(1,603)
Net income available (loss) to common stockholders$6,848 $43,390 $17,057 $66,918 
Per Share Data:
Basic earnings (loss) per common share$0.30 $1.78 $0.73 $2.72 
Diluted earnings (loss) per common share$0.29 $1.74 $0.72 $2.66 
Weighted average shares outstanding - basic23,138,835 24,427,270 23,249,668 24,612,988 
Weighted average shares outstanding - diluted23,455,471 24,866,573 23,634,343 25,122,985 
Performance ratios - Annualized:
Return on average assets0.56 %3.02 %0.70 %2.36 %
Return on average total equity3.64 %20.08 %4.43 %15.67 %
Return on average common equity3.45 %20.78 %4.27 %16.13 %
Return on average tangible common equity (1)
5.16 %30.63 %6.37 %23.91 %
Yield on loans(2)
9.14 %8.79 %9.18 %8.69 %
Cost of interest bearing deposits1.13 %0.41 %0.85 %0.32 %
Cost of total deposits0.68 %0.23 %0.50 %0.19 %
Cost of total funds1.23 %0.40 %0.97 %0.34 %
Net interest margin(2)
7.57 %7.68 %7.82 %7.68 %
Efficiency ratio87.80 %59.23 %86.65 %64.10 %
Net noninterest expense to average assets5.79 %2.76 %5.88 %3.71 %
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(Dollars in thousands, except per share amounts)June 30,
2023		December 31,
2022
Balance Sheet Data:
Total assets$5,652,721 $5,333,783 
Cash and cash equivalents417,375 408,182 
Investment securities311,585 263,772 
Loans held for investment, net4,289,788 4,077,484 
Total liabilities4,819,255 4,444,812 
Noninterest bearing deposits1,608,411 1,756,680 
Interest bearing deposits2,685,055 2,414,656 
FHLB advances280,000 30,000 
Subordinated notes108,234 107,800 
Junior subordinated debentures41,444 41,158 
Total stockholders’ equity833,466 888,971 
Preferred stockholders' equity45,000 45,000 
Common stockholders' equity788,466 843,971 
Per Share Data:
Book value per share$33.88 $35.09 
Tangible book value per share (1)
$22.58 $24.04 
Shares outstanding end of period23,269,885 24,053,585 
Asset Quality ratios(3):
Past due to total loans1.55 %2.53 %
Nonperforming loans to total loans0.74 %1.17 %
Nonperforming assets to total assets0.68 %1.02 %
ACL to nonperforming loans109.41 %88.76 %
ACL to total loans0.81 %1.04 %
Net charge-offs to average loans(4)
0.31 %0.14 %
Capital ratios:
Tier 1 capital to average assets12.01 %13.00 %
Tier 1 capital to risk-weighted assets12.68 %14.57 %
Common equity Tier 1 capital to risk-weighted assets10.93 %12.73 %
Total capital to risk-weighted assets15.59 %17.66 %
Total stockholders' equity to total assets14.74 %16.67 %
Tangible common stockholders' equity ratio (1)
9.75 %11.41 %
(1)The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The non-GAAP measures used by the Company include the following:
•"Tangible common stockholders' equity" is defined as common stockholders' equity less goodwill and other intangible assets.
•“Total tangible assets” is defined as total assets less goodwill and other intangible assets.
•“Tangible book value per share” is defined as tangible common stockholders’ equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets.
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•“Tangible common stockholders’ equity ratio” is defined as the ratio of tangible common stockholders’ equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets.
•“Return on average tangible common equity” is defined as net income available to common stockholders divided by average tangible common stockholders’ equity.
(2)Performance ratios include discount accretion on purchased loans for the periods presented as follows:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands, except per share amounts)2023202220232022
Loan discount accretion$990 $3,556 $2,800 $5,092 
(3)Asset quality ratios exclude loans held for sale, except for non-performing assets to total assets.
(4)Net charge-offs to average loans ratios are for the six months ended June 30, 2023 and the year ended December 31, 2022.
GAAP Reconciliation of Non-GAAP Financial Measures
We believe the non-GAAP financial measures included above provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. The following reconciliation table provides a more detailed analysis of the non-GAAP financial measures:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands, except per share amounts)2023202220232022
Average total stockholders' equity$841,979 $882,505 $850,002 $881,732 
Average preferred stock liquidation preference(45,000)(45,000)(45,000)(45,000)
Average total common stockholders' equity796,979 837,505 805,002 836,732 
Average goodwill and other intangibles(264,544)(269,319)(264,930)(272,332)
Average tangible common equity$532,435 $568,186 $540,072 $564,400 
Net income available to common stockholders$6,848 $43,390 $17,057 $66,918 
Average tangible common equity532,435 568,186 540,072 564,400 
Return on average tangible common equity5.16 %30.63 %6.37 %23.91 %
Efficiency ratio:
Net interest income$91,451 $101,428 $184,833 $201,507 
Noninterest income11,511 48,160 22,533 59,281 
Operating revenue102,962 149,588 207,366 260,788 
Total noninterest expense$90,396 $88,607 $179,677 $167,171 
Efficiency ratio87.80 %59.23 %86.65 %64.10 %
Net noninterest expense to average assets ratio:
Total noninterest expense$90,396 $88,607 $179,677 $167,171 
Total noninterest income11,511 48,160 22,533 59,281 
Net noninterest expenses$78,885 $40,447 $157,144 $107,890 
Average total assets$5,461,946 $5,878,320 $5,386,429 $5,860,916 
Net noninterest expense to average assets ratio5.79 %2.76 %5.88 %3.71 %
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(Dollars in thousands, except per share amounts)June 30,
2023		December 31,
2022
Total stockholders' equity$833,466 $888,971 
Preferred stock(45,000)(45,000)
Total common stockholders' equity788,466 843,971 
Goodwill and other intangibles(262,958)(265,767)
Tangible common stockholders' equity$525,508 $578,204 
Common shares outstanding23,269,885 24,053,585 
Tangible book value per share$22.58 $24.04 
Total assets at end of period$5,652,721 $5,333,783 
Goodwill and other intangibles(262,958)(265,767)
Tangible assets at period end$5,389,763 $5,068,016 
Tangible common stockholders' equity ratio9.75 %11.41 %
Results of Operations
Three months ended June 30, 2023 compared with three months ended June 30, 2022.
Net Income
We earned net income of $7.7 million for the three months ended June 30, 2023 compared to net income of $44.2 million for the three months ended June 30, 2022, a decrease of $36.5 million. The decrease in net income was driven by a $36.6 million decrease in noninterest income, a $10.0 million decrease in net interest income, and a $1.8 million increase in noninterest expense partially offset by an $11.6 million decrease in income tax expense and a $0.3 million decrease in credit loss expense.
Details of the changes in the various components of net income are further discussed below.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest earning assets, including loans and securities, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of interest earning assets and interest bearing liabilities, combine to affect net interest income. Our net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing liabilities, referred to as a “rate change.”
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The following table presents the distribution of average assets, liabilities and equity, as well as interest income and fees earned on average interest earning assets and interest expense paid on average interest bearing liabilities. Average balances and interest are inclusive of assets and deposits classified as held for sale.
Three Months Ended June 30,
20232022
(Dollars in thousands)Average
Balance		Interest
Average
Rate(4)
Average
Balance		Interest
Average
Rate(4)
Interest earning assets:
Cash and cash equivalents227,696 2,956 5.21 %343,210 787 0.92 %
Taxable securities318,285 5,167 6.51 %174,489 1,237 2.84 %
Tax-exempt securities10,399 67 2.58 %14,378 92 2.57 %
FHLB and other restricted stock27,071 219 3.24 %12,526 34 1.09 %
Loans (1)
4,262,170 97,077 9.14 %4,753,893 104,157 8.79 %
Total interest earning assets4,845,621 105,486 8.73 %5,298,496 106,307 8.05 %
Noninterest earning assets:
Cash and cash equivalents73,176 91,882 
Other noninterest earning assets543,149 487,942 
Total assets5,461,946 5,878,320 
Interest bearing liabilities:
Deposits:
Interest bearing demand804,799 715 0.36 %876,536 536 0.25 %
Individual retirement accounts60,171 104 0.69 %81,678 106 0.52 %
Money market506,782 1,685 1.33 %545,508 280 0.21 %
Savings529,952 475 0.36 %528,450 201 0.15 %
Certificates of deposit286,253 902 1.26 %461,280 550 0.48 %
Brokered time deposits244,721 2,823 4.63 %101,270 302 1.20 %
Other brokered deposits13,188 173 5.26 %76,155 731 3.85 %
Total interest bearing deposits2,445,866 6,877 1.13 %2,670,877 2,706 0.41 %
Federal Home Loan Bank advances363,901 4,756 5.24 %155,549 316 0.81 %
Subordinated notes108,115 1,312 4.87 %107,263 1,302 4.87 %
Junior subordinated debentures41,378 1,090 10.57 %40,802 556 5.47 %
Other borrowings308 — — %5,844 (1)(0.07)%
Total interest bearing liabilities2,959,568 14,035 1.90 %2,980,335 4,879 0.66 %
Noninterest bearing liabilities and equity:
Noninterest bearing demand deposits1,598,733 1,951,725 
Other liabilities61,666 63,755 
Total equity841,979 882,505 
Total liabilities and equity5,461,946 5,878,320 
Net interest income91,451 101,428 
Interest spread (2)
6.83 %7.39 %
Net interest margin (3)
7.57 %7.68 %
(1)Balance totals include respective nonaccrual assets.
(2)Net interest spread is the yield on average interest earning assets less the rate on interest bearing liabilities.
(3)Net interest margin is the ratio of net interest income to average interest earning assets.
(4)Ratios have been annualized.
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The following table presents loan yields earned on our loan portfolios:
Three Months Ended June 30,
20232022
(Dollars in thousands)Average BalanceInterestAverage RateAverage BalanceInterestAverage Rate
Banking loans$3,120,594 $57,258 7.36 %$3,014,573 $44,131 5.87 %
Factoring receivables1,036,922 36,368 14.07 %1,576,208 55,854 14.21 %
Payments receivables104,654 3,451 13.23 %163,112 4,172 10.26 %
Total loans$4,262,170 $97,077 9.14 %$4,753,893 $104,157 8.79 %
We earned net interest income of $91.5 million for the three months ended June 30, 2023 compared to $101.4 million for the three months ended June 30, 2022, a decrease of $9.9 million, or 9.8%, primarily driven by the following factors.
Interest income decreased $0.8 million, or 0.8%, due to a decrease in average interest earning assets of $452.9 million, or 8.5%, and a decrease in average total loans of $491.7 million, or 10.3%. The average balance of our higher yielding Factoring factored receivables decreased $539.3 million, or 34.2%, driving the decrease in interest income along with a decrease in average Payments factored receivables. Average Banking loans increased $106.0 million, or 3.5% due to increases in the average balances of commercial real estate, residential real estate, general commercial and mortgage warehouse loans. The decrease in average loans was partially offset by higher average balances among other types interest earning assets and higher rates discussed below. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $848.0 million for the three months ended June 30, 2023 compared to $651.4 million for the three months ended June 30, 2022. A component of interest income consists of discount accretion on acquired loan portfolios and acquired liquid credit. We recognized discount accretion on purchased loans of $1.0 million and $3.6 million for the three months ended June 30, 2023 and 2022, respectively.
Interest expense increased $9.2 million, or 187.7%, despite a decrease in average interest-bearing liabilities. More specifically, average total interest bearing deposits decreased $225.0 million, or 8.4%. Average noninterest bearing demand deposits decreased $353.0 million. The change in interest expense period over period was also driven by higher average rates discussed below.
Net interest margin decreased to 7.57% for the three months ended June 30, 2023 from 7.68% for the three months ended June 30, 2022, a decrease of 11 basis points or 1.4%.
The decrease in our net interest margin was most impacted by an increase in our average cost of interest bearing liabilities of 124 basis points. This increase in average cost was caused by generally higher interest rates paid on our interest-bearing liabilities driven by changes in interest rates in the macro economy.
The decrease in our net interest margin was partially offset by an increase in our yield on interest earning assets of 68 basis points to 8.73% for the three months ended June 30, 2023. This increase was primarily driven by higher yields on loans which increased 35 basis points to 9.14% for the same period. That being said, further growth in loan yield was halted by a decrease in Factoring yield period over period, as well as a decrease in average Factoring factored receivables as a percentage of the total loan portfolio. Our transportation factoring balances, which generally generate a higher yield than our non-transportation factoring balances, were 95% and 94% of our Factoring portfolio at June 30, 2023 and 2022, respectively. Banking and Payments yields increased period over period. Non-loan yields were higher across the board period over period.


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The following table shows the effects that changes in average balances (volume) and average interest rates (rate) had on the interest earned on our interest earning assets and the interest incurred on our interest bearing:
Three Months Ended
June 30, 2023 vs. 2022
Increase (Decrease) Due to:
(Dollars in thousands)RateVolumeNet Increase
Interest earning assets:
Cash and cash equivalents$3,669 $(1,500)$2,169 
Taxable securities1,596 2,334 3,930 
Tax-exempt securities1 (26)(25)
FHLB and other restricted stock67 118 185 
Loans4,120 (11,200)(7,080)
Total interest income9,453 (10,274)(821)
Interest bearing liabilities:
Interest bearing demand243 (64)179 
Individual retirement accounts35 (37)(2)
Money market1,534 (129)1,405 
Savings273 1 274 
Certificates of deposit904 (552)352 
Brokered time deposits866 1,655 2,521 
Other brokered deposits268 (826)(558)
Total interest bearing deposits4,123 48 4,171 
Federal Home Loan Bank advances1,717 2,723 4,440 
Subordinated notes— 10 10 
Junior subordinated debentures519 15 534 
Other borrowings1 — 1 
Total interest expense6,360 2,796 9,156 
Change in net interest income$3,093 $(13,070)$(9,977)
Credit Loss Expense
Credit loss expense is the amount of expense that, based on our judgment, is required to maintain the allowances for credit losses (“ACL”) at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the Company’s 2022 Form 10-K for detailed discussion regarding ACL methodologies for available for sale debt securities, held to maturity securities and loans held for investment.
The following table presents the major categories of credit loss expense:
Three Months Ended June 30,
(Dollars in thousands)20232022$ Change% Change
Credit loss expense (benefit) on loans$3,514 $2,069 $1,445 69.8 %
Credit loss expense (benefit) on off balance sheet credit exposures(1,162)932 (2,094)(224.7)%
Credit loss expense (benefit) on held to maturity securities291 (100)391 391.0 %
Credit loss expense on available for sale securities— — — — 
Total credit loss expense (benefit)$2,643 $2,901 $(258)(8.9)%
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For available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. At June 30, 2023 and March 31, 2023, the Company determined that all impaired available for sale securities experienced a decline in fair value below the amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at those respective dates and there was no credit loss expense recognized by the Company during the three months ended June 30, 2023. The same was true for the same period in the prior year.
The ACL on held to maturity ("HTM") securities is estimated at each measurement date on a collective basis by major security type. At June 30, 2023 and December 31, 2022, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At June 30, 2023 and March 31, 2023, the Company carried $6.3 million and $6.5 million, respectively, of these HTM securities at amortized cost. The required ACL on these balances was $2.9 million at June 30, 2023 and $2.6 million at March 31, 2023, resulting in $0.3 million of credit loss expense during the current quarter. Credit loss expense during the three months ended June 30, 2022 was a benefit of $0.1 million. None of the overcollateralization triggers tied to the CLO securities were tripped as of June 30, 2023. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.
Our ACL on loans was $35.0 million as of June 30, 2023, compared to $42.8 million as of December 31, 2022, representing an ACL to total loans ratio of 0.81% and 1.04%, respectively.
Our credit loss expense on loans increased $1.4 million, or 69.8%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.
During the three months ended June 30, 2023, new adverse developments with one of the two remaining Over-Formula Advance clients caused us to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $3.3 million; however, this net charge-off had no impact on credit loss expense as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant will reimburse us for $1.7 million of this charge-off which is reflected as a receivable on our June 30, 2023 Consolidated Balance Sheet. We continue to reserve the full balance of the Over-Formula Advance clients at June 30, 2023 which totals $4.0 million.
The increase in credit loss expense was primarily driven by increased net charge-offs during the period. Including the $3.3 million over-formula advance net charge-off previously discussed, net charge-offs during the three months ended June 30, 2023 were $10.8 million compared to $0.2 million during the same period a year ago. Approximately $8.1 million of the $10.8 million net charge-offs for the three months ended June 30, 2023 were reserved in a prior period while charge-offs during the three months ended June 30, 2022 were fully reserved in a prior period. Such prior period reserves are included in the discussion of changes in specific reserves below.
Changes in volume and mix of the loan portfolio also increased credit loss expense. Such changes created a benefit to credit loss expense of $0.2 million during the three months ended June 30, 2023 compared to a benefit to credit loss expense of $1.6 million during the same period a year ago.
The increased credit loss expense was partially offset by changes in new specific reserves. Such specific reserves decreased $7.1 million during the three months ended June 30, 2023 compared to an increase of $0.9 million during the same period a year ago.
The increase in credit loss expense was also partially offset by changes to projected loss drivers and prepayment speeds that the Company forecasted over the reasonable and supportable forecast period to calculate expected losses. The result of such changes had an insignificant impact to credit loss expense for the three months ended June 30, 2023 compared to credit loss expense of $2.6 million during the same period a year ago.
Credit loss expense for off balance sheet credit exposures decreased $2.1 million, primarily due to decreased underlying outstanding commitments to fund period over period.
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Noninterest Income
The following table presents our major categories of noninterest income:
Three Months Ended June 30,
(Dollars in thousands)20232022$ Change% Change
Service charges on deposits$1,769 $1,664 $105 6.3 %
Card income2,119 2,080 39 1.9 %
Net OREO gains (losses) and valuation adjustments— 18 (18)(100.0)%
Net gains (losses) on sale or call of securities— 2,514 (2,514)(100.0)%
Net gains (losses) on sale of loans87 17,269 (17,182)(99.5)%
Fee income7,462 6,273 1,189 19.0 %
Insurance commissions1,303 1,346 (43)(3.2)%
Other(1,229)16,996 (18,225)(107.2)%
Total noninterest income$11,511 $48,160 $(36,649)(76.1)%
Noninterest income decreased $36.6 million, or 76.1%. Changes in selected components of noninterest income in the above table are discussed below.
•Net gains (losses) on sale or call of securities. Net gains (losses) on sale or call of securities decreased $2.5 million as no securities we sold or called during the three months ended June 30, 2023.
•Net gains (losses) on sale of loans. Net gains (losses) on sale of loans decreased $17.2 million due to the aforementioned $13.2 million gain on sale of factored receivables and the aforementioned $3.9 million gain on sale of equipment loans during the three months ended June 30, 2022. Sales of such magnitude did not repeat during the three months ended June 30, 2023.
•Fee income. Fee income increased $1.2 million, or 19.0%, due to a $0.7 million increase in fees earned by TriumphPay Audit during the three months ended June 30, 2023 compared to the same period a year ago.
•Other. Other noninterest income decreased $18.2 million primarily due to a gain of $8.9 million on the aforementioned termination of an interest rate swap recognized during the three months ended June 30, 2022. During that same period, we recognized a net gain of $7.0 million on the aforementioned termination of WSI warrants and additional investment in WSI common stock. The decrease was also driven by a write down of our revenue share asset, which is carried at fair value, of $1.2 million during the three months ended June 30, 2023.
Noninterest Expense
The following table presents our major categories of noninterest expense:
Three Months Ended June 30,
(Dollars in thousands)20232022$ Change% Change
Salaries and employee benefits$54,219 $54,257 $(38)(0.1)%
Occupancy, furniture and equipment7,292 6,507 785 12.1 %
FDIC insurance and other regulatory assessments796 382 414 108.4 %
Professional fees3,035 3,607 (572)(15.9)%
Amortization of intangible assets3,001 3,064 (63)(2.1)%
Advertising and promotion1,577 1,785 (208)(11.7)%
Communications and technology11,397 9,820 1,577 16.1 %
Travel and entertainment1,555 1,423 132 9.3 %
Other7,524 7,762 (238)(3.1)%
Total noninterest expense$90,396 $88,607 $1,789 2.0 %
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Noninterest expense increased $1.8 million, or 2.0%. Details of the more significant changes in the various components of noninterest expense are further discussed below.
•Salaries and Employee Benefits. Salaries and employee benefits expenses were relatively flat period over period. Employee salaries and payroll taxes increased $3.2 million and $0.4 million, respectively, which is primarily due to merit increases for existing employees and growth in our workforce. The size of our workforce increased period over period due to organic growth within the Company. Our average full-time equivalent employees were 1,480.7 and 1,365.3 for the three months ended June 30, 2023 and 2022, respectively. Further, compensation for temporary and/or contract labor increased $0.3 million and sales commissions, primarily related to our operations at Triumph Financial Services and TriumphPay, increased $0.5 million period over period. Accruals for bonus expense were $1.0 million lower period over period and stock based compensation expense included in salaries and employee benefits expense decreased $4.2 million period over period.
•Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $0.8 million, or 12.1%, primarily due to growth in our operations period over period.
•Professional Fees. Professional fees decreased $0.6 million, or 15.9%, primarily due to a $0.6 million decrease in legal and consulting fees period over period.
•Communication and Technology. Communication and technology increased $1.6 million, or 16.1%, primarily as a result of increased spending on IT information security and IT license and software maintenance to develop efficiency in our operations and improve the functionality and security of our technology platforms period over period.
•Other. Other noninterest expense includes loan-related expenses, software amortization, training and recruiting, postage, insurance, and subscription services. Other noninterest expense decreased $0.2 million, or 3.1%. There were no notable variances in other noninterest expense period over period.
Income Taxes
The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the effect of changes in valuation allowances maintained against deferred tax benefits.
Income tax expense decreased $11.6 million, from $13.9 million for the three months ended June 30, 2022 to $2.3 million for the three months ended June 30, 2023. The effective tax rate was 23% for the three months ended June 30, 2023, compared to 24% for the three months ended June 30, 2022. There were no notable income tax events in either period.
Operating Segment Results
Our reportable segments are Banking, Factoring, Payments, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. Our Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Factoring segment includes the operations of Triumph Financial Services with revenue derived from factoring services. The Payments segment includes the operations of the TBK Bank's TriumphPay division, which provides a presentment, audit, and payment solution to Shipper, Broker, and Factor clients in the trucking industry. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a Carrier a quickpay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering Brokers the ability to settle their invoices with us on an extended term following our payment to their Carriers as an additional liquidity option for such Brokers.
Prior to March 31, 2023, the majority of salaries and benefits expense for our executive leadership team, as well as other selling, general, and administrative shared services costs including human resources, accounting, finance, risk management and a significant amount of information technology expense, were allocated to the Banking segment. During the quarter ended March 31, 2023 management began allocating such shared service costs to its Corporate segment. We continue to make considerable investments in shared services that benefit the entire organization and by moving such expenses to the Corporate segment, our chief operating decision maker and investors now have greater visibility into the operating performance of each reportable segment. Prior periods were revised to reflect such allocations and achieve appropriate comparability.
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Separately, prior to March 31, 2023, intersegment interest expense was allocated to the Factoring and Payments segments (when the Payments segment is not self-funded) based on a rolling average of Federal Home Loan Bank advance rates. When the Payments segment was self-funded with funding in excess of its factored receivables, intersegment interest income was allocated based on the Federal Funds effective rate. During the quarter ended March 31, 2023, we began allocating intersegment interest expense to the Factoring and Payments segments based on one-month term SOFR for their funding needs. When the Payments segment is self-funded, with funding in excess of its factored receivables, intersegment interest income will continue to be allocated based on the Federal Funds effective rate. Management believes that such intersegment interest allocations are more intuitive in the current interest rate environment. Prior periods were revised to reflect such allocations and achieve appropriate comparability.
Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Other than the changes to allocations discussed above, the accounting policies of the segments are substantially the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2022 Form 10-K.
Transactions between segments consist primarily of borrowed funds, payment network fees, and servicing fees. Intersegment interest expense is allocated to the Factoring and Payments segments as described above. Beginning January 1, 2023, payment network fees are paid by the Factoring segment to the Payments segment for use of the payments network. Beginning prospectively on June 1, 2023, factoring transactions with freight broker clients were transferred from our Factoring segment to our Payments segment to align with TriumphPay's supply chain finance product offerings. Servicing fees are paid by the Payments segment to the Factoring segment for servicing such product. Credit loss expense is allocated based on the segment’s ACL determination. Noninterest income and expense directly attributable to a segment are assigned to it with various shared service costs such as human resources, accounting, finance, risk management and information technology expense assigned to the Corporate segment. Taxes are paid on a consolidated basis and are not allocated for segment purposes. The Factoring segment includes only factoring originated by Triumph Financial Services.
The following tables present our primary operating results for our operating segments:
(Dollars in thousands)
Three Months Ended June 30, 2023BankingFactoringPaymentsCorporateConsolidated
Total interest income$65,624 $36,367 $3,451 $44 $105,486 
Intersegment interest allocations7,478 (9,358)1,880 — — 
Total interest expense11,634 — — 2,401 14,035 
Net interest income (expense)61,468 27,009 5,331 (2,357)91,451 
Credit loss expense (benefit)831 1,481 41 290 2,643 
Net interest income after credit loss expense 60,637 25,528 5,290 (2,647)88,808 
Noninterest income6,347 980 4,119 65 11,511 
Intersegment noninterest income (expense)(1)
— (97)97 — — 
Noninterest expense31,934 20,218 16,939 21,305 90,396 
Net income (loss) before income tax expense$35,050 $6,193 $(7,433)$(23,887)$9,923 
(Dollars in thousands)
Three Months Ended June 30, 2022BankingFactoringPaymentsCorporateConsolidated
Total interest income$46,239 $55,854 $4,172 $42 $106,307 
Intersegment interest allocations4,246 (3,878)(368)— — 
Total interest expense3,021 — — 1,858 4,879 
Net interest income (expense)47,464 51,976 3,804 (1,816)101,428 
Credit loss expense (benefit)3,120 64 (184)(99)2,901 
Net interest income after credit loss expense 44,344 51,912 3,988 (1,717)98,527 
Noninterest income22,282 15,521 10,309 48 48,160 
Intersegment noninterest income (expense)(1)
— — — — — 
Noninterest expense31,205 23,512 17,663 16,227 88,607 
Net income (loss) before income tax expense$35,421 $43,921 $(3,366)$(17,896)$58,080 
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(1) Intersegment noninterest income (expense) includes:
(Dollars in thousands)FactoringPayments
Three Months Ended June 30, 2023
Factoring revenue received from Payments$170 $(170)
Payments revenue received from Factoring(267)267 
Intersegment noninterest income (expense)$(97)$97 
Three Months Ended June 30, 2022
Factoring revenue received from Payments$— $— 
Payments revenue received from Factoring— — 
Intersegment noninterest income (expense)$— $— 
(Dollars in thousands)
June 30, 2023BankingFactoringPaymentsCorporateEliminationsConsolidated
Total assets$5,161,837 $1,084,139 $447,935 $1,021,259 $(2,062,449)$5,652,721 
Gross loans$3,688,130 $997,842 $175,952 $— $(537,166)$4,324,758 
(Dollars in thousands)
December 31, 2022BankingFactoringPaymentsCorporateEliminationsConsolidated
Total assets$4,910,628 $1,260,209 $371,948 $1,061,662 $(2,270,664)$5,333,783 
Gross loans$3,572,716 $1,151,727 $85,722 $— $(689,874)$4,120,291 
Banking
(Dollars in thousands)Three Months Ended June 30,
Banking20232022$ Change% Change
Total interest income$65,624 $46,239 $19,385 41.9 %
Intersegment interest allocations7,478 4,246 3,232 76.1 %
Total interest expense11,634 3,021 8,613 285.1 %
Net interest income (expense)61,468 47,464 14,004 29.5 %
Credit loss expense (benefit)831 3,120 (2,289)(73.4)%
Net interest income after credit loss expense60,637 44,344 16,293 36.7 %
Noninterest income6,347 22,282 (15,935)(71.5)%
Noninterest expense31,934 31,205 729 2.3 %
Operating income (loss)$35,050 $35,421 $(371)(1.0)%
Our Banking segment’s operating income decreased $0.4 million, or 1.0%.
Total interest income increased $19.4 million, or 41.9%, at our Banking segment due to an increase in average interest earning Banking assets. Additionally, the increase in interest income was driven by an increase in yields on interest earning assets at our Banking segment. Average loans in our Banking segment, excluding intersegment loans, increased 3.5% from $3.015 billion for the three months ended June 30, 2022 to $3.121 billion for the three months ended June 30, 2023, and average balances of other interest earning assets at our Banking segment increased period over period. Intersegment interest income allocated to our Banking segment increased period over period due to an increased interest rate charged to our Factoring segment consistent with increased interest rates experienced in the macro economy period over period.
Interest expense increased $8.6 million, or 285.1%, despite a decrease in average interest-bearing liabilities, including a decrease in average total interest bearing deposits of $225.0 million, or 8.4%, period over period. This increase was driven by higher interest rates paid on our interest-bearing liabilities driven by changes in interest rates in the macro economy.
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Credit loss expense at our Banking segment is made up of credit loss expense related to loans and credit loss expense related to off balance sheet commitments to lend. Credit loss expense related to loans was $2.0 million for the three months ended June 30, 2023 compared to credit loss expense on loans of $2.2 million for the three months ended June 30, 2022. The decrease in credit loss expense was the result of changes to the projected loss drivers and prepayment speeds that the Company forecasted over the reasonable and supportable forecast period and decreased specific reserves period over period. These decreases were partially offset by an increase driven by the volume and mix of our portfolio and increased net charge-off activity period over period.
Credit loss expense for off balance sheet credit exposures decreased $2.1 million, from $0.9 million for the three months ended June 30, 2022 to a benefit of $1.2 million for the three months ended June 30, 2023, primarily due to decreased underlying outstanding commitments to fund period over period.
Noninterest income at our Banking segment decreased period over period due to the aforementioned $3.9 million gain on sale of equipment loans, the aforementioned gain of $8.9 million on the termination of an interest rate swap, and a $2.5 million gain on sale of securities during the three months ended June 30, 2022 that did not repeat during the current period.
Noninterest expense increased primarily due to an increase in salaries and employee benefits expense due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. The increase in noninterest expense was also driven by increased communications and information technology spend.
Year to date, our aggregate outstanding balances for our banking products, excluding intercompany loans, has increased $268.1 million, or 9.3%, to $3.151 billion as of June 30, 2023. The following table sets forth our banking loans:
(Dollars in thousands)June 30,
2023		December 31,
2022		$ Change% Change
Banking
Commercial real estate$768,711 $678,144 $90,567 13.4 %
Construction, land development, land110,071 90,976 19,095 21.0 %
1-4 family residential130,628 125,981 4,647 3.7 %
Farmland67,913 68,934 (1,021)(1.5)%
Commercial - General295,159 316,364 (21,205)(6.7)%
Commercial - Paycheck Protection Program45 55 (10)(18.2)%
Commercial - Agriculture46,839 48,494 (1,655)(3.4)%
Commercial - Equipment493,763 454,117 39,646 8.7 %
Commercial - Asset-based lending231,265 229,754 1,511 0.7 %
Commercial - Liquid Credit151,821 202,326 (50,505)(25.0)%
Consumer8,409 8,868 (459)(5.2)%
Mortgage Warehouse846,340 658,829 187,511 28.5 %
Total banking loans$3,150,964 $2,882,842 $268,122 9.3 %
Factoring
(Dollars in thousands)Three Months Ended June 30,
Factoring20232022$ Change% Change
Total interest income$36,367 $55,854 $(19,487)(34.9)%
Intersegment interest allocations(9,358)(3,878)(5,480)(141.3)%
Total interest expense— — — — 
Net interest income (expense)27,009 51,976 (24,967)(48.0)%
Credit loss expense (benefit)1,481 64 1,417 2,214.1 %
Net interest income (expense) after credit loss expense25,528 51,912 (26,384)(50.8)%
Noninterest income980 15,521 (14,541)(93.7)%
Intersegment noninterest income (expense)(97)— (97)(100.0)%
Noninterest expense20,218 23,512 (3,294)(14.0)%
Net income (loss) before income tax expense$6,193 $43,921 $(37,728)(85.9)%
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Three Months Ended June 30,
20232022
Factored receivable period end balance$997,842,000 $1,474,852,000 
Yield on average receivable balance14.07 %14.21 %
Current quarter charge-off rate(1)
0.54 %— %
Factored receivables - transportation concentration95 %94 %
Interest income, including fees$36,367,000 $55,854,000 
Non-interest income980,000 15,521,000 
Intersegment noninterest income170,000 — 
Factored receivable total revenue37,517,000 71,375,000 
Average net funds employed918,439,000 1,409,312,000 
Yield on average net funds employed16.38 %20.31 %
Accounts receivable purchased$2,732,976,000 $4,023,569,000 
Number of invoices purchased1,494,963 1,725,721 
Average invoice size$1,828 $2,332 
Average invoice size - transportation$1,773 $2,176 
Average invoice size - non-transportation$5,790 $6,469 
Metrics above include assets and deposits held for sale.
(1) June 30, 2023 includes a $3.3 million charge-off of an over-formula advance balance, which contributed approximately 0.32% to the net charge-off rate for the quarter. In accordance with the agreement reached with Covenant, Covenant will reimburse us for $1.7 million of this charge-off.
Our Factoring segment’s operating income decreased $37.7 million, or 85.9%.
Our average invoice size decreased 21.6% from $2,332 for the three months ended June 30, 2022 to $1,828 for the three months ended June 30, 2023. Additionally, the number of invoices purchased decreased 13.4% period over period.
Net interest income at our Factoring segment decreased period over period. Overall average net funds employed (“NFE”) decreased 34.8% during the three months ended June 30, 2023 compared to the same period in 2022. The decrease in average NFE was the result of decreased invoice purchase volume and decreased average invoice sizes. Those, in turn, resulted from a softening transportation market. See further discussion under the Recent Developments: Trucking Transportation section. We maintained high concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration was at 95% at June 30, 2023 and 94% at June 30, 2022. The aforementioned transfer of freight broker supply chain finance to the Payments segment resulted in a reduction of net interest income at our Factoring segment of $0.5 million.
Credit loss expense at our Factoring segment increased period over period, primarily due to increased net charge-offs, including the fully reserved $3.3 million charge-off of the acquired over-advance factored receivables. This increase was partially offset by a reduction in specific reserves and a reduction of period end volume of the factoring portfolio period over period. Changes in loss assumptions did not have a material impact on the change in credit loss expense period over period.
Noninterest income at our Factoring segment decreased period over period due to the aforementioned $13.2 million gain on sale of factored receivables during the three months ended June 30, 2022. The decrease was also driven by a $1.2 million write down of our revenue share asset, which is carried at fair value, during the three months ended June 30, 2023.
Noninterest expense decreased primarily due to a decrease in salary and benefits expense including a decrease in stock compensation. Additionally, there was a decrease in communications and technology expense period over period.
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Payments
(Dollars in thousands)Three Months Ended June 30,
Payments20232022$ Change% Change
Total interest income$3,451 $4,172 $(721)(17.3)%
Intersegment interest allocations1,880 (368)2,248 610.9 %
Total interest expense— — — — %
Net interest income (expense)5,331 3,804 1,527 40.1 %
Credit loss expense (benefit)41 (184)225 122.3 %
Net interest income after credit loss expense5,290 3,988 1,302 32.6 %
Noninterest income4,119 10,309 (6,190)(60.0)%
Intersegment noninterest income (expense)97 — 97 100.0 %
Noninterest expense16,939 17,663 (724)(4.1)%
Net income (loss) before income tax expense$(7,433)$(3,366)$(4,067)(120.8)%
Three Months Ended June 30,
20232022
Supply chain financing factored receivables$93,678,000 $— 
Quickpay and other factored receivables82,274,000 145,835,000 
Factored receivable period end balance$175,952,000 $145,835,000 
Interest income$3,451,000 $4,172,000 
Intersegment interest income1,880,000 — 
Noninterest income4,119,000 10,309,000 
Intersegment noninterest income267,000 $— 
Total revenue$9,717,000 $14,481,000 
Operating income (loss)$(7,433,000)$(3,366,000)
Intersegment interest expense— 368,000 
Depreciation and software amortization expense368,000 103,000 
Intangible amortization expense1,729,000 1,477,000 
Earnings (losses) before interest, taxes, depreciation, and amortization$(5,336,000)$(1,418,000)
EBITDA margin(55)%(10)%
Number of invoices processed4,526,629 4,394,351 
Amount of payments processed$4,940,317,000 $6,033,898,000 
Network invoice volume181,904 118,580 
Network payment volume$299,948,000 $253,312,000 
Our Payments segment's operating loss increased $4.1 million, or 120.8%.
The number of invoices processed by our Payments segment increased 3.0% from 4,394,351 for the three months ended June 30, 2022 to 4,526,629 for the three months ended June 30, 2023, and the amount of payments processed decreased 18.1% from $6.034 billion for the three months ended June 30, 2022 to $4.940 billion for the three months ended June 30, 2023 driven by lower average invoice prices.
We began processing network transactions during the first quarter of 2022. When a fully integrated TriumphPay payor receives an invoice from a fully integrated TriumphPay payee, we call that a “network transaction.” All network transactions are included in our payment processing volume above. These transactions are facilitated through TriumphPay APIs with parties on both sides of the transaction using structured data; similar to how a credit card works at a point-of-sale terminal. The integrations largely automate the process and make it cheaper, faster and safer. During the three months ended June 30, 2023, we processed 181,904 network invoices representing a network payment volume of $299.9 million. During the three months ended June 30, 2022, we processed 118,580 network invoices representing a network payment volume of $253.3 million.
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Net interest income increased due to increased yields at our Payments segment period over period and intersegment interest allocation. The aforementioned transfer of factoring transactions with freight broker clients to the Payments segment resulted in an increase of net interest income at our Factoring segment of $0.4 million.
Noninterest income decreased due to the $7.0 million net gain on the aforementioned termination of WSI warrants and additional investment in WSI common stock during the three months ended June 30, 2023. The decrease was offset by a $0.7 million increase in payment fees earned by TriumphPay during the three months ended June 30, 2023 compared to the same period a year ago.
Noninterest expense decreased primarily due to a decrease in salaries and employee benefits expense driven by a decrease in employee salaries, temporary and/or contract labor, incentive comp, and stock based compensation at our Payments segment. The decrease was partially offset by an increase in communications and technology expense.
The acquisition of HubTran during 2021 allows TriumphPay to create a fully integrated payments network for trucking, servicing brokers and factors. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to an open-loop payments network for the trucking industry with a focus on fee revenue. It is for this reason that management believes that earnings before interest, taxes, depreciation, and amortization and the adjustment to that metric enhance investors' overall understanding of the financial performance of the Payments segment. Further, as a result of the HubTran acquisition, management recorded $27.3 million of intangible assets that will lead to meaningful amounts of amortization going forward. The aforementioned transfer of factoring transactions with freight broker clients to the Payments segment contributed four percentage points to the EBITDA margin at our payments segment for the three months ended June 30, 2023.
Corporate
(Dollars in thousands)Three Months Ended June 30,
Corporate20232022$ Change% Change
Total interest income$44 $42 $2 4.8 %
Intersegment interest allocations— — — — 
Total interest expense2,401 1,858 543 29.2 %
Net interest income (expense)(2,357)(1,816)(541)(29.8)%
Credit loss expense (benefit)290 (99)389 392.9 %
Net interest income (expense) after credit loss expense(2,647)(1,717)(930)(54.2)%
Other noninterest income65 48 17 35.4 %
Noninterest expense21,305 16,227 5,078 31.3 %
Net income (loss) before income tax expense$(23,887)$(17,896)$(5,991)(33.5)%
The Corporate segment reported an operating loss of $23.9 million for the three months ended June 30, 2023 compared to an operating loss of $17.9 million for the three months ended June 30, 2022. The increased operating loss was driven by increased noninterest expense which was the result of increased salaries and benefits expense due to due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. Further, the size of our workforce increased period over period due to organic growth within the Company. Additionally, occupancy expense and communication and technology expense increased period over period.
Results of Operations
Six months ended June 30, 2023 compared with six months ended June 30, 2022
Net Income
We earned net income of $18.7 million for the six months ended June 30, 2023 compared to $68.5 million for the six months ended June 30, 2022, a decrease of $49.8 million. The decrease in net income was driven by a $36.7 million decrease in noninterest income, a $16.7 million decrease in net interest income, a $12.5 million increase in noninterest expense, and a $1.9 million increase in credit loss expense offset by a $18.0 decrease in income tax expense.
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Details of the changes in the various components of net income are further discussed below.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest earning assets, including loans and securities, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of interest earning assets and interest bearing liabilities, combine to affect net interest income. Our net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing liabilities, referred to as a “rate change.”
The following table presents the distribution of average assets, liabilities and equity, as well as interest income and fees earned on average interest earning assets and interest expense paid on average interest bearing liabilities. Average balances and interest are inclusive of assets and deposits classified as held for sale.
Six Months Ended June 30,
20232022
(Dollars in thousands)Average
Balance		Interest
Average
Rate(4)
Average
Balance		Interest
Average
Rate(4)
Interest earning assets:
Cash and cash equivalents$244,012 $5,950 4.92 %$308,668 $915 0.60 %
Taxable securities306,883 9,196 6.04 %172,282 2,320 2.72 %
Tax-exempt securities11,763 151 2.59 %14,582 187 2.59 %
FHLB and other restricted stock18,558 344 3.74 %11,267 110 1.97 %
Loans (1)
4,186,570 190,519 9.18 %4,783,709 206,210 8.69 %
Total interest earning assets4,767,786 206,160 8.72 %5,290,508 209,742 7.99 %
Noninterest earning assets:
Cash and cash equivalents83,730 80,583 
Other noninterest earning assets534,913 489,825 
Total assets$5,386,429 $5,860,916 
Interest bearing liabilities:
Deposits:
Interest bearing demand$820,467 $1,285 0.32 %$855,756 $979 0.23 %
Individual retirement accounts62,663 189 0.61 %82,182 210 0.52 %
Money market502,456 2,815 1.13 %542,050 561 0.21 %
Savings537,404 784 0.29 %519,269 393 0.15 %
Certificates of deposit292,665 1,457 1.00 %489,682 1,134 0.47 %
Brokered time deposits172,354 3,373 3.95 %60,065 305 1.02 %
Other brokered deposits6,768 176 5.24 %142,710 685 0.97 %
Total interest bearing deposits2,394,777 10,079 0.85 %2,691,714 4,267 0.32 %
Federal Home Loan Bank advances251,961 6,503 5.20 %109,972 354 0.65 %
Subordinated notes108,009 2,621 4.89 %107,151 2,601 4.90 %
Junior subordinated debentures41,303 2,124 10.37 %40,732 1,010 5.00 %
Other borrowings1,457 — — %5,469 3 0.11 %
Total interest bearing liabilities2,797,507 21,327 1.54 %2,955,038 8,235 0.56 %
Noninterest bearing liabilities and equity:
Noninterest bearing demand deposits1,651,463 1,944,606 
Other liabilities87,457 79,540 
Total equity850,002 881,732 
Total liabilities and equity$5,386,429 $5,860,916 
Net interest income$184,833 $201,507 
Interest spread (2)
7.18 %7.43 %
Net interest margin (3)
7.82 %7.68 %
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(1)Balance totals include respective nonaccrual assets.
(2)Net interest spread is the yield on average interest earning assets less the rate on interest bearing liabilities.
(3)Net interest margin is the ratio of net interest income to average interest earning assets.
(4)Ratios have been annualized.
The following table presents loan yields earned on our loan portfolios:
Six Months Ended June 30,
20232022
(Dollars in thousands)Average
Balance		InterestAverage RateAverage
Balance		InterestAverage Rate
Banking loans$3,019,168 $109,796 7.33 %$3,023,608 $84,978 5.67 %
Factoring receivables1,073,434 74,525 14.00 %1,595,230 112,228 14.19 %
Payments receivables93,968 6,198 13.30 %164,871 9,004 11.01 %
Total loans$4,186,570 $190,519 9.18 %$4,783,709 $206,210 8.69 %
We earned net interest income of $184.8 million for the six months ended June 30, 2023 compared to $201.5 million for the six months ended June 30, 2022, a decrease of $16.7 million, or 8.3%, primarily driven by the following factors.
Interest income decreased $3.6 million, or 1.7%, due to a decrease in total average interest earning assets of $522.7 million, or 9.9%, and a decrease in average total loans of $597.1 million, or 12.5%. The average balance of our higher yielding Factoring factored receivables decreased $521.8 million, or 32.7%, driving the majority of the decrease in interest income along with a decrease in average Payments factored receivables. Additionally, the decrease in interest income was the result of a decrease in average Banking loans of $4.4 million, or 0.1% due to decreases in the average balances of all Banking loan types except for commercial real estate, residential real estate, general commercial, liquid credit, and mortgage warehouse. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $794.9 million for the six months ended June 30, 2023 compared to $644.1 million for the six months ended June 30, 2022. A component of interest income consists of discount accretion on acquired loan portfolios. We recognized discount accretion on purchased loans of $2.8 million and $5.1 million for the six months ended June 30, 2023 and 2022, respectively. The decrease in interest income was partially offset by increases in rates discussed below. Further, increased average balances and yields of taxable securtities partially offset the decrease in interest income.
Interest expense increased $13.1 million, or 159.0%, due to increased average rates on interest bearing liabilities discussed below. The increase in interest expense was partially offset by a decrease in average interest bearing liabilities of $157.5 million, or 5.3%. More specifically, average total interest bearing deposits decreased $296.9 million, or 11.0%. Average noninterest bearing deposits decreased $293.1 million.
Net interest margin increased to 7.82% for the six months ended June 30, 2023 from 7.68% for the six months ended June 30, 2022, an increase of 14 basis points, or 1.8%.
Our net interest margin was impacted by an increase in yield on our interest earning assets of 73 basis points to 8.72% for the six months ended June 30, 2023. This increase was driven by higher yields on loans which increased 49 basis points to 9.18% for the same period. Factoring yield decreased period over period and average Factoring factored receivables as a percentage of the total loan portfolio also decreased which had a meaningful downward impact on total loan yield. Our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, were flat as a percentage of the overall factoring portfolio at 96% for June 30, 2023 and June 30, 2022, respectively. Banking and Payments yields increased period over period and non-loan yields also increased over the same period.
The increase in our net interest margin was partially offset by an increase in our average cost of interest bearing liabilities of 98 basis points.
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The following table shows the effects that changes in average balances (volume) and average interest rates (rate) had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities:
Six Months Ended
June 30, 2023 vs. 2022
Increase (Decrease) Due to:Net Increase
(Dollars in thousands)RateVolume
Interest earning assets:
Cash and cash equivalents$6,612 $(1,577)$5,035 
Taxable securities2,843 4,033 6,876 
Tax-exempt securities— (36)(36)
FHLB and other restricted stock99 135 234 
Loans11,483 (27,174)(15,691)
Total interest income21,037 (24,619)(3,582)
Interest bearing liabilities:
Interest bearing demand361 (55)306 
Individual retirement accounts38 (59)(21)
Money market2,476 (222)2,254 
Savings365 26 391 
Certificates of deposit1,304 (981)323 
Brokered time deposits870 2,198 3,068 
Other brokered deposits3,026 (3,535)(509)
Total interest bearing deposits8,440 (2,628)5,812 
Federal Home Loan Bank advances2,484 3,665 6,149 
Subordinated notes(1)21 20 
Junior subordinated debentures1,085 29 1,114 
Other borrowings(3)— (3)
Total interest expense12,005 1,087 13,092 
Change in net interest income$9,032 $(25,706)$(16,674)
Credit Loss Expense
Credit loss expense is the amount of expense that, based on our judgment, is required to maintain the allowances for credit losses (“ACL”) at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the Company’s 2022 Form 10-K for detailed discussion regarding ACL methodologies for available for sale debt securities, held to maturity securities and loans held for investment.
The following table presents the major categories of credit loss expense:
Six Months Ended June 30,
(Dollars in thousands)20232022$ Change% Change
Credit loss expense on loans$5,167 $2,933 $2,234 76.2 %
Credit loss expense on off balance sheet credit exposures(343)196 (539)(275.0)%
Credit loss expense on held to maturity securities432 273 159 58.2 %
Credit loss expense on available for sale securities— — — — 
Total credit loss expense$5,256 $3,402 $1,854 54.5 %
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For available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. At December 31, 2022 and June 30, 2023, the Company determined that all impaired available for sale securities experienced a decline in fair value below the amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at those respective dates and there was no credit loss expense recognized by the Company during the six months ended June 30, 2023. The same was true for the same period in the prior year.
The ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At June 30, 2023 and December 31, 2022, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At June 30, 2023 and December 31, 2022, the Company carried $6.3 million and $6.5 million of these HTM securities at amortized cost, respectively. The ACL on these balances was $2.9 million at June 30, 2023 and $2.4 million at December 31, 2022 and we recognized credit loss expense of $0.4 million during the six months ended June 30, 2023. Credit loss expense during the six months ended June 30, 2022 was $0.3 million. None of the overcollateralization triggers tied to the CLO securities were tripped as of June 30, 2023. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.
Our ACL on loans was $35.0 million as of June 30, 2023, compared to $42.8 million as of December 31, 2022, representing an ACL to total loans ratio of 0.81% and 1.04% respectively.
Our credit loss expense on loans increased $2.2 million, or 76.2%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
During the six months ended June 30, 2023, new adverse developments with one of the two remaining Over-Formula Advance clients caused us to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $3.3 million; however, this net charge-off had no impact on credit loss expense as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant will reimburse us for $1.7 million of this charge-off which is reflected as a receivable on our June 30, 2023 Consolidated Balance Sheet. We continue to reserve the full balance of the Over-Formula Advance clients at June 30, 2023 which totals $4.0 million.
The increase in credit loss expense was primarily driven by increased net charge-offs during the period. Including the $3.3 million over-formula advance net charge-off previously discussed, net charge-offs during the six months ended June 30, 2023 were $13.0 million compared to $1.7 million during the same period a year ago. Approximately $8.5 million of the $13.0 million net charge-offs for the six months ended June 30, 2023 were reserved in a prior period while $0.7 million of the $1.7 million of charge-offs during the six months ended June 30, 2022 were reserved in a prior period. Such prior period reserves are included in the discussion of changes in specific reserves below.
Changes in volume and mix of the loan portfolio also increased credit loss expense. Such changes created a benefit to credit loss expense of $0.2 million during the six months ended June 30, 2023 compared to a benefit to credit loss expense of $2.1 million during the same period a year ago.
The increased credit loss expense was partially offset by changes in new specific reserves. Such specific reserves decreased $8.0 million during the six months ended June 30, 2023 compared to an increase of $1.8 million during the same period a year ago.
The increase in credit loss expense was also partially offset by changes to projected loss drivers and prepayment speeds that the Company forecasted over the reasonable and supportable forecast period to calculate expected losses. This resulted in credit loss expense of $0.4 million for the six months ended June 30, 2023 compared to credit loss expense of $1.5 million during the same period a year ago.
Credit loss expense for off balance sheet credit exposures decreased $0.5 million, primarily due to decreases to outstanding commitments to fund period over period.
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Noninterest Income
The following table presents our major categories of noninterest income:
Six Months Ended June 30,
(Dollars in thousands)20232022$ Change% Change
Service charges on deposits$3,482 $3,627 $(145)(4.0 %)
Card income4,087 4,091 (4)(0.1 %)
Net OREO gains (losses) and valuation adjustments— (114)114 100.0 %
Net gains (losses) on sale or call of securities— 2,514 (2,514)(100.0 %)
Net gains (losses) on sale of loans3 17,203 (17,200)(100.0 %)
Fee income13,612 11,976 1,636 13.7 %
Insurance commissions2,896 3,018 (122)(4.0 %)
Other(1,547)16,966 (18,513)(109.1 %)
Total noninterest income$22,533 $59,281 $(36,748)(62.0 %)
Noninterest income decreased $36.7 million, or 62.0%. Changes in selected components of noninterest income in the above table are discussed below.
•Net gains (losses) on sale or call of securities. Net gains (losses) on sale or call of securities decreased $2.5 million as no securities we sold or called during the six months ended June 30, 2023.
•Net gains (losses) on sale of loans. Net gains (losses) on sale of loans decreased $17.2 million, due to the aforementioned $13.2 million gain on sale of factored receivables and the $3.9 million gain on sale of equipment loans during the six months ended June 30, 2022. Sales of such magnitude did not repeat during the six months ended June 30, 2023.
•Fee income. Fee income increased $1.6 million, or 13.7% primarily due to a $1.2 million increase in payment fees earned by TriumphPay during the six months ended June 30, 2023 compared to the same period a year ago.
•Other. Other noninterest income decreased $18.5 million, or 109.1% primarily due to a gain of $8.9 million on the aforementioned termination of an interest rate swap recognized during the six months ended June 30, 2022. During that same period, we recognized a net gain of $7.0 million on the aforementioned termination of WSI warrants and additional investment in WSI common stock. The decrease was also driven by a write down of our revenue share asset, which is carried at fair value, of $1.8 million during the six months ended June 30, 2023.
Noninterest Expense
The following table presents our major categories of noninterest expense:
Six Months Ended June 30,
(Dollars in thousands)20232022$ Change% Change
Salaries and employee benefits$108,905 $100,541 $8,364 8.3 %
Occupancy, furniture and equipment13,995 12,943 1,052 8.1 %
FDIC insurance and other regulatory assessments1,141 793 348 43.9 %
Professional fees6,120 7,266 (1,146)(15.8 %)
Amortization of intangible assets5,851 6,172 (321)(5.2 %)
Advertising and promotion2,921 2,987 (66)(2.2 %)
Communications and technology22,249 18,932 3,317 17.5 %
Travel and entertainment3,453 2,524 929 36.8 %
Other15,042 15,013 29 0.2 %
Total noninterest expense$179,677 $167,171 $12,506 7.5 %
Noninterest expense increased $12.5 million, or 7.5%. Details of the more significant changes in the various components of noninterest expense are further discussed below.
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•Salaries and Employee Benefits. Salaries and employee benefits expenses increased $8.4 million, or 8.3%, which is primarily due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. Employee salaries and payroll taxes increased $9.8 million and $1.8 million, respectively, and our average full-time equivalent employees were 1,470.3 and 1,328.2 for the six months ended June 30, 2023 and 2022, respectively. Further, compensation for temporary and/or contract labor increased $2.0 million and accruals for bonus expense increased $0.4 million period over period. Sales commissions, primarily related to our operations at Triumph Financial Services and TriumphPay, decreased $1.1 million period over period. Stock based compensation expense decreased $5.9 million period over period.
•Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $1.1 million, or 8.1%, primarily due to growth in our operations period over period.
•Professional Fees. Professional fees decreased $1.1 million, or 15.8%, primarily due to a $1.0 million decrease in legal and consulting fees period over period.
•Communications and Technology. Communications and technology expenses increased $3.3 million, or 17.5%, primarily as a result of increased spending on IT information security and IT license and software maintenance to develop efficiency in our operations and improve the functionality and security of our technology platforms period over period.
•Travel and entertainment. Travel and entertainment expenses increased $0.9 million, or 36.8%, primarily due to increased business development activity in this area period over period.
•Other. Other noninterest expense includes loan-related expenses, software amortization, training and recruiting, postage, insurance, and subscription services. Other noninterest expense was relatively flat period over period despite a $0.7 million decrease in correspondent bank charges. There were no other significant increases or decreases in the individual components of other noninterest expense period over period.
Income Taxes
The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the effect of changes in valuation allowances maintained against deferred tax benefits.
Income tax expense decreased $17.9 million, or 82.6%, from $21.7 million for the six months ended June 30, 2022 to $3.8 million for the six months ended June 30, 2023. The effective tax rate was 17% for the six months ended June 30, 2023 and 24% for the six months ended June 30, 2022. The decrease in the effective tax rate period over period was primarily driven by the performance based performance stock units windfall that was recorded during the six months ended June 30, 2023 as those related shares vested during the period.
Operating Segment Results
Our reportable segments are Banking, Factoring, Payments, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. Our Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Factoring segment includes the operations of Triumph Financial Services with revenue derived from factoring services. The Payments segment includes the operations of the TBK Bank's TriumphPay division, which provides a presentment, audit, and payment solution to Shipper, Broker, and Factor clients in the trucking industry. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a Carrier a quickpay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering Brokers the ability to settle their invoices with us on an extended term following our payment to their Carriers as an additional liquidity option for such Brokers.
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Prior to March 31, 2023, the majority of salaries and benefits expense for our executive leadership team, as well as other selling, general, and administrative shared services costs including human resources, accounting, finance, risk management and a significant amount of information technology expense, were allocated to the Banking segment. During the quarter ended March 31, 2023 management began allocating such shared service costs to its Corporate segment. We continue to make considerable investments in shared services that benefit the entire organization and by moving such expenses to the Corporate segment, our chief operating decision maker and investors now have greater visibility into the operating performance of each reportable segment. Prior periods were revised to reflect such allocations and achieve appropriate comparability.
Separately, prior to March 31, 2023, intersegment interest expense was allocated to the Factoring and Payments segments (when the Payments segment is not self-funded) based on a rolling average of Federal Home Loan Bank advance rates. When the Payments segment was self-funded with funding in excess of its factored receivables, intersegment interest income was allocated based on the Federal Funds effective rate. During the quarter ended March 31, 2023, we began allocating intersegment interest expense to the Factoring and Payments segments based on one-month term SOFR for their funding needs. When the Payments segment is self-funded, with funding in excess of its factored receivables, intersegment interest income will continue to be allocated based on the Federal Funds effective rate. Management believes that such intersegment interest allocations are more intuitive in the current interest rate environment. Prior periods were revised to reflect such allocations and achieve appropriate comparability.
Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Other than the changes to allocations discussed above, the accounting policies of the segments are substantially the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2022 Form 10-K.
Transactions between segments consist primarily of borrowed funds, payment network fees, and servicing fees. Intersegment interest expense is allocated to the Factoring and Payments segments as described above. Beginning January 1, 2023, payment network fees are paid by the Factoring segment to the Payments segment for use of the payments network. Beginning prospectively on June 1, 2023, factoring transactions with freight broker clients were transferred from our Factoring segment to our Payments segment to align with TriumphPay's supply chain finance product offerings. Servicing fees are paid by the Payments segment to the Factoring segment for servicing such product. Credit loss expense is allocated based on the segment’s ACL determination. Noninterest income and expense directly attributable to a segment are assigned to it with various shared service costs such as human resources, accounting, finance, risk management and information technology expense assigned to the Corporate segment. Taxes are paid on a consolidated basis and are not allocated for segment purposes. The Factoring segment includes only factoring originated by Triumph Financial Services.
The following tables present our primary operating results for our operating segments:
(Dollars in thousands)
Six Months Ended June 30, 2023BankingFactoringPaymentsCorporateConsolidated
Total interest income$125,350 $74,524 $6,198 $88 $206,160 
Intersegment interest allocations15,090 (18,512)3,422 — — 
Total interest expense16,582 — — 4,745 21,327 
Net interest income (expense)123,858 56,012 9,620 (4,657)184,833 
Credit loss expense (benefit)2,754 2,030 41 431 5,256 
Net interest income after credit loss expense121,104 53,982 9,579 (5,088)179,577 
Noninterest income12,020 2,558 7,826 129 22,533 
Intersegment noninterest income (expense)(1)
— (362)362 — — 
Noninterest expense64,174 41,987 32,356 41,160 179,677 
Net income (loss) before income tax expense$68,950 $14,191 $(14,589)$(46,119)$22,433 
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(Dollars in thousands)
Six Months Ended June 30, 2022BankingFactoringPaymentsCorporateConsolidated
Total interest income$88,422 $112,228 $9,004 $88 $209,742 
Intersegment interest allocations4,851 (4,430)(421)— — 
Total interest expense4,624 — — 3,611 8,235 
Net interest income (expense)88,649 107,798 8,583 (3,523)201,507 
Credit loss expense (benefit)250 2,013 170 969 3,402 
Net interest income after credit loss expense88,399 105,785 8,413 (4,492)198,105 
Noninterest income28,253 17,392 13,551 85 59,281 
Intersegment noninterest income (expense)(1)
— — — — — 
Noninterest expense59,817 45,643 31,996 29,715 167,171 
Net income (loss) before income tax expense$56,835 $77,534 $(10,032)$(34,122)$90,215 
(1) Intersegment noninterest income (expense) includes:
(Dollars in thousands)FactoringPayments
Six Months Ended June 30, 2023
Factoring revenue received from Payments$170 $(170)
Payments revenue received from Factoring(532)532 
Intersegment noninterest income (expense)$(362)$362 
Six Months Ended June 30, 2022
Factoring revenue received from Payments$— $— 
Payments revenue received from Factoring— — 
Intersegment noninterest income (expense)$— $— 
(Dollars in thousands)
June 30, 2023BankingFactoringPaymentsCorporateEliminationsConsolidated
Total assets$5,161,837 $1,084,139 $447,935 $1,021,259 $(2,062,449)$5,652,721 
Gross loans$3,688,130 $997,842 $175,952 $— $(537,166)$4,324,758 
(Dollars in thousands)
December 31, 2022BankingFactoringPaymentsCorporateEliminationsConsolidated
Total assets$4,910,628 $1,260,209 $371,948 $1,061,662 $(2,270,664)$5,333,783 
Gross loans$3,572,716 $1,151,727 $85,722 $— $(689,874)$4,120,291 
Banking
(Dollars in thousands)Six Months Ended June 30,% Change
Banking20232022$ Change
Total interest income$125,350 $88,422 $36,928 41.8 %
Intersegment interest allocations15,090 4,851 10,239 211.1 %
Total interest expense16,582 4,624 11,958 258.6 %
Net interest income123,858 88,649 35,209 39.7 %
Credit loss expense (benefit)2,754 250 2,504 1,001.6 %
Net interest income after credit loss expense121,104 88,399 32,705 37.0 %
Noninterest income12,020 28,253 (16,233)(57.5 %)
Noninterest expense64,174 59,817 4,357 7.3 %
Net income (loss) before income tax expense$68,950 $56,835 $12,115 21.3 %
Our Banking segment’s operating income increased $12.1 million, or 21.3%.
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Total interest income increased $36.9 million, or 41.8%, primarily as a result of increased yields on our interest earning assets at our Banking segment. The increase was also due to increases in the balances of our interest earning assets. Average loans in our Banking segment, excluding intersegment loans, decreased 0.1% from $3.024 billion for the six months ended June 30, 2022 to $3.019 billion for the six months ended June 30, 2023; however, average balances of certain other interest earning assets at our Banking segment increased period over period. Intersegment interest income allocated to our Banking segment increased period over period due to an increased interest rate charged to our Factoring segment consistent with increased interest rates experienced in the macro economy period over period.
Interest expense increased $12.0 million, or 258.6% despite a decrease in average interest-bearing liabilities as average total interest bearing deposits decreased $296.9 million, or 11.0%. The increase in interested expense was driven by higher interest rates paid on our interest-bearing liabilities driven by changes in interest rates in the macro economy.
Credit loss expense at our Banking segment is made up of credit loss expense related to loans and credit loss expense related to off balance sheet commitments to lend. Credit loss expense related to loans was $3.1 million for the six months ended June 30, 2023 compared to $0.1 million for the six months ended June 30, 2022. The decrease in credit loss expense was the result of changes to the projected loss drivers and prepayment speeds that the Company forecasted over the reasonable and supportable forecast period and decreased specific reserves period over period. These decreases were partially offset by an increase driven by the volume and mix of our portfolio and increased net charge-off activity period over period.
Credit loss expense for off balance sheet credit exposures decreased $0.5 million from $0.2 million for the six months ended June 30, 2022 to a benefit of $0.3 million for the six months ended June 30, 2023, primarily due to decreased underlying outstanding commitments to fund period over period.
Noninterest income at our Banking segment decreased period over period due to the aforementioned $3.9 million gain on sale of equipment loans, the aforementioned gain of $8.9 million on the termination of an interest rate swap, and a $2.5 million gain on sale of securities during the six months ended June 30, 2022 that did not repeat during the current period.
Noninterest expense increased primarily due to an increase in salaries and employee benefits expense due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. The increase in noninterest expense was also driven by increased communications and information technology spend.
During the six months ended June 30, 2023, the aggregate outstanding balances of our banking products increased $268.1 million, or 9.3%, to $3.151 billion as of June 30, 2023. See the Financial Condition section below for further discussion of changes in loan balances:
(Dollars in thousands)June 30,
2023		December 31,
2022
Banking
Commercial real estate$768,711 $678,144 
Construction, land development, land110,071 90,976 
1-4 family residential130,628 125,981 
Farmland67,913 68,934 
Commercial - General295,159 316,364 
Commercial - Paycheck Protection Program45 55 
Commercial - Agriculture46,839 48,494 
Commercial - Equipment493,763 454,117 
Commercial - Asset-based lending231,265 229,754 
Commercial - Liquid Credit151,821 202,326 
Consumer8,409 8,868 
Mortgage Warehouse846,340 658,829 
Total banking loans$3,150,964 $2,882,842 
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Factoring
(Dollars in thousands)Six Months Ended June 30,
Factoring20232022$ Change% Change
Total interest income$74,524 $112,228 $(37,704)(33.6 %)
Intersegment interest allocations(18,512)(4,430)(14,082)(317.9 %)
Total interest expense— — — — 
Net interest income56,012 107,798 (51,786)(48.0 %)
Credit loss expense (benefit)2,030 2,013 17 0.8 %
Net interest income after credit loss expense53,982 105,785 (51,803)(49.0 %)
Noninterest income2,558 17,392 (14,834)(85.3 %)
Intersegment noninterest income (expense)(362)— (362)(100.0 %)
Noninterest expense41,987 45,643 (3,656)(8.0 %)
Net income (loss) before income tax expense$14,191 $77,534 $(63,343)(81.7 %)
Six Months Ended June 30,
20232022
Factored receivable period end balance$997,842,000 $1,474,852,000 
Yield on average receivable balance14.00 %14.19 %
Year to date charge-off rate(1)
0.72 %0.05 %
Factored receivables - transportation concentration95 %94 %
Interest income, including fees$74,524,000 $112,228,000 
Noninterest income(2)
2,558,000 17,392,000 
Intersegment noninterest income170,000 — 
Factored receivable total revenue77,252,000 129,620,000 
Average net funds employed947,241,000 1,430,530,000 
Yield on average net funds employed16.45 %18.27 %
Accounts receivable purchased$5,660,080,000 $8,065,452,000 
Number of invoices purchased2,986,726 3,329,733 
Average invoice size$1,895 $2,422 
Average invoice size - transportation$1,842 $2,284 
Average invoice size - non-transportation$5,480 $5,984 
(1)June 30, 2023 includes a $3.3 million charge-off of an over-formula advance balance, which contributed approximately 0.31% to the net charge-off rate for the period. In accordance with the agreement reached with Covenant, Covenant will reimburse us for $1.7 million of this charge-off.
(2)Non-interest income for the six months ended June 30, 2022 includes a $13.2 million gain on sale of a portfolio of factored receivables, which contributed 1.86% to the yield on average net funds employed for the period.
Our Factoring segment’s operating income decreased $63.3 million, or 81.7%.
Our average invoice size decreased 21.8% from $2,422 for the six months ended June 30, 2022 to $1,895 for the six months ended June 30, 2023 and the number of invoices purchased decreased 10.3% period over period.
Net interest income at our Factoring segment decreased period over period. Overall average net funds employed (“NFE”) decreased 33.8% during the six months ended June 30, 2023 compared to the same period in 2022. The decrease in average NFE was the result of decreased invoice purchase volume and decreased average invoice sizes. Those, in turn, resulted from a softening transportation market. See further discussion under the Recent Developments: Trucking Transportation section. We maintained high concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration, calculated based on receivables held for investment and held for sale, was at 94% at June 30, 2022 and 95% at June 30, 2023. The aforementioned transfer of freight broker supply chain finance to the Payments segment resulted in a reduction of net interest income at our Factoring segment of $0.5 million.
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Credit loss expense was relatively flat period over period. Increased net charge-offs, including the fully reserved $3.3 million charge-off of the acquired over-advance factored receivables, were offset by a reduction in specific reserves and a reduction of period end volume of the factoring portfolio period over period. Changes in loss assumptions did not have a material impact on the change in credit loss expense period over period.
The decrease in noninterest income at our Factoring segment was primarily due to the aforementioned $13.2 million gain on sale of factored receivables during the six months ended June 30, 2022. The decrease was also driven by a $1.2 million write down of our revenue share asset, which is carried at fair value, during the six months ended June 30, 2023.
Noninterest expense decreased primarily due to a decrease in salary and benefits expense including a decrease in stock compensation. Additionally, there were decreases in communications and technology expense and correspondent bank charges period over period.
Payments
(Dollars in thousands)Six Months Ended June 30,
Payments20232022$ Change% Change
Total interest income$6,198 $9,004 $(2,806)(31.2)%
Intersegment interest allocations3,422 (421)3,843 912.8 %
Total interest expense— — — — %
Net interest income 9,620 8,583 1,037 12.1 %
Credit loss expense (benefit)41 170 (129)(75.9)%
Net interest income after credit loss expense9,579 8,413 1,166 13.9 %
Noninterest income7,826 13,551 (5,725)(42.2)%
Intersegment noninterest income (expense)362 — 362 100.0 %
Noninterest expense32,356 31,996 360 1.1 %
Net income (loss) before income tax expense$(14,589)$(10,032)$(4,557)(45.4)%
Six Months Ended
20232022
Supply chain financing factored receivables$93,678,000 $— 
Quickpay and other factored receivables82,274,000 145,835,000 
Factored receivable period end balance$175,952,000 $145,835,000 
Interest income$6,198,000 $9,004,000 
Intersegment interest income3,422,000 — 
Noninterest income7,826,000 13,551,000 
Intersegment noninterest income$532,000 $— 
Total revenue$17,978,000 $22,555,000 
Operating income (loss)$(14,589,000)$(10,032,000)
Interest expense— 421,000 
Depreciation and software amortization expense561,000 211,000 
Intangible amortization expense3,277,000 2,967,000 
Earnings (losses) before interest, taxes, depreciation, and amortization$(10,751,000)$(6,433,000)
EBITDA margin(60)%(29)%
Number of invoices processed8,787,283 8,366,885 
Amount of payments processed$9,970,865,000 $11,734,747,000 
Network invoice volume341,257 170,762 
Network payment volume$589,615,000 $382,881,000 
Our Payments segment's operating loss increased $4.6 million, or 45.4%.
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The number of invoices processed by our Payments segment increased 5.0% from 8,366,885 for the six months ended June 30, 2022 to 8,787,283 for the six months ended June 30, 2023, and the amount of payments processed decreased 15.0% from $11.735 billion for the six months ended June 30, 2022 to $9.971 billion for the six months ended June 30, 2023.
We began processing network transactions during the first quarter of 2022. When a fully integrated TriumphPay payor receives an invoice from a fully integrated TriumphPay payee, we call that a “network transaction.” All network transactions are included in our payment processing volume above. These transactions are facilitated through TriumphPay APIs with parties on both sides of the transaction using structured data; similar to how a credit card works at a point-of-sale terminal. The integrations largely automate the process and make it cheaper, faster and safer. During the six months ended June 30, 2023, we processed 341,257 conforming invoices representing a conforming payment volume of $589.6 million. During the six months ended June 30, 2022, we processed 170,762 conforming invoices representing a conforming payment volume of $382.9 million.
Net interest income increased due to increased yields at our Payments segment period over period and intersegment interest allocation. The aforementioned transfer of factoring transactions with freight broker clients to the Payments segment resulted in an increase of net interest income at our Factoring segment of $0.4 million.
Noninterest income decreased due to the $7.0 million net gain on the aforementioned termination of WSI warrants and additional investment in WSI common stock during the six months ended June 30, 2023. The decrease was offset by a $1.2 million increase in payment fees earned by TriumphPay during the six months ended June 30, 2023 compared to the same period a year ago.
Noninterest expense increased primarily due to an increase in communication and technology expense. This increase was partially offset by smaller decreases in professional fees, correspondent bank charges, and salaries and benefits expense.
The acquisition of HubTran during 2021 allows TriumphPay to create a fully integrated payments network for trucking; servicing brokers and factors. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to an open-loop payments network for the trucking industry with a focus on fee revenue. It is for this reason that management believes that earnings before interest, taxes, depreciation, and amortization and the adjustment to that metric enhance investors' overall understanding of the financial performance of the Payments segment. Further, as a result of the HubTran acquisition, management recorded $27.3 million of intangible assets that will lead to meaningful amounts of amortization going forward. The aforementioned transfer of factoring transactions with freight broker clients to the Payments segment contributed two percentage points to the EBITDA margin at our payments segment for the six months ended June 30, 2023.
Corporate
(Dollars in thousands)Six Months Ended June 30,% Change
Corporate20232022$ Change
Total interest income$88 $88 $— — %
Intersegment interest allocations— — — — 
Total interest expense4,745 3,611 1,134 31.4 %
Net interest income (expense)(4,657)(3,523)(1,134)(32.2 %)
Credit loss expense (benefit)431 969 (538)(55.5 %)
Net interest income (expense) after credit loss expense(5,088)(4,492)(596)(13.3 %)
Noninterest income129 85 44 51.8 %
Noninterest expense41,160 29,715 11,445 38.5 %
Net income (loss) before income tax expense$(46,119)$(34,122)$(11,997)(35.2 %)
The Corporate segment reported an operating loss of $46.1 million for the six months ended June 30, 2023 compared to an operating loss of $34.1 million for the six months ended June 30, 2022. The increased operating loss was driven by increased noninterest expense which was the result of increased salaries and benefits expense, occupancy expense, communication and technology expense, and travel and entertainment expense period over period.
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Financial Condition
Assets
Total assets were $5.653 billion at June 30, 2023, compared to $5.334 billion at December 31, 2022, an increase of $318.9 million, the components of which are discussed below.
Loan Portfolio
Loans held for investment were $4.325 billion at June 30, 2023, compared with $4.120 billion at December 31, 2022.
The following table shows our total loan portfolio by portfolio segments:
June 30, 2023December 31, 2022$ Change% Change
(Dollars in thousands)% of Total% of Total
Commercial real estate$768,711 18 %$678,144 16 %$90,567 13.4 %
Construction, land development, land110,071 3 %90,976 2 %19,095 21.0 %
1-4 family residential130,628 3 %125,981 3 %4,647 3.7 %
Farmland67,913 2 %68,934 2 %(1,021)(1.5 %)
Commercial1,218,892 28 %1,251,110 30 %(32,218)(2.6 %)
Factored receivables1,173,794 26 %1,237,449 31 %(63,655)(5.1 %)
Consumer8,409 — %8,868 — %(459)(5.2 %)
Mortgage warehouse846,340 20 %658,829 16 %187,511 28.5 %
Total Loans$4,324,758 100 %$4,120,291 100 %$204,467 5.0 %
Commercial Real Estate Loans. Our commercial real estate loans increased $90.6 million, or 13.4%, due to new origination activity that outpaced paydowns.
Construction and Development Loans. Our construction and development loans increased $19.1 million, or 21.0%, due to origination and draw activity that outpaced paydowns and conversions to term loans.
Residential Real Estate Loans. Our one-to-four family residential loans increased $4.6 million, or 3.7%, due to new origination activity that outpaced paydowns.
Farmland Loans. Our farmland loans decreased $1.0 million, or 1.5%, due to paydowns that outpaced modest origination activity.
Commercial Loans. Our commercial loans held for investment decreased $32.2 million, or 2.6%, due to a decrease in period end liquid credit balances and other commercial lending. The decrease was partially offset by increased equipment lending. Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, decreased $21.2 million, or 6.7%.
The following table shows our commercial loans:
(Dollars in thousands)June 30, 2023December 31, 2022$ Change% Change
Commercial
Equipment$493,763 $454,117 $39,646 8.7 %
Asset-based lending231,265 229,754 1,511 0.7 %
Liquid credit151,821 202,326 (50,505)(25.0 %)
Paycheck Protection Program loans45 55 (10)(18.2 %)
Agriculture46,839 48,494 (1,655)(3.4 %)
Other commercial lending295,159 316,364 (21,205)(6.7 %)
Total commercial loans$1,218,892 $1,251,110 $(32,218)(2.6 %)
Factored Receivables. Our factored receivables decreased $63.7 million, or 5.1% due to a slowing freight market. At June 30, 2023, the balance of the Over-Formula Advance Portfolio included in factored receivables was $4.0 million. At June 30, 2023, the balance of Misdirected Payments included in factored receivables was $19.4 million. See discussion of our factoring subsidiary in the Operating Segment Results for analysis of the key drivers impacting the change in the ending factored receivables balance during the period.
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Consumer Loans. Our consumer loans decreased $0.5 million, or 5.2%, due to paydowns that outpaced modest origination activity.
Mortgage Warehouse. Our mortgage warehouse facilities increased $187.5 million, or 28.5%, due to increased utilization. Client utilization of mortgage warehouse facilities may experience significant fluctuation on a day-to-day basis given mortgage origination market conditions. Our average mortgage warehouse lending balance was $848.0 million for the three months ended June 30, 2023 compared to $651.4 million for the three months ended June 30, 2022 and $794.9 million for the six months ended June 30, 2023 compared to $644.1 million for the six months ended June 30, 2022.
The following tables set forth the contractual maturities, including scheduled principal repayments, of our loan portfolio and the distribution between fixed and floating interest rate loans:
June 30, 2023
(Dollars in thousands)One Year or
Less		After One
but within
Five Years		After Five but within Fifteen
Years		After Fifteen
Years		Total
Commercial real estate$264,867 $442,446 $59,610 $1,788 $768,711 
Construction, land development, land65,535 40,739 3,797 — 110,071 
1-4 family residential8,226 28,659 14,455 79,288 130,628 
Farmland8,802 30,258 25,211 3,642 67,913 
Commercial353,635 815,724 49,533 — 1,218,892 
Factored receivables1,173,794 — — — 1,173,794 
Consumer1,183 6,257 961 8 8,409 
Mortgage warehouse846,340 — — — 846,340 
$2,722,382 $1,364,083 $153,567 $84,726 $4,324,758 
Sensitivity of loans to changes in interest rates:After One
but within
Five Years		After Five but within Fifteen
Years		After Fifteen
Years
Predetermined (fixed) interest rates
Commercial real estate$264,240 $4,170 $502 
Construction, land development, land4,005 297 — 
1-4 family residential20,019 7,757 5,634 
Farmland21,490 1,011 — 
Commercial582,569 39,133 — 
Factored receivables— — — 
Consumer6,248 961 8 
Mortgage warehouse— — — 
$898,571 $53,329 $6,144 
Floating interest rates
Commercial real estate$178,206 $55,440 $1,286 
Construction, land development, land36,734 3,500 — 
1-4 family residential8,640 6,698 73,654 
Farmland8,768 24,200 3,642 
Commercial233,155 10,400 — 
Factored receivables— — — 
Consumer9 — — 
Mortgage warehouse— — — 
$465,512 $100,238 $78,582 
Total$1,364,083 $153,567 $84,726 
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As of June 30, 2023, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Texas (15%), Colorado (15%), Illinois (11%), and Iowa (6%) make up 47% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2022, the states of Texas (23%), Illinois (11%), Colorado (11%), and Iowa (6%) made up 51% of the Company’s gross loans, excluding factored receivables.
Further, a majority (96%) of our factored receivables, including factored receivables held for sale, representing approximately 26% of our total loan portfolio as of June 30, 2023, are receivables purchased from trucking fleets, owner-operators, and freight brokers in the transportation industry. Although such concentration may cause our future interest income with respect to our factoring operations to be correlated with demand for the transportation industry in the United States generally, we feel that the credit risk with respect to our outstanding portfolio is appropriately mitigated as we limit the amount of receivables acquired from individual debtors and creditors thereby achieving diversification across a number of companies and industries. At December 31, 2022, 96% of our factored receivables, representing approximately 29% of our total loan portfolio, were receivables purchased from trucking fleets, owner-operators, and freight brokers in the transportation industry.
Nonperforming Assets
We have established procedures to assist us in maintaining the overall quality of our loan portfolio. In addition, we have adopted underwriting guidelines to be followed by our lending officers and require senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we monitor them for any negative or adverse trends. Our loan review procedures include approval of lending policies and underwriting guidelines by the board of directors of our bank subsidiary, independent loan review, approval of large credit relationships by our bank subsidiary’s Management Loan Committee and loan quality documentation procedures. We, like other financial institutions, are subject to the risk that our loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. We classify nonperforming assets as nonaccrual loans and securities, factored receivables greater than 90 days past due, OREO, and other repossessed assets. Additionally, we consider the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification to be nonperforming (reflected in nonperforming loans - factored receivables). The balances of nonperforming loans reflect the recorded investment in these assets, including deductions for purchase discounts.
(Dollars in thousands)June 30, 2023December 31, 2022
Nonperforming loans:
Commercial real estate$1,933 $871 
Construction, land development, land— 150 
1-4 family residential1,085 1,391 
Farmland394 400 
Commercial5,501 15,896 
Factored receivables22,869 29,431 
Consumer180 91 
Mortgage warehouse— — 
Total nonperforming loans31,962 48,230 
Held to maturity securities4,778 5,051 
Equity investments without readily determinable fair value1,170 — 
Other repossessed assets750 1,300 
Total nonperforming assets$38,660 $54,581 
Nonperforming assets to total assets0.68 %1.02 %
Nonperforming loans to total loans held for investment0.74 %1.17 %
Total past due loans to total loans held for investment1.55 %2.53 %
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Nonperforming loans decreased $16.3 million, or 33.7%, due to a $3.4 million nonperforming equipment loan pay-off, a $3.2 million partial charge-off and $4.4 million partial paydown of a nonperforming liquid credit loan, and an $6.6 million reduction in nonperforming factored receivables which includes the aforementioned $3.3 million net charge-off of the fully reserved over-formula advance balance. These decreases were offset by the addition of a $1.4 million equipment loan securitized by transportation equipment and a $1.1 million commercial real estate loan secured by real estate. The entire $19.4 million of Misdirected Payments is included in nonperforming loans (specifically, factored receivables) in accordance with our policy.
As a result of the activity previously described and changes in our period end total loans held for investment, the ratio of nonperforming loans to total loans held for investment decreased to 0.74% at June 30, 2023 from 1.17% December 31, 2022.
Our ratio of nonperforming assets to total assets decreased to 0.68% at June 30, 2023 from 1.02% December 31, 2022. This is due to the aforementioned loan activity and changes in our period end total assets. During the six months ended June 30, 2023, we received $1.1 million of equity in a former borrower as part of a partial paydown of a nonperforming loan to said borrower. Such equity is considered a nonperforming asset at June 30, 2023. Additionally, the amortized cost basis of our HTM CLO securities considered to be nonaccrual decreased $0.3 million during the period.
Past due loans to total loans held for investment decreased to 1.55% at June 30, 2023 from 2.53% at December 31, 2022, as a result of the aforementioned loan activity and a decrease in past due factored receivables. Both the $4.0 million acquired factoring Over-Formula Advance balance and the $19.4 million Misdirected Payments balance are considered greater than 90 days past due at June 30, 2023.
Allowance for Credit Losses on Loans
The ACL is a valuation allowance estimated at each balance sheet date in accordance with US GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See Note 1 of the Company’s 2022 Form 10-K and notes to the consolidated financial statements included elsewhere in this report for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in the Company’s judgment, should be charged-off.
Loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of collateral dependent loans and factored invoices greater than 90 days past due with negative cash reserves.
The following table sets forth the ACL by category of loan:
June 30, 2023December 31, 2022
(Dollars in thousands)Allocated
Allowance		% of Loan
Portfolio		ACL to
Loans		Allocated
Allowance		% of Loan
Portfolio		ACL to
Loans
Commercial real estate$4,783 18 %0.62 %$4,459 16 %0.66 %
Construction, land development, land1,235 3 %1.12 %1,155 2 %1.27 %
1-4 family residential1,046 3 %0.80 %838 3 %0.67 %
Farmland476 2 %0.70 %483 2 %0.70 %
Commercial12,977 28 %1.06 %15,918 30 %1.27 %
Factored receivables13,441 26 %1.15 %19,121 31 %1.55 %
Consumer166 — %1.97 %175 — %1.97 %
Mortgage warehouse846 20 %0.10 %658 16 %0.10 %
Total Loans$34,970 100 %0.81 %$42,807 100 %1.04 %
The ACL decreased $7.8 million, or 18.3%. This decrease reflects net charge-offs of $13.0 million and credit loss expense of $5.2 million. Refer to the Results of Operations: Credit Loss Expense section for discussion of material charge-offs and credit loss expense. At quarter end, our entire remaining Over-Formula Advance position was down from $8.2 million at December 31, 2022 to $4.0 million at June 30, 2023 and the entire balance at June 30, 2023 was fully reserved. At June 30, 2023, the Misdirected Payments amount was $19.4 million. Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of June 30, 2023.
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A driver of the change in ACL is slight projected deterioration of the loss drivers that the Company forecasted to calculate expected losses at June 30, 2023 as compared to December 31, 2022. It had a negative impact on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period and resulted in an increase of $0.4 million of ACL period over period.
The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit and PPP), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. The Company also forecasts prepayments speeds for use in the DCF models with higher prepayment speeds resulting in lower required ACL levels and vice versa for shorter prepayment speeds. These assumed prepayment speeds are based upon our historical prepayment speeds by loan type adjusted for the expected impact of the future interest rate environment. The impact of these assumed prepayment speeds is lesser in magnitude than the aforementioned loss driver assumptions.
For all DCF models at June 30, 2023, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At June 30, 2023 as compared to December 31, 2022, the Company forecasted a slight decrease national unemployment, a steeper decrease in one-year percentage change in national retail sales, a decrease in one-year percentage change in the national home price index, and a minimal change in one-year percentage change in national gross domestic product. At June 30, 2023 for national unemployment, the Company projected a low percentage in the first quarter followed by a gradual rise in the following three quarters. For percentage change in national retail sales, the Company projected a near-zero level in the first projected quarter followed by a decline to negative levels over the last three projected quarters to a level below recent actual periods. For percentage change in national home price index, the Company projected a negative levels for all four quarters with such negative levels peaking in the third projected quarter. For percentage change in national gross domestic product, management projected near-zero growth for each projected quarter. At June 30, 2023, the Company slowed its historical prepayment speeds in response to the expected interest rate environment in the macro economy.
The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.
The following tables show our credit ratios and an analysis of our credit loss expense:
(Dollars in thousands)June 30, 2023December 31, 2022
Allowance for credit losses on loans$34,970 $42,807 
Total loans held for investment$4,324,758 $4,120,291 
Allowance to total loans held for investment0.81 %1.04 %
Nonaccrual loans$9,093 $18,296 
Total loans held for investment$4,324,758 $4,120,291 
Nonaccrual loans to total loans held for investment0.21 %0.44 %
Allowance for credit losses on loans$34,970 $42,807 
Nonaccrual loans$9,093 $18,296 
Allowance for credit losses to nonaccrual loans384.58 %233.97 %
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Three Months Ended June 30,
20232022
(Dollars in thousands)Net
Charge-Offs		Average Loans HFINet Charge-Off RatioNet
Charge-Offs		Average Loans HFINet Charge-Off Ratio
Commercial real estate$— $715,484 — %$(46)$645,321 (0.01)%
Construction, land development, land(1)101,982 — %(1)120,633 — %
1-4 family residential(8)129,958 (0.01)%(2)128,222 — %
Farmland— 67,797 — %— 71,971 — %
Commercial5,074 1,223,944 0.41 %70 1,381,328 0.01 %
Factored receivables5,661 1,141,580 0.50 %139 1,739,320 0.01 %
Consumer63 9,129 0.69 %55 10,077 0.55 %
Mortgage warehouse— 870,285 — %— 651,369 — %
Total Loans$10,789 $4,260,159 0.25 %$215 $4,748,241 — %
Quarter to date net loans charged off increased $10.6 million reflecting the aforementioned $3.3 million net charge-off of the fully reserved over-formula advance balance. Net charge-offs of factored receivables excluding the over-formula advance were $2.4 million. The Company also charged off two liquid credit loans carrying balances of $3.2 million and a $1.6 million, respectively, at the time of charge-off.
Six Months Ended June 30,
20232022
(Dollars in thousands)Net
Charge-Offs		Average Loans HFINet Charge-Off RatioNet
Charge-Offs		Average Loans HFINet Charge-Off Ratio
Commercial real estate$(70)$700,914 (0.01)%$48 $639,379 0.01 %
Construction, land development, land(2)99,818 — %(2)122,481 — %
1-4 family residential(5)129,627 — %(5)126,827 — %
Farmland— 68,075 — %— 73,562 — %
Commercial5,256 1,210,339 0.43 %733 1,399,872 0.05 %
Factored receivables7,751 1,167,402 0.66 %818 1,760,101 0.05 %
Consumer74 9,378 0.79 %147 10,388 1.42 %
Mortgage warehouse— 794,941 — %— 644,080 — %
Total Loans$13,004 $4,180,494 0.31 %$1,739 $4,776,690 0.04 %
Year to date net loans charged off increased $11.3 million reflecting the aforementioned $3.3 million net charge-off of the fully reserved over-formula advance balance. Net charge-offs of factored receivables excluding the over-formula advance were $4.5 million. The Company also charged off two liquid credit loans carrying balances of $3.2 million and a $1.6 million, respectively, at the time of charge-off.
Securities
As of June 30, 2023 and December 31, 2022, we held equity securities with readily determinable fair values of $4.4 million and $5.2 million, respectively. These securities represent investments in a publicly traded Community Reinvestment Act mutual fund and are subject to market pricing volatility, with changes in fair value reflected in earnings.
As of June 30, 2023, we held debt securities classified as available for sale with a fair value of $303.8 million, an increase of $49.3 million from $254.5 million at December 31, 2022. The following table illustrates the changes in our available for sale debt securities:
Available For Sale Debt Securities:
(Dollars in thousands)June 30, 2023December 31, 2022$ Change% Change
Mortgage-backed securities, residential$45,829 $50,633 $(4,804)(9.5)%
Asset-backed securities1,252 6,331 (5,079)(80.2)%
State and municipal5,195 13,438 (8,243)(61.3)%
CLO Securities249,079 181,011 68,068 37.6 %
Corporate bonds760 1,263 (503)(39.8)%
SBA pooled securities1,664 1,828 (164)(9.0)%
$303,779 $254,504 $49,275 19.4 %
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Our available for sale CLO portfolio consists of investment grade positions in high ranking tranches within their respective securitization structures. As of June 30, 2023, the Company determined that all impaired available for sale securities experienced a decline in fair value below their amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at June 30, 2023. Our available for sale securities can be used for pledging to secure FHLB borrowings and public deposits, or can be sold to meet liquidity needs.
As of June 30, 2023, we held investments classified as held to maturity with an amortized cost, net of ACL, of $3.4 million, a decrease of $0.7 million from $4.1 million at December 31, 2022. See previous discussion of Credit Loss Expense related to our held to maturity securities for further details regarding the nature of these securities and the required ACL at June 30, 2023.
The following tables set forth the amortized cost and average yield of our debt securities, by type and contractual maturity:
Maturity as of June 30, 2023
One Year or LessAfter One but within Five YearsAfter Five but within Ten YearsAfter Ten YearsTotal
(Dollars in thousands)Amortized
Cost		Average
Yield		Amortized
Cost		Average
Yield		Amortized
Cost		Average
Yield		Amortized
Cost		Average
Yield		Amortized
Cost		Average
Yield
Mortgage-backed securities$8 3.73 %$8,852 4.68 %$1,406 2.63 %$40,803 3.71 %$51,069 3.85 %
Asset-backed securities— — %— — %— — %1,286 6.43 %1,286 6.43 %
State and municipal723 2.55 %2,213 3.11 %828 2.54 %1,519 2.40 %5,283 2.74 %
CLO securities— — %— — %72,194 7.22 %178,066 7.25 %250,260 7.24 %
Corporate bonds501 6.06 %— — %— — %268 5.14 %769 5.76 %
SBA pooled securities— — %— — %473 2.67 %1,300 4.49 %1,773 4.00 %
Total available for sale securities$1,232 3.99 %$11,065 4.37 %$74,901 7.06 %$223,242 6.53 %$310,440 6.57 %
Held to maturity securities:$— — %$1,913 — %$4,343 3.96 %$— — %$6,256 2.44 %
Liabilities
Total liabilities were $4.819 billion as of June 30, 2023, compared to $4.445 billion at December 31, 2022, an increase of $374.4 million, the components of which are discussed below.
Deposits
The following table summarizes our deposits:
(Dollars in thousands)June 30, 2023December 31, 2022$ Change% Change
Noninterest bearing demand$1,608,411 $1,756,680 $(148,269)(8.4 %)
Interest bearing demand778,972 856,512 (77,540)(9.1 %)
Individual retirement accounts57,575 68,125 (10,550)(15.5 %)
Money market569,318 508,534 60,784 12.0 %
Savings524,210 551,780 (27,570)(5.0 %)
Certificates of deposit270,273 319,150 (48,877)(15.3 %)
Brokered time deposits484,666 110,555 374,111 338.4 %
Other brokered deposits41 — 41 100.0 %
Total Deposits$4,293,466 $4,171,336 $122,130 2.9 %
Our total deposits increased $122.1 million, or 2.9%, primarily due to an increase in brokered time deposits and money market deposits. The Company experienced decreases in interest bearing demand deposits, individual retirement accounts, savings deposits and certificates of deposit. As of June 30, 2023, interest bearing demand deposits, noninterest bearing deposits, money market deposits, other brokered deposits, and savings deposits accounted for 81% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered time deposits made up 19% of total deposits.
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At June 30, 2023 we held $59.1 million of time deposits that meet or exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limit. The following table provides information on the maturity distribution of time deposits exceeding the FDIC insurance limit as of June 30, 2023:
(Dollars in thousands)Over
$250,000
Maturity
3 months or less$10,712 
Over 3 through 6 months14,879 
Over 6 through 12 months15,017 
Over 12 months10,529 
$51,137 
The following table summarizes our average deposit balances and weighted average rates:
Three Months Ended June 30, 2023Three Months Ended June 30, 2022
(Dollars in thousands)Average
Balance		Weighted
Avg Rates		% of
Total		Average
Balance		Weighted
Avg Rates		% of
Total
Interest bearing demand$804,799 0.36 %20 %$876,536 0.25 %19 %
Individual retirement accounts60,171 0.69 %1 %81,678 0.52 %2 %
Money market506,782 1.33 %13 %545,508 0.21 %12 %
Savings529,952 0.36 %13 %528,450 0.15 %11 %
Certificates of deposit286,253 1.26 %7 %461,280 0.48 %10 %
Brokered time deposits244,721 4.63 %6 %101,270 1.20 %2 %
Other brokered deposits13,188 5.26 %— %76,155 3.85 %2 %
Total interest bearing deposits2,445,866 1.13 %60 %2,670,877 0.41 %58 %
Noninterest bearing demand1,598,733 — 40 %1,951,725 — 42 %
Total deposits$4,044,599 0.68 %100 %$4,622,602 0.23 %100 %
Six Months Ended June 30, 2023Six Months Ended June 30, 2022
(Dollars in thousands)Average
Balance		Weighted
Avg Yields		% of
Total		Average
Balance		Weighted
Avg Yields		% of
Total
Interest bearing demand$820,467 0.32 %20 %$855,756 0.23 %18 %
Individual retirement accounts62,663 0.61 %2 %82,182 0.52 %2 %
Money market502,456 1.13 %12 %542,050 0.21 %12 %
Savings537,404 0.29 %13 %519,269 0.15 %11 %
Certificates of deposit292,665 1.00 %7 %489,682 0.47 %11 %
Brokered time deposits172,354 3.95 %4 %60,065 1.02 %1 %
Other brokered deposits6,768 5.24 %— %142,710 0.97 %3 %
Total interest bearing deposits2,394,777 0.85 %58 %2,691,714 0.32 %58 %
Noninterest bearing demand1,651,463 — 42 %1,944,606 — 42 %
Total deposits$4,046,240 0.50 %100 %$4,636,320 0.19 %100 %
The Company's deposit base is made up of a high number of customers with accounts spread across 63 locations in six states. Our deposit base is diverse in terms of both geography and industry, comprised largely of retail as well small-to-medium sized business customers. The majority of our deposits are FDIC insured, and the runoff we have seen in the first half of the year appears to be a continuation of the trend we have seen over the past several quarters: the normalizing of pandemic-era surge balances and the movement of rate-sensitive excess balances to other investments.
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Other Borrowings
Customer Repurchase Agreements
The following provides a summary of our customer repurchase agreements as of and for the six months ended June 30, 2023 and the year ended December 31, 2022:
(Dollars in thousands)June 30, 2023December 31, 2022
Amount outstanding at end of period$— $340 
Weighted average interest rate at end of period0.03 %0.03 %
Average daily balance during the period$1,457 $6,701 
Weighted average interest rate during the period0.03 %0.03 %
Maximum month-end balance during the period$3,208 $13,463 
Our customer repurchase agreements generally have overnight maturities. Variances in these balances are attributable to normal customer behavior and seasonal factors affecting their liquidity positions.
FHLB Advances
The following provides a summary of our FHLB advances as of and for the six months ended June 30, 2023 and the year ended December 31, 2022:
(Dollars in thousands)June 30, 2023December 31, 2022
Amount outstanding at end of period$280,000 $30,000 
Weighted average interest rate at end of period5.18 %4.25 %
Average amount outstanding during the period251,961 69,658 
Weighted average interest rate during the period5.20 %1.19 %
Highest month end balance during the period530,000 230,000 
Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. At June 30, 2023 and December 31, 2022, we had $613.1 million and $646.3 million, respectively, in unused and available advances from the FHLB.
Subordinated Notes
The following provides a summary of our subordinated notes as of June 30, 2023:
(Dollars in thousands)Face ValueCarrying ValueMaturity DateCurrent Interest RateFirst Repricing DateVariable Interest Rate at Repricing DateInitial Issuance Costs
Subordinated Notes issued November 27, 2019$39,500 $39,017 20294.875%11/27/2024Three Month LIBOR plus 3.330%$1,218 
Subordinated Notes issued August 26, 202170,000 69,217 20313.500%9/01/2026
Three Month SOFR(1) plus 2.860%
$1,776 
$109,500 $108,234 
(1) Secured Overnight Financing Rate
The Subordinated Notes bear interest payable semi-annually in arrears to, but excluding the first repricing date, and thereafter payable quarterly in arrears at an annual floating rate. We may, at our option, beginning on the respective first repricing date and on any scheduled interest payment date thereafter, redeem the Subordinated Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the Subordinated Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.
The Subordinated Notes are included on the consolidated balance sheets as liabilities at their carrying values; however, for regulatory purposes, the carrying value of these obligations were eligible for inclusion in Tier 2 regulatory capital. Issuance costs related to the Subordinated Notes have been netted against the subordinated notes liability on the balance sheet. The debt issuance costs are being amortized using the effective interest method through maturity and recognized as a component of interest expense.
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The Subordinated Notes are subordinated in right of payment to the Company’s existing and future senior indebtedness and are structurally subordinated to the Company’s subsidiaries’ existing and future indebtedness and other obligations.
Junior Subordinated Debentures
The following provides a summary of our junior subordinated debentures as of June 30, 2023:
(Dollars in thousands)Face ValueCarrying ValueMaturity DateInterest Rate
National Bancshares Capital Trust II$15,464 $13,559 September 2033LIBOR + 3.00%
National Bancshares Capital Trust III17,526 13,522 July 2036LIBOR + 1.64%
ColoEast Capital Trust I5,155 3,797 September 2035LIBOR + 1.60%
ColoEast Capital Trust II6,700 4,913 March 2037LIBOR + 1.79%
Valley Bancorp Statutory Trust I3,093 2,914 September 2032LIBOR + 3.40%
Valley Bancorp Statutory Trust II3,093 2,739 July 2034LIBOR + 2.75%
$51,031 $41,444 
These debentures are unsecured obligations and were issued to trusts that are unconsolidated subsidiaries. The trusts in turn issued trust preferred securities with identical payment terms to unrelated investors. The debentures may be called by the Company at par plus any accrued but unpaid interest; however, we have no current plans to redeem them prior to maturity. Interest on the debentures is calculated quarterly, based on a contractual rate equal to three month LIBOR plus a weighted average spread of 2.24%. As part of the purchase accounting adjustments made with the National Bancshares, Inc. acquisition on October 15, 2013, the ColoEast acquisition on August 1, 2016, and the Valley acquisition on December 9, 2017, we adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition dates. The discounts on the debentures will continue to be amortized through maturity and recognized as a component of interest expense.
The debentures are included on our consolidated balance sheet as liabilities; however, for regulatory purposes, these obligations are eligible for inclusion in regulatory capital, subject to certain limitations. All of the carrying value of $41.4 million was allowed in the calculation of Tier I capital as of June 30, 2023.
Capital Resources and Liquidity Management
Capital Resources
Our stockholders’ equity totaled $833.5 million as of June 30, 2023, compared to $889.0 million as of December 31, 2022, a decrease of $55.5 million. Stockholders’ equity decreased during this period primarily due to treasury stock purchases made under our accelerated share repurchase program, offset in part by our net income of $18.7 million.
Liquidity Management
We define liquidity as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, or other cash demands and disbursement needs, and otherwise to operate on an ongoing basis.
We manage liquidity at the holding company level as well as that of our bank subsidiary. The management of liquidity at both levels is critical, because the holding company and our bank subsidiary have different funding needs and sources, and each is subject to regulatory guidelines and requirements which require minimum levels of liquidity. We believe that our liquidity ratios meet or exceed those guidelines and that our present position is adequate to meet our current and future liquidity needs.
Our liquidity requirements are met primarily through cash flow from operations, receipt of pre-paid and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. Our liquidity position is supported by management of liquid assets and liabilities and access to other sources of funds. Liquid assets include cash, interest earning deposits in banks, federal funds sold, securities available for sale and maturing or prepaying balances in our investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of funds include the sale of loans, brokered deposits, the issuance of additional collateralized borrowings such as FHLB advances or borrowings from the Federal Reserve, the issuance of debt securities and the issuance of common securities. For additional information regarding our operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in our consolidated financial statements.
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In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of June 30, 2023, TBK Bank had $549.1 million of unused borrowing capacity from the Federal Reserve Bank discount window and unsecured federal funds lines of credit with seven unaffiliated banks totaling $227.5 million, with no amounts advanced against those lines. Additionally, as of June 30, 2023, we had $613.1 million in unused and available advances from the FHLB.We routinely utilize FHLB advances to support the fluctuating and sometimes unpredictable balances in our mortgage warehouse lending portfolio, and we will continue to do so.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of June 30, 2023. The amount of the obligations presented in the table reflect principal amounts only and exclude the amount of interest we are obligated to pay. Also excluded from the table are a number of obligations to be settled in cash. These excluded items are reflected in our consolidated balance sheet and include deposits with no stated maturity, trade payables, and accrued interest payable.
Payments Due by Period - June 30, 2023
(Dollars in thousands)TotalOne Year or
Less		After One
but within
Three Years		After Three
but within
Five Years		After Five
Years
Federal Home Loan Bank advances$280,000 $250,000 $— $30,000 $— 
Subordinated notes109,500 — — — 109,500 
Junior subordinated debentures51,031 — — — 51,031 
Operating lease agreements39,079 6,546 12,166 9,437 10,930 
Time deposits with stated maturity dates812,514 755,293 48,525 8,145 551 
Total contractual obligations$1,292,124 $1,011,839 $60,691 $47,582 $172,012 
Regulatory Capital Requirements
Our capital management consists of providing equity to support our current and future operations. We are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. For further information regarding our regulatory capital requirements, see Note 11 – Regulatory Matters in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. For further information, see Note 9 – Off-Balance Sheet Loan Commitments in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses. Since December 31, 2022, there have been no changes in critical accounting policies as further described under “Critical Accounting Policies and Estimates” and in Note 1 to the Consolidated Financial Statements in our 2022 Form 10-K.
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Recently Issued Accounting Pronouncements
See Note 1 – Summary of Significant Accounting Policies in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.
Forward-Looking Statements
This document contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable of a future or forward-looking nature. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but are not limited to, the following:
•business and economic conditions generally and in the bank and non-bank financial services industries, nationally and within our local market areas;
•our ability to mitigate our risk exposures;
•our ability to maintain our historical earnings trends;
•changes in management personnel;
•interest rate risk;
•concentration of our products and services in the transportation industry;
•credit risk associated with our loan portfolio;
•lack of seasoning in our loan portfolio;
•deteriorating asset quality and higher loan charge-offs;
•time and effort necessary to resolve nonperforming assets;
•inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;
•risks related to the integration of acquired businesses and any future acquisitions;
•our ability to successfully identify and address the risks associated with our possible future acquisitions, and the risks that our prior and possible future acquisitions make it more difficult for investors to evaluate our business, financial condition and results of operations, and impairs our ability to accurately forecast our future performance;
•lack of liquidity;
•fluctuations in the fair value and liquidity of the securities we hold for sale;
•impairment of investment securities, goodwill, other intangible assets or deferred tax assets;
•our risk management strategies;
•environmental liability associated with our lending activities;
•increased competition in the bank and non-bank financial services industries, nationally, regionally or locally, which may adversely affect pricing and terms;
•the accuracy of our financial statements and related disclosures;
•material weaknesses in our internal control over financial reporting;
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•system failures or failures to prevent breaches of our network security;
•the institution and outcome of litigation and other legal proceedings against us or to which we become subject;
•changes in carry-forwards of net operating losses;
•changes in federal tax law or policy;
•the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, such as the Dodd-Frank Act and their application by our regulators;
•governmental monetary and fiscal policies;
•changes in the scope and cost of FDIC, insurance and other coverages;
•failure to receive regulatory approval for future acquisitions;
•increases in our capital requirements and;
•the impact of COVID-19 on our business.
The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Asset/Liability Management and Interest Rate Risk
The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The board of directors of our subsidiary bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.
As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so in the future. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.
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The following table summarizes simulated change in net interest income versus unchanged rates as of June 30, 2023 and December 31, 2022:
June 30, 2023December 31, 2022
Following 12 MonthsMonths
13-24		Following 12 MonthsMonths
13-24
+400 basis points18.4 %22.1 %19.4 %24.9 %
+300 basis points13.7 %16.4 %14.5 %18.5 %
+200 basis points9.1 %10.9 %9.7 %12.2 %
+100 basis points4.5 %5.4 %4.8 %6.1 %
Flat rates0.0 %0.0 %0.0 %0.0 %
-100 basis points(4.7 %)(5.7 %)(5.0 %)(6.2 %)
-200 basis points(9.8 %)(11.7 %)(10.4 %)(13.0 %)
The following table presents the change in our economic value of equity as of June 30, 2023 and December 31, 2022, assuming immediate parallel shifts in interest rates:
Economic Value of Equity at Risk (%)
June 30, 2023December 31, 2022
+400 basis points19.1 %20.0 %
+300 basis points15.2 %15.7 %
+200 basis points10.7 %10.9 %
+100 basis points5.8 %5.8 %
Flat rates0.0 %0.0 %
-100 basis points(6.3 %)(6.4 %)
-200 basis points(13.4 %)(13.7 %)
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.
As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest-bearing non-maturity deposit accounts, whose cost is less sensitive to changes in interest rates. We intend to focus our strategy on utilizing our deposit base and operating platform to increase these deposit transaction accounts.
ITEM 4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are a party to various litigation matters incidental to the conduct of our business. Except as set forth below, we are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
We are party to a lawsuit in the United States Court of Federal Claims seeking a ruling that the United States Postal Service (“USPS”) is obligated to make payment to us with respect to invoices totaling approximately $19.4 million that it separately paid to our customer, a vendor to the USPS who hauled mail pursuant to contracts it has with such entity, in violation of notices provided to the USPS that such payments were to be made directly to us (the “Misdirected Payments”). Although we believe we have valid claims that the USPS is obligated to make payment to us on such receivable and that the USPS will have the capacity to make such payment, the issues in this litigation are novel issues of law that have little to no precedent and there can be no assurances that a court will agree with our interpretation of the law on these matters. If a court were to rule against us in this litigation, our only recourse would be against our customer, who failed to remit the Misdirected Payments to us as required when received, and who may not have capacity to make such payment to us. Consequently, we could incur losses up to the full amount of the Misdirected Payments in such event, which could be material to our business, financial condition and results of operations.
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 1, 2023, the Company entered into an accelerated share repurchase (“ASR”) agreement to repurchase $70,000,000 of the Company’s common stock. The ASR is part of the Company’s previously announced plan to repurchase up to $100,000,000 of the Company’s common stock and is within the remaining amount authorized by the Company’s Board of Directors pursuant to such plan. Under the terms of the ASR agreement, the Company received an initial delivery of 961,373 common shares representing approximately 80% of the expected total to be repurchased. On April 28, 2023, the ASR was completed and we received an additional delivery of 247,954 common shares.
In connection with the completion of the ASR, on May 4, 2023, we announced that our board of directors had authorized us to repurchase up to an additional $50.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions at our discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of our common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. The repurchase program is authorized for a period of up to one year and does not require us to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time. We have not repurchased any shares under the new share repurchase program.
The following repurchases were made under stock repurchase programs during the three months ended June 30, 2023:
Period(a)
Total number of shares (or units) purchased		(b)
Average price paid per share (or unit)		(c)
Total number of shares (or units) purchased as part of publicly announced plans or programs		(d)
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
April 1, 2023 — April 30, 2023247,954 $57.88 247,954 50,000,000 
May 1, 2023 — May 31, 2023— $— — 50,000,000 
June 1, 2023 — June 30, 2023— $— — 50,000,000 
Total247,954 $58.25 247,954 
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
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Not applicable.
Item 5. Other Information
Insider Trading Arrangements and Policies
On June 15, 2023, Mr. Aaron Graft, the Company’s Vice Chairman and Chief Executive Officer, adopted a written plan for the sale of our common stock that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act (the “Trading Plan”). The Trading Plan covers the sale of up to 75,000 shares of the Company’s common stock in several transactions over a period commencing after the later of (1) 90 days from the execution of the Trading Plan and (2) the second trading day following the public disclosure of the Company’s financial results on Form 10-Q for the quarter ended June 30, 2023, and will cease upon the earlier of June 11, 2024 or the sale of all shares subject to the Trading Plan.
During the second quarter of 2023, none of our other directors or executive officers adopted Rule 10b5-1 trading plans and none of our directors or executive officers terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).
Item 6. Exhibits
Exhibits (Exhibits marked with a “†” denote management contracts or compensatory plans or arrangements)
3.1
3.2
3.3
3.4
3.5
3.6
10.1†
10.2†
10.3†
10.4†
31.1
31.2
32.1
101.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
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101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRIUMPH FINANCIAL INC.
(Registrant)
Date:July 20, 2023/s/ Aaron P. Graft
Aaron P. Graft
President and Chief Executive Officer
Date:July 20, 2023/s/ W. Bradley Voss
W. Bradley Voss
Chief Financial Officer
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