Triumph Financial, Inc.

Good morning and welcome to Triumph Bancorp's third quarter 2021 earnings conference call. All participants will be in 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 touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Luke Wise, Senior Vice President, Investor Relations. Please go ahead.

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 statement. 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, 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 would like to turn the call over to Aaron. Aaron? 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 use that time to discuss developments in our transportation financial technology platform, which includes both Triumph Pay and Triumph Business Capital. We will continue to include all relevant metrics for our community bank segment in our investor presentations. Todd Ritterbush, 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 Triumph Pay to be the largest payor in all of brokered freight. During the third quarter, Triumph Pay processed approximately 3.8 million invoices, paying almost 117,000 distinct carriers. As of September 30th, 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. Triumph Pay'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 Triumph Pay'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 continued to add brokers to the network, bringing our total count of freight brokers to 532 who are Triumph Pay customers, Hub Tran customers, or both. On September 21st, Integrity Express Logistics went live with Triumph Pay 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 11 cents 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 Grant. We disclosed an incentive program in our 2019 proxy that covered a significant portion of our senior leadership team. We called 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, were we to determine that some level of payout is likely, an inception today 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 10K available on our website. With that, we will turn the call over for questions.