Triumph Financial(TFIN) - 2020 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements and notes for the period ended June 30, 2020 Consolidated Balance Sheets Total assets grew to $5.62 billion, driven by loan growth, while liabilities increased due to higher deposits and borrowings Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $5,617,493 | $5,060,297 | | Total cash and cash equivalents | $437,064 | $197,880 | | Loans, net of allowance | $4,338,698 | $4,165,420 | | Goodwill | $158,743 | $158,743 | | Total Liabilities | $4,960,622 | $4,423,707 | | Total deposits | $4,062,332 | $3,789,906 | | Paycheck Protection Program Liquidity Facility | $223,809 | $0 | | Total Stockholders' Equity | $656,871 | $636,590 | Consolidated Statements of Income Q2 2020 net income rose due to a one-time gain, while year-to-date income fell sharply on higher credit loss expense Consolidated Income Statement Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $64,251 | $63,419 | $126,751 | $124,730 | | Credit Loss Expense | $13,609 | $3,681 | $33,907 | $4,695 | | Noninterest Income | $20,029 | $7,623 | $27,506 | $15,161 | | Noninterest Expense | $52,726 | $50,704 | $107,479 | $99,270 | | Net Income | $13,440 | $12,730 | $8,990 | $27,518 | | Diluted EPS | $0.56 | $0.48 | $0.37 | $1.03 | Consolidated Statements of Cash Flows Financing activities provided significant cash inflow, offsetting cash used in investing, resulting in a net cash increase Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $20,557 | $33,826 | | Net cash provided by (used in) investing activities | ($313,899) | ($226,280) | | Net cash provided by (used in) financing activities | $532,526 | $166,820 | | Net increase (decrease) in cash and cash equivalents | $239,184 | ($25,634) | Condensed Notes to Consolidated Financial Statements The notes detail the adoption of CECL, the significant impact of COVID-19, a key divestiture, and a subsequent acquisition - The company adopted ASU 2016-13 (CECL) on January 1, 2020, resulting in a net reduction to retained earnings of $1.77 million[102][103] - The COVID-19 pandemic has had a significant impact, leading the company to implement payment deferral programs for borrowers on loans totaling $572 million as of June 30, 2020[33][41] - The company originated 1,937 Paycheck Protection Program (PPP) loans with a book value of $219 million as of June 30, 2020[42][95] - On June 30, 2020, the company sold the assets of its Triumph Premium Finance (TPF) division for total consideration of $94.5 million, resulting in a net gain of $9.8 million[29][113][114] - Subsequent to quarter-end, the company acquired transportation factoring assets and identified that approximately $66 million were advances for services not yet performed[268][269][270] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial results, highlighting the impact of COVID-19, the sale of a division, and the shift to the CECL model Overview and Recent Developments Key developments include the TPF division sale, a preferred stock offering, and a problematic acquisition of TFS assets - On July 8, 2020, the company acquired transportation factoring assets and discovered approximately $66.0 million were advances for unperformed services[285][286][287] - The company sold its Triumph Premium Finance (TPF) division on June 30, 2020, resulting in a gain on sale of $9.8 million[277][288] - On June 19, 2020, the company issued $45.0 million of 7.125% Series C Preferred Stock, with net proceeds of $42.4 million[290] - The company completed its $50.0 million stock repurchase program in Q1 2020, having repurchased 871,319 shares for $35.6 million during the quarter[291] Impact of COVID-19 The pandemic materially increased credit loss provisions and prompted significant loan deferrals and PPP lending - The company is executing a payment deferral program for clients, with 1,320 deferrals on outstanding loan balances of $572 million as of June 30, 2020[307] - The company originated 1,937 PPP loans totaling $219 million, receiving approximately $7.3 million in fees from the SBA[308] - The ACL calculation and provision for credit losses were significantly impacted by changes in forecasted economic conditions due to the pandemic[297] - The company identified specific loan exposures considered 'at-risk' due to the pandemic: Retail Lending ($179.9M), Energy Lending ($86.6M), and Hospitality Lending ($129.4M)[309][311][312] Results of Operations Q2 2020 net income was boosted by a one-time gain, masking a surge in credit loss expense and margin compression - Q2 2020 net income of $13.4 million included a $9.8 million gain on the sale of the TPF division; excluding this, adjusted net income was $6.1 million[331][332] - Credit loss expense for Q2 2020 surged to $13.6 million from $3.7 million in Q2 2019, an increase of 269.7%, due to deteriorating economic forecasts[346][350] - Net interest margin decreased by 88 basis points to 5.11% in Q2 2020, driven by a 143 basis point reduction in loan yield[341][342] - For the six months ended June 30, 2020, total credit loss expense was $33.9 million, a 622.2% increase from the prior-year period[391] Financial Condition Total assets grew to $5.62 billion, while credit quality deteriorated with rising nonperforming loans and a larger ACL Loan Portfolio Composition (in thousands) | Loan Category | June 30, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Commercial real estate | $910,261 | $1,046,961 | (13.1%) | | Commercial | $1,518,656 | $1,342,683 | 13.1% | | Mortgage warehouse | $876,785 | $667,988 | 31.3% | | Factored receivables | $561,576 | $619,986 | (9.4%) | | Total Loans | $4,393,311 | $4,194,512 | 4.7% | Nonperforming Assets (in thousands) | Category | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total nonperforming loans | $55,924 | $40,613 | | Held to maturity securities | $8,140 | $0 | | Other real estate owned, net | $1,962 | $3,009 | | Total nonperforming assets | $67,166 | $44,098 | | NPLs to Total Loans | 1.27% | 0.97% | - The Allowance for Credit Losses (ACL) on loans increased to $54.6 million (1.24% of total loans) at June 30, 2020, from $29.1 million (0.69% of total loans) at year-end[443][444] Quantitative and Qualitative Disclosures About Market Risks The company's primary market risk is interest rate volatility, with an asset-sensitive balance sheet position Simulated Change in Net Interest Income (NII) | Rate Shock | NII Change (Next 12 Months) - June 30, 2020 | NII Change (Next 12 Months) - Dec 31, 2019 | | :--- | :--- | :--- | | +200 bps | 8.6% | 6.3% | | +100 bps | 3.9% | 3.1% | | Flat rates | 0.0% | 0.0% | | -100 bps | (1.5%) | (3.3%) | Simulated Change in Economic Value of Equity (EVE) | Rate Shock | EVE Change (%) - June 30, 2020 | EVE Change (%) - Dec 31, 2019 | | :--- | :--- | :--- | | +200 bps | 28.2% | 13.4% | | +100 bps | 15.7% | 7.5% | | Flat rates | 0.0% | 0.0% | | -100 bps | (19.4%) | (9.9%) | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[501] - No changes occurred during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[502] PART II — OTHER INFORMATION Legal Proceedings The company is not party to any legal proceedings expected to have a material adverse effect on its business - The company states it is not presently party to any legal proceedings that would have a material adverse effect on its business or financial condition[504] Risk Factors A new material risk factor related to the COVID-19 pandemic has been added to existing company risks - A new material risk factor has been added concerning the ongoing COVID-19 pandemic, which could have a material adverse effect on the business[505] - Potential adverse impacts from COVID-19 include increased credit losses, declines in collateral values, third-party disruptions, and increased fraud risk[507] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during the reporting period - The report indicates 'None' for this item[511] Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL data