Earnings Call Transcript - TFIN Q3 2021

Operator, Operator

Good morning, and welcome to Triumph Bancorp's Third Quarter 2021 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Luke Wyse, Senior Vice President, Investor Relations. Please go ahead.

Luke Wyse, Senior Vice President, Investor Relations

Good morning. Welcome to the Triumph Bancorp conference call to discuss our third quarter 2021 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 in to 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, Brad Voss; Todd Ritterbusch, our Chief Lending Officer; Geoff Brenner, our CEO of Triumph Business Capital; and Ed Schreyer, our President and COO of TriumphPay. 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, everyone. For the third quarter, we earned net income to common stockholders of $23.6 million or $0.94 per diluted share. As discussed in the earnings release, we had some unusual items affect our results this quarter, which lowered our core profitability. We do not expect these to be recurring. Beginning this quarter, we are not going to address our community banking results in our prepared remarks, and instead we'll use that time to discuss developments in our transportation financial technology platform, which includes both TriumphPay and Triumph Business Capital. We will continue to include all relevant metrics for our Community Bank segment in our Investor Presentations. Todd Ritterbusch, Luke and I are always available to answer any questions investors and analysts may have regarding our Community Bank segment, and if there are any unusual events, we will of course address those in our comments. Our goal for the Community Bank is continued improvement of our funding mix, prudent credit, moderate growth, and a focus on fee income. The team has been doing that with excellence for some time now. What everyone should appreciate about Triumph overall is that we generate enough cash to invest in a technology platform that is going to transform an industry, and even while doing so we are achieving market-leading profitability. The ability to incubate a fintech that could be eventually valued in the billions of dollars without diluting our existing investors is extremely unique. Related to that point, let's transition to some very important metrics. As we announced a few weeks ago, we have grown TriumphPay to be the largest payer in all of brokered freight. During the third quarter, TriumphPay processed approximately 3.8 million invoices, paying almost 117,000 distinct carriers. As of September 30, we have paid over 156,000 distinct carriers in the last 12 months, which is over 60% of all active carriers. Third quarter payments processed totaled approximately $4.2 billion, a 22% increase over the prior quarter and a 243% increase from Q3 2020. TriumphPay's annual run rate payment volume for the quarter as a result was $16.8 billion. Using only the month of September as a baseline, the annualized payment volumes were $17.8 billion. At this point, I am comfortable declaring that we have established a proof of concept. In other words, we have created an ecosystem that improves the experience for all involved, which is why we continue to experience such exponential growth. But volume alone is just vanity and proving a concept is not the same as proving a business model. We know that volume must turn into revenue. To that end, on Slide 15 of the deck, we illustrate how we're thinking about TriumphPay's revenue model upon the achievement of $75 billion in annualized payment volume. We believe that over time $75 billion could generate even more fee income than the $100 million noted as more market participants join the network. The $75 billion in payment volume or $100 million revenue number do not represent the end goal for us. It's actually just the beginning of proving the business model. We firmly believe that our value proposition is going to revolutionize presentment, audit, and payment in the for-hire trucking industry. That is a $420 billion market and growing. Driving revenue requires engagement with all participants in the market: brokers, carriers, factors, and shippers. In the third quarter, we added another six factors to the HubTran ecosystem, bringing the total to 66. We have not lost a factor yet since the acquisition of HubTran. We have three more in various stages of integration. We also continue to add brokers to the network, bringing our total count of freight brokers to 532, who are TriumphPay customers, HubTran customers, or both. On September 21, Integrity Express Logistics went live with TriumphPay as our latest Tier 1 broker, bringing that total to 8 out of 25. In future quarters, we will add conforming transaction volume to our tracked metrics. We define a conforming transaction as one in which a network factor is on one side of a transaction and a network broker is on the other. We believe conforming transaction volume will grow rapidly throughout 2022. Switching to Triumph Business Capital, we had another strong quarter. We did recognize a downward adjustment to third quarter interest income of $3.5 million or $0.11 per share on certain factored receivables, the majority of which represents a timing difference for revenue that will be recognized in future periods. This adjustment will have minimal impact on subsequent quarters. In addition to this item, we elected to add an additional $1.5 million to our 2021 bonus pool to reward a much broader group of team members across the company for what is shaping up to be a fantastic year. The year-to-date catch-up adjustment in Q3 was just over $1.1 million and contributed to our total non-interest expense for the quarter being a bit higher than the guidance we provided in our second quarter earnings call. The tax-affected impact of this decision was about $0.03. Average purchases per day at Triumph Business Capital exceeded $55 million for the quarter, and the dollar volume of invoices purchased was $3.5 billion, a 78% increase over Q3 2020. That's an annualized run rate of approximately $14 billion in purchases. Average transportation invoice sizes were $2,195 for the quarter. Triumph Business Capital purchased approximately 1.5 million invoices, an increase of approximately 134,000 over the prior quarter and a 49% increase over Q3 2020. Triumph Business Capital ended the quarter with $1.48 billion in accounts receivable, a 55% increase over Q3 2020. Finally, I'd like to take a moment and comment on the strategic equity grants. We disclosed an incentive program in our 2019 proxy that covered a significant portion of our senior leadership team. We call this the strategic equity grant or the SEG. The purpose of this grant was to encourage unity among our team as we repositioned the business away from the growth in the community bank and towards a transportation and fintech focus. For an organization to be effective at change management, it requires focused communication and thoughtful incentive practices. The SEG was built around one of my core beliefs that far too many banks focus on growing assets rather than profits. The SEG set a target for $10 of cumulative earnings per share for the years 2020 through 2022. Should we hit that metric, it would represent EPS growth in the 90th percentile of the historical EPS growth achieved by all banks we modeled in a very large peer group. And doing this even while continuing to invest heavily in our transportation fintech platform. This was very much a stretch goal. At the time we created the SEG program, our belief was that we would continue to buy back common shares, improve the quality of our deposit funding mix, and limit balance sheet asset growth primarily to factored receivables at TBC. We have fulfilled many of those expectations including buying back 2.95 million shares at a blended cost of $34 per share prior to the pandemic. As of the end of this quarter, we have earned cumulative EPS of $5.86 since January 1, 2020. In a future period, if we determine that some level of payout is likely, an inception-to-date catch-up of the accrual to cover the cost of the SEG grant would occur in that period, and then the remainder would be expensed quarterly through the end of 2022. Further details can be found in our 2019 proxy statement or the equity footnote of our 10-K available on our website. With that, we will turn the call over for questions.

Operator, Operator

The first question is from Brad Milsaps of Piper Sandler. Please proceed.

Brad Milsaps, Analyst

Hey, good morning.

Aaron Graft, Vice Chairman and CEO

Good morning, Brad.

Brad Milsaps, Analyst

Aaron, it looks like you guys continue to build tons of momentum in the transportation side of the business, and I appreciate the additional color that you provided in the deck. You don't have a crystal ball, but questions I've gotten this morning just what is your timetable to achieve the $100 million of revenue. I know things can shift quickly and just kind of curious, what your crystal ball says in terms of getting to that goal?

Aaron Graft, Vice Chairman and CEO

Yes, you're right, that it's difficult to make a precise prediction on something that's never been done before, but I'm going to say 3 years. Hopefully sooner than that, but let's just use 3 years as a number to hold us to and for all listening, for people to understand that $75 billion in payments and $100 million in revenue is not what we view to be a mature business model. That's just a waypoint on to what I think eventually is going to be a business that'll generate $500 million of income as it gets fully integrated into this industry. So the timing on which all of that happens is hard to predict. But over the next 3 years, our goal would be to complete the metrics we've laid out for the first stage, which would be $75 billion in payments and $100 million in revenue and understand that the further you go along with $75 billion in payment run rate, the more factors that integrate that $100 million revenue on $75 billion goes up as more market participants use the system. So we were just putting that out there to give what I think investors need to see would be a major milestone, of course, $100 million revenue business, but that is by no means the end game that we're playing for.

Brad Milsaps, Analyst

Is the plan still in 2022 to essentially provide the service for free, or do you expect to see an increase in revenue later in the year?

Aaron Graft, Vice Chairman and CEO

I think really revenue does not become meaningful until 2023. There is going to be revenue growth in 2022. But as we've talked about previously, we are not giving this product away for free. When people fully understand how this adds efficiency to their business model and mitigates fraud, everyone is going to want to use it. And the price we are charging is a price that is going to be accretive to their business model. But I think we have to demonstrate that to them in the year 2022 and get paid for it in the year 2023. So that has not changed.

Brad Milsaps, Analyst

And then maybe final question for me, as you do ramp up, how should we think about the efficiency of that business? I mean I know you've made a tremendous amount of investments to this point to get the product where it is. Just kind of curious kind of how to think about the incremental spend as the revenue does ramp?

Aaron Graft, Vice Chairman and CEO

We've previously indicated that the majority of the spending for TriumphPay to reach its goals is already in place. However, I anticipate that over the next year, it wouldn’t be surprising to see that expense increase by 15% as we continue to recruit team members through a two-phase approach. The first phase involves engaging with freight brokers, factors, and shippers, followed by an integration phase when any of these groups decide to become fully conforming TriumphPay participants. After that, there's a follow-up phase that should not be overlooked: the capacity to generate revenue around the core transaction. The core transaction consists of a network transaction where both the payer and payee are integrated TriumphPay entities, which we believe facilitates smooth transactions. Additionally, there are opportunities to create extra value surrounding these core transactions for market participants. To deliver this added value, we will need skilled team members and further development in what could be seen as a second wave. In summary, I estimate that a 15% growth rate would be an appropriate expectation for 2022 compared to our 2021 spending for this segment. Ed, do you have anything to add?

Ed Schreyer, President and COO

No, we will spend Q4 stabilizing the key leadership position to drive it forward. The 15% growth is expected to align with new wins, new brokers, and factors coming onto the network to manage the integrations and the associated client volume.

Aaron Graft, Vice Chairman and CEO

I want to conclude by mentioning that we are just weeks away from finalizing the conforming transaction, along with the actual programming and product itself. The next step is to start integrating with some of the first factors joining the system. While conforming transactions may begin in Q4, it is more likely to start in Q1 of next year. This is an important KPI to monitor, but we are already over 90% with the technology built. Therefore, there won't be significant additional expenses required to keep the product on the timeline we shared with you.

Brad Milsaps, Analyst

That’s great. And to be clear, is it 15% for that segment, or 15% consolidated?

Aaron Graft, Vice Chairman and CEO

For that segment.

Brad Milsaps, Analyst

Okay. Best of luck. Thank you. Thank you. I appreciate it. I will hop back in queue.

Operator, Operator

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

Michael Rose, Analyst

Hey, good morning. Thanks for taking my questions. So it's good to see the growth in both the brokers and the factors. I think part of making this work is to get the larger freight brokers, the top 20. And then the larger factoring companies, I think the top 10 represent about 75% of the industry. Where do you stand with those efforts in negotiations? Because that really seems to be kind of the linchpin to get the network up and running. And once the conforming transaction software is put into place, it seems like once you get those two pieces, it's kind of off to the races. Is that the way to kind of think about it? Thanks.

Aaron Graft, Vice Chairman and CEO

We recently announced that Integrity Express Logistics is now live on TriumphPay, and while we won't see 100% of their volume from day one, we expect to gradually see more volume as we ramp up to their quarterly payment schedules. Among the top 25 freight brokers, 8 are currently using TriumphPay, with a few utilizing TriumphPay alongside HubTran. By the end of this year, all of this will consolidate into TriumphPay, simplifying our explanation of the system. Additionally, there are 9 more Tier 1 brokers that are enabled with HubTran, allowing for a smooth transition to the full TriumphPay ecosystem. This leaves us with 8 potential prospects that have not yet adopted either platform, and we are actively engaging with them and having extensive discussions as part of our enterprise sales process. On the factoring side, 11 of the top 20 factors already have integrations with HubTran. We anticipate announcing additional integrations with TriumphPay in the near future, possibly as soon as the fourth quarter. The interest from factors is growing within and beyond the top 20, and we expect this process to accelerate given that the larger factors manage more volume than the top brokers. Once we successfully integrate these two segments, we will position ourselves strongly to tap into over $170 billion in brokered freight expenditures, facilitating a significant volume of conforming transactions. Simultaneously, our team is engaging with the shipper community to extend our integration efforts. To summarize, our focus is on achieving freight broker adoption among the top 25 and factoring adoption from the top 20, with ongoing movement expected each quarter moving forward.

Michael Rose, Analyst

Okay, that's helpful. And then just on the $100 million revenue target, is that a quarterly run rate goal? Or is that kind of like the cumulative target? And I assume that it doesn't really include the brokered shipper market. That's just the broker freight market, correct?

Aaron Graft, Vice Chairman and CEO

Yes, there isn't much regarding the shipper side in this discussion. We are primarily focusing on the brokered freight market. I can't specify the exact day we reach $75 billion or if it will equate to $100 million annualized on that day. I believe we might reach a $100 million annualized slightly before that, but it feels like a good benchmark as we make predictions about the future. At $75 billion in volume, we're currently at a run rate of $17.8 billion as of September. I expect that number will increase in the upcoming quarters, and you'll start to see indications of this $100 million next year as we begin reporting network fees. Network fees are linked to conforming transactions, which rely on fully integrated freight brokers and factors processing invoices seamlessly. This will start in Q1, when Triumph Business Capital and a few other factors will be operational. You will begin to see the early signs of that growth over time. I can't say exactly when we will reach $75 million or $100 million in revenue, but you will notice incremental progress starting next year.

Michael Rose, Analyst

Okay. And then when do you think the network hits profitability?

Aaron Graft, Vice Chairman and CEO

At a revenue run rate of $100 million, if we consider our current expense rate in Triumph Business and TriumphPay, even with a 15% increase, it remains quite profitable. While I can't calculate it quickly right now, I can say that we've shared our expense growth projections for TPay, which we estimate to be around 15% over the next year. We can discuss how much revenue is required to cover those expenses and generate profits once we explore that further. However, we won't need to reach $75 billion in annualized payments to see a positive EBITDA. We expect to achieve EBITDA positive results much sooner than that.

Michael Rose, Analyst

Okay. That's helpful. Thanks for taking my questions.

Operator, Operator

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

Brady Gailey, Analyst

Hey, thanks. Good morning, guys.

Aaron Graft, Vice Chairman and CEO

Good morning.

Brady Gailey, Analyst

Maybe to ask the question a little differently. Aaron, bigger picture, what do you see as the efficiency ratio for TPay? I know that'll probably get down over time as this business grows and grows. But it's like $100 million in revenue, how much of that do you think falls to the bottom line? Maybe not even at that level, but just bigger picture longer term, what do you think is the efficiency ratio for TPay?

Aaron Graft, Vice Chairman and CEO

Yes, great question, Brady. So at $100 million, I think a fair assumption for your model is a 50% efficiency ratio, or if we're going to talk like a fintech, 50% operating margin at that size. Ultimately, at scale from there, this should be a 75% or the efficiency ratio should be 25% or lower, or the operating margin should be 75% or higher, because this is Software-as-a-Service. I mean, it's at its core. And so the scalability is pretty powerful. So that's what you should be looking for as we approach maturity. But at that first waypoint of $100 million revenue, let's just say that it's about a 50% efficiency ratio.

Brady Gailey, Analyst

Right. That's helpful. Then as you said, the $100 million does not include any benefit from the shippers market. Is there any way to frame what the revenue or the payment opportunity could be from the shipper side?

Aaron Graft, Vice Chairman and CEO

We have many ideas on that, Brady, but they're not fully formed yet. Right now, I invite you to consider the $250 billion in payments being processed, which includes a freight audit component. This component generates fee income, and while there are various players in this area—some are banks capable of handling payments for their freight audit clients—not all of them are. Moving forward, we plan to take action because as we integrate more payments into the TriumphPay ecosystem, we expect to reach every carrier. We’ve already processed payments for over 60% of all active trucking companies, and I believe that number will reach the 90th percentile within the next year. Once we connect with all trucking companies, including large fleets that operate in the shipping space, we’ll have their profiles set up in our payments network. This will allow us to discuss fund transmission with shippers on behalf of known carriers integrated into the TriumphPay ecosystem. If those carriers use factoring services, those factors will also be incorporated into our ecosystem. I believe we will create significant monetization opportunities on a large scale. This is a business that operates on basis points, which we are excited about, as it allows for deep integration into various businesses while reducing friction in fund transfers between shippers and carriers. However, I am not ready to specify the metrics to examine for our monetization in the shipper market just yet. We will implement a subscription fee, a network fee, and a syndication fee. The syndication fee applies when carriers want to receive quick payments, and shippers prefer not to carry QuickPay receivables on their balance sheets. We’ll manage those receivables, which likely won’t reside on TriumphPay’s balance sheet or even Triumph Business Capital’s but will be placed with the factoring community that is well-suited to hold them. Essentially, as I've noted before, we serve as a tollway, not a parking lot, and will charge fees for directing those receivables to where they are best suited on the balance sheet. These three fee components—subscription, network, and syndication—will be relevant in the shipper space, though not in the same proportions as in the brokered freight sector.

Brady Gailey, Analyst

All right. That's helpful. Then finally for me here, and thanks for the heads up on the strategic equity grant. It feels like you guys have a shot at making that which would be great for you all, great for shareholders. But can you just talk to us about the magnitude of what expense that could bring if you guys hit it?

Aaron Graft, Vice Chairman and CEO

Yes, and it has to be self-funded, Brady. So if we hit $10 a share, it's roughly going to be $0.30. So we got to get to $10.30 of cumulative EPS for to even trigger, because we had to deliver $10 of net EPS to our shareholders in order to hit it. And of course at the time, we thought TriumphPay was going to be a closed-loop payments network which would be very profitable, and we thought we would have bought back more shares. Neither of those two things turned out quite the way we anticipated. But I think actually for the good of all, is how it's gone. But because of the strong tailwinds, and because of how what an awesome job Triumph Business Capital is doing and the Community Bank, we might actually make it. The top end would be if we deliver $12 of EPS, it would be a $0.60 expense. So we'd have to earn $12.60 to hit the very top end of the range. So the minimum impact to EPS is $0.30, the maximum impact and I could be off a penny but roughly it's $0.60, but it has to be self-funded from earnings. And you know, it's very plausible we could hit it. But we're also in an environment where freight, while it's really good right now, we've lived through cycles before. And so things could happen next year, our corporate tax rate could change, we may need to make an additional investment in TriumphPay, which is the long-term plan to win big. So we're not at a place where we feel confident enough to start accruing for it. But we thought it was appropriate for investors to be aware that it's out there in the event that in the next quarter or two, we decide that's an appropriate thing to do.

Brady Gailey, Analyst

Got it. Thanks for the color.

Operator, Operator

The next question is from Steve Moss of B. Riley Securities. Please go ahead.

Steve Moss, Analyst

Good morning.

Aaron Graft, Vice Chairman and CEO

Good morning.

Steve Moss, Analyst

You talked a lot about TriumphPay here. Maybe just one last thing there. As a thing of I just kind of curious, Aaron, is what are you thinking for payments volume as you exit 2021? $17.8 billion, I think was for September. Just kind of curious what do you think is coming on board here and how to think about that in the short-term?

Aaron Graft, Vice Chairman and CEO

Yes, it's very unpredictable. Making short-term predictions is challenging because integrating with a Tier 1 freight broker isn't as simple as just saying we're ready on November 3 at noon. It's a process that takes about a month, which, while difficult, ultimately benefits the long-term growth of the business. We currently have enough volume in our pipeline to exceed $20 billion. I just can't specify the exact timing for when that will happen. There will be some growth in Q4, but I can't say if it will be sufficient to exceed $20 billion then. Likely, it won't happen until early next year. However, if it does happen in Q4, please bear with us, as we're doing our best to expedite the process, which also hinges on the integration capabilities of the freight brokers. We can't handle all the integration alone, so we have to collaborate with them. That’s why I can't provide a specific timeline. What I can say is that we will reach $20 billion in the next couple of quarters. That's all I can confirm at this time.

Steve Moss, Analyst

Okay, that's helpful. Regarding your last comment about additional investments in TriumphPay, I'm curious about what you're considering, especially in relation to the shipper market you mentioned. What additions are you contemplating?

Ed Schreyer, President and COO

Yes, so this is Ed Schreyer. I’m just going to kind of speak to what that foundation looks like. So where we're really spending our time and adding resources tends to be around the foundation. So if you look at when Aaron just mentioned getting to $20 billion, we're trying to build something that's going to hold $75 to $100 billion and north of that. So we're trying to put as much in place now to do that as we know there'll be heavy onboarding over the next year. So everything from customer service to resiliency around the network to fraud risk and mitigation, all the things that mature companies and payment companies have to do to put that in place to have longevity, that's really where the expense side is coming up. Where the 15% will grow over time is just incremental growth as you add more companies, we need to bring on more developers, more people to integrate. So we're hoping we have a gearing ratio somewhere in the middle of '22 that really ties to revenue growth and volume growth and the expenses follow that, but in the meantime we're building a strong foundation to support it long-term.

Aaron Graft, Vice Chairman and CEO

And one thing to add to that if you were to sit in our meetings here, we have the luxury and I pointed this out in the early part of the call. We are generating top decile profitability for all banks while reinvesting heavily in TriumphPay. And if we think about the long-term value of TriumphPay, and you think about this business, it can generate $500 million in income plus what you should be doing now where you can is paying to any cost associated with integrations, we need to recognize those now, hire developers now, do those things now, rather than creating evergreen revenue sharing, because we’re cash poor. Triumph is not cash poor. We generate a lot of money. The Community Bank and TBC, our shareholders in TriumphPay's success and TriumphPay's future because they generate a substantial amount of profitability that allows us to do these things fast with excellence with the best people available and not have to give away future revenue. So we think a lot about that. So that can spike some short-term expenses, because we're paying for something now rather than giving someone an evergreen revenue share. Three years from now, five years from now, investors who take the long-term view with us are going to love that decision. But that's a reason why you may see short-term spikes in TriumphPay's expenses, because we're trying to build this in a way to protect the most value well down the road.

Steve Moss, Analyst

Okay, great. And then maybe one on factored receivables here. Good growth on the purchase volume side as well. Just kind of curious what are your thoughts for that market going forward and how we kind of think about purchase receivables? Obviously, invoice prices, I think probably remain strong. I'm curious on that aspect of your thoughts as well.

Geoff Brenner, CEO of Triumph Business Capital

Yes, Steve. This is Geoff Brenner. I think from our viewpoint, the capacity is going to continue to be tight. Everything from driver shortages to classic backlog orders, stretching now 11 months, and you probably seen on the news 100 ships off the Long Beach port. So we're looking at 2022 as perhaps the entire year will be tight capacity, which is obviously good for our business because rates will stay high.

Steve Moss, Analyst

You're seeing growth in the number of invoices you purchase, and I'm curious about that growth if you have any insights.

Geoff Brenner, CEO of Triumph Business Capital

Yes. Over the past two and a half years, our business has doubled, and our objective is to continue this growth. We are anticipating significant growth in 2022 as well. While I cannot specify a number at this moment, we expect to keep growing aggressively.

Operator, Operator

The next question is from Thomas Wendler of Stephens. Please go ahead.

Thomas Wendler, Analyst

Hey, good morning, guys. Most of my questions have been answered. And I really appreciate all the color around to TriumphPay. Just a couple of nitpicky things for me. You guys had that $3.5 million revenues subject to the timing adjustment. Can you give an idea of when that's going to be recognized? And then also, I think there was a $3.6 million charge-off in factored receivables. Can you give me a little color around that as well, would be great. Thank you.

Brad Voss, Chief Financial Officer

Hi, Thomas. This is Brad. I'll take the first part of that question. So $2.5 million of that $3.5 million adjustment relates to our deferred revenue accounting on factored receivables. So if you think about the way that works, when we buy a receivable at a discount, our factoring system reports that invoice at face value. So if it's a $2,000 invoice, we'll record a $2,000 receivable. And we book that discount as an upfront fee. In reality, kind of similar to buying a zero coupon bond, we haven't really earned that fee until we collect from the debtor, hadn't earned it entirely until we collect from the debtor. So each balance sheet date we have to estimate the balance of those fees that are unearned based on the average age of the receivables and the average projected time to collection. And we report that deferred revenues reduction in our factored receivables balance, and then the change in that from period to period runs through interest income. In the third quarter, we made a correction to that report that drives that calculation. That's what resulted in a $2.5 million adjustment to bring that balance up to where it should be. It is a timing issue. But substantially all of that revenue should be earned in the current quarter and the fourth quarter, given the speed at which these receivables turn, but it will not likely be noticeable on our income statement because that gets offset by deferring revenue on new receivable that we purchased during this quarter. So as long as that portfolio is growing, there will be a very modest drag to the extent of maybe a penny a share on earnings that will happen on an ongoing basis. But all of those revenues will be collected, will just be replaced by new deferred revenues. The other million dollars of that is a reversal of the accrued income on to factored receivables that were deemed uncollectible and charged off. Most of that actually does relate to the charge-off that you just mentioned. I don’t know, Geoff, you want to give some color on what that was about.

Geoff Brenner, CEO of Triumph Business Capital

Sure. It was a one-time breakdown on our part accruing for revenue that part of the organization knew would be uncollectible and it wasn't communicated appropriately, that's a people process and a technology miss on our part. And all three of those elements have been corrected.

Brad Voss, Chief Financial Officer

The charge-off itself, I think it was …

Aaron Graft, Vice Chairman and CEO

The charge-off was related to a non-transportation factoring relationship, which you're going to see not very many of those around here and going forward.

Geoff Brenner, CEO of Triumph Business Capital

That was a relationship that was acquired going back to purchase a couple of years ago. So it had never performed. It had been fully reserved, and we tried to work it out for some time.

Thomas Wendler, Analyst

That's great color, guys. Thank you.

Operator, Operator

The next question is from Jared Shaw of Wells Fargo. Please go ahead.

Jared Shaw, Analyst

Hey, guys, thanks for the time. Just a couple of follow-ups. Just on the time to collection item around the timing, have you seen a change in the time to collection on invoices overall? Is that more of a change to your macro view? Has that been slowing down at all?

Brad Voss, Chief Financial Officer

No, it really hasn't. It's been pretty consistent over time. That was, as I mentioned, a correction in a report, there was a filter on that report that shouldn't have been there. And then we caught it during this quarter and corrected it. So we're still collecting on average, what, 37 days or so. And that will bounce around a little bit. It's been fairly consistent over time.

Aaron Graft, Vice Chairman and CEO

Yes, so Jared, let me be clear for you and everyone listening. The $3.5 million is our fault, okay. It's not the $2.5 million on deferred revenue; it's going to get collected, it's just the way the report was running on a small segment of the factored relationships. It wasn't deferring it appropriately. And it's like pennies, but these pennies have added up. That's nothing to do with the industry. It's our fault. We caught it, we fixed it, we recognized it, you're not going to see it in future quarters. And there's a reason the yield on the factored receivables was lower this quarter; it will go back up next quarter. But that's how we had to recognize that adjustment. So we're not seeing anything in the industry that suggests a slowdown or a decrease in average invoice sizes. All that happened is we found something; smart people working really hard sometimes make mistakes, we found two pieces of our business were not communicating well, we fixed it. And we're ready for the next quarter.

Jared Shaw, Analyst

Okay. And then you're talking about bringing on the freight brokers and the new factors. What percentage of the wallet share do you think you're getting now? And then as you look at your aspirational goals, does that assume that you're getting 100% of those wallet shares?

Aaron Graft, Vice Chairman and CEO

Yes, that’s a very insightful question. We are structuring the pricing to encourage all participants to utilize the network fully. This approach of flat pricing, instead of charging per transaction, may delay our profitability but ultimately enhances the network. A stronger network benefits everyone involved. Our aim is to capture the entire wallet share, though some individuals might opt not to use TriumphPay for all their payments due to their internal processes, strategies, and other factors. On the factoring side, they primarily use TriumphPay for its advantages in receipt handling, seamless presentment, and auditing of compliant transactions, which need a broker on the other side. Not all brokers participate in TriumphPay, but I hope to engage as many as possible. Additionally, a factor can utilize our audit feature, currently termed HubTran, for transactions that aren’t fully compliant to aid in presentment and auditing. Our pricing encourages these factoring companies to use this tool for every transaction, and while it's ultimately their decision, the pricing strategy is designed to support value addition across all transactions without penalties.

Jared Shaw, Analyst

Okay. Thanks. And then just finally for me, just to clarify on Slide 4 or Page 4, you have Triumph Business Capital purchase $3.5 billion of invoices. TriumphPay paid invoices of $4.2 billion. Does that $4.2 billion include the TBC $3.5 billion, or is that just $4.2 billion from outside of the Triumph ecosystem?

Aaron Graft, Vice Chairman and CEO

There would be an approximately 14% overlap. If you consider Triumph Business Capital, it likely accounts for 14% of the total factoring industry. Thus, from the $4.2 billion in payments made to factoring companies, which we estimate 50% or $2.1 billion is attributed to them, TriumphPay would have received about 14% of that $2.1 billion.

Jared Shaw, Analyst

Okay, great. Thank you.

Operator, Operator

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

Gary Tenner, Analyst

Thank you. Good morning. I have a couple of questions. Regarding the fees you outlined on Page 15 and your recent comments about implementing flat fees, especially as you establish your business model in 2022, is there a specific date when the fee structure will change uniformly with factors and brokers? Will there be a 12-month transition period for this change, or is there a specific date, like January 1, 2023, when this pricing takes effect, or will it be implemented in phases?

Aaron Graft, Vice Chairman and CEO

Yes, every negotiation is unique, but the plan is for January 2023. The subscription fee should be established for a year, and there is an expectation that this fee will increase over time by a percentage that resembles a cost of living adjustment. This fee aims to cover processing costs and motivate users to take advantage of the network for all invoices due to the flat subscription model. The network fee is a percentage of conforming transactions and will be determined through negotiation. Once we set the network fee for 2023, it won't change significantly in 2024. Transparency in pricing is essential for factors, brokers, and shippers; they need to know the costs to build trust and realize the benefits for their businesses. The network fee's increase won't be due to a higher fee per transaction but rather the volume of transactions. We aim to enhance the user experience by adding value and will charge for that added value. However, our approach to the network fee won't involve drastic changes from year to year, as that would undermine trust in the payments network. The syndication fee compensates us for distributing receivables appropriately. Initially, there was a misconception that Triumph would use this fee to grow its own portfolio, but we plan to encourage freight factors in our network to provide QuickPay, generating revenue for them. Thus, they will benefit from both network efficiency and additional revenue, which we believe will foster loyalty among those who partner with us. The syndication fee will evolve but will be part of a broader discussion regarding working capital injections into the ecosystem. We believe TriumphPay shouldn't be the sole provider of liquidity. Instead, we want to establish a market rate for parties willing to inject capital into the system, where they can confidently hold receivables that TriumphPay services, and the fee will be established within that framework.

Gary Tenner, Analyst

Okay. So just a quick follow-up on that, Aaron. As you're talking about doing kind of placing some of these factored receivables, with the factors versus TriumphPay holding it, you've also got this portion of the slide that talks about QuickPay interest income for what's funded by TriumphPay. Should we assume that's going to be a fairly de minimis amount because you're going to try to work that out of the balance sheet syndication?

Aaron Graft, Vice Chairman and CEO

Yes, you’re absolutely right, Gary. For a period, TriumphPay will retain these receivables as part of our banking operation. Looking ahead, that's the plan we see for the near future. However, as we develop this fintech business model, which may need a banking component, we believe it doesn't solely depend on having a balance sheet. There are ways to leverage a banking framework that create additional value, often resulting in higher revenue multiples in the market. We're aware of this, and we’re focused on that direction. We're prepared to use our balance sheet to manage these receivables at yields of 10% and 11%, as it generates significant profit. Nevertheless, it wouldn't be wise to retain all of those receivables long-term. A more advantageous strategy is to engage other capital providers within our network, starting with factoring companies, and facilitate holding these receivables, for which we will earn a revenue share. This is the direction we're pursuing. While we'll maintain some balance sheet involvement for now, our ultimate goal is to ensure that most receivables are managed by parties ready to hold them, while we act as the intermediary.

Gary Tenner, Analyst

Great. Thanks for that. And then just one follow-up on expenses. You kind of highlighted the expected growth in expenses for the payments segment. I think it's probably pretty fair to assume the banks segment will get little or no growth in expenses over the kind of next 12 months, let's say or through 2022. What's the kind of key driver we should be thinking about in terms of the factoring segment? I mean, obviously, volume is an issue. But at some point when spot rates come in and invoice prices come down, are there other offsets in terms of the expense level?

Aaron Graft, Vice Chairman and CEO

I’ll begin and then let Geoff wrap up. This quarter, a notable highlight was the bonus we accrued for our factoring staff, reflecting an exceptional year for TriumphPay with numerous successes. Our year-to-date return on assets is 2%, and our return on equity exceeds 20%, all while nurturing a fintech initiative. Thus, we deemed it fitting to reward our team with a one-time bonus. Geoff and his team are also undertaking efforts to enhance operational efficiencies at TBC, which will improve and accelerate as TBC integrates with TPay starting in the first quarter of 2024. You can expect to see an increase in touchless transactions and network transactions, which will be beneficial. Geoff, what additional insights can you provide regarding our readiness to adapt if invoices fluctuate over the coming year?

Geoff Brenner, CEO of Triumph Business Capital

Yes. Well, I mean, I think on your point, Aaron, if I look at our volumes today and the staff we have with typical efficiency ratios, I would say we're understaffed and we need to add people. But as you noted, there's efficiencies and things we're implementing. The thing I'm really looking forward to is, if we can race and this is why TBC is highly incented to do it, if we can get to the world where we have conforming transactions, I can see the volume go up, and I can bend or break that curve that typically applies with the people I have to follow it with. So, we're all obviously running as fast as we can towards the conforming transactions. And from a TBC perspective, there's a selfish motive that’s going to make us more efficient.

Gary Tenner, Analyst

So if I were to boil that down over the next 12 months in the factoring segment, there should be little or modest increase in expense. I mean, is that too simple to say that?

Aaron Graft, Vice Chairman and CEO

I believe that you will see operating leverage improve in the factoring segment in 2022. I cannot predict where invoice sizes will go, but if they remain the same, what is the number of millions of dollars of net funds employed, handled per employee at Triumph Business Capital now, Geoff?

Geoff Brenner, CEO of Triumph Business Capital

It's twice the most efficient number we've ever seen. So I mean …

Aaron Graft, Vice Chairman and CEO

We have 366 FTEs handling $1.3 billion.

Geoff Brenner, CEO of Triumph Business Capital

And you would expect that to be closer to 650 in a normal room.

Aaron Graft, Vice Chairman and CEO

We're evaluating how TBC moves forward, and I believe a lot of this growth will be pushed to other factoring companies out of TriumphPay, meaning it won't all go to TBC. I don't anticipate a significant reduction in headcount, nor do I expect a substantial increase. The full-time equivalent, which makes up 65% of our spending, is unlikely to change much, so expenses shouldn't vary significantly either. A reasonable estimate for incremental growth in expenses would be in the 2% to 3% range, but we must remain agile due to the revenue volatility in our business. I would suggest using a 2% to 3% estimate, and if market conditions shift, we will ensure everyone is updated.

Gary Tenner, Analyst

Great. Thanks, guys.

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 closing remarks.

Aaron Graft, Vice Chairman and CEO

Thank you all for joining us today. We hope you have a great day and we'll talk soon.

Operator, Operator

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