Triumph Financial, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023. 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 March 31, 2024, we had consolidated total assets of $5.575 billion, total loans held for investment of $4.195 billion, total deposits of $4.451 billion and total stockholders’ equity of $872.3 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.

At March 31, 2024, 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 three months ended March 31, 2024, our Banking segment generated 60% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 30% of our total revenue, our Payments segment generated 9% of our total revenue, and our Corporate segment generated less than 1% of our total revenue.

First Quarter 2024 Overview

Net income available to common stockholders for the three months ended March 31, 2024 was $3.4 million, or $0.14 per diluted share, compared to net income to common stockholders for the three months ended March 31, 2023 of $10.2 million, or $0.43 per diluted share. For the three months ended March 31, 2024, our return on average common equity was 1.62% and our return on average assets was 0.31%.

At March 31, 2024, we had total assets of $5.575 billion, including gross loans held for investment of $4.195 billion, compared to $5.347 billion of total assets and $4.163 billion of gross loans held for investment at December 31, 2023. Total loans held for investment increased $32.0 million during the three months ended March 31, 2024. Our Banking loans, which constitute 72% of our total loan portfolio at March 31, 2024, decreased from $3.046 billion in aggregate as of December 31, 2023 to $3.041 billion as of March 31, 2024, a decrease of 0.2%. Our Factoring factored receivables, which constitute 23% of our total loan portfolio at March 31, 2024, increased from $941.9 million in aggregate as of December 31, 2023 to $976.8 million as of March 31, 2024, an increase of 3.7%. Our Payments factored receivables, which constitute 4% of our total loan portfolio at March 31, 2024, increased from $174.7 million in aggregate as of December 31, 2023 to $177.3 million as of March 31, 2024, an increase of 1.5%.

At March 31, 2024, we had total liabilities of $4.703 billion, including total deposits of $4.451 billion, compared to $4.483 billion of total liabilities and $3.977 billion of total deposits at December 31, 2023. Deposits increased $473.5 million during the three months ended March 31, 2024.

At March 31, 2024, we had total stockholders' equity of $872.3 million. During the three months ended March 31, 2024, total stockholders’ equity increased $7.9 million, primarily due to our net income during the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 13.62% and 16.69%, respectively, at March 31, 2024.

The total dollar value of invoices purchased by Triumph Financial Services during the three months ended March 31, 2024 was $2.470 billion with an average invoice size of $1,806. The average transportation invoice size for the three months ended March 31, 2024 was $1,771. This compares to invoice purchase volume of $2.927 billion with an average invoice size of $1,962 and average transportation invoice size of $1,911 during the same period a year ago.

TriumphPay processed 5.7 million invoices paying Carriers a total of $6.380 billion during the three months ended March 31, 2024. This compares to processed volume of 4.3 million invoices for a total of $5.031 billion during the same period a year ago.

2024 Items of Note

Triumph Financial Headquarters Purchase

On March 20, 2024, we purchased a building in Dallas, TX that will be the future headquarters for Triumph Financial. The purchase price, including direct costs, was $54.6 million with approximately $51.7 million allocated to land and building and $2.9 million allocated to lease-related intangibles. We do not anticipate occupying the space until 2026 and we do not expect this acquisition to materially impact our results of operations in the short-term.

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 March 31, 2024.

At March 31, 2024, the carrying value of the acquired over-formula advances was $2.7 million, the total reserve on acquired over-formula advances was $2.7 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 $1.3 million.

As of March 31, 2024 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 March 31, 2024. The full amount of such receivable is reflected in non-performing and past due factored receivables as of March 31, 2024 in accordance with our policy. As of March 31, 2024, the entire $19.4 million Misdirected Payments amount was greater than 90 days past due.

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.

Trucking transportation and factoring

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 during 2023 was a combination of falling volumes and excess capacity and such softness continued through the first quarter of 2024. In recent quarters, average rates per mile have decreased and returned spot rates to levels last seen in 2019. For the spot rate market, the drop was a little higher than the drop in diesel prices over the same period. Throughout much of 2023 and into 2024, spot rates had fallen below the cost per mile to operate for many carriers. 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. The confluence of these circumstances resulted in a steady decline in invoice prices and costs of new and used equipment during the first half of 2023. Such invoice prices and costs of new and used equipment remained consistently below recent years throughout the latter half of 2023 and into the first quarter of 2024.

Though the transportation factoring industry continues to fight headwinds due to higher cost of capital and lower average invoices, we have sufficient access to capital, manageable funding costs, and an ability to diversify factoring income. We continue to focus our efforts on technology initiatives to be more efficient, support the enterprise, and enhance our customer experience while delivering various products to strengthen our clients throughout their business lifecycle. Our plan is for managed growth in our factoring segment with a greater emphasis on enhancing efficiency and profitability.

Financial Highlights

(Dollars in thousands, except per share amounts)

43

(Dollars in thousands, except per share amounts)

(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.
• “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:

(Dollars in thousands, except per share amounts)

(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 three months ended March 31, 2024 and the year ended December 31, 2023.

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:

(Dollars in thousands, except per share amounts)

45

(Dollars in thousands, except per share amounts)

Results of Operations

Three months ended March 31, 2024 compared with three months ended March 31, 2023.

Net Income

We earned net income of $4.2 million for the three months ended March 31, 2024 compared to net income of $11.0 million for the three months ended March 31, 2023, a decrease of $6.8 million or 62.2%.

(Dollars in thousands, except per share amounts)

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.

(Dollars in thousands)

(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:

(Dollars in thousands)

We earned net interest income of $86.0 million for the three months ended March 31, 2024 compared to $93.4 million for the three months ended March 31, 2023, a decrease of $7.4 million, or 7.9%, primarily driven by the following factors.

Interest income increased $1.3 million, or 1.3%, due to increased yields across all of our broad interest earning asset categories with the exception of loans. Additionally, average interest earning assets increased $55.5 million, or 1.2%, while we experienced a decrease in average total loans of $64.8 million, or 1.6%. The average balance of our higher yielding Factoring factored receivables decreased $167.8 million, or 15.1%, while we experienced an increase in average Payments factored receivables. The decrease in average Factoring factored receivables and the increase in Payments factored receivables was impacted by our decision to move supply chain financing receivables from our Factoring segment to our Payments segment during the second quarter 2023. Average Banking loans increased $16.0 million, or 0.5% due to increases in the average balances of commercial real estate, construction and development, agriculture, and asset-based lending loans. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $633.9 million for the three months ended March 31, 2024 compared to $718.8 million for the three months ended March 31, 2023. A component of interest income consists of discount accretion on acquired loan portfolios and acquired liquid credit loans. We recognized discount accretion on purchased loans of $0.5 million and $1.8 million for the three months ended March 31, 2024 and 2023, respectively.

Interest expense increased $8.6 million, or 118.2%, primarily driven by higher average rates discussed below. Additionally, average interest-bearing liabilities increased period over period. More specifically, average total interest bearing deposits increased $109.3 million, or 4.7%. Average noninterest bearing demand deposits grew $19.8 million.

Net interest margin decreased to 7.29% for the three months ended March 31, 2024 from 8.08% for the three months ended March 31, 2023, a decrease of 79 basis points or 9.8%.

The decrease in our net interest margin was most impacted by an increase in our average cost of interest bearing liabilities of 125 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 also impacted by a decrease in our yield on interest earning assets of 7 basis points to 8.64% for the three months ended March 31, 2024. This decrease was primarily driven by lower yields on loans which decreased 13 basis points to 9.09% for the same period. Our yield on Factoring factored receivables was relatively flat period over period; however our average Factoring factored receivables as a percentage of the total average loan portfolio decreased which had a meaningful impact on our overall loan yield. Our transportation factoring balances, which generally generate a higher yield than our non-transportation factoring balances, were 97% and 95% of our Factoring portfolio at March 31, 2024 and 2023, respectively. Banking and payments yields decreased period over period. Non-loan yields were higher across the board period over period.

Our mortgage warehouse business has nearly self-funded for several quarters due to the servicing deposits of its customers. We grew such deposits by $292.8 million during the first quarter to a total of $519.6 million at March 31, 2024. These deposits are noninterest bearing deposits on our balance sheet. Despite their classification, many of these deposits are not truly free of cost as our clients are compensated for these balances in the form of an earnings interest rebate rather than deposit interest. As a result, such noninterest bearing deposits decrease our loan yield rather than increase our deposit rates. It is important to note that our net interest margin is not affected by this arrangement. During the first quarter of 2024, these deposits decreased our overall yield on loans by 47 bps and our overall cost of deposits and cost of funds would have been 45 bps and 42 bps higher, respectively.

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:

(Dollars in thousands)

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 2023 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:

(Dollars in thousands)

49

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 March 31, 2024 and December 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 March 31, 2024. 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 March 31, 2024 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 March 31, 2024 and December 31, 2023, the Company carried $6.1 million and $6.2 million, respectively, of these HTM securities at amortized cost. The required ACL on these balances was $3.1 million at March 31, 2024 and $3.2 million at December 31, 2023, resulting in a $0.1 million benefit to credit loss expense during the current quarter. Credit loss expense during the three months ended March 31, 2023 was $0.1 million. None of the overcollateralization triggers tied to the CLO securities were tripped as of March 31, 2024. 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 $38.2 million as of March 31, 2024, compared to $35.2 million as of December 31, 2023, representing an ACL to total loans ratio of 0.91% and 0.85%, respectively.

Our credit loss expense on loans increased $3.3 million, or 197.0%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The increase in credit loss expense was primarily driven by changes in required specific reserves. Such specific reserves increased $1.3 million during the three months ended March 31, 2024 compared to a decrease of $0.9 million during the same period a year ago.

Changes in volume and mix of the loan portfolio also drove an increase in credit loss expense period over period. Such changes resulted in credit loss expense of $0.8 million during the three months ended March 31, 2024 compared to an insignificant impact to credit loss expense during the same period a year ago. Changes to projected loss drivers and prepayment speeds that the Company forecasted over the reasonable and supportable forecast periods to calculate expected losses resulted in credit loss expense of $0.9 million during the three months ended March 31, 2024 compared to credit loss expense of $0.4 million during the same period a year ago.

The increase in credit loss expense was partially offset by net charge-off activity during the period. Net charge-offs during the three months ended March 31, 2024 were $1.9 million compared to $2.2 million during the same period a year ago. Approximately $1.4 million of the $1.9 million net charge-offs for the three months ended March 31, 2024 were reserved in a prior period while the entire balance charged-off during the three months ended March 31, 2023 was fully reserved in a prior period. Such prior period reserves are included in the discussion of changes in specific reserves above.

Credit loss expense for off balance sheet credit exposures increased $0.2 million, primarily due to changes to outstanding commitments to fund and changes to assumed loss rates period over period.

Noninterest Income

The following table presents our major categories of noninterest income:

(Dollars in thousands)

Noninterest income increased $4.0 million, or 36.1%. Changes in selected components of noninterest income in the above table are discussed below.

• Fee income. Fee income increased $2.5 million, or 41.2%, due to a $1.8 million increase in fees earned by our Payments segment during the three months ended March 31, 2024 compared to the same period a year ago. Additionally, early termination fees at our Factoring segment increased $0.6 million period over period.
• Other. Other noninterest income increased $1.7 million due to a gain on our revenue share asset of $0.5 million during the three months ended March 31, 2024 compared to a $0.6 million loss during the same period a year ago. There were no other significant variances in other noninterest income period over period.

Noninterest Expense

The following table presents our major categories of noninterest expense:

(Dollars in thousands)

Noninterest expense increased $1.1 million, or 1.2%. 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 decreased $0.5 million, or 0.9%. Employee salaries and payroll taxes decreased $1.3 million and $0.7 million, respectively, which is primarily due to increased labor subject to capitalization. The size of our workforce increased period over period due to organic growth within the Company. Our average full-time equivalent employees were 1,518.3 and 1,459.8 for the three months ended March 31, 2024 and 2023, respectively. Further, sales commissions, primarily related to our operations at Triumph Financial Services and TriumphPay, decreased $0.6 million period over period. Compensation for temporary labor decreased $0.9 million period over period. These decreases were offset by an increase in accruals for bonus expense of $1.2 million. Additionally, stock based compensation expense included in salaries and employee benefits expense increased $0.8 million period over period. Employee insurance expense increased $0.5 million period over period.
• Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $0.9 million, or 13.9%, primarily due to growth in our operations period over period.
• Communication and Technology. Communication and technology increased $0.5 million, or 4.8%, primarily as a result of increased spending on IT data processing IT infrastructure.
• Other. Other noninterest expense includes loan-related expenses, training and recruiting, postage, insurance, and subscription services. Other noninterest expense decreased $0.1 million, or 1.6%. There were no significant 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 $0.9 million, from $1.5 million for the three months ended March 31, 2023 to $0.6 million for the three months ended March 31, 2024. The effective tax rate was 13% for the three months ended March 31, 2024, compared to 12% for the three months ended March 31, 2023. The effective tax rate for the three months ended March 31, 2024 was impacted by an adjustment to our disallowance related to highly compensated individuals. The effective tax rate for the three months ended March 31, 2023 was impacted by a performance based performance stock units windfall that was recorded during the period 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 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.

Expenses that are directly attributable to our Banking, Factoring, and Payments segments are allocated as such. We continue to make considerable investments in shared services that benefit the entire organization and these expenses are allocated to our Corporate segment. We allocate such expenses to our Corporate segment in order for our chief operating decision maker and investors to have clear visibility into the operating performance of each reportable segment.

We allocate 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 customer deposit funding in excess of its factored receivables, intersegment interest income is allocated based on the Federal Funds effective rate. Management believes that such intersegment interest allocations appropriately reflect the current interest rate environment.

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. 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 2023 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. 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. Beginning prospectively on January 1, 2024, the Factoring and Payments segments began paying fees to our Banking segment for the Banking segment's execution of various banking services that benefit those segments. 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 following tables present our primary operating results for our operating segments:

(Dollars in thousands)

(Dollars in thousands)

(1) Net intersegment noninterest income (expense) includes:

(Dollars in thousands)

53

(Dollars in thousands)

Banking

(Dollars in thousands)

Our Banking segment’s operating income decreased $5.7 million, or 16.9%.

Total interest income increased $4.3 million, or 7.1%, 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 0.5% from $2.917 billion for the three months ended March 31, 2023 to $2.933 billion for the three months ended March 31, 2024, and average balances of other interest earning assets at our Banking segment increased period over period. Intersegment interest income allocated to our Banking segment decreased period over period due to decreased factored receivable balances at our Factoring segment.

Interest expense increased $8.6 million, or 172.9%, due to an increase in average interest-bearing liabilities, including an increase in average total interest bearing deposits of $109.3 million, or 4.7%, period over period. This increase was also 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 $4.4 million for the three months ended March 31, 2024 compared to credit loss expense on loans of $1.1 million for the three months ended March 31, 2023. The increase in credit loss expense was the result of increased specific reserves and net charge-offs at our Banking segment period over period. Changes to the projected loss drivers and prepayment speeds that the Company forecasted over the reasonable and supportable forecast periods and changes in the volume and mix of our portfolio also increased credit loss expense at our Banking segment period over period.

Credit loss expense for off balance sheet credit exposures decreased $0.7 million, from $0.8 million for the three months ended March 31, 2023 to $0.1 million for the three months ended March 31, 2024, primarily due to changes to outstanding commitments to fund and changes to assumed loss rates period over period.

There were no significant changes in the components of noninterest income at our Banking segment period over period. The decrease in noninterest expense was driven by a $1.9 million decrease in salaries and benefits expense partially offset by a $1.0 million increase in communications and technology expense.

Year to date, our aggregate outstanding balances for our banking products, excluding intercompany loans, has decreased $5.4 million, or 0.2%, to $3.041 billion as of March 31, 2024. The following table sets forth our banking loans:

(Dollars in thousands)

Factoring

(Dollars in thousands)

55

Our Factoring segment’s operating income decreased $0.9 million, or 11.3%.

Our average invoice size decreased 8.0% from $1,962 for the three months ended March 31, 2023 to $1,806 for the three months ended March 31, 2024. Additionally, the number of invoices purchased decreased 8.3% period over period.

Net interest income at our Factoring segment decreased period over period. Overall average net funds employed (“NFE”) decreased 14.0% during the three months ended March 31, 2024 compared to the same period in 2023. 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 a high concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration was at 97% at March 31, 2024 and 95% at March 31, 2023. Net interest income at our Factoring segment was also impacted by a decrease in its intersegment interest allocation charge period over period.

Credit loss expense on factored receivables at our Factoring segment was relatively flat period over period. Net charge-offs decreased period over period. This decrease was partially offset by changes in the volume of the factoring portfolio period over period and changes in specific reserves. Changes in loss assumptions did not have a material impact on the change in credit loss expense period over period. Credit loss expense for off balance sheet credit exposures increased $0.9 million, from $0.0 million for the three months ended March 31, 2023 to $0.9 million for the three months ended March 31, 2024, primarily due to changes to outstanding commitments to fund period over period.

Noninterest income at our Factoring segment increased period over period due to a gain on our revenue share asset of $0.5 million during the three months ended March 31, 2024 compared to a $0.6 million loss during the same period a year ago. Additionally, we experienced a $0.6 million increase in early termination fees at our Factoring segment period over period. There were no other significant variances in noninterest income at our Factoring segment.

Noninterest expense decreased primarily due to a $1.5 million decrease in salary and benefits expense including a decrease in stock compensation. Additionally, there was a $1.2 million decrease in communications and technology expense period over period. There were no other significant variances in noninterest expense at our Factoring segment.

Payments

(Dollars in thousands)

Our Payments segment's operating loss decreased $3.0 million, or 41.3%.

The number of invoices processed by our Payments segment increased 34.2% from 4,260,654 for the three months ended March 31, 2023 to 5,717,016 for the three months ended March 31, 2024, and the amount of payments processed increased 26.8% from $5.031 billion for the three months ended March 31, 2023 to $6.380 billion for the three months ended March 31, 2024 in the face of lower average invoice prices.

A "network transaction" occurs when a fully integrated TriumphPay payor receives an invoice from a fully integrated TriumphPay payee. All network transactions are included in our payment processing volume above. These transactions are facilitated through TriumphPay application programming interfaces ("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 March 31, 2024, we processed 621,209 network invoices representing a network payment volume of $1.035 billion. During the three months ended March 31, 2023, we processed 159,353 network invoices representing a network payment volume of $289.7 million.

Net interest income increased due to increased average balances at our Payments segment and increased intersegment interest allocation period over period. The majority of the increased average balance was driven by supply chain finance receivables previously discussed. The increase in net interest income was partially offset by lower yields at our Payments segment.

Noninterest income increased due to a $1.8 million increase in payment and audit fees, including intersegment fees, earned by TriumphPay during the three months ended March 31, 2024 compared to the same period a year ago.

There were no significant variances in the components of noninterest expense at our Payments segment period over period.

The acquisition of HubTran during the year ended December 31, 2021 allows TriumphPay to create a fully integrated payments network for transportation; 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., 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 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 has led to meaningful amounts of intangible amortization.

Corporate

(Dollars in thousands)

The Corporate segment reported an operating loss of $26.3 million for the three months ended March 31, 2024 compared to an operating loss of $22.2 million for the three months ended March 31, 2023. The increased operating loss was driven by increased noninterest expense which was the result of a $3.3 million increase in salaries and benefits expense and a $0.7 million increase in IT and communications expense period over period.

Financial Condition

Assets

Total assets were $5.575 billion at March 31, 2024, compared to $5.347 billion at December 31, 2023, an increase of $228.2 million, the components of which are discussed below.

Loan Portfolio

Loans held for investment were $4.195 billion at March 31, 2024, compared with $4.163 billion at December 31, 2023.

The following table shows our total loan portfolio by portfolio segments:

(Dollars in thousands)

Commercial Real Estate Loans. Our commercial real estate loans increased $7.0 million, or 0.9%, due to new origination activity that outpaced paydowns.

Construction and Development Loans. Our construction and development loans increased $86.1 million, or 63.0%, 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 $4.3 million, or 3.4%, due to new origination activity that outpaced paydowns.

Farmland Loans. Our farmland loans decreased $5.1 million, or 8.1%, due to paydowns that outpaced modest origination activity.

Commercial Loans. Our commercial loans held for investment decreased $9.5 million, or 0.8%, due to decreased equipment lending and liquid credit balances. The decrease was partially offset by increased asset-based lending balances as well as an increase in other commercial loans. Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, increased $4.8 million, or 1.6%.

The following table shows our commercial loans:

(Dollars in thousands)

Factored Receivables. Our factored receivables increased $37.4 million, or 3.3%. At March 31, 2024, the balance of the Over-Formula Advance Portfolio included in factored receivables was $2.7 million. At March 31, 2024, 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.

Consumer Loans. Our consumer loans decreased $1.2 million, or 13.8%, due to paydowns that outpaced modest origination activity.

Mortgage Warehouse. Our mortgage warehouse facilities decreased $87.0 million, or 11.9%, due to seasonal changes in 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 $633.9 million for the three months ended March 31, 2024 compared to $718.8 million for the three months ended March 31, 2023.

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:

(Dollars in thousands)

60

As of March 31, 2024, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Texas (24%), Illinois (12%), Colorado (11%), and Iowa (6%) make up 53% 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, 2023, the states of Texas (17%), Colorado (15%), Illinois (12%), and Iowa (6%) made up 50% of the Company’s gross loans, excluding factored receivables.

Further, a majority (97%) of our factored receivables, representing approximately 27% of our total loan portfolio as of March 31, 2024, 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, 2023, 97% of our factored receivables, representing approximately 26% 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)

Nonperforming loans increased $14.4 million, or 20.9%, due to the addition of four equipment finance loans of $9.1 million, $4.1 million, $2.4 million and $1.6 million all collateralized by various equipment. These increases were partially offset by a $1.2 million nonperforming equipment loan pay-down and a $0.1 million reduction in nonperforming factored receivables. 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 increased to 1.98% at March 31, 2024 from 1.65% December 31, 2023.

Our ratio of nonperforming assets to total assets increased to 1.61% at March 31, 2024 from 1.42% December 31, 2023. This is due to the aforementioned loan activity and changes in our period end total assets.

Past due loans to total loans held for investment decreased to 1.90% at March 31, 2024 from 2.00% at December 31, 2023, as a result of a decrease in past due factored receivables partially offset by increased past due commercial loans. Both the $2.7 million acquired factoring Over-Formula Advance balance and the $19.4 million Misdirected Payments balance are considered greater than 90 days past due at March 31, 2024.

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 2023 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:

(Dollars in thousands)

The ACL increased $3.0 million, or 8.6%. This increase reflects net charge-offs of $1.9 million and credit loss expense of $4.9 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 $3.2 million at December 31, 2023 to $2.7 million at March 31, 2024 and the entire balance at March 31, 2024 was fully reserved. At March 31, 2024, 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 March 31, 2024.

A driver of the change in ACL is change in the loss drivers that the Company forecasted to calculate expected losses at March 31, 2024 as compared to December 31, 2023. Such change had a slightly negative impact on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period and resulted in an increase of $0.9 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 March 31, 2024, 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 March 31, 2024 as compared to December 31, 2023, the Company forecasted minimal change in national unemployment, one-year percentage change in national retail sales, one-year percentage change in the national home price index, and one-year percentage change in national gross domestic product. At March 31, 2024 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 small increase 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 an increase in the first projected quarter followed by a steep drop to negative levels for the remaining three quarters with such negative levels peaking in the fourth projected quarter. For percentage change in national gross domestic product, management projected low-to-near-zero growth for each projected quarter with the exception of positive growth in the first projected quarter. At March 31, 2023, the Company used its historical prepayment speeds with minimal adjustment.

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)

63

(Dollars in thousands)

Quarter to date net loans charged off decreased $0.3 million with no individually significant charge-offs in either period.

Securities

As of March 31, 2024 and December 31, 2023, we held equity securities with readily determinable fair values of $4.4 million and $4.5 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 March 31, 2024, we held debt securities classified as available for sale with a fair value of $320.1 million, an increase of $20.5 million from $299.6 million at December 31, 2023. The following table illustrates the changes in our available for sale debt securities:

(Dollars in thousands)

Our available for sale CLO portfolio consists of investment grade positions in high ranking tranches within their respective securitization structures. As of March 31, 2024, 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 March 31, 2024. 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 March 31, 2024 and December 31, 2023, we held investments classified as held to maturity with an amortized cost, net of ACL, of $3.0 million. 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 March 31, 2024.

The following tables set forth the amortized cost and average yield of our debt securities, by type and contractual maturity:

(Dollars in thousands)

Liabilities

Total liabilities were $4.703 billion as of March 31, 2024, compared to $4.483 billion at December 31, 2023, an increase of $220.2 million, the components of which are discussed below.

Deposits

The following table summarizes our deposits:

(Dollars in thousands)

Our total deposits increased $473.5 million, or 11.9%, primarily due to an increase in noninterest bearing demand deposits, money market deposits, brokered time deposits, and other brokered deposits. The Company experienced decreases in all other deposit categories. Other brokered deposits are non-maturity deposits obtained from wholesale sources. As of March 31, 2024, interest bearing demand deposits, noninterest bearing deposits, money market deposits, other brokered deposits, and savings deposits accounted for 84% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered time deposits made up 16% of total deposits. At March 31, 2024 and December 31, 2023, our estimated uninsured deposits were $1,827,130,000 and $1,840,621,000, respectively.

At March 31, 2024 we held $68.1 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 March 31, 2024:

(Dollars in thousands)

65

The following table summarizes our average deposit balances and weighted average rates:

(Dollars in thousands)

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 of certain deposit types we have seen throughout 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.

Other Borrowings

Customer Repurchase Agreements

The following provides a summary of our customer repurchase agreements as of and for the three months ended March 31, 2024 and the year ended December 31, 2023:

(Dollars in thousands)

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 three months ended March 31, 2024 and the year ended December 31, 2023:

(Dollars in thousands)

Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. At March 31, 2024 and December 31, 2023, we had $771.9 million and $587.0 million, respectively, in unused and available advances from the FHLB.

Subordinated Notes

The following provides a summary of our subordinated notes as of March 31, 2024:

(Dollars in thousands)

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.

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 March 31, 2024:

(Dollars in thousands)

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 S plus a weighted average spread of 2.41%. 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 $41.9 million was allowed in the calculation of Tier I capital as of March 31, 2024.

Capital Resources and Liquidity Management

Capital Resources

Our stockholders’ equity totaled $872.3 million as of March 31, 2024, compared to $864.4 million as of December 31, 2023, an increase of $7.9 million. Stockholders’ equity increased during this period primarily due to our net income of $4.2 million.

Liquidity Management

We define liquidity as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, 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.

As part of our liquidity management process, we regularly stress test our balance sheet to ensure that we are continually able to withstand unexpected liquidity shocks such as sudden or protracted material deposit runoff. This analysis explicitly contemplates the immediate runoff of any meaningful deposit concentrations such as the servicing deposits that we hold on behalf of our mortgage warehouse customers

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.

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 March 31, 2024, TBK Bank had $529.4 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 March 31, 2024, we had $771.9 million in unused and available advances from the FHLB. We have historically utilized FHLB advances to support the fluctuating and sometimes unpredictable balances in our mortgage warehouse lending portfolio, and we continue to have the ability to do so.

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of March 31, 2024. 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.

(Dollars in thousands)

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 9 – 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 7 – 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, 2023, 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 2023 Form 10-K.

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;
• 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 and;
• increases in our capital requirements.

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.

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.

The following table summarizes simulated change in net interest income versus unchanged rates as of March 31, 2024 and December 31, 2023:

The following table presents the change in our economic value of equity as of March 31, 2024 and December 31, 2023, assuming immediate parallel shifts in interest rates:

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.

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 March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2023.