Triumph Bancorp, Inc.

Welcome to the TRENF Bancorp Inc. 4Quotes 2021 Earnings Conference Call. My name is Juan and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I will now hand over to your host, Luke Wise, Vice President of Investor Relations, to begin with. Please, Luke, go ahead.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our fourth quarter and full year 2021 financial results. Before we get started, I would 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 are logged into our webcast, please refer to the slide presentation available online, including our safe harbor statement on slide two. For those joining by phone, please note that the safe harbor statement and presentation are available on our website at www.triumphbankcorp.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 Ritterbush, our Chief Lending Officer, Jeff Brenner, our CEO of Triumph Business Capital, and Ed Schreier, our President and COO of Triumph Pay. After the presentation, we will be happy to address any questions you may have. At this time, I'd like to turn the call over to Aaron. Aaron?

Thank you, Luke. Good morning. For the fourth quarter, we earned net income to common stockholders of $25.8 million, or $1.02 per diluted share. By almost any measure, this was a remarkable quarter. We did have one unusual item this quarter to accrue for the cost of our strategic equity grant, which I will discuss later in the call, which was a 23 cent drag on reported EPS. Last quarter, we introduced you to the metrics that matter at TriumphPay. During the fourth quarter, Triumph Pay processed approximately 4 million invoices, paying just over 120,000 distinct carriers. That represents an increase of about 50,000 distinct carriers, or 70% compared to the fourth quarter of 2020. Fourth quarter payments processed totaled approximately 5.2 billion, a 25% increase over the prior quarter, and a 173% increase from Q4 of 2020. Triumph Pay's annual run rate payment volume for the quarter was 21 billion. Undoubtedly, the strength of the market has had a positive effect on total dollar volume. The more important long-term metric is the number of market participants who use our platform. That number continues to grow as you can see on slide nine. As important as the top-line volume growth, we have, as of January 11th, completed our first conforming transaction and multiple thereafter. A conforming transaction is a payment between a fully Triumph Pay-enabled payor, either a freight broker or a shipper, to a fully Triumph Pay-enabled payee, either a carrier or their factoring company. As of today, we have two Triumph Pay enabled freight brokers making payments to five Triumph Pay enabled factoring companies in our test program. We have 11 more factors in the queue. Not all of these will be live next quarter, but they are in the integration queue for 2022. As to our own factoring business, Triumph Business Capital, it is in the integration queue but has not gone live yet. We expect to complete the TBC integration into Triumph Pay in the first half of 2022. What makes a conforming transaction unique is that the entire process of presentment, audit, payment, and cash application can be completed in an automated environment. You can think of this as the difference between pulling out a checkbook at the grocery store 30 years ago versus tapping a credit card today. One process is manual, the other is automated using integrations and structured data. That conforming transaction reflects the culmination of years of software development, the ingestion and digital transformation of tens of millions of disparate paper transaction documents, the application of machine learning and artificial intelligence, and the assembly of a platform to take this to market. As you see on slide eight, we view this first conforming transaction as equivalent to the moment when Thomas and Edison asked Mr. Watson to join him in the next room via the first ever phone call. The complexity of this accomplishment is significant given the hundreds of data points that can apply to any given invoice on both sides of the transaction. This accomplishment has been years in the making. I would also point out that beginning this quarter, we will rebrand the HubTran product as Triumph Pay Audit, and you will hear us using that term going forward. Creating the network effect requires engagement with all participants in the market, brokers, carriers, factors, and shippers. In the fourth quarter, we added another three factors to the Triumph Pay Audit ecosystem, bringing the total to 69. We also continued to add brokers to the network, bringing our total count of freight brokers to 554 who are Triumph Pay customers, Triumph Pay audit customers, or both. We should also remember the carriers. These are the actual truckers who move the freight that keep our country rolling. Making their life better goes to the heart of the Triumph Pay network. As we have said before, it is one thing to pay a carrier, it is a better thing for a carrier to register with the Triumph Pay Network. In the fourth quarter, we added just over 12,000 new registered carriers, bringing the total to just over 91,000 registered carriers, a 15.3% increase for the quarter and a 72% increase over the fourth quarter of 2020. Now turning to Triant Business Capital, which also had a very strong quarter. Average purchases per day exceeded $60 million for the quarter, and the dollar volume of invoices purchased was $4.03 billion, a 63.8% increase over Q4 2020. That's an annualized run rate of approximately $16.1 billion in purchases. Average transportation invoice sizes were $2,291 for the quarter. Triumph Business Capital purchased approximately 1.7 million invoices, 8.7% higher than the prior quarter, and a 40.4% increase over Q4 2020. Triumph Business Capital ended the quarter with $1.55 billion in accounts receivable, a 49.2% increase over Q4 of 2020. I cannot overemphasize how remarkable the team's effort has been to achieve these results. Our TBC team members deserve an extended standing ovation for their performance this year. The outlook for transportation is strong well into 2022. Everything we see and read expects strength in the transportation demand and invoice prices to continue through the first half of 2022. Some economists are calling for a return to normal, whatever that new normal looks like, in 2023, while others say that we should start to have some normalization in the back half of 2022. Like all of you, we don't know, but we believe that 2022 will be another strong year for Triumph Business Capital and Triumph Pay, and as we like to say, our sails are up and we are catching all the tailwinds we can for as long as they are available to be caught. In the midst of all this good news around industry tailwinds and our march towards becoming the ubiquitous payments network in trucking, I want to urge caution for 2022 earnings estimates. Wages are rising, particularly in the area of technology hiring. Our need for technical resources is significant, more significant than I thought when I shared the 15% expense estimate growth for Triumph Pay on the last call. Triumph Business Capital will also experience expense growth above projections due to wage pressure and hiring to invest in its technology stack. In light of these facts, we need to adjust expectations from the last earnings call, and I am using this call to level set for investors. First, we expect expenses for Q1 to be approximately $80 million, excluding any XEG accrual. Second, by the end of 2022, our company-wide non-interest expense base could be as much as 15% higher than it was in the fourth quarter of 2021, excluding the strategic equity grant. It is difficult to predict the timing of this growth. The scope and timing of our plans are very ambitious. We view ourselves in the middle of a race to revolutionize payments in the trucking industry, and we will invest heavily to ensure our success in reaching the finish line first. Our team has a significant economic incentive to maintain and grow profits in the near term. But if we did that to the exclusion of what we view as a generational opportunity, we would not be working in the long-term best interests of our team or our shareholders. The second risk, as a reminder, is that things will not always be like this in transportation and that there are many things out of our control. The upside of a tight freight market is that it boosts our current performance metrics. The downside is that these heady times can cause market constituents to delay implementation of efficiency measures, such as joining Triumph Pay, because the rising tide is lifting all boats, even those using legacy systems. When the market turns, and it will, it will affect our short-term performance, but it will also be a catalyst for participants to grab every efficiency they can. and we will be ready at that time to welcome them. On that note, as a reminder, while the last couple of years have been atypical, we usually see a seasonal decline in quarterly invoice volume in the first quarter relative to the fourth quarter. In past years, this seasonality has ranged from as much as a 12.7% reduction in volume to a 2.7% increase in volume. Finally, Turning to the one unusual item in this quarter's numbers. On our last call, we reminded investors about the Strategic Equity Grant, or the SEG, which was designed in 2019 to incentivize key team members to embrace a strategic shift, prioritizing growth in our market-leading transportation businesses while de-emphasizing overall balance sheet growth. We believe then, as we do now, that this intense focus on what we do best would create an opportunity for us to materially grow earnings and enterprise value. The SEG was designed to be a real stretch, requiring a minimum of $10 in cumulative earnings per share in the years 2020 through 2022 to trigger any distribution. The results so far have been extraordinary. Despite reinvesting in the business in ways that were not on our radar at the time we implemented the program, during the fourth quarter, we determined that the $10 threshold will likely be surpassed and that as a result, we will distribute shares. The estimated total three-year expense of the equity grant is $11.5 million, and we recorded two-thirds of that amount, $7.4 million, as additional compensation expense in the fourth quarter. Net of taxes, this reduced our reported earnings per share by 23 cents. We will refresh our estimate of the full three-year expense throughout this year, and we will record compensation expense each quarter to accrue towards those estimate goals. If our internal projections do not change during the year, we will record an additional $1 million of compensation expense during each quarter of 2022 for the SEGs. Further details can be found in our 2020 proxy statement or the equity footnote of our 10K available on our website. With that, we will turn the call over to questions.