Triumph Financial, Inc.

Good day and welcome to the Triumph Bank Incorporated Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Luke Wise. Please go ahead.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our second quarter 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're 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, Bryce Fowler, Todd Ritterbusch, our Chief Lending Officer, Jeff Brenner, our CEO of Triumph Business Capital, and Brad Voss, our Treasurer. After the presentation, we will be happy to answer any questions you may have. At this time, I'd like to turn the call over to Aaron. Aaron? Thank you, Lou. Good morning.

For the second quarter, we earned net income to common stockholders of $27.2 million, or $1.08 per diluted share. Adjusting for closing costs related to the Hub Tran acquisition, adjusted earnings per share were $1.17. Before I go into specifics on the quarter, I want to address two topics. First, on July 15th, we announced that Bryce Fowler will be retiring on September 1st. Bryce has been my steady companion since Triumph became a bank. He is a great friend and teammate. He is in the room with me today and will continue to be in the room as he serves on our Bank Board of Directors following his retirement. We wish him nothing but the best in his well-deserved retirement and all of us join together and thank him for all he has done. Upon Bryce's retirement, Brad Voss will be promoted to Chief Financial Officer. Brad has also been part of our team since the early days and speaks to the depth of leadership we have built over the last 10 years. Brad's promotion is the culmination of Bryce's mentoring within our succession planning process, and investors and team members should witness a seamless transition. Brad has deep experience in broad areas of finance and banking, and most importantly, he is steeped in our culture of transparency, innovation, and servant leadership. The second topic I want to address is a change in the way we present our results. Beginning this quarter, we reconfigured our reporting to break the consolidated entity into four reportable segments, consisting of payments, factoring, banking, and corporate. The payments segment relates solely to the activities of Triumph Pay, making it easier for investors to see and monitor our progress. The factoring segment is unchanged from before and consists of all factoring, both transportation and non-transportation, at Triumph Business Capitals. The banking segment is unchanged from before with the exception of removing Triumph Pay and includes our traditional lending and deposit relationship banking activities as well as our mortgage warehouse lending, ABL, the liquid credit portfolio, and equipment lending. The corporate segment also remains unchanged from before containing our holding company activities and certain expenses to support the overall operations of the company. Now turning to the quarter. It was a strong and eventful quarter for TVK with a number of positive things to call out. Before covering those, I think it's appropriate to address non-interest expenses as I'm sure investors have questions given that the number grew just under $10 million from last quarter to this one. If I were to break that increase into a few buckets, it goes like this. $3 million were professional fees associated with the Hub Tran acquisition. This is not a recurring expense. $1.3 million was for HubTran operations and amortization expense for the partial quarter. This is recurring, and we expect HubTran to add $3.6 million of expense per quarter going forward. $1 million was an additional bonus accrual in the second quarter. As our operating metrics have improved significantly over the first quarter, I would expect an elevated level of accrual through year end. $2 million was for additional stock compensation expense. This is recurring and reflects grants made to our team, largely at Triumph Business Capital and Triumph Pay, including the new team members from HubTran. Finally, $2.6 million of additional compensation for new team members and commission expense on sales at Triumph Business Capital and Triumph Pay both relate to the exceptional volumes and growth I will discuss later in this call. Going forward, we expect quarterly expenses of $71 million through year-end. Triumph Business Capital continues to grow and execute with excellence. A few interesting facts about the results that speak to the current market conditions. During the second quarter, Triumph Business Capital crossed over 10,000 active clients. Now, while client count is not the perfect proxy for growth, because for Triant Business Capital, a single client can be a 500-truck fleet or just a single owner-operator, it is noteworthy given that we were at 8,835 clients in the first quarter and 6,302 clients in Q2 of 2020. The client growth has continued into July with a very strong pipeline that is averaging more than 1,000 new client applications per month. This is a significant lift versus any prior period in our history. During this quarter, we also saw several days in which purchases exceeded $50 million, and we averaged nearly $48 million per business day for the entire quarter. Triant Business Capital purchased approximately 1.4 million invoices, an increase of more than 200,000 over the first quarter. Second quarter Triumph Business Capital factoring revenue was $47.4 million and the dollar volume of invoices purchased was $3.1 billion. That's an annualized run rate of approximately $12.4 billion in purchases. Average transportation invoice sizes were $2,090 for the quarter. Given the size of TBC relative to our balance sheet, investors should understand that a $100 move up or down in average transportation invoice prices would impact annualized EPS by about 26 cents per share. To that point, we often receive questions about our economic outlook and how long we expect this transportation cycle to continue. Everything we're currently seeing and reading suggests strength in the spot market through the end of the year. And some transportation experts are beginning to speculate it could continue well into the first half of 2022. Given the multitude of variables that affect transportation, we are not comfortable making any projections for 2022. Turning to Triumph Pay. On June 1st, we closed the acquisition of HubTran and made good progress in the integration of our teams and systems. HubTran brought client relationships and integrations with over 225 freight brokers and 55 factors. We have not lost a single factor or broker following the announcement. In fact, we have added five more factors to HubTran, including a couple who had not begun negotiations until after the acquisition announcement. The acquisition resulted in $27.3 million of intangible assets and $73.7 million of goodwill. Additional detail on the acquired intangible assets will be in our 10Q, but total amortization expense on all of our intangible assets will be $6.5 million over the last two quarters of this year. While there are not a lot of quantitative items to discuss as we continue to integrate the teams and products, these additions of factors and freight brokers are a testament to how the industry views what we're building. We now have 60 factors and 482 freight brokers who are Triumph Pay customers, Hubtrend customers, or both. Our focus going forward is to create full product relationships with each of them as we build out the network. You can see the metrics on slide 11 and 12 of our deck. During the second quarter, Triumph Pay processed 3.2 million invoices, paying almost 93,000 distinct carriers. As of June 30th, we have paid 135,000 distinct carriers in the last 12 months, which is over 50% of all active carriers. Second quarter payments process totaled approximately $3.4 billion, a 49% increase over the prior quarter, and a 413% increase from Q2 2020. Triumph Pay's annual run rate payment volume as a result was $13.7 billion. This was an exceptional growth quarter for Triumph Pay. We've added a new section around Triumph Pay beginning on slide seven in our investor deck as we want to be clear about the metrics that matter. In addition to the $13.7 billion annualized run rate, going through Triumph Pay currently, HubTran touches companies with an additional $13 billion in volume. That volume is valuable, however, it would not be appropriate to count it as true payment volume. To be specific, we needed to find the difference between the current HubTran product and the Triumph Pay product, at least in the current state of affairs. To our freight broker clients, HubTran serves an audit function allowing these clients to validate that invoices as presented are correct Paperwork is in order, and the invoice is legitimate for the broker to pay. For our factor clients, HubTrans serves the same audit function, allowing them to determine whether or not to purchase a particular invoice, and also provides a mechanism to present and process the invoice by the factor for purchase. Triumph Pay, on the other hand, specializes in the presentment of invoices and the payment of the invoice on behalf of the freight broker. But prior to HubTran was missing the audit functionality that we now have. Combined, these two technology platforms create seamless presentment, audit, and payment of transportation invoices. We expect the merger of these technology platforms to be complete in Q1 2022. Until that date, we will continue our practice of only reporting payment volumes on what Triumph Pay actually touches. We will also report additions of factors and brokers on both products in the near term, as you see on slide 12, and call out brokers or factors who utilize both products. We expect to finalize pricing for the combined technology in the third quarter. As I said, we expect to deliver an integrated product in Q1 of 2022 with the ability to offer a fully conforming transaction solution at that point. Meaning, little to no human interaction in the full cycle from presentment through audit to payment. I want to urge investor patience as these results come in. Even with an integrated product in 2022, a meaningful trend line for the revenue growth and profitability of this business is unlikely to emerge until 2023. Creating a payments network is an exceedingly complex endeavor. Beyond the technology build, it requires sophisticated integrations with thousands of market participants. Following these integrations, ultimate success requires participants to modify their operating procedures to take advantage of the efficiency, data security, and fraud mitigation the network offers. In other words, Triumph Pay's customers need to see the value we are offering in their bottom line before we can meaningfully see it in ours. All of this is happening as we speak. Day by day, we move the ball further down the field and revenue and volume is growing quarter over quarter. We remain as excited and committed as ever to the future of Triumph Pay, in part because of the size of the market. To this end, I'd like to call your attention to slide 13. The addressable market for brokered freight is not simple to define. However, based on the best available sources of information we can find and our own internal data, We believe the for hire market to be $420 billion, with about $170 billion of that in brokered freight and $250 billion in contract shipping. Slides 14 and 15 break that addressable market out by volume and participants. At $13.7 billion in annualized payment volume, Triumph Pay has a lot of runway in front of it. As we stated last quarter, we're providing the metrics as we have in the past, but due to the shift in strategy towards the open loop, these metrics and what we monitor for success will change going forward. With that said, I'd like to call your attention to the new Triumph Pay segment table in our earnings release. This table breaks out Triumph Pay reporting elements while also presenting the data in an EBITDA format. We believe this is appropriate and useful to investors given our direction towards fee income versus balance sheet growth for Triumph Pay. Now I would like to turn the call over to Todd Ritterbush, our Chief Lending Officer.