Earnings Call Transcript - TFIN Q4 2023

Operator, Operator

Good morning. It's 9:30 in Dallas, and we're looking forward to our time with you this morning. I'd like to start by thanking you for your interest in Triumph Financial. I speak with enough of you to know what a busy time of year this is, and we sincerely appreciate you taking a moment to discuss our Fourth Quarter results with us. With that, let's get to business. We had some great developments this quarter, and we're carrying a lot of momentum despite a persistently challenging freight environment. As you read in the letter last evening, we are also working on some interesting opportunities and seeing positive results from our efforts and investments. We remain encouraged and optimistic. Last evening, we published our quarterly shareholder letter. That letter and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation 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. For details, please refer to the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron?

Aaron Graft, CEO

Thank you, Luke. Good morning, everyone, and welcome. I too, hope that you found the shareholder letter informative and even thought-provoking. Before turning it over to questions, I do want to reiterate the four things that I think investors should know. First, TriumphPay hit the much-anticipated target of being breakeven one year ahead of schedule. We're not calling this a mission accomplished moment, but it is encouraging to see this performance in the face of a very soft transportation market. Second, we used this letter to announce LoadPay as a natural extension of the payments network. This wallet is targeted towards smaller truckers, which make up 95% of the entire trucking universe. We believe that the total addressable market for LoadPay will be very large. We further believe that our unique positioning for distribution will set LoadPay apart from any others who've come before, and we hope and expect we will see widespread adoption. Third, we did recognize some credit expense during the quarter that was outside our normal performance. The majority of that was tied to the rate and freight environment. While we don't ever love having that happen, I would say overall, I'm pleased with how our credit performed through one of the most challenging years in recent memory. Finally, the year ahead could continue to be difficult from a short-term or near-term earnings perspective, especially if interest rates fall as projected and transportation remains weak. We have the ability to adjust our strategy at the margins to offset some of those headwinds, but we will not deviate from the plan. If you own our stock or are considering owning our stock, you need to be prepared to accept the revenue volatility associated with our business. It would also be helpful if you're considering investing to understand that we think in longer windows of time, generally five-year increments. We are not distracted by one, two, or even three years of headwinds if we are seeing progress on the long-term vision. There is no question in my mind that we are seeing progress on the long-term vision. 2023 was not a great year for earnings, but it was a great year for Triumph Financial. We are far better as a company and further on our journey than we were when we began the year. The plan is the same for 2024. With that, I will turn the call over for questions.

Operator, Operator

We will now go to Q&A. Our first question comes from Joe Yanchunis from Raymond James.

Joseph Yanchunis, Analyst

Good morning.

Aaron Graft, CEO

Good morning, Joe.

Joseph Yanchunis, Analyst

I appreciate the color on non-interest expenses that you gave in the shareholder letter, but can you give a range of outcomes of how non-interest expenses would fare, including some of the special initiatives you're working on? Additionally, based on your shareholder letter, it sounds like the launch of LoadPay as well as what you just said is a given at this point. How much incremental expenses will that program add to 2024 and 2025?

Aaron Graft, CEO

Brad, why don't you take the LoadPay question, and then I'll follow up.

Brad Voss, CFO

Sure. We have guided to core expense growth for the year of about 5%, and we continue to think that is a good number, not considering initiatives like LoadPay. It would be a fair modeling assumption for today to think in terms of mid to high-single digits for overall expense growth, including initiatives like LoadPay.

Aaron Graft, CEO

I don't know, Joe, if I totally understood the first part of the question about the variability around expenses. We have a strategy that is built, as you well know, in and around creating the payments network for trucking and the ways in which we continue to add value and monetize that. I really don't think you're going to see anything happen in the year 2024 that will make us deviate from the investments in and around that strategy. There are things like I said in the opening, we can do with the margins, but there are not going to be material changes in how we think about investing or not investing as long as we're seeing progress towards the long-term goals.

Joseph Yanchunis, Analyst

Understood. On the 3Q call, you noted you had $9 billion in annualized payment volume that was scheduled to come online in the coming quarters. Looks like in this past quarter, you added $1.3 billion in annualized payment volume. I understand there's fluctuations in average invoice prices can move this amount. But can you provide us an update on how much contracted volume you expect to come online in the coming quarters?

Melissa Forman, VP

Yeah. I can take that one. When we onboarded the clients from last quarter, we have seen the majority of that volume come onboard. There's about another $2 billion gap that is not there as a result of the continued pressures on the market that we had initially anticipated, but just their shrinkage and so that exists. It could continue into this year, but that's where the miss is. Additionally, there were shippers that are in our integration pipeline of another $2 billion to $3 billion that we're expected to be able to go live in the last quarter of last year, but they remain in the pipeline, and we expect them to come on in this first half.

Joseph Yanchunis, Analyst

Got it. So that $4 billion to $5 billion in annualized payment volume that's coming online that you have line of sight into?

Melissa Forman, VP

Yeah.

Joseph Yanchunis, Analyst

I appreciate that. In the shareholder letter, you noted that four factoring companies joined TPay, which on a percentage basis is pretty meaningful. Is there any way to quantify the aggregate size of these factoring companies and what does the typical volume ramp look like for a factoring company joining the payment network?

Melissa Forman, VP

So one of them was what we would consider a Tier 1, which is over $100 million in NFE, our net funds employed, and the others were smaller factors in the network that would be classified as a Tier 3. The volumes are not huge from what they received from the network that was different. You can't think of a factor the same way you do as a broker. The value to them is different in how they leverage the network. A $100 million broker is very different than a $100 million factor. That's how they're classified.

Joseph Yanchunis, Analyst

I appreciate that. Last one for me: we saw last night, Covenant Logistics called out severe weather as a potential headwind to 1Q earnings along with normal seasonal declines. Understand quarter-to-date average trend transportation invoice sizes are up, but they do appear to be trending down. Do you have a sense for how 1Q volumes will shake out for the industry?

Brad Voss, CFO

Joe, I think it's interesting because what has happened is we are seven weeks into positive indications of average invoice amount and margin improvement for our carriers. The challenge we have is we've had a head fake in this space before due to seasonality, weather, and a variety of small carriers parking their capacity. It's a little bit too early to tell what direction we're going. But we have built our business around surviving whatever direction that is.

Aaron Graft, CEO

To add on to that, Joe, in our factoring business, 7% of our carriers who were active before the end of the year have not been active in January. We don't know whether that means they've left the industry; I doubt that all of them have. Some of them have chosen to park their trucks because they knew the market was soft, and the weather would create expectations to be paid more because it's more difficult and time-consuming. It's hard to create a trend line, as Tim was saying, over what you've seen some three weeks into the year.

Joseph Yanchunis, Analyst

Perfect. Thank you for taking my questions.

Aaron Graft, CEO

You got it. Thank you.

Operator, Operator

Our next question comes from Frank Schiraldi from Piper Sandler. Feel free to unmute and ask your question.

Frank Schiraldi, Analyst

Good morning.

Aaron Graft, CEO

Good morning.

Frank Schiraldi, Analyst

Just wondering on the targets you give in the near-term. Now obviously, you got the EBITDA positive ahead of schedule. You talked about getting the target of processing more than 50% of all transactions in that segment of the market. What does that imply or what are your thoughts on timing there? What does that imply maybe for any sort of guide you can give on near-term profitability on TriumphPay? Lastly, on that front, can you share any targets you saw with really nice growth in network transactions?

Melissa Forman, VP

Overall, we look at, as Aaron said, in the opening at five-year time spans. When you think about the milestones we laid out for TriumphPay, number one, we want to maintain EBITDA profitability throughout the year and beyond. The second is to touch 50% of all brokered freight transactions. We still have a ways to go. We're at roughly one in three transactions there, 33%. We'll continue to move forward on those. How quickly that happens is certainly going to depend on the market and our organic growth that we've demonstrated; we have very strong pipelines. The last and important one, which would be further out in that five-year plan, is to be able to hit a 50% EBITDA margin on our core business. What date we plan on doing that, we won't be able to give you that direction right now, but within the next five-year term.

Aaron Graft, CEO

I want to pause here and say what the TriumphPay team did, which is always the entire team, doesn’t operate in isolation from the rest of the enterprise during this past year was exceptional, absolutely exceptional. What everyone did to pull together in the face of a very difficult environment was exceptional. But there's one other thing I want to add to Melissa's comments. At the stage we are in with TriumphPay, we think this is still a revenue growth story, not just an EBITDA margin story. If you look at revenue growth in 2023 in the face of a falling market, it's pretty impressive. I also think about achieving the goal we laid out several years ago of $100 million in total revenue. We're at about 50% of that goal. We originally thought we would need to get to $100 million of revenue on $75 billion of transactions in order to breakeven. What we've learned is there are other ways to deliver value with the network that we can monetize that we didn't foresee, and that is a most welcome sign. So we're focused on full year EBITDA margin profitability for 2024, but there will be volatility quarter-to-quarter with these investments we're making and the freight markets we can't make any predictions related to that. Number two, we're after 50% of all brokered freight, as Melissa alluded to, and we're within a couple of large names of achieving that goal. It's a tremendous thing to touch one out of every two transactions. Number three, getting to $100 million in revenue means roughly doubling the revenue from where it is currently. And then long-term, we believe just like other card networks, this business should operate at a 50% EBITDA margin or better. And all of that, as Melissa said, in the next five years is the vision to deliver. And that's about as specific on timing as we can be at this point.

Frank Schiraldi, Analyst

On LoadPay, I want to clarify if Triumph is responsible for the entire customer-facing aspect, including the traditional banking as a service component. Is that accurate? Also, I've noticed that expenses are incurred upfront while revenue is expected to come in about 12 to 18 months later. Is that a reasonable timeframe for LoadPay?

Aaron Graft, CEO

Indeed. We certainly use vendors, but we are developing this in-house. That's a great question, Frank, and something I want to point out. We will, in the year 2024, spend or I think of it as invest over $110 million in technology. Now that includes our people and tech spend away from people. That amount constitutes over 25%, almost 30% of all of our noninterest expenses. I don't think that other banks invest that much in technology. We're not just using other people to build the tech and marketing it under our name. This is built from the ground up by us for truckers because we know that there is no other bank that cares about truckers the way we care about them. So it is being built by us. We certainly use vendors as any technology provider would. For 2024, you can expect to see roughly $5 million of investment in the LoadPay initiative. Some of that will be capitalized, and some will be expensed. It would be reasonable to expect revenue to start showing up in 2025. There may be some that shows up in 2024, but we're not counting on it. We think of this as a 2025 and beyond opportunity.

Frank Schiraldi, Analyst

I appreciate that. Sorry, go ahead.

Unidentified Company Representative, Company Representative

I'm just going to confirm that yes, we are serving as the bank sponsor behind LoadPay as well, which is important from an economic perspective because it allows us to capture the float benefit, the fees, and leverage our existing systems without as much incremental cost as we might otherwise if we had relied on another bank sponsor.

Frank Schiraldi, Analyst

On the loan modifications, I assume those are primarily on the rate side. If you can share what those modifications generally look like from a rate standpoint in terms of reduction in rate and if you can just share total modifications end of period or growth in the quarter in the various segments. Thank you.

Unidentified Company Representative, Company Representative

To your question about the modifications, yes, they are primarily around rate. They deal with credits that had variable rates that had risen to over 10% in most cases. We're having to realign the rate to reflect the realities of the cash flow of the underlying borrower. That means we're taking the rates down to typically between 6% and 6.5%, which you'll see in our disclosures. The total amount of the modifications we've made so far is around $125 million.

Frank Schiraldi, Analyst

Great. Thank you for all the color. I appreciate it.

Aaron Graft, CEO

Of course. Thank you.

Operator, Operator

Our next question comes from Gary Tenner from D.A. Davidson.

Gary Tenner, Analyst

Good morning. I mute there.

Aaron Graft, CEO

Good morning.

Gary Tenner, Analyst

Wanted to ask about one of your comments in the investor letter or a shareholder letter regarding the renewal of contracts with factors on the TPay network. Was there a particularly large slug of renewals that came in the fourth quarter based on when folks came onboard and joined the network? Can you talk about in general about changes, if any, of the contracts that are financially beneficial to TPay now that the value proposition is a bit more proven out?

Melissa Forman, VP

Those renewals are important just to speak to in terms of the entire year. As we built out the payments for factors, they came on in late 2022 and into 2023. Our pricing structure associated with those contracts contemplates the growth of the payments network and renegotiating the pricing to include new brokers that onboarded within the year for the following year. We made a conscious decision given the state of the market and the pain that factors are feeling with the compressed margins and rates to not increase their fees going into 2023. We wanted to be good partners for our factoring clients, but we determined that every one of them wanted to re-up their contract and continue leveraging the network, understanding that the value is there and continues to grow for them.

Gary Tenner, Analyst

Is your sense, then, that you chose not to increase the fee component, but will you have pricing power to do so in a better environment?

Melissa Forman, VP

Yes, absolutely. Those are the conversations we had with our clients that we wanted to ensure that as the market environment recovers, we plan to have those conversations again in 2024.

Gary Tenner, Analyst

I don't think I saw, but can you provide the average float at TriumphPay for the quarter?

Brad Voss, CFO

Roughly $300 million.

Melissa Forman, VP

$300 million, yeah. I think we're sitting right around $300 million in average float.

Aaron Graft, CEO

How that gets accounted for, I think we've laid out in the letter before. One of the great things about where float sits now because you're generating that float on roughly $24 billion-ish in payments is we are self-funding. Any supply chain finance we are doing, where we are injecting liquidity into transactions to make them easier for network participants is being funded out of that float, and the excess float, of course, we treat as if we sell overnight to the Fed at current Fed funds rates.

Melissa Forman, VP

The average was $340 million.

Gary Tenner, Analyst

Thank you.

Operator, Operator

Our next question comes from Michael Perito from KBW.

Michael Perito, Analyst

Hey. Good morning. Thanks for taking my questions. I just had a couple. I see a few hands up, so I don't want to take away everyone's ammo here. Just to follow up on Frank's questions around LoadPay. Two questions: One, could you kind of give us a basic example of how you hope the technology works in the field and what the value proposition is? Secondly, I'd like to know, since this is really the first time you guys are doing a banking as a service type setup, are there any bank regulatory considerations or capital required that we should consider, especially if LoadPay really starts to ramp in '25 or '26?

Aaron Graft, CEO

Let me take the first part of that, and then Todd can answer the banking as a service piece. Think about the use case; when you think about the end of the day at a factoring company, when you start to bump against the ACH deadline, which varies by bank, but call it roughly 4:00 p.m. Central. There's desperation to get dollars out the door because truckers need that money to fill up or to fix their truck. The ability to not have that deadline but to be able to push money 24/7 through what is essentially a journal entry on the books of TBK Bank allows you to smooth out funding. We have almost 30,000 select carriers who are being paid directly by TriumphPay and in some cases, being QuickPay by TriumphPay on behalf of the freight brokers we serve. The ability to smooth out funding to them and get it to them when they need it is a really big thing.

Tim Valdez, COO

The ability for ease of access to funds and visibility for our clients is a significant benefit from that program. LoadPay creates a portal for us outside of the Fed, providing flexibility across the entire enterprise.

Melissa Forman, VP

For a trucking company or carrier owner-operator on the road, they may have an emergency on a Saturday or on the Fourth of July, a breakdown or a blowout. Today's solutions don’t allow them to get paid quickly without having to do some sort of money code type transaction. LoadPay gives them the opportunity to see what their pending payments are within TriumphPay, and then select to be paid instantly, not having to wait until the next business day to receive those funds. That's huge because they can quickly solve problems, help them get back on the road easily.

Aaron Graft, CEO

One final point: there's far more to this than just the timing. The way the whole wallet is designed, and how we allow carriers to offload into various products is unique. Think about competition; we are competing against banks and payment systems that don’t serve small truckers the way we do. They lack the same kind of innovation and commitment to truckers. For us, it's about helping them thrive because when they thrive, we thrive. There’s a lot more to this than just the timing. Todd, you can speak to the banking as a service component now.

Todd Ritterbusch, CFO

Your question about regulatory considerations is essential. The major difference between providing banking as a service capabilities and traditional banking is the involvement of third-party vendors. Crucially, you cannot lay off any of your compliance responsibility to those third parties. This means we must invest considerable time and energy in ensuring compliance, regardless of what third parties do on our behalf. So yes, that is a significant concern for us, but we believe we've got it under control.

Michael Perito, Analyst

So for LoadPay, it will be a mobile app that truckers download, and they will have VIN numbers with TBK Bank accounts for the money to flow in and out of; correct? Is that the right general understanding?

Todd Ritterbusch, CFO

That's correct.

Michael Perito, Analyst

Great. I appreciate all that. Thanks for spending a few minutes on it. Lastly, I have a bigger picture question for Aaron. The balance sheet hasn't grown for a while; what's the five-year plan for the balance sheet? Should we expect it to continue shrinking? How should we think about it moving forward?

Aaron Graft, CEO

That's a tremendous question and very fair. Remember, as we seek to be a counterparty for freight brokers, it's vital we are a strong financial counterparty to them. I don't see any time soon where we're inclined to just go it alone on fees in transportation. We don't need to raise equity from private equity or venture capital; we don't want to dilute our investors. So, we need to maintain a strong liquidity position. You should expect a static balance sheet; you should expect us to compound capital without growing our balance sheet. We're focused on maintaining a strong liquidity and deposit base and being conservative on credit, and ensuring we make smart loans. We need to protect our revenue base, as that's how we can invest significantly next year in technology.

Michael Perito, Analyst

So, just to summarize, the balance sheet will stay in this $5 billion range for the foreseeable future, and you guys hope to be compounding capital and continuing to invest in your initiatives for the next handful of years, minimum.

Aaron Graft, CEO

Absolutely. We have about $200 million in excess capital over regulatory minimums, which should increase unless we utilize it for M&A or share repurchases. At our current valuation, those actions aren't things we plan for. We would consider M&A to ensure it adds long-term value to the payments network without diluting shareholders.

Michael Perito, Analyst

Great. Thank you very much for taking my question this morning.

Operator, Operator

Our next question comes from Thomas Wendler from Stephens.

Thomas Wendler, Analyst

Hey. Good morning, everyone.

Aaron Graft, CEO

Good morning.

Thomas Wendler, Analyst

I just want to go back to LoadPay. Distribution seems to be a pretty big focus for you guys and a bit of an edge you have. Have you reached out to any of these power users and gotten any preliminary feedback on the distribution of LoadPay?

Aaron Graft, CEO

Yes, we have. We wouldn't talk about it with investors unless we had talked about it with customers first.

Thomas Wendler, Analyst

Thank you.

Aaron Graft, CEO

Thank you.

Operator, Operator

At this time, there are no further questions. We thank you for joining us. We wish you all a prosperous 2024, and we'll talk to you soon. Thank you.