Triumph Financial Inc
NASDAQ:TFIN
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Good morning. Welcome to the Triumph Bancorp conference call to discuss our second quarter 2022 financial results.Before we get started, I would like to remind you that this call may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. For details, please refer to the safe harbor statement in our shareholder letter and earnings release published last evening. All comments made during today's call are subject to that safe harbor statement.I'm joined this morning by Triumph's Vice Chairman and CEO, Aaron Graft; our Chief Financial Officer, Brad Voss; Todd Ritterbusch, President of TBK Bank; Geoff Brenner, our CEO of Triumph Business Capital and Melissa Forman, our President of TriumphPay.With that housekeeping out of the way, I'd like to turn the call over to Aaron.
Good morning, everyone. We hope that the shareholder letter we published last evening was helpful for you in preparing for this call. At this time, we're ready to open the call up for any questions.
[Operator Instructions] Our first question comes from Michael Rose from Raymond James.
Obviously, a lot of moving parts this quarter, a lot of repositioning efforts. Would love to get some context there. But first, I just wanted to dig into the average invoice size. It definitely held up better than I think we were modeling. And I think there's been a lot of chatter in the trucking space about invoice prices and freight costs and things like that. Can you just kind of walk us through kind of the dynamics and maybe what you might expect for invoice prices as we move forward? It doesn't seem like they're going to get back down to where they had been kind of pre-COVID just given structurally higher fuel prices and labor costs. But would just love any insights into kind of the nearer-term direction of TBC.
Michael, this is Geoff. I'll take that one. I think we benefited from heightened diesel prices. And as you know, that factors into the average invoice size. And we think the imputed higher diesel prices and these invoices just held them up from what we had called for, which is a gradual return to normal. So that dynamic certainly occurred in Q2.And looking into Q3, if diesel prices stay at or about their current levels and if utilization stays at or about its current level, which is about 96%, we would anticipate cautiously, optimistic return. We're holding flat and then individual often return back to what you've seen several years ago.
Okay. And then maybe on -- as a follow-up, just on the network side. I think the trends there were maybe a little bit weaker than what we've modeled. But just as we think about kind of the intermediate term, is there any updates to when you guys expect to for the network to really become breakeven and then begin to generate some profitability because of look like the ramp is just perhaps a little bit slower than, at least I was expecting. But we just love any updated color there.
Yes. Great question. I'll take that. And if I say anything wrong, Melissa will correct it. But as we've tried to focus the market on, there is a steady drift every quarter of clients coming into the TriumphPay ecosystem. It's just that the ones that really move the needle are the ones we describe as Tier 1s because they control such a large amount of business, each one of them individually and certainly collectively.We pointed out in the letter, we have over $15 billion in volume in the pipeline, and those are very -- those are chunky because they come associated with large names. That's just the identifiable pipeline. So given where we are in the year, where we are in the integration schedule, I would actually expect for Q3, the gross payment volume to be flat to perhaps down slightly just if invoice prices do moderate even more. We expect there to be a big spike upwards in Q4 when we go live with the first part of this group of new clients who are in the pipeline, and it's going to be chunky from there or it will be a step function each time a new one comes on just because of their size.As for revenue we'll move right along with that. And ultimately, we believe we are on track to exit 2024 with a business that's doing over $75 billion in payment volume, an ever-growing portion of that being conforming transactions upon which we charge network fees. And we think at that pace or at that sort of scaled size that gross revenues will be $100 million, and this will be a business that generates positive EBITDA. So that timing is still intact. You're just seeing a quarter -- first quarter in a while where we didn't have -- bring someone live onto the system, but that pause won't last very long.
Okay. And then maybe just finally for me. Any updates on -- you talked about the potential for the contract shipper market at some point. I didn't see much in the shareholder letter about that. I mean, I know there were some, but would just love an update there. You previously had slides, and I think you were kind of 2% to 3% by your math of kind of the volume there. What's kind of the outlook there? And should we be thinking about that?And then just with the repositioning efforts, I mean a lot of moves this quarter. Could we expect moving forward much cleaner results because I think there has been a lot of noise in the numbers.
Shipper.
Yes. I think on the shipper market, we did have 1 Tier 1 shipper come on to the platform in Q2. And so we've seen some growth in that business. We also made an additional investment in Intelligent Audit, which is a freight audit company in that space to further our initiatives in that segment of the market.And so there's significant total addressable market available in the shipper space. When you look at the contract shipping it's about a 250 or we size it at around $250 billion opportunities. We're continuing to invest there. And the additional investment with IA has allowed us to really reposition our relationship there, and then our strategy within the market to be more in line with our open network that we're building out for TriumphPay, so you'll see more coming soon on that side.
Yes, Mike, I wouldn't overlook that Intelligent Audit investment as being consistent with what we've always said. There is another market yet to go get more of. We have a couple of billion of it, but there's a lot more to go get. And so things are happening.And then in response to your last question about expecting clean quarters, I can never predict quarter-to-quarter what opportunities are going to present themselves. But I think it is likely that the next few quarters won't have anywhere near this amount of noise.But as you said, and we want everyone to understand we are still in a period of strategically turning this business towards where we want it to go. And as a result, there's going to be things along the way where we reallocate parts of what we're doing to things that are consistent with our future strategy. So there may be noise in quarters to come, but I don't expect it to be anything like this one.
And our next question comes from Matt Olney from Stephens.
I also want to dig more into TPay. I thought most of 2Q metrics showed some improvement or at least were similar to what I was forecasting. We saw a higher number of invoices, higher dollar amount of invoices, but the dollar amount of receivables was down linked quarter. And I'm not clear if the turn times increase or the discount rates declined? Any color you can give us on why the average dollar amount of the receivable declined in TriumphPay?
Yes, that would be in direct alignment with the average invoice price going down. The receivables themselves are tied to the amount of the invoice. And so as that has softened within the portfolio, we'll see that revenue drop.
Okay. And then within TriumphPay also curious about the investment spend there. I appreciate that it's vital what we're trying to achieve. But help us appreciate the ramp of the expense in that TriumphPay segment. When do you expect that ramp to moderate? How close are we to that?
So right now our investment is primarily in our operations folks. So as we continue to grow the payment volume on the platform it requires support and contact center support for the customer service side of that. As we look at our future growth and what's in our pipeline, and as Aaron mentioned, we have $15 billion that's kind of stacked up, ready to come on to the platform. That is a significant increase. And so we are in preparation of that volume, staffing our teams up so that we're prepared for it and have the training, et cetera, in place to be able to handle that smoothly for our customers. So you'll continue to see us invest operationally to support the growth, and that will continue to go out through 2024.
Yes. I think, Matt, to your question on whether the glide slope is probably flattening a little bit. But we did a significant amount of hiring and building with TriumphX, bringing in some very extensive, but very valuable team members to help us shape this strategy. So the go-forward investments are always to update the software ecosystem. I mean, that's a living, breathing thing. But most of these adds are in operational support. So it won't have -- it will be a flatter growth from here.
Okay. And then just I guess lastly, we've talked in the past about eventually doing some syndications within TriumphPay. Could you just remind us, how close are we to see these syndications? Is this something we could see towards the end of this year or just more of an initiative that we'll see more impactfully in 2023?
I think it's going to be more of a 2023 issue, Matt. We're not balance sheet constrained, as you know, from everything that we've -- all the repositioning that has been done. And so we're not in a position where we need to be selling those assets to make room for the balance sheet allocation we have for it. We think that's a future state problem when we have significantly more volume coming across the system.But nevertheless, just like we wanted to create the plumbing for equipment finance syndication opportunities, the syndication inside of TriumphPay, it would be wise of us to do one in 2023, just to demonstrate that the plumbing works for ourselves and our counterparties and investors. So I think even if we have the balance sheet room to hold it all, you'll see us do the first one of those next year.
Our next question comes from Steve Moss from B. Riley.
On the pipeline here, you guys mentioned that there's $15 billion in annualized payment volume here come online. Is all of that just what is in integration or is some of that also be like contract -- contracted, but not yet started in terms of API integration?
It's a both in, right. When this is volume that is in the contracting phase, and we have already started integration, but we haven't signed the final contract or completed the integration.
Okay.
And it's not as linear of a process as you would expect. These are long -- by the time you get into the point where you're working on the contract, that means you're also working on integrations just because the pipeline is so long.
Okay. And then in terms of just the conforming volumes here, just to conform transactions. Your end of quarter numbers imply a healthy step up. Just kind of how do we think about conforming transaction growth as we go here over maybe the second half of the year?
Yes. So as we step up that volume on the payments network, the payment volume, where we have this turbulence coming, they will be conforming enabled brokers. And then as in the last quarter, we spent a lot of time reengineering the plumbing for our existing clients to get them to a conforming level as well. So fully integrated conforming capable.So there's still a lot of work to do with our existing clients to get them there. Those take reengineering and reintegrating existing plumbing for them. But the team has spent a significant amount of time making that happen. So you'll see us to continue to grow that. We're continuing to add factors into that network as well so that they can receive that data. So we have a team that is completely focused on just reengineering the existing clients to get them there. It does take some development efforts on our customer side as well, so we're kind of a little bit at the mercy of their availability to make those changes, but we're making significant progress.
And Steve, just to take it from just that to a more granular level, it's kind of which side goes first. You need a certain number of large freight brokers to be on the ecosystem for this to make sense for the factoring customers, right? They have to believe that they're going to see 20% of their payments come through as conforming transactions in order to change their business models and take advantage of the network.On the flip side, the large freight brokers want to see more factors on this system because that creates a more efficient way for them to work together. If you look at the market right now, 15% of the payments the Triumph Business Capital receives, they received from TriumphPay. So that's our penetration of the market as it's going to factors. About 6%-5% of that volume is coming through is conforming because there's a lag in making sure all of those freight brokers are fully integrated.When you add the $15 billion that's in the pipeline, plus what are the other things we're working on, the day is going to be here before the end of 2024, when we make far more than 20% of all payments to the factoring industry, and we can deliver almost that same amount in conforming transactions. At which point, if you don't join the network for conforming transactions, your business model is going to struggle to compete with the efficiencies that the other players will have.
And then just one question on expenses here. I hear you guys on the stable expense guide quarter-over-quarter. But maybe just kind of curious, are you seeing any additional inflationary pressures as [Technical Difficulty] beyond the third quarter.
Steve, I lost the second half of your question, but I think you were asking about just inflationary pressures on our expense base overall. We have definitely seen wage competition as we're bringing new people onboard. That's clearly been happening and is continuing. And it feels as though it may be moderating a little bit at this point, especially on the technical side. We tell our team all the time that we're in a very good position relative to a lot of other folks who would be bringing on technical talent because we're not beholden to that next round of venture funding. And a lot of the start-up type of companies out there are pulling back in a pretty material way, just given market conditions, and we don't have to do that. But I wouldn't say that it's anything accelerating or anything like that, but we're definitely feeling it to an extent.
And our next question comes from Brad Milsaps from Piper Sandler.
Aaron, thanks for the shareholder letter. That was very helpful. Just kind of wanted to ask around that the timing of some of the actions that you took this quarter. I think the factory sale was at the end of the quarter and then was unsure of the timing on the sale of the equipment loans. But just curious how both impacted maybe Q2 results. I know you guide us on there, if you don't employ some of that it would be kind of what it means for earnings. But just wondered if you would talk about your ability to kind of replace those lost assets. It looks like you were sitting on more than $700 million in cash at the end of the quarter. So just kind of wanted to think through some of those moving parts.
Yes. Brad, both of those transactions closed in the back half of June. So that cash balance that you see is definitely inflated relative to where we would normally have it be. As far as the opportunities to reinvest, there are several ways that we could go with that. We've already started some of that. The market has given us an opportunity to invest in some more liquid market investments, I think top of the stack CLO securities, liquid loans and things like that. We'll continue to do that. But we're going to do it at a measured pace.We kind of have to think about our excess capital in a few different buckets and relevering is one of those buckets. Looking at our own shares is another and holding capital back for another day for a variety of purposes is another. So we look at all of that in -- kind of in totality.As far as what we're giving up, I think we mentioned in our shareholder letter that the net interest margin given up on the equipment portfolio -- and as a reminder, that is a fully amortizing set of loans that's a bit of a melting ice cube, and we retain those customer relationships and we'll continue to originate more assets with those same customers.But we're giving up about a little over $3 million in net interest margin over the balance of this year, another $4 million over the totality of 2023 from the equipment sale. General factoring, it's a little bit harder to pin down because those balances fluctuate quite a bit more. They're not quite as scheduled out, so to speak. But just rough numbers, we're probably looking at about $7.5 million of net interest margin that we'll not receive on those assets.
And Brad, it's probably a safe and conservative assumption to assume that we will replace a portion of that revenue over the next few quarters. I think the balance sheet will stay roughly around the size it is. So you'll see some loan growth to the extent we believe in opportunities. But there's going to be a period, certainly this period and next period where there's some margin that hasn't been backfilled.If we backfill it, when we backfill it, it's going to be consistent with the strategy, so it's very likely going to be either quick pay balances that come from this additional volume coming into TriumphPay or the continued growth of Triumph Business Capital in its core transportation markets.Everything else around the edges in the community bank and otherwise, we'll do if it's appropriate and as it makes sense. So it's okay for us to have the excess capital during this period of time when we are evaluating other ways to invest in TriumphPay to accelerate its growth in freight audit and pay when we're looking at the opportunity to buy our own stock back, should the market pull back to a level where we believe that the TriumphPay call option is priced close to 0, and we think that's a good use of that excess capital.So we're not going to be led to do a less than excellent decision just to protect margin over the next 2 quarters. I mean, if we give back a few cents in earnings because we've maintained optionality, we are very comfortable with that.
So kind of in the interim, you might see a step back in traditional factoring revenue, but that would be the start up kind of backfill out with more TPay revenue towards the end of the year and the next.
Correct.
And I know it's not cool to talk about the bank on these calls, but I'll ask the question. Just curious, you're probably more asset sensitive at the bank than you ever have been, just given the improvements in your deposit base. How much lift sort of ex the impact of the assets that you sold, do you expect to see in net interest income at the banking segment as you move through 2023 and '24.
I think that -- bear with me, I had the -- yes. Just looking at the rate environment and our deposit base, about 85% of our deposit base now is what I would consider to be a very high-quality non-maturity deposits that are not particularly rate sensitive. We've not really seen any intense price competition for those deposits so far. Other banks remain fairly liquid as well. We are responding to specific situations as we feel is appropriate.But as far as what the impact of rate changes would be, we're looking at about -- probably about $3 million or $4 million, if I recall, relative to what the net interest margin would be over the balance of this year in a flat rate environment. So we're projecting another 175 basis points or so of increases on the short end of the curve, and that should produce $3 million or $4 million over the balance of this year. And then looking at it beyond that over the next 6 months after that, I think another $8 million or $10 million, if I recall, what the modeling would suggest.
And our final question comes from Gary Tenner from D.A. Davidson.
I'm going to ask another mundane bank question. I noticed in the quarter, the provision was up quite a bit. Obviously, a tiny bit related to kind of the cancellation of the plan to sell the branches. And looks like the provision was mostly in the bank segment. So just wondering if you could talk about changes you may have made to your ACL model or otherwise, the ACL is the highest it's been since probably early stages of COVID?
Yes, we did recalibrate our economic model that drives a lot of those ACL results, and we've got a higher probability of a recessionary type of environment and higher unemployment. And that's what drove the increase in this period.
We'll take one more question on this line and then we'll go the phone line. This one comes from Matthew Olney from Stephens.
I want to dig more into the equipment lending portfolio. Equipment lending, as an asset class, I think a lot of investors are becoming more cautious on due to some of the economic headwinds. But you guys announced a loan sale that resulted in a nice premium and you hinted that it could be more such sales in this asset class. So we just love to dig in more into this portfolio and kind of what else you have planned for the future for this.
Yes, I'll take this one. Yes. So we definitely intend to do more of these sales in the future. This is completely consistent with our desire to continue to serve our transportation clients with equipment finance solutions without necessarily growing our overall balance sheet. And so the plan would be for us to continue to originate at least our current pace and maybe at faster pace going forward. And then as we accumulate balance to continue to either sell to other banks or securitize whatever the best execution would be.In this case, the execution was a sale to another bank, and that bank was just very eager for earning assets, so they were willing to pay a higher price than anyone else. It was a competitive process. And so we thought it was a really good move for us to be able to take that gain, basically reload the equipment finance sales team, send them back out to originate more, which allows us to stay within our internal credit limits for our existing clients and also potentially go out to market for other clients that we haven't pursued in the past.We have pretty high hurdle rates and expectations for what we make for the assets that we keep on our own balance sheet. But we could go after higher quality, lower rate clients with the idea that we would sell those assets in the future, and that would open up new markets for us as well. So we're just as committed to equipment finance as a tool to serve transportation clients as we ever were. And with the way we structured this and our ability to retain the relationships with this being completely transparent to the borrower, I think positions us really well to do so.
And Matt, is you probably be -- just so that you have clarity. The equipment finance, obviously, for us is largely in and around Class 8 truck, over-the-road trucking, whether it's trucks, trailers, any type of that equipment. There is construction lending in there for heavy construction equipment, and there is also for waste hauling. And we don't do subprime lending in our equipment finance portfolio. And that means many of the smallest independent owner operators are not our borrowers in that portfolio. It's more of a small-to-medium sized fleet product.If you get into large fleet, we're not going to be competitive because as you know, we try to have pricing discipline. So you're talking about the actual trucking companies who produce financials and all the things you would expect, which is why the credit quality has performed well enough that we have regional banks who would like to be our counterparty in that, because it's difficult to produce that many loans as it takes and they amortize down so quickly because they're on fully amortizing -- they're made on a fully amortizing basis.But there's value in the team, the relationships the team have built, but we've always made sure that we were focusing on the higher end of that universe, and we will continue to do so. And so I think investors are right to have concerns about equipment finance portfolios.I think you're right to have those concerns in any given market. I would be really worried about people who underwrote those loans using algorithms in a black box. I mean that has been proven not to be successful at scale. That's not what we do. Our equipment team knows our borrowers. There are companies, many of whom have deposit relationships with us now. So we are their bank, and we know them well enough to judge credit well. And I hope that this loan sale that we did, you can imagine that the buyer would have looked through that with a fine-tooth comb and to understand the risk. And I hope it demonstrates to you and the market the quality of that equipment finance portfolio.
And just lastly, I want to ask about capital and capital constraints at the company. It seems like you've got plenty of excess capital today. I think your CET1 still over 11%. I'm assuming continued capital build because there's no dividend. When you talk about freeing up capital, you've done some loan sales. I guess, help me appreciate big picture what the capital constraint is today as you see it?
Well, on an organic basis, Matt, I don't think there is a capital constraint. I mean as you watched, we hold our balance sheet relatively at its current level and have done so for several quarters. And we've been far more focused on the mix shift of assets underneath to take us into the transportation-centric future that we envision for ourselves. So the capital constraint then comes down to the only other 2 uses of capital, which are on our radar.Number one would be to buy back shares, and we've executed on that. We're not executing on it right at this moment. But that is a tool that we will not hesitate to use if we see our shares pull back to, as we've said, if you're intrinsically pricing TriumphPay at 0, we'll buy all of that we can, because we see the long-term value proposition.And the second option would be the use of that capital to buy an invested technology companies that would support our growth in freight audit and pay, much like we did with Intelligent Audit. As you would expect, many of those investments, even if the underlying company is profitable, creates a significant intangible, which becomes a use for the capital base we have. So that would be where I would see the constraints to show up, which would be adding additional intangibles to the balance sheet if the opportunity presented itself and then ultimately buying back our own shares because we believe in the long-term value of what we're doing also given where we trade still create an intangible.
All right. I'll now hand things over to Chelsea for any questions from the phone line.
[Operator Instructions] Our first question will come from Adam [Indiscernible] with Ulysses.
Term restraint in the balance sheet. Medium to longer term, is there any growth that you'd expect to see on the balance sheet?
No. Adam, I think we're always going to be opportunistic. There is, I think, I would say no or an extremely small chance we would ever consider going over $10 million in assets. That's not part of our roadmap here. We want to be more nimble than that. And so between now and the end state, and if the end state is, we are the ubiquitous payments network for the trucking industry, and we allow parties to own the receivables that are generated in that structure through syndications. And I think we would say to you over the long term, if we are being successful at the play we have called for ourselves, our balance sheet will shrink from here.
So just to try to understand how you think about it, and I don't need any guidance. But just directionally, your GAAP EPS approximates your free capital generation, which means your optionality going forward vis-a-vis whether you buy strategic technologies or return the capital to shareholders really approximates your earnings and whatever excess capital you generate?
We would agree.
[Operator Instructions] There are no further questions in the queue via the telephone. Thank you. We conclude the Q&A portion.
Sorry. Thank you all for joining us today. We look forward to speaking with you soon. Have a great day.