Earnings Call Transcript - TFIN Q4 2020

Operator, Operator

Good morning, and welcome to the Triumph Bancorp Conference Call to discuss Fourth Quarter and Full Year 2020 Financial Results. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Luke Wyse, Senior Vice President, Finance and Investor Relations. Please go ahead.

Luke Wyse, Senior Vice President, Finance and Investor Relations

Good morning. Welcome to the Triumph Bancorp Conference Call to discuss our fourth quarter and full year 2020 financial results. Before we get started, I’d like to remind you that this presentation 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 statements. If you're logged into our webcast, please refer to the slide presentation available online, including our safe harbor statement on Slide 2. For those joining by phone, please note that the Safe Harbor statement and presentation are available on our website at www.triumphbancorp.com. 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, Bryce Fowler; Todd Ritterbusch, our Chief Lending Officer; and Geoff Brenner, our CEO of Triumph Business Capital. After the presentation, we'll be happy to address any questions you may have. At this time, I'd like to turn the call over to Aaron.

Aaron Graft, Vice Chairman and CEO

Thank you, Luke. Good morning. For the fourth quarter, we earned net income to common stockholders of $31.1 million or $1.25 per diluted share. This was a very solid quarter. We made significant progress executing on strategic priorities. Our transportation payments businesses are continuing their strong growth becoming a bigger part of our total revenue and with market tailwinds currently at their back. The quality of our funding mix and our liquidity position continues to improve and overall profitability for the enterprise was strong. Our asset quality is very good and in my view better than the reported metric may appear due to the impact of the acquired TFS factoring portfolio. Our third quarter acquisition of the factoring portfolio from Transport Financial Solutions and Covenant Logistics or TFS continues to present challenges. The impact of this acquired portfolio on our asset quality metrics, as well as the financial statement impact of the subsequent modification to the acquisition agreement with CVLG has resulted in several items in our financials that I want to point out. We have provided quite a bit of detail about this transaction in our earnings release in an effort to be as transparent as we can. In the third quarter, we reached a settlement with covenants that provided us protection from loss up to $45 million on $62 million of over advanced receivables that were within the total $108 million portfolio acquired. The accounting for this produced a specific loss reserve for a portion of the over advances, and it produced an indemnification asset for the estimated amount we would have to collect from covenant for any incurred losses. The modification also provided for a reduction in the purchase price we paid for the portfolio. We received a total of $10.9 million in cash in the fourth quarter from covenant as a reduction from the original purchase price. This payment was $8.9 million more than we had recorded as a receivable at the end of the prior quarter and is reflected in non-interest income in the fourth quarter. This positive difference is due to the appreciation in our stock that was part of the consideration in the original transaction. Our plan has been to work with each of the acquired TFS clients to recoup the over-advanced amounts with an appropriate workout plan while continuing to factor their current business in the ordinary course with the Postal Service. However, we have encountered a new twist. In the fourth quarter, we purchased approximately $19.6 million of accounts receivable from the largest acquired trucking client which would normally be collected by us from the Postal Service. After we advanced funds to the trucking client, that client instructed the U.S. Postal Service to remit payment directly to them. Inexplicably, the U.S. Postal Service in direct contravention to the written notice of assignment we delivered to them complied with this request and ended up paying $19.6 million of what was due to us directly to our client. The client has refused to remit these funds as required. As you might imagine, we have commenced litigation against both our client and the USPS in separate actions. The USPS has cited purported deficiencies in our notices as justifying their actions despite initially honoring such notices, honoring identical notices for other clients without interruption and choosing to subsequently dishonor these notices without any prior communication to us. In my view, these facts can only suggest that the U.S. Postal Service and our client worked in concert to violate our agreement and applicable law in order to ensure timely mail delivery during the holidays and the election season. There were other and better ways to have handled this, but they did not give us the opportunity to be part of the solution. The litigation surrounding this matter has the potential to be drawn out and complicated and involves novel issues given the unique nature of the U.S. Postal Service. However, based on our legal analysis and discussions with our counsel advising us on this matter, we believe it is probable that we will prevail in our action against the USPS, and that they have the financial capacity to pay us what we are owed. Therefore, we have determined that a specific reserve on this amount is not warranted at the end of the year. Please know it may take some time to work through the legal process. In the fourth quarter, we established an additional $11.5 million of reserves to fully reserve all of the over advances to the largest carrier who is at the center of the converted payments dispute. This expense was partially offset by a $5.3 million increase in our indemnification asset, which was recorded to other non-interest income resulting in a net $6.2 million pre-tax loss. Our earnings release provides a summary of the impact the TFS acquisition had on our financial statements and adverse impact on our reported asset quality metrics. Now, this is a lot of detail around one relationship. But I thought it was important for investors to understand the context on a potential credit issue of this size, and what was otherwise a near perfect quarter. In my opinion, this wasn't a credit failure it was assessed. With that tedious topic out of the way, let's turn to all the good things that are happening at TBK; first deposits, which you can see on slide 14, you will note that we continue to improve our funding mix. Non-interest bearing deposits as a percentage of total deposits are now 29% of total deposits, which is a significant increase from a year ago. Our loan-to-deposit ratio moved down slightly to 106% at the end of the year from 114% at the end of the third quarter. Adjusted for mortgage warehouse loan balances, the ratio is approximately 22 basis points lower this quarter. Given market conditions and the growth of non-interest bearing accounts, we expect our funding costs to continue to trend lower in the near term. Now to margin, our loan yields this quarter were up to 7.2% versus 7.05% in Q3. NIM is now 6.2% which is the top of our peer group. The primary driver for the expansion of NIM is the growth of our transportation lines of business versus other parts of our business. We hope and expect this trend to continue. Our total credit loss expense was $4.7 million in the quarter. Net charge-offs were 3 basis points of loans and the net change in specific loss reserves were $11.6 million, $11.5 million of which was from the TFS acquisition. The good underlying loan credit performance combined with a more optimistic outlook drove an $8 million reduction in credit loss expense Aside from the aforementioned items related to the TFS transaction for this quarter, there were a few one-time items we should point out. Our occupancy furniture and equipment expenses are inflated by approximately $1.4 million related to our decision to consolidate part of our El Paso factoring operations to our TBC headquarters in Coppell. Finally, based on year-end performance, incentive comp adjustments added about $2 million to fourth quarter expenses. Looking out into the first quarter, we expect core expenses to be approximately $58 million. Now I'd like to turn the call over to Todd Ritterbusch, our Chief Lending Officer.

Todd Ritterbusch, Chief Lending Officer

Thanks, Aaron. I'd like to start by providing an update on our pandemic relief lending efforts. On slide 18, you can see that we had $104.6 million in deferred loan balances at year end. This represents an 82% decline from the $572 million in deferred loan balances on June 30th 2020. While deferred loan balances were flat from prior quarter, there were quite a few deferrals that expired without requiring expansion. These were offset by new deferrals for clients that didn't need them initially but requested them as the pandemic persisted late in the year. The majority of the current deferred balances are expected to remain on deferral until the economy recovers, but they're well collateralized and we feel that the underlying businesses are viable over the long term. Moving to PPP forgiveness, we have completed the forgiveness process for $36 million or 15% of PPP loan balances. Almost 100% of these loans received full forgiveness without requiring a portion to be termed out. We have another $67 million in completed forgiveness applications that are pending validation and payment from the SBA. The remaining $125 million pertains to around 1500 loans with an average size of $82,000 to clients that haven't submitted their forgiveness applications yet. Most of these borrowers have been awaiting the simplified forgiveness process that Congress just approved. So we expect the forgiveness process will accelerate rapidly this quarter. We are also participating in the new round of PPP funding, but we don't expect volumes or balances to be very large given the unused funding in the last round, and the restrictions on borrowers seeking second PPP loans. While providing pandemic relief to our clients, we've also been working hard to manage our credit risk. As discussed in our earnings release, the Over Formula Advanced Portfolio and the Misdirected USPS Payments contributed 1.63% and 27 basis points to our past due and non-performing asset ratios of 3.22% and 1.15%, respectively. Absent these additions, we've made significant progress on this front due largely to the strong partnership and alignment between our credit and lending teams, which have handled the stress and uncertainty of the pandemic very effectively. As we look forward to 2021, our focus on relationship banking across all of our lending units is unchanged, but we intend to accelerate its execution. We've made a lot of progress in providing treasury and depository services to our lending clients in the mortgage, warehouse and community bank. But there's still plenty of opportunity to do more in these businesses. We are also investing in team members, products and services that will allow us to accelerate our efforts to build fuller relationships and provide complete banking solutions for transportation factoring and equipment finance clients. As we do so we expect deposits and fee income to grow faster than loan balances and our loan mix will continue to shift away from transactional credit toward loans that align with our transportation focus and clients that seek long-term banking relationships with us. I'll now turn the discussion back over to Aaron for a transportation update.

Aaron Graft, Vice Chairman and CEO

Thank you, Todd. For the fourth quarter, our transportation payments businesses paid approximately 2.9 million invoices totaling approximately $4.03 billion, which equals an annualized run rate of just over $16 billion. That is a 38% growth over the prior quarter. You can see a breakdown of this on slide eight. Turning to Slide 9, total Q4 2020 Triumph business capital factoring revenue was $36.8 million. The dollar volume of invoices purchased was $2.5 billion during Q4 2020, a 24% increase compared to the third quarter and a 65% increase over Q4 of 2019. We purchased 1.2 million invoices during Q4, a 16% increase compared to the prior quarter and a 33% increase over Q4 of 2019. Average transportation invoice sizes were $1,943 for the quarter, up 9% compared to the third quarter. Now to TriumphPay. Turning to slide 10, during the fourth quarter TriumphPay processed 1.8 million invoices, paying 68,153 distinct carriers. As of December 31, we have paid 119,098 carriers since inception. Payments processed totaled approximately $1.8 billion, a 56% increase over the prior quarter, and a 282% increase from Q4 of 2019. Using December numbers only, TriumphPay’s annual run rate payment volume was approximately $8.5 billion, so we continue to grow. In fact, we added another Tier 1 broker to our logistics team in the fourth quarter. Last quarter, we told you about TriumphPay Select Carrier Program, which allows carriers to choose to have their invoices automatically QuickPay by any broker they haul for on the TriumphPay network. We opened the program in June on an invite-only basis to test it and subsequently opened it to all carriers in August. As of the end of Q3, we had 1,945 select carriers. As of December 31, that number has grown by 325% to 8,272. Select Carrier Clients now exceed the total client base for Triumph Business Capital. And this happened over a period of six months versus 16 years of Triumph Business Capital. Investors should pay attention to this number and its rate of growth. Much of our team continues to work from home. While we wish we could all be back together safely in our offices, we will not do so until it is clear our employees’ health and safety is protected per the guidelines established in our pandemic business continuity plan. Despite these difficulties, we turned in one of the finest quarters in our history. I am exceptionally proud of our team and their work. With that we will turn the call over for questions.

Operator, Operator

The first question comes from Brad Milsaps of Piper Sandler. Please go ahead.

Brad Milsaps, Analyst

Hey, good morning.

Aaron Graft, Vice Chairman and CEO

Good morning, Brad.

Brad Milsaps, Analyst

Aaron, thanks for the update. Let's begin with TriumphPay, as it seems to be gaining significant momentum. I'm curious about the current usage of QuickPay considering the variability based on the clients you onboard and their implementation status. Specifically, what is the QuickPay usage like right now in relation to your current volume? Additionally, how can we gauge what this volume translates to in terms of average balances on the balance sheet that are contributing to your income at this time?

Aaron Graft, Vice Chairman and CEO

Yes, it's challenging, and here's why. Whenever we onboard a new broker, particularly a Tier 1 broker, the QuickPay numbers initially look poor because we start from zero. However, for those who have been using the system for nearly a year, we're seeing QuickPay penetration reaching the mid-teens and higher. Furthermore, the Select Carrier Program is expected to enhance QuickPay usage, and its growth rate is noteworthy. As I mentioned earlier, the number of Select Carriers as of December 31 was about 8,300, and now it's 9,469. This growth is almost exponential, and while it won't continue at this pace indefinitely, as more carriers opt for QuickPay through TPay brokers, we're approaching a point where around 10,000 Select Carriers could represent about 5% of the total active carrier universe, which will drive the numbers up. I'm not trying to dodge the question; it's simply that each time we bring in new brokers, the numbers dip initially. In Q1, we expect to add two more Tier 1 brokers, which will also start from zero, but we'll keep marketing to their carrier base. You didn't specifically ask this, but I want to emphasize that in 2021, when we believe the data becomes significant, we should consider disclosing revenue and QuickPay penetration as the business matures. Currently, it remains a growth investment phase, and we experienced a $2 million impact in Q4. We're focused on long-term value creation rather than short-term profitability and will continue to invest in the business. Clients who have been with us for a while are seeing mid-teens penetration, and I believe that will improve as the Select Carrier program expands.

Brad Milsaps, Analyst

That's helpful. But just and I think you kind of answered this. But of the billion eight in average commercial finance loans, you have outstanding; it's pretty easy to say that. And I would say it is a bad thing. But TriumphPay is not having a huge impact on that number yet. Just because the QuickPay usage is not where you think it can be. So, a lot of that is still sort of on the come, if that makes sense?

Aaron Graft, Vice Chairman and CEO

It is absolutely on the come. I mean, we're, what the board has charged us to do, the way I think about things is we're trying to build something that's going to be amazing five years from now. We want to be the best in the world at billing and payments and trucking. And I think we are well on our way to doing that. But it's not meaningful right now. What's meaningful is the amount of market adoption that's coming, and we will eventually monetize that. But right now we're just carrying it. And I don't even view it as an expense drag, I view it as the most valuable investment we are making as a company.

Brad Milsaps, Analyst

Got it? And I know you don't have a crystal ball on average invoice size. And I know sometimes Q1 can be seasonally weak, but just kind of curious how you're thinking about average invoice sizes as you move into 2021?

Aaron Graft, Vice Chairman and CEO

Yes, so if we, the average invoice size for transportation for the first 20 days of January is $1,934. So it continues to stay strong. And this is not like 2019. You remember we came through 2018 and 2019 quickly fell off a cliff. I don't know what will happen. But their supply chains are still so backed up freight is still so tight. It suggests that this tailwind that we have currently is continuing in the first quarter and will continue going forward. Now I think utilization will be a little lower in Q1 and always is. So I'm not saying net income will look the same in TBC, but average invoice sizes in the spot market that's telling you that freight is still tight, which is great news for us.

Brad Milsaps, Analyst

Okay, and then final question for me. If you happen to have the impact, it's sort of average warehouse loans and the National lending line this quarter. And did you guys think you've kind of taken sufficient market share there to kind of keep the warehouse relatively high as you move into, move through this year?

Aaron Graft, Vice Chairman and CEO

Well, so I'm not sure exactly what you're asking for with respect to the impact. But obviously, the mortgage warehouse continued to grow and be very active in the fourth quarter, and continues right into January. So I would expect that for the very near future, you're going to continue to see the similar levels of activity to what you saw in the fourth quarter. We're seeing refinance activity continue to be very robust. And I think there's a real rush to try to get all the refinancings done before interest rates start to rise dramatically for borrowers. So nothing really changing there. We haven't changed the strategy. We're not looking to add new clients to that list. We're looking to continue to expand the existing relationships to be the primary bank for them.

Brad Milsaps, Analyst

Okay, great. Thank you.

Operator, Operator

The next question comes from Michael Rose of Raymond James. Please go ahead.

Michael Rose, Analyst

Hey, good morning, and thanks for taking my questions. I know you guys onboarded another Tier 1 client this past quarter. I think you had another couple in the pipeline. Just wanted to see if we could get an update there. And then just on the TPay side, I think you said December was kind of an $8.5 billion run rate. I think you guys should kind of guide it to 10 by mid-year. Any sort of updates there? And how would those potential new clients factor into that previous outlook? Thanks.

Aaron Graft, Vice Chairman and CEO

Yes. So Michael, I expect we will onboard two more Tier 1 brokers, at least in Q1. Now, that can always slide, but they're in the pipeline for Q1. We will go well beyond $10 billion this coming year. I think in the past, we've given different projections, let me go ahead and throw the one out that you can use for us for the end of year 2021, the target would be $14 billion. So if our December run rate is $8.6 billion, and you think about the rate of growth, we think $14 billion would be our goal exit rate for the end of 2021. And perhaps we can surpass that. But as of now we have five Tier 1 brokers, roughly 25% of that universe. And we have 21 Tier 2 brokers of which we think there's about 260. So we just continue to add them every quarter. And as we do that, and then grow select carriers, and I'll throw this out there, our target for select carriers for the end of the year is 20,000. We would like to have 20,000 registered select carriers by the end of 2021. So I think we will be well beyond $10 billion during the year 2021. And we think we will continue to grow.

Michael Rose, Analyst

Okay, that's great color. And then just looking at the spot market, here over the past couple of weeks looks like spot rates are down a little bit, but it still seems like the kind of the trajectory is upward, given the factors that you that you mentioned earlier, give just a kind of a broad outlook for how you think, the sector plays out, maybe more broadly over the next couple years. It seems like the market will persist in a pretty tight manner for at least the next couple quarters, but perhaps for the next couple of years, so any broader thoughts you might have on the sector as a whole? Thanks.

Aaron Graft, Vice Chairman and CEO

Geoff, why don't you take that one?

Geoff Brenner, CEO of Triumph Business Capital

Yes, Michael, I don't know anybody who's willing to speculate looking out that far in terms of years. I think Aaron's comments around Q1 and Q2 are probably as accurate as we can be. But going any further than that feels like almost beyond speculation. What we do know is that there is still difficulty finding qualified drivers. That is a massive problem. We also know that Class 8 truck orders and trailers are backed up by people who've ordered that product or are trying to get in line to order that product or are several months out. What we know from the past is this is a low barrier to entry business. So it won't persist like this forever. If people see that others are making profitability, they'll find a way to enter the space. But it certainly looks like Q1 and Q2 are good. There's still a lot of shipments that we're still catching up from shutting down the economy. And if stimulus turns into consumer spending, I mean as we've said before, if you bought it, a truck brought it. I mean, trucks, that's how goods get to people. And so if that's what happens, then we're going to continue to see strength and transportation, which obviously, we celebrated. And because this has happened, even with diesel prices remaining relatively flat. So it's just been a very strong season.

Michael Rose, Analyst

Fair enough. And maybe just one final one, another kind of longer-term strategic question. I know you guys are collecting a lot of data points. You've talked about fuel card initiatives, things like that. Can you just give us an update on maybe where it stands? I assume it's still kind of early days and some of those efforts. But just any updated thoughts on the other stuff you guys are working on inside TPay and TBC would be great? Thanks.

Aaron Graft, Vice Chairman and CEO

Geoff, why don't you just talk about the data we're collecting, and then I can follow up?

Geoff Brenner, CEO of Triumph Business Capital

Sure. So, as we've mentioned, before, we're collecting at least 1.5 million data elements every single day from the invoices and through TriumphPay. We've looked at a number of different ways to build out different indexes with that data. There are certainly a lot of options that are on the table. The one that's presented itself is the most unique, the one that we're currently pursuing, is creating a capacity index. That's a current void in the market. And that's something that our data could potentially address. We'll have an internal white paper on the progress of that within the next week. So we're making headway on that. Probably the larger use, the more immediate use of all this data, is just creating opportunities to be more efficient internally. As an enterprise that wins to truckers, that factors truckers, that QuickPays truckers and provides insurance to truckers, collecting and utilizing that data just to become smarter about our clients and how we offer our products more efficiently is a big strategic advantage. So we're in the process of harnessing that as well.

Aaron Graft, Vice Chairman and CEO

Yes. I would add, Michael. So, as we spend on artificial intelligence and machine learning, which we are doing. We are making significant investments in that, that both benefit TPay and Triumph Business Capital. It touches on the internal operating efficiencies that Geoff talked about. I mean, if you look at the efficiency ratio for Triumph Business Capital in this quarter, the first time I ever remember it being below 50%. Now, part of that is just the revenue that we're generating. But we think we can continue using this technology to automate a lot of these processes. But let me tell you what we won't do, because I think it's important for everyone to know this. When you become the trusted partner for a third-party logistics company, and you handle payments on their behalf, you have access to all their data. I mean, we require that data in order to be able to effectively pay truckers. Well, we are a bank. There, we have a fiduciary responsibility to our TriumphPay customers to protect their data, to not use their data in a way that could hurt their businesses. And I think that's a reason many fintechs won't ever penetrate this space is because I don't think freight brokers can trust them the same way they can trust a bank to be a good steward of this data. And so there are ways to anonymize and structure the data and provide value to the marketplace and monetize that value for our investors. But we have a sacred duty to our freight broker clients to protect their proprietary data. And we will do that. We take that very seriously. And I think that's why we built a lot of trust with that segment of the transportation world.

Michael Rose, Analyst

Hey, guys, appreciate all the color. Thank you.

Operator, Operator

The next question comes from Matt Olney of Stephens. Please go ahead.

Matt Olney, Analyst

Good morning and thanks for taking my question. I wanted to circle back on something and thinking about the seasonal nature of your markets. In the past, you've cautioned us that the net interest income typically experienced a sequential decline from the fourth quarter into the first quarter. But these are obviously unusual times. So, as we sit today, do you think these headwinds are going to produce lower NII in the first quarter as compared to the fourth quarter?

Aaron Graft, Vice Chairman and CEO

I don't believe you'll see the same decline you've experienced in the past. However, even in a strong freight market, seasonality still plays a significant role. Therefore, I don't expect our net interest income in the first quarter to surpass what we had in the fourth quarter. It would surprise me if that were to occur.

Matt Olney, Analyst

And Aaron, what about the net interest margin? I guess there's similar dynamics there, but obviously a few more different things. Do you expect the margin to also sequentially flatten out in the first quarter? Are there enough tailwinds to move that higher?

Aaron Graft, Vice Chairman and CEO

Yes. Our margin closely follows the asset mix. If we assume that the factored receivables purchased in Q1 will not be included, and both the factored receivables and the QuickPay from TPay on invoices paid will result in total volume being slightly lower than in Q4, this will affect our margin. However, I don't expect a dramatic change because we are continually acquiring new clients and adding these customers to TriumphPay. Additionally, it's important for investors to understand that the TFS transaction has impacted our balance sheet in several ways. We are fully reserved for past events and are committed to ensuring the government adheres to the law. The factoring yield of 13.81% includes reserves and is 1.37% lower than it would be if some revenue related to the largest carrier were excluded. Given the historical non-accrual balances, the net interest margin is likely not to expand and may only see a slight increase in Q1 if any.

Matt Olney, Analyst

Got it. Okay. That's helpful. And then switching over to credit and provision expense. If I understand that correctly, I think the provision expense in the fourth quarter would have been negative if it weren't for some of this TFS noise. Even though loan growth was very strong in the fourth quarter, I think the ACL ratio is now around 2%. What's the outlook for provision expense? And what the change that we could see provision expense be zero or even negative over the next few quarters?

Aaron Graft, Vice Chairman and CEO

I believe it's quite probable. Unless something changes, TriumphPay and our highest growth sectors have historically low loss ratios. We've mentioned that TFS is not something that can be replicated; it's unique compared to other parts of our business. Looking at our overall strategy, we are not forecasting significant loan growth for 2021. Our focus, as led by Todd and the retail bank team, is on deposit growth and stable, consistent loan growth. I still anticipate that transportation will be our largest growth area. As you know, this sector doesn’t significantly increase our balance sheet's total, and it's been consistently predictable regarding credit losses, so I don't see a need for anything further in that area. Bryce, do you have anything to add?

Bryce Fowler, CFO

No. I agree. I mean, obviously, we have the variable of just those changes in the economic outlook from seasonal, but underlying credit trends and our forecast on growth should be consistent with where they are outlined there. So they could have releases of reserves or small amounts.

Matt Olney, Analyst

Got it. Okay. And then, just lastly from me, I think both Todd and Aaron, you mentioned that deposit growth could outstrip loan growth this year. Any thoughts on that loan-to-deposit ratio where that could end up? I think we're at 106% right now in the fourth quarter?

Todd Ritterbusch, Chief Lending Officer

The main factor affecting the 22 basis points this quarter is the mortgage warehouse business. We've stopped trying to predict its performance. Just when you think that everyone in America has refinanced their homes, rates drop again, and the cycle repeats. For those analyzing our situation, it's important to set that aside. We finance this through Federal Home Loan Bank advances as a secondary business. The team excels in this area, making it profitable, but excluding it, we fall below a 100% loan-to-deposit ratio. When discussing deposit growth, I focus more on the growth of non-interest-bearing deposits compared to the rest of our portfolio. A year and a half ago, we aimed to shift our focus, and at that time, 19% of our deposits were non-interest-bearing; now it's 29%. I hope to see continued growth in that area. We're excited about the developments in transportation and FinTech and our efforts to revolutionize payment processes in the trucking sector. However, while we remain in community banking, my discussion on deposit growth centers on transactional relationships. I believe that number will keep increasing because that's what we incentivize our staff to do with the technology we've implemented. The loan-to-deposit ratio may stay above 100% as long as the mortgage warehouse functions, but my primary focus is on increasing non-interest-bearing deposits as a share of total deposits.

Matt Olney, Analyst

Got it. Okay. That's helpful. Thank you guys.

Operator, Operator

The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Gary Tenner, Analyst

Thanks. Good morning, guys.

Aaron Graft, Vice Chairman and CEO

Good morning.

Gary Tenner, Analyst

My trucking questions generally been answered. I was going to ask about the declining yield that you'd mentioned, Aaron, it’s a 13.81%. I just want to clarify the numbers I heard. Was that 1.37% below what it would have been actually revenue reversal?

Aaron Graft, Vice Chairman and CEO

That is correct.

Gary Tenner, Analyst

And that's regulated. Go ahead.

Aaron Graft, Vice Chairman and CEO

Go ahead. 1.37% of the decline was tied to this largest carrier, that was part of the converted funds problem. We are fully reserved on the historical relationship. Now with that carrier, of course, the indemnification asset is highly correlated to that reserve, if there's a charge-off, obviously, because of the covenant indemnity. And then, we've moved some of the incoming receivables into a non-accrual balance while we work through this. And so the point is, if you exclude that one customer who we no longer factor and will not beyond this workout, it would have been 1.37% higher.

Gary Tenner, Analyst

Okay. And that'll be isolated, obviously, the fourth quarter. So that would get you back over 15%, more in line with the couple of prior quarters of the year?

Aaron Graft, Vice Chairman and CEO

Correct.

Gary Tenner, Analyst

Okay. You mentioned several times the focus on the commercial finance part of the business and mortgage warehouse, rather than the community bank side, which you've been discussing for a while. Average community bank loans decreased by about $200 million from the previous year in the fourth quarter. At some point, there must be a minimum level where those balances could go, considering your presence in those markets. Can you share your thoughts on how much lower that number might go, or do you believe it is nearing stabilization?

Aaron Graft, Vice Chairman and CEO

We don’t have a specific number, but we do have a specific approach. In the past, we were open to credit-only deals in those markets, but that is no longer the case. If we aren’t your primary bank, we won’t extend credit to you. We don’t need the loan growth. It’s not like Todd and I are focused on reducing numbers. Instead, we won’t offer you loans unless you also contribute to our resources. We aren’t in the business of just lending money anymore because we generate sufficient revenue and don’t have the same overhead concerns we had as a smaller bank. Whether this trend continues will depend on our relationship bankers’ ability to secure full relationships. We are still focused on community bank loans, but only if there is a full relationship and it meets our credit standards. The loans that are rolling off are those where customers were only using us for transactions, and we will no longer engage in that practice.

Gary Tenner, Analyst

I appreciate the color.

Operator, Operator

The next question comes from Brady Gailey of KBW. Please go ahead.

Brady Gailey, Analyst

Thanks. Good morning, guys.

Aaron Graft, Vice Chairman and CEO

Good morning.

Brady Gailey, Analyst

So I know the TFS deal hasn't panned out as you guys initially thought. But do feel like you have a good handle on where things are right now with that deal? Or could there continue to be some potentially negative surprises?

Aaron Graft, Vice Chairman and CEO

Yes. That's a very fair question, Brady. Because I never dreamed that the Post Office would divert funds over written notice in order to keep a carrier running. And I get it. There was an election, a highly contested election; the mail needed to run, but you would expect someone to pick up the phone and call you. So look, here's where we said that the Post Office uses five large carriers and we essentially financed two of them. One of them, we will no longer be financing. And we're in the workout mode, as we described. Growing our exposure to the Post Office is so low on my priority list, I can't even see it. So, I don't look for that to happen in the future. They don't act like a commercial entity, the thousands of them that we deal with in factoring. We're not going to do that. Other people can step in and finance that. So, we fully reserved for the largest carrier. We think we fully understand where the second carrier is. And I would not expect any more surprises. Now you can never predict theft. I mean, frankly, we deal with misdirection of funds on a regular basis in our factoring business. The difference there is we're talking about it's $50,000, not $19 million. That's the beauty, frankly, of the way our business is built as you have a very fragmented customer base. So no one customer can hurt you. That something we underestimated in this acquisition is the concentration exposure to a single trucker and to a single better, that has really shaped our thinking for how we move forward. So I would be very surprised, Brady, if you see this show up again, as any new losses, I'd be stunned, frankly. I believe we will get the $19.6 million worked out. And I think you'll see those balances shrink over time, and we will not be pursuing this business anymore. We'll be more in brokered freight, and commercial shipper freight, and less about government or quasi-government contracting.

Brady Gailey, Analyst

Right. And then, Aaron, I know in the past, and recently, you kind of downplayed M&A, especially bank M&A. Is that still the right way to think about it given all the stuff you'll have gone on organically on the growth side?

Aaron Graft, Vice Chairman and CEO

Certainly. If we pursue mergers and acquisitions, they will likely focus on the transportation sector. This may include technology acquisitions that strengthen the TriumphPay ecosystem or related areas such as factoring that we are familiar with and where we are dedicated to progress. Aside from that, it is very unlikely that there will be any other mergers or acquisitions planned.

Brady Gailey, Analyst

Alright. And then finally from me, Aaron, I know, right now, it's not as much about profitability. It's more about growth and getting market share, just as you all build out this interesting business. In the past, you've talked about, getting to a two plus ROA and sometimes you've attempted to throw out a timeline. Any update, or ideas as far as when we could see profitability enhancement, given the excitement of what you're growing here?

Aaron Graft, Vice Chairman and CEO

First, Brady, I believe that every one of you will arrive at different core figures for this quarter, mainly because of the various factors at play. Regardless of how you analyze the business, it seems to be operating at approximately a 2% return on assets, certainly higher than a 1.5% core return on assets. The key point is that compared to our competitors, we're quite profitable on a core level, even while making investments. TPay, for instance, is expected to negatively impact our fourth quarter by $2 million, but that's an important investment that will yield benefits down the line. I would direct your attention to Triumph Business Capital, which registered just below 7% on a pre-tax return on assets this quarter. While that figure may not remain constant, it should hover around 6%. We've indicated that TriumphPay, when scaled, is expected to achieve around a 3% to 3.5% pre-tax return on assets. It's worth noting that there aren't many FinTech companies generating profits, which might explain their inflated valuations. We're managing many facets simultaneously: investing, hiring, and developing a user-friendly product for the market. Will we reach a 2% return on assets? Yes, mathematically that appears likely. If Triumph Business Capital operates at a 6% return and TriumphPay starts off as a drag but is set to become profitable in 2021, and considering the community bank's trajectory, we expect to see improvement. Currently, we're in the early stages of our development cycle, and I'm pleased with our core profitability at this moment, which I anticipate will persist into 2021. Ultimately, if those two transportation sectors expand quicker than our other operations, it will naturally elevate our return on assets above 2%. While I can't specify when that will occur, I believe you'll witness advancements toward that goal in 2021.

Brady Gailey, Analyst

Got it. That's good color. You guys keep doing what you're doing. Thanks Aaron.

Operator, Operator

The next question comes from Steve Moss of B. Riley FBR. Please go ahead.

Steve Moss, Analyst

Hi. Good morning, guys.

Aaron Graft, Vice Chairman and CEO

Good morning, Steve.

Steve Moss, Analyst

I want to ask about expenses. I know, Aaron, you provided expense guidance for the first quarter, but I'm curious about how you see expense growth for the full year in relation to 2020, considering you have ongoing investments.

Aaron Graft, Vice Chairman and CEO

Yes. So anything that may move that Steve is if we do any M&A in the year around adding technology or other assets. So setting that aside, because that's unpredictable. But I think we don't expect expense growth over Q1 to be material throughout the year. I mean, we gave you $58 million for Q1. I don't think it will move materially between Q1 and Q4.

Steve Moss, Analyst

Okay. Well, thank you very much. That was my one last remaining question. Good quarter.

Aaron Graft, Vice Chairman and CEO

Thank you.

Operator, Operator

This concludes our question and answer session. I would like to turn the conference back over to Aaron Graft for any closing remarks.

Aaron Graft, Vice Chairman and CEO

Thank you all for joining us today. 2020 was a year unlike any that I remember. We're all hopeful for 2021 for the health of our nation, the physical health and the mental health and just the overall unity as a nation. And so, we pray for that for all of us. Thank you for being on this call. And we look forward to seeing you soon.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.