Triumph Financial, Inc. (NASDAQ:TFIN) Q3 2023 Earnings Call Transcript

Triumph Financial, Inc. (NASDAQ:TFIN) Q3 2023 Earnings Call Transcript October 20, 2023

Luke Wyse: Good morning. It’s 9:30 and a beautiful morning in Dallas. We’d like to start the call today by thanking you for the interest in TFIN and your attendance today. We know it’s a busy day for earnings and we appreciate the time to discuss our Third Quarter Results with you. With that, let’s get to the business at hand. We had a strong third quarter and a lot of things break our way, but the quarter continued to present a challenging freight environment, one which we do not yet see improving. We remain excited about the possibilities and our progress in spite of that. Last evening, we published our quarterly shareholder letter. That letter and our quarterly results will form the basis of our day. However, 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 published last evening. All comments made during today’s call are subject to that safe harbor statement. With that, I’d like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron?

Aaron Graft: Thank you, Luke, and good morning. Thank you all for joining us. We made significant progress in the third quarter on several fronts. Our financial results were also better than in prior periods. In the shareholder letter released last night, I outlined four things that I thought were important to communicate to our investors about the quarter. Those included: First, TriumphPay’s momentum and financial performance has exceeded even our own expectations. Second, we had a unique quarter from an expense perspective that is unlikely to repeat in the near term. Third, the freight market has not rebounded and it could get worse before it gets better. And finally, related to that, the things that make us uncomfortable in the short term, we believe will create value for us in the long term.

As it relates to those third and fourth points, the last few days have produced some interesting headlines. Two days ago, FreightWaves broke a story detailing that Convoy, a well-known tech-enabled freight broker had pulled its loads and that an announcement was forthcoming. We now know that Convoy is in the process of shutting down without a sale. That is something that would have been hard to imagine just a few months ago. Additional stories have followed speculating that several more freight brokers and carriers could face a similar fate. I’m friends with many people in this industry, and it saddens me to think about the disruption this will bring to many employees and customers. But however, I feel about it, that is the reality of how capitalism works.

Companies that are not profitable will eventually fail. And one of the reasons I am bearish on freight over the short term is because I believe that private equity and venture capital have artificially propped up some companies that were attempting to bring disruption to the industry without ever achieving profitability. I believe a significant amount of money will exit the stage in the freight industry and may not return anytime soon. I also believe that Triumph Financial and specifically what we’re doing at TriumphPay is bringing innovation to the industry. And I know that this change is another healthy force of capitalism. The difference is that we are able to earn our cost of capital while bringing about this advancement instead of being beholden to additional outside funding.

My journey into banking started in 2008 and 2009 and going through that process leaves you with a deep appreciation of the need to remain profitable even through the toughest cycles, and that is what we are built to do. As it relates to Convoy, Triumph has less than 300,000 of counterparty risk outstanding, some of which we expect to collect in short order. And as additional brokers go through difficult times, we will continue to focus our attention on servicing the needs of the industry, while we remain vigilant in protecting our own balance sheet as we always have. Before turning it over for questions, let me explain that while my bearishness about the next 12 months or so is real, it also makes me extremely bullish on the long-term future for Triumph Financial.

We have a business plan and a balance sheet that is prepared for a soft freight market. We will be one of those companies who emerge stronger through this, and we should have a materially greater market share than we do now. We are receiving more inbound inquiries than I can recall at any time in the past. As companies in the industry look to partner with a known industry leader with the financial wherewithal operational experience and technology stack to help them navigate this market. And if the market ends up performing better than I expected in the short term, we will be more profitable and that would be great. But I am far more interested in creating value for the long term. In conclusion, Triumph Financial is not a typical bank nor do we desire to be one.

We are building a payments network in a market that needs one now more than ever. communicating that requires effort. So we put a significant amount of time and energy into our shareholder letters to help investors achieve an informed view. I hope you find those efforts valuable. With that, we’re ready to take your questions.

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Q&A Session

Operator: We will now go to Q&A. [Operator Instructions] Our first question comes from Michael Perito from KBW. Michael, please go ahead.

Michael Perito: Hey, everybody. Good morning.

Aaron Graft: Good morning.

Michael Perito: I had a few things I wanted to touch on. Number one, just off of your comments, Aaron, the shareholder letter was very helpful. So thanks for the color and thoughts around the current environment. On TriumphPay, obviously, a very strong quarter. I know there were a couple of things. It sounds like on the expense side, you guys highlighted. But one comment in the release I also noticed was around flow – and I was just curious, I mean I imagine that’s at pretty high margin. So I was wondering if you can maybe just dissect what the contribution of float was to try and pay in the quarter. And is it fair to think that, that freight stay at current levels were higher for longer that, that should be kind of a sustainable EBITDA margin contributor? Or do you expect any volatility around that?

Aaron Graft: Sure. The – as we’ve explained in the past, how we calculate float for purposes of intersegment accounting is at the Fed funds rate overnight. So I believe that rate is roughly 5.4%. And – so that contribution of that just under $300 million of float at that – the Fed funds rate would be $16 million in pretax revenue. That is very valuable for us. That is very high margin for us. And of course, it’s going to track what Fed funds do. So if we stay in a market that’s higher for longer, then we expect that revenue component to grow because we expect our float will grow as our payment volume grows and we definitely believe that will happen over the next 12 months.

Michael Perito: Yes, that was more of the question to the volume – obviously, the rates are the rates, but does the volume, you expect that to continue to grow as your network transaction volume grows?

Melissa Forman: Yes, we do. Especially as we move further upmarket into the shipper participants, we would expect that to be – have exponential growth.

Michael Perito: Okay. And then secondly, I wanted to ask, Eric, I thought some of your comments around credit stood out. And I appreciate that for you guys. It’s less of a percentage of your business and what you’re trying to become, but still impactful near term. And so I did see that the nonperforming assets ticked up, but it looks like the reserve didn’t really change much. I was just wondering if you could give us some color about what you saw on the credit side and maybe near-term expectations around any provisioning or reserve build that we should just factor in as we model out the early part of ‘24?

Todd Ritterbusch: Yes, I’ll take that one. So on the tick up in the nonperforming assets, those particular assets happen to be so well covered that there was no reserve required. That’s the short answer to that question. As we continue to look forward, if there are additional credits that need to be downgraded, we’ll go through the same analysis, but we’re already stress testing the portfolio and we feel very good about secondary sources of repayment.

Aaron Graft: And Mike, if I can just add, if you go back and look at our shareholder letters from a year or 2 years ago, that was the time to make sure you were being vigilant on credit when the market was far more competitive than it is now. And I would never submit to you that we got it perfectly correct, right? That doesn’t happen. But what I do know is because we weren’t obsessed with growing our balance sheet. And because we know this market operates in cycles, we were very disciplined. We are very thoughtful when we take credit on our books. And I believe that will serve us well. And so we have some things. I’m sure we will work through in this cycle. Do I expect there to be material losses? I do not. Because I know how our team has approached that and the discipline we brought to it in a market when a lot fewer people were thinking about that.