Good morning. Welcome to the Triumph Bank Corp Conference Call to discuss our second quarter 2022 financial results. Before we get started, I would like to remind you that this call may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. For details, please refer to the safe harbor statement in our shareholder letter and earnings release published last evening. All comments made during today's call are subject to that safe harbor statement. I'm joined this morning by Triumph's Vice Chairman and Chief Executive Officer, Aaron Graft, our Chief Financial Officer, Brad Voss, Todd Ritterbusch, President of TBK Bank, Geoff Brenner, our Chief Executive Officer of Triumph Business Capital, and Melissa Forman, our President of Triumph Pay.
With that housekeeping out of the way, I'd like to turn the call over to Aaron.
Good morning, everyone. We hope that the shareholder letter we published last evening was helpful for you in preparing for this call. At this time, we're ready to open the call up for any questions.
All right. If you have any questions, feel free to use the Raise Hand feature and activate your camera. Our first question comes from Michael Rose, from Raymond James. Michael, feel free to ask your question.
Hey, thanks. Good morning, everyone. Thanks for taking my question. Obviously a lot of moving parts this quarter, a lot of repositioning efforts. Would love to get some context there. First, just wanted to dig into the average invoice size. It definitely held up better than I think we were modeling. You know, I think there's been a lot of you know, chatter in the trucking space about invoice prices and freight costs and things like that. Can you just kinda walk us through kind of the dynamics and maybe what you might expect for invoice prices as we move forward?
You know, it doesn't seem like they're gonna get back down to, you know, where they had been kind of pre-COVID, just given structurally higher, you know, fuel prices and labor costs. Would just love any insights into kind of the nearer term, you know, direction of TBC. Thanks.
Hey, Michael Rose, this is Geoff Brenner. I'll take that one. I think we've benefited from heightened diesel prices. You know, as you know, that factors into the average invoice size. We think, you know, the imputed higher diesel prices in these invoices has held them up from what we had called for, which is a gradual return to normal. You know, that dynamic certainly occurred in Q2. Looking into Q3, if diesel prices stay at or about their current levels, and if utilization stays at or about its current level, which is about 96%, we would anticipate cautiously optimistic return or holding flat and then an eventual upturn back to what you had seen several years ago.
Okay, thanks. Maybe on as a follow-up, just on the network side, you know, I think the trends there were maybe a little bit weaker than what we'd modeled. Just as we think about kind of the intermediate term, is there any updates to when you guys expect to, you know, for the network to really become, you know, break even and then, you know, begin to generate some profitability? Because it does look like the ramp is just perhaps a little bit slower than, you know, at least I was expecting. Would just love any updated color there. Thanks.
Yeah, great question. I'll take that, and if I say anything wrong, Melissa will correct it. As we've tried to focus the market on, there is a steady drip every quarter of clients coming into the Triumph Pay ecosystem. It's just that the ones that really move the needle are the ones we describe as tier ones because they control such a large amount of business, each one of them individually and certainly collectively. We pointed out in the letter, we have over $15 billion in volume in the pipeline, and those are chunky because they come associated with large names. That's just the identifiable pipeline.
Given where we are in the year, where we are in the integration schedule, I would actually expect for Q3, the gross payment volume to be flat to perhaps down slightly, just if invoice prices do moderate even more. We expect there to be a big spike upwards in Q4 when we go live with the first part of this group of new clients who are in the pipeline. It's gonna be chunky from there, or it'll be a set function each time a new one comes on just because of their size. Revenue will move right along with that. Ultimately, we believe we are on track to exit 2024 with a business that's doing over $75 billion in payment volume, an ever-growing portion of that being conforming transactions upon which we charge network fees.
We think at that pace or at that sort of scaled size, that gross revenues will be $100 million, and this will be a business that generates positive EBITDA. That timing is still intact. You're just seeing a quarter, the first quarter in a while where we didn't have to bring someone live onto the system, but that pause won't last very long.
Okay, helpful. Maybe just, you know, finally for me, any updates on, you know, you talked about the potential for the contract shipper market at some point. I didn't see much in the shareholder letter about that. I mean, I know there was some, but would just love an update. You know, you previously had slides, and I think you were, you know, kind of 2%-3%, you know, by your math of kind of the volume there. What's kind of the outlook there, and should we be thinking about that? Just with the repositioning efforts, I mean, a lot of moves this quarter. Could we expect, you know, moving forward, you know, much cleaner results?
'Cause I think there has been a lot of noise, in the numbers. Thanks, guys.
Shipper.
Yeah, I think on the shipper market, we did have one tier 1 shipper come onto the platform, in Q2, and so we've seen some growth in that business. We also made an additional investment in Intelligent Audit, which is a freight audit company in that space to further our initiatives in that segment of the market. There's significant total addressable market available in the shipper space. You know, when you look at the contract shipping, it's about a $250 billion, or we size it around a $250 billion opportunity, so we're continuing to invest there.
The additional investment with IA has allowed us to really reposition our relationship there, and then our strategy within the market to be more in line with our open network that we're building out for Triumph Pay. You'll see more coming soon on that side.
Yeah, Mike, I wouldn't overlook that Intelligent Audit investment as being consistent with what we've always said. There is another market yet to go get more of. We have $2 billion of it, but there's a lot more to go get, and so things are happening. In response to your last question about expecting clean quarters, you know, I can never predict quarter to quarter what opportunities are going to present themselves. I think it is likely that the next few quarters won't have anywhere near this amount of noise. As you said, and we want everyone to understand, we are still in a period of strategically turning this business towards where we want it to go.
As a result, there's going to be things along the way where we reallocate parts of what we're doing to things that are consistent with our future strategy. There may be noise in quarters to come, but I don't expect it to be anything like this one.
Appreciate all the color. Thanks for taking my questions.
You got it.
Our next question comes from Matt Olney from Stephens.
Hey, guys. Good morning.
Good morning, Matt.
I also wanna dig more into TPay. I thought most of 2Q metrics showed some improvement or at least were similar to what I was forecasting. We saw higher number of invoices, higher dollar amount of invoices, but the dollar amount of receivables was down linked quarter. I'm not clear if the turn times increased or the discount rates declined. Any color you can give us on why the average dollar amount of the receivable declined in TriumphPay?
Yeah. That would be in direct alignment with the average invoice price going down. The receivables themselves are tied to the amount of the invoice, and so as that has softened, within the portfolio, we'll see that revenue drop.
Okay. Within Triumph Pay, also curious about the investment spend there. Appreciate that it's vital what you're trying to achieve, but help us appreciate the ramp of the expense in that Triumph Pay segment. When do you expect that ramp to moderate? How close are we to that?
Right now, our investment is primarily in our operations folks. As we continue to grow the payment volume on the platform, that requires support, and contact center support for the customer service side of that. As we look at our future growth and what's in our pipeline, as Aaron mentioned, we have $15 billion that's kinda stacked up, ready to come onto the platform. That is a significant increase, and we are in preparation of that volume, staffing our teams up so that we're prepared for it and have the training, et cetera, in place, to be able to handle that smoothly for our customers. You'll continue to see us invest operationally, to support the growth, and that will, you know, continue to go out through 2024.
Yeah. I think, Matt, to your question on whether the glide slope is probably flattening a little bit. We did a significant amount of hiring and building with TriumphX, bringing in some very expensive but very valuable team members to help us shape this strategy. The go-forward investments are always to update the software ecosystem. I mean, that's a living, breathing thing. Most of these adds are in operational support. It'll be a flatter growth from here.
Okay. That's helpful. Thank you for that. Just, I guess, lastly, we've talked in the past about eventually doing some syndications within Triumph Pay. Could you just remind us how close are we to seeing these syndications? Is this something we could see towards the end of this year, or just more of an initiative that we'll see more impactfully in 2023?
I think it's gonna be more of a 2023 issue, Matt. We're not balance sheet constrained, as you know, from everything that we've you know all the repositioning that has been done. We're not in a position where we need to be selling those assets, to make room for the balance sheet allocation we have for it. We think that's a future state problem when we have significantly more volume coming across the system. Nevertheless, just like we wanted to create the plumbing for equipment finance syndication opportunities, the syndication inside of TriumphPay, it would be wise of us to do one in 2023 just to demonstrate that the plumbing works for ourselves, and our counterparties, and investors.
I think even if we have the balance sheet room to hold it all, you'll see us do the first one of those next year.
Okay, thanks. I'll step back in the queue.
Our next question comes from Steve Moss from B. Riley.
Sorry about that, guys. Morning.
Good morning.
Just, you know, on the pipeline here, you guys mentioned that there's $15 billion in annualized payment volume here from online. Is it? You know, is all that just what is in integration or is some of that also includes, like, contracts that have not yet started in terms of API integration?
Yeah. It's a both and, right? This is volume that is in the contracting phase, and we have already started integration, but we haven't signed the final contract or completed the integration.
Okay.
It's not as linear of a process as you would expect. These are long, you know, by the time you get into the point where you're working on the contract, that means you're also working on integrations, just because the pipeline is so long.
Okay. In terms of just the conforming volumes here, just conforming transactions, you know, your end of quarter numbers imply a healthy step up. Just kind of how we think about conforming transaction growth as we go here over maybe the second half of the year.
Yeah. As we step up that volume on the payments network, the payment volume where we have those share ones come in, they will be conforming enabled brokers. As in the last quarter, we spent a lot of time re-engineering the plumbing for our existing clients to get them to a conforming level as well, so fully integrated conforming capable. There's still a lot of work to do with our existing clients to get them there. Those take re-engineering and reintegrating existing plumbing for them. The team has spent significant amount of time making that happen. You'll see us to continue to grow that. We're continuing to add factors into that network as well, so they can receive that data.
We have a team that is completely focused on just re-engineering the existing clients to get them there. It does take some development efforts on our customer side as well, so we're kind of a little bit at the mercy of their availability to make those changes. We're making significant progress.
Steve, just to take it from just that to a more granular level, it's kind of which side goes first. You need a certain number of large freight brokers to be on the ecosystem for this to make sense for the factoring universe, right? They have to believe that they're gonna see 20% of their payments come through as conforming transactions in order to change their business models and take advantage of the network. On the flip side, the large freight brokers wanna see more factors on this system because that creates a more efficient way for them to work together. If you look at the market right now, 15% of the payments that Triumph Business Capital receives they receive from TriumphPay. So that's our penetration of the market as it's going to factors.
About 6.5% of that volume is coming through as conforming because there's a lag in making sure all of those freight brokers are fully integrated. When you add the $15 billion that's in the pipeline, plus what other things we're working on, the day is going to be here before the end of 2024 when we make far more than 20% of all payments to the factoring industry, and we can deliver almost that same amount in conforming transactions. At which point, if you don't join the network for conforming transactions, your business model is going to struggle to compete with the efficiencies that the other players will have.
Okay. That's all. Appreciate that color. One question on expenses here. I hear you guys on the stable expense guide quarter over quarter, but maybe just kind of curious, are you seeing any additional inflationary pressures beyond the third quarter?
Steve, I lost the second half of your question, but I think you were asking about just inflationary pressures on our expense base overall. We have definitely seen wage competition as we're bringing new people aboard. That's clearly been happening and is continuing. It feels as though it may be moderating a little bit at this point, especially on the technical side. You know, we tell our team all the time that we're in a very good position relative to a lot of other
Folks who would be bringing on technical talent, because we're not beholden to that next round of venture funding. You know, a lot of the startup type companies out there are pulling back in a pretty material way just given market conditions, and we don't have to do that. I wouldn't say that it's anything accelerating or anything like that. We're definitely feeling it to an extent.
All right. Thank you very much. Appreciate the time.
Thanks, Steve.
Our next question comes from Brad Milsaps from Piper Sandler.
Hey, good morning, guys.
Morning, Brad.
Aaron, thanks for the shareholder letter. That was very helpful. Just kinda wanted to ask around the timing of some of the actions that you took this quarter. I think the factoring sale was at the end of the quarter, and then was unsure of the timing on the sale of the equipment loans. Just curious how both you know impacted maybe Q2 results. I know you guided us on there. If you know, if you don't deploy some of that liquidity, you know, kind of what it means for earnings. Just wanted you to talk about your ability to kind of replace those lost assets. Looks like you were sitting on more than $700 million in cash at the end of the quarter.
Just kind of wanted to think through some of those moving parts.
Yeah, Brad, both of those transactions closed in the back half of June. That cash balance that you see is definitely inflated relative to where we would normally have it be. As far as the opportunities to reinvest, there are several ways that we could go with that. We've already started to some of that. The market has given us an opportunity to invest in some more liquid market investments. Think top of the stack CLO securities, liquid loans and things like that. We'll continue to do that, but we're gonna do it at a measured pace. We kind of have to think about our excess capital in a few different buckets. Relevering is one of those buckets.
Looking at our own shares is another, and holding capital back for another day, for a variety of purposes is another. We look at all of that in totality. As far as what we're giving up, I think we mentioned in our shareholder letter that the net interest margin given up on the equipment portfolio. As a reminder, that is a fully amortizing set of loans, that's a bit of a melting ice cube. We retain those customer relationships, and we'll continue to originate more assets with those same customers. We're giving up about a little over $3 million in net interest margin over the balance of this year, another $4 million over the totality of 2023 from the equipment sale.
General factorings is a little bit harder to pin down because those balances fluctuate quite a bit more, and they're not quite as, you know, scheduled out, so to speak. Just rough numbers, we're probably looking at about $7.5 million of net interest margin that we'll not receive on those assets.
Brad, it's probably a safe and conservative assumption to assume that we will replace a portion of that revenue over the next few quarters. I think the balance sheet will stay roughly around the size it is. You'll see some loan growth to the extent we believe in opportunities. There's gonna be a period, certainly this period and next period, where there's some margin that hasn't been backfilled. If we backfill it, when we backfill it's going to be consistent with the strategy. It's very likely going to be either quick pay balances that come from this additional volume coming into TriumphPay or the continued growth of Triumph Business Capital in its core transportation markets. Everything else around the edges in the community bank and otherwise, we'll do if it's appropriate and as it makes sense.
It's okay for us to have the excess capital during this period of time when we are evaluating other ways to invest in TriumphPay to accelerate its growth in freight audit and pay. When we're looking at the opportunity to buy our own stock back, should the market pull back to a level where we believe that the TriumphPay call option is priced close to zero, then we think that's a good use of that excess capital. We're not gonna be led to do a less than excellent decision just to protect margin over the next two quarters. I mean, if we give back a few cents in earnings because we maintain optionality, we are very comfortable with that.
No, that's helpful. Kind of in the interim, you might see a step back in traditional factoring revenue, but that would be the start to kind of backfill that with more TPay revenue, you know, towards the end of the year into next.
Correct.
I know it's not cool to talk about the bank on these calls, but I'll ask the question. Just curious, you know, you're probably more asset sensitive at the bank than you ever have been, just given the improvement in your deposit base. How much lift, sort of ex the impact of the assets that you sold do you expect to see in net interest income at the banking segment as you move through 2023 into 2024?
Bear with me. Yeah, just looking at the rate environment and our deposit base. You know, about 85% of our deposit base now is what I would-
Consider to be, you know, very high quality non-maturity deposits, that are not particularly rate sensitive. We've not really seen any intense price competition for those deposits so far. Other banks remain fairly liquid as well. We are responding to specific situations as we feel is appropriate. As far as, you know, what the impact of rate changes would be, we're looking at about, probably about $3 million-$4 million, if I recall, relative to what the net interest margin would be over the balance of this year, in a flat rate environment.
We're projecting another 175 basis points or so of increases on the short end of the curve, and that should produce $3 million-$4 million over the balance of this year. You know, looking at it, maybe $10 million, if I recall what the modeling would suggest.
Okay, great. Thank you, guys. I'll back to you.
Our final question comes from Gary Tenner from D.A. Davidson.
Thanks. Morning, everybody. I'm gonna ask another mundane bank question. Noticed in the quarter, the provision was up quite a bit, obviously a tiny bit related to kind of the, you know, cancellation of the plan to sell the branches. It looks like the provision was mostly in the bank segment. Just wondering if you could talk about changes you may have made to your ACL model or otherwise. The ACL is the highest it's been since, you know, probably early stages of COVID. Thanks.
Yes. We did recalibrate our economic model that drives a lot of those ACL results. We've got a higher probability of a recessionary type environment and higher unemployment, and that's what drove the increase in this period.
Thank you.
All right, we'll take one more question on this line, and then we'll go to the phone line. This one comes from Matt Olney from Stephens.
Thanks for the follow-up. I wanna dig more into the equipment lending portfolio. You know, equipment lending is an asset class I think a lot of investors are becoming more cautious on due to some of the economic headwinds. You guys announced a loan sale that resulted in a nice premium. You hinted that it could be more such sales in this asset class. Would you like to dig in more into this portfolio and kind of what else do you have planned for the future for this?
Yeah, I'll take this one. Thanks, Matt, for the question. Yeah, so we definitely intend to do more of these sales in the future. This is completely consistent with our desire to continue to serve our transportation clients with equipment finance solutions without necessarily growing our overall balance sheet. You know, the plan would be for us to continue to originate at least our current pace and maybe a faster pace going forward, and then as we accumulate balance, to continue to either sell to other banks or securitize whatever the best execution would be. In this case, the execution was a sale to another bank. You know, that bank was just very eager for earning assets, so they were willing to pay a higher price than anyone else. It was a competitive process.
We thought it was a really good move for us to be able to, you know, take that gain, basically reload the equipment finance sales team, send them back out to originate more, which allows us to stay within our internal credit limits for our existing clients, and also potentially go out to market for other clients that we haven't pursued in the past. You know, we have pretty high hurdle rates and expectations for what we make, for the assets that we keep on our own balance sheet. We could go after higher quality, lower rate clients with the idea that we would sell those assets in the future, and that would open up new markets for us as well. We're just as committed to equipment finance as a tool to serve transportation clients as we ever were.
With the way we've structured this and our ability to retain the relationships, with this being completely transparent to the borrower, I think positions us really well to do so.
Matt, it should probably be just so that you have clarity. The equipment finance, obviously for us, is largely in and around Class 8 trucking, over-the-road trucking, whether it's trucks, trailers, any type of that equipment. There is construction lending in there for heavy construction equipment, and there is also for waste hauling. We don't do subprime lending in our equipment finance portfolio. That means many of the smallest independent owner-operators are not our borrowers in that portfolio. It's more of a small to medium-sized fleet product. If you get into large fleet, we're not gonna be competitive because, as you know, we try to have pricing discipline.
You're talking about the actual trucking companies who produce financials and all the things you would expect, which is why the credit quality has performed well enough that we have regional banks who would like to be our counterparty in that. Because it's difficult to produce that many loans as it takes, and they amortize down so quickly because they're on fully amortizing, you know, they're made on a fully amortizing basis. That there's value in the team, the relationships the team have built. We've always made sure that we were focusing on the higher end of that universe, and we will continue to do so. I think investors are right to have concerns about equipment finance portfolios. I think you're right to have those concerns in any given market.
I would be really worried about people who underwrote those loans using algorithms in a black box. I mean, that has been proven not to be successful at scale. That's not what we do. Our equipment team knows our borrowers, their companies, many of whom have deposit relationships with us now. We are their bank, and we know them well enough to judge credit well. I hope that this loan sale that we did, you can imagine that the buyer would have looked through that with a fine-tooth comb and to understand the risk. I hope it demonstrates to you and the market the quality of that equipment finance portfolio.
Yeah, that's helpful. That all makes sense. Just lastly, I wanna ask about capital and capital constraints at the company. It seems like you've got plenty of excess capital today. I think your CET1's still over 11%. I'm assuming continued capital build because there's no dividend. When you talk about freeing up capital, you've done some loan sales. I guess help me appreciate your big picture what the capital constraint is today, as you see it.
Well, on an organic basis, Matt, I don't think there is a capital constraint. I mean, as you watched, we hold our balance sheet relatively at its current level and have done so for several quarters, and we've been far more focused on the mix shift of assets underneath to take us into the transportation-centric future, that we envision for ourselves. The capital constraint then comes down to the only other two uses of capital which are on our radar. Number one would be to buy back shares. You know, we've executed on that. We're not executing on it right at this moment, but that is a tool that we will not hesitate to use if we see our shares pull back to
As we've said, if you're intrinsically pricing Triumph Pay at zero, we'll buy all of it we can, 'cause we see the long-term value proposition. The second option would be the use of that capital to buy and invest in technology and companies that would support our growth in freight audit and pay, much like we did with Intelligent Audit. As you would expect, many of those investments, even if the underlying company is profitable, creates a significant intangible, which becomes a use for the capital base we have. That would be where I would see the constraints to show up, which would be adding additional intangibles to the balance sheet if the opportunity presented itself, and then ultimately buying back our own shares because we believe in the long-term value of what we're doing, also would, given where we trade, still create an intangible.
That, that's helpful. Thanks, guys.
Thank you.
All right. I'll now hand things over to Chelsea for any questions from the phone line. Thank you.
Thank you. At this time, if you would like to ask a question via the telephone, you may do so by pressing star one on your telephone keypad. Once again, that is star one to ask a question. We'll pause for a moment to allow questions to queue. Our first question will come from Adam Hurwich with Ulysses.
Term restraint in the balance sheet. Medium to longer term, is there any growth that you'd expect to see on the balance sheet?
No. Adam, I think we're always gonna be opportunistic. There is. I would say no or an extremely small chance we would ever consider going over $10 billion in assets. That's not part of our roadmap here. We wanna be more nimble than that. Between now and the end state, if the end state is we are the ubiquitous payments network for the trucking industry, and we allow parties to own the receivables that are generated in that structure, through syndications, then I think we would say to you, over the long term, if we are being successful at the play we have called for ourselves, our balance sheet will shrink from here.
Just to try to understand how you think about it, and I don't need any guidance, but just directionally. Your GAAP EPS approximates your free capital generation, which means that your optionality going forward, vis-à-vis whether you buy strategic technologies or return the capital to shareholders, really approximates your earnings and whatever excess capital you generate.
We would agree.
Fine. Thank you.
Thank you. Once again, that is star one to ask a question. All right, there are no further questions in the queue via the telephone.
Thank you. This concludes the Q&A portion.
Sorry. Thank you all for joining us today. We look forward to speaking with you soon. Have a great day.