Q1 2021 Triumph Bancorp Inc Earnings Call
Good morning, and welcome to the Triumph Bancorp fourth quarter 2021 earnings call all participants will be on listen only mode.
Assistance. Please signal conference specialist by pressing the Starkey followed by zero after today's presentation on weight opportunity to ask questions. Please.
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On the call over.
Mr. Luke.
Alright.
So that's the relations officer. Please go ahead.
Good morning, welcome to the Triumph Bancorp conference call to discuss our first 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 wanted to do on webcast. Please refer to the slide presentation available online, including our Safe Harbor statement on slide two.
I'm also joined by phone. Please note that the safe Harbor statement and presentation are available on our website www Dot triumph Bancorp Dot com.
All comments made during today's call are subject to net safe Harbor statement.
I'm joined this morning by times, Vice Chairman and CEO, Aaron graft, our Chief Financial Officer, Bryce Fowler, Todd Ritterbusch, our chief lending officer, and Geoff Brenner, our CEO of triumph business capital.
For this 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.
Thank you Luke good morning, everyone for the first quarter, we earned net income to common stockholders on $33 1 million.
For $1.32 per diluted share.
There are so many good things to talk about this quarter, it's hard to know where to start therefore, I will start by providing an update on the only negative item of note I have to report on today.
That being the continuing developments associated with our acquisition of TFS.
Then we will move on to addressing the many great things impacting this quarter and the future of our business.
We acquired the transportation factoring assets of transport financial solutions or TSS from Covenant logistics group in the third quarter of 2020.
Upon discovering several issues related to DFS post closing covenant agreed to indemnify us for up to $45 million of losses incurred on the $60 million up over advanced receivables acquired in the original transaction.
By the end of last year, we had fully reserved for the entire $41 3 million dollar relationship to the largest customer in this portfolio.
In the first quarter, given new adverse developments with that customer we charged off the entire 41 3 million dollar relationship which had no impact on earnings given that it had been fully reserved in prior periods.
Covenant has reimbursed on $35 6 million of this charge offs in accordance with the indemnification agreement, which they funded by drawing on their secured credit facility with us.
At quarter end, our entire remaining over Formula advanced position is down from $62 1 million at year end to $10 6 million.
In the first quarter, we increased our related reserve by $2 9 million to fully reserve for the remaining $10 $6 million balance.
This had the effect of increasing our credit loss expense and ACL by $2 9 million.
We summarized the TFS impact in our earnings release, however to state it simply here the net impact on first quarter results of the additional $2 9 million reserve and the upward revaluation of the remaining indemnification asset led to a pre tax gain of $1 8 million.
In conclusion on this topic I want to say something that is not entirely germane to this call. The TFS transaction was a mess, but the leadership at Covenant Logistics group consists of some of the finest and most honorable people I know in our industry. They have been people of their work throughout this workouts.
As it relates to the diverted $19 2 million currently in dispute with the U S Postal service and our former client the process continues to work its way through litigation and we have no material updates at this time based upon our legal analysis and discussions with our counsel advising us on this matter we continue to believe.
It is probable that we will prevail in our action against the U S. P S and that they have the financial capacity to pay us what we are owed therefore, we continue to carry this receivable without a specific reserve at the end of the quarter.
Staying on non core matters, but now turning to good news, we released $9.5 million of reserves due to improved economic forecast this quarter. Our current ACL stands at $48 million, including an existing specific reserve of $10 6 million on the remaining portion of the TFS acquisition.
Prior to the pandemic, our ACL as a percentage of loans was around 70 basis points and should macroeconomic conditions continue to improve it is possible that we could return to that level.
Our current level is zero point 94 per cent.
Now, let's turn to the great core things that happened. This quarter. This was another record quarter for <unk> on many fronts. We continue to grow our deposit base noninterest bearing deposits grew approximately $285 million and now represent 34% of total deposits.
Our loan to deposit ratio was relatively unchanged at 106 per cent.
Our loan yields this quarter were $7 two 4% NIM is 6.06%.
Looking out into the second quarter, we projected expenses will grow to approximately $63 4 million incorporating continued investment in our transportation related businesses now I would like to turn the call over to Todd Ritterbusch, our chief lending officer.
Thanks, Aaron I would like to start by providing an update on our PPP lending and forgiveness efforts in 2021, we've originated just over $83 million in new first and second draw on loans with an additional $10 million that we expect to close soon with.
With the exploration of the latest round of funding insight, we recently shifted resources from originating new PPP loans to forgiving existing loans.
We've completed the forgiveness process on 74 million on roughly one third of the loans made in 2020.
We also recognized $1 1 million in P. P. P fee income in first quarter 2021, with an estimated $6 6 million more to be recognized as we complete the procurement process.
About 80% of the remaining balances originated in 2020 are in various stages of completing the forgiveness process.
For loans that had been for given today over 99% of the outstanding balances have been forgiven, resulting in negligible outstanding amortizing loans.
Interestingly, we have not yet seen the expected corresponding decrease in deposit balances associated with the forgiveness of these clients loans.
Moving to our core lending activity competition for quality loans remains stiff some competitors, particularly in our community bank markets are not yet raising prices on term loans to reflect recent changes in the yield curve. Consequently, we expect to see balances declining credit only relationships along with additional spread compression as we defend broader.
Long term relationships.
We'll deliver acceptable relationship returns and are not driven solely by price.
Fortunately, we still have relatively attractive options for deploying our capital in excess liquidity. These options extend beyond our transportation payments business to equipment finance and ABL in particular the pipelines in these businesses are robust and deal flow is accelerating we are also putting greater emphasis on leveraging these capabilities along with our treasury management offerings.
To support our efforts to build deeper longer term relationships with factoring clients.
Overall, we don't expect the balance sheet on the lending organization to grow as fast as it has in the past, but we are increasingly recognizing and realizing other growth opportunities.
For example, our new Treasury management product sales are already 50% higher than last year and growing rapidly.
While it is clear that fiscal stimulus has driven some of our liquidity growth. It is also clear that a significant share of the growth was driven by deepening client relationships.
I'll now turn the discussion back over to Aaron for our transportation update. Thank you Todd and the second quarter of 2019, we announced a pivot in our business model, we narrowed our focus towards our transportation businesses, specifically leaning in to try on pay in triumph business capital.
This quarter, we announced a major step consistent with that pivot.
With the agreement to acquire hub Tran, we are creating on open loop payments network for the trucking industry by open loop I mean that multiple capital providers can join the network. It's not just for triumph. The network will provide tools and services to create frictionless presentment settlement and payment of invoices and <unk>.
Other words triumph pay is now becoming more than a b to b payments technology platform with HUD Tran, we use data integrations with parties on both sides of the transaction to materially change the way the industry operates on.
On slide 10, we map out a typical transaction between a carrier a factor in a freight broker as it now exists everywhere you see a hand is a point of human interaction in the process.
For a 1500 dollar average invoice this is extremely inefficient for everyone involved.
Factoring companies have large staffs to mitigate fraud manually handle all documentation paperwork and to call or email brokers to verify that invoices are valid.
Brokers have large staffs to handle those calls and emails into manually match the document type with the loans being hauled by the carrier.
Now if you flip to slide 11, we demonstrate how this process will work with try a pay plus hub Tran and an open loop environment.
But for a carrier even picks up the load, they're factoring company will be able to see the load and the brokers transportation management software after hauling the load carriers will be able to select the reload from their factors portal, which is connected to try and pay try on pay as the invisible pipe that allows parties on both sides of the transaction.
Factoring company and the broker to share structured data instantly between them efficiency speed and fraud mitigation take a quantum leap forward everyone wins.
In order to deliver this process optimization, we needed to complete the technology suite to handle the life of the trucking load in a structured format you can see how we do that in this combination on slide 12.
Moreover, not only as hub train a technology fit it is also a well known player in the transportation payment space with a multitude of legacy integrations that will speed up our progress to scale the.
The technology only works if you have an integration to the source of truth for the data hub.
<unk> brings client relationships and integrations of over 230 freight brokers and 50 factoring companies.
As a result of this transaction triumph pay plus hub trend will have integrations with 14 of the top 25 freight brokers as well as several of the largest factoring companies.
Combining hub train and trying to pay we estimate that we touch total transactional volume of $25 billion and brokered freight which is just under 20% of the market.
We expect this transaction to close in Q2 with total intangibles created approaching 90% of the purchase price customer relationship intangible and internally develop software could be 25% to 50% of total intangibles.
We expect the acquisition to be a modest drag on earnings mostly driven by amortization of intangibles, the magnitude of which is still being finalized.
With this acquisition triumph will have invested more than $120 million and the creation of trying to pay we are fully committed to this strategy and we firmly believe that through it we will compound value for all of our stakeholders.
Before leaving this topic I want to point out the obvious for the payments network to be effective we have to deliver a compelling value proposition to all participants that includes data security for both brokers and factors who joined the platform all.
All factors, including triumph business capital must operate from a level playing field. We are intentionally building safeguards into the terms of service for triumph pay to align everyone's interest and to protect their proprietary data as a bank and a fiduciary to our customers. This is a well understood responsibility that we.
Take very seriously.
Now to try on paid quarterly results.
We're providing the metrics as we have in the past, but due to the shift in strategy towards the open loop or key performance indicators will change going forward. For example, we will deemphasize quick pay on our balance sheet in favor of transaction based fees and the select carrier program will evolve to reflect the open loop focus.
Yes.
Next quarter, we will enhance the try on pay disclosures in our financials to make its progress easier to track for investors.
During the first quarter try on pay process to $5 3 million invoices paying over 77000 carriers as of March 31, we have paid 132000 carriers since inception paint.
Payments processed in the first quarter totaled approximately $2 3 billion, a 27% increase over the prior quarter.
Using March numbers, only triumph pays annual run rate payment volume was $10 7 billion.
We added one more tier one broker in the first quarter and expect to add another in the next few weeks as a result, we expect volumes to continue to grow.
Finally, we turn to try on business capital all I can say is that this team is amazing while we spend a lot of airtime talking about trying to pay everyone would do well to remember that very few companies are able to incubate a fintech startup the size of try and pay and still deliver return on tangible common equity above <unk>.
80%.
That wouldn't be happening without triumph business capital.
We have a tailwind unlike any I have ever seen in transportation, but without the people technology and processes to catch that tailwind it would passes by.
Triumph business capital purchased approximately 1.19 million invoices in the first quarter from just over 8000 clients Q.
Q1, factoring revenue was $37 6 million, excluding the $4 $7 million gain on the indemnification asset referenced in the opening.
The dollar volume of invoices purchased was $2 5 billion in Q1 2021.
That is a one 3% increase compared to last quarter and a 72% increase over the first quarter of 2020.
Average transportation invoice sizes for $1974 for the quarter. This is the strongest first quarter, we have ever seen.
The conversion of trying to pay two on open loop payments network takes away potential advantages for triumph business capital that our team has spent several years discussing in the end. However, we think the health of the entire transportation factoring industry is the best course, the market need several healthy participants to meet the <unk>.
Capital and other needs of the smaller trucking universe triumph business capital will be a leader among those participants TBC is working on several technology projects of its own to improve efficiencies and the user experience for our customers again, I can't say enough about how exceptional our team at TBC is and what.
They are continuing to do.
Finally regarding return to office. After this most unusual past year as of April 19th working in consultation with health care professionals, we return to approximately 60% occupancy at our headquarters. Despite the remote environment, we had one of our finest quarters ever I'm exceptionally proud of our team and their work.
With that we will turn the call over for questions.
Yes.
Well now begin the question and answers day.
Can I ask a question press star one on your Touchtone phone.
We use it or pay for bone pick up your handset before pressing magee.
For all of your question. Please press Star then.
At this time will pop up on <unk>.
For example, the wrong.
First question compressed bad most apps hybrid handler, we go ahead.
Hey, good morning.
Good morning, Brad.
Aaron Thanks for thanks for all the great color, maybe maybe just to start you know bigger picture.
What do you think is the best measure going forward is it still we should be tracking you know the number the number of invoices. The number of distinct carriers that you guys continue to you know.
The platform is that for the best way to kind of manage your progress just trying to get a sense of you know.
How the handoff is going to be from traditional type trial.
Triad business capital or even try and pay type revenue to kind of what you have now developed with the acquisition of pub Tran.
Yeah, It's a great question and one that we owe you some metrics next quarter, but let's just stepping back if you think about.
Volume and freight broker adoption of course that matters.
It also matters now that didn't matter so much prior to converting to open loop is how many factoring companies have chosen to engage on the other side of the network. So that's something you should look for are we able to grow the number of participants if theres 400, factoring companies and hub trans engaged with 50 of them existing.
How many more will come on because they see the efficiency gain that will come from this so I would point you to that.
Secondly is to start to understand the fee income.
Right now if you combine try on pay and hub Tran on a run rate basis, the revenues are around $18 $5 million.
Of course for us if we achieve what we're after we expect that to grow materially, but it's important that that growth in fee based revenue hub DRAM prices things on a per load basis or per invoice basis try and pay historically used its balance sheet.
And generated quick quick pay revenue, which as you know spread revenue that will be de emphasized going forward.
So I would I think those are the things to look for but clearly a leading indicator for being successful is the continued growth of volume going through the network that includes tier one brokers all the way through tier for brokers, but there's 25 tier one freight brokers, who have more than $500 million in revenue.
As we told you we are now integrated on a combined basis with 14 of those.
You should watch and see how many more of those come and of course that will materially drive volume for that.
Give some amount of clarity of what will be pointing you to in the future.
Yep Yep, just need the numbers right that to back it up but yeah, I think I get the I think I get the roadmap.
Do you still think there's you know there's still shelf space for you know plus or minus $2 billion of kind of traditional.
Factored receivables can that number grow just kind of any any color around that.
Average invoice price there so on another tick up this quarter as well not as dramatic as last quarter, but obviously still running running very high relative to history.
Yeah. So let me start off debt I'm going to ask Jeff to finish.
Look we want to make clear try a PE is a tool that is built for the entire industry.
So that means that factoring it's built for other factoring companies triumph business capital will be treated with equal parity to them in that tool and so going forward youre going to see more growth on a just volume basis and try on pain, because it addresses the entire market, but adds to try on business capital, which as you know.
For a long time has delivered very high profitability around here, we're still very proud of that business and think it will grow organically.
Jeff do you want to talk about some of the things you think that might affect the next few quarters, Yeah, I think going back and just thinking about the factoring industry itself. It remains highly fragmented you do have a few large players that occupy a third of the market and then it drops off relatively swiftly to hundreds of others.
Smaller players I think there will be some consolidation in that I think honestly those that come into the network will enjoy benefits along with triumph business capital I think those that don't come into the network could become vulnerable to losing market share. So I think theres a lot of growth for triumph business capital organically.
Our plan has always been to go into the market and take market share and we will do it a little differently in the open loop model, but we're still going to do it.
Great and just final question for me Aaron I know you mentioned the intangible amortization, but.
Or maybe for Brian can you give us any sense of kind of maybe where to start with with operating expenses for.
But from a run rate perspective, as <unk> comes on board.
This price I mean.
The run rate expenses of hub crown itself are not that material I mean really overall I mean their run rate revenue was kind of building up to eight.
<unk> 10 million annualized range.
For the last few months and are running at around a probably a net breakeven after before the amortization impact overall is kind of what's being plugged in and then of course rule.
We'll be spending on technology and integration cost over the next few quarters to plug all that in.
Okay. Thank you.
Thank you the next question for Michael.
Raymond James Please go ahead.
Hey, good morning, guys how are you.
Good morning or great.
Hey, good.
I think part of building. This open loop network involves buying obviously from from not only the freight brokers, but also from your competitors on the factoring side just wanted to see you know I know.
It's still early days, but where those efforts standard and obviously part of the hub training acquisition.
It comes with 50 factoring clients I think it was a big part of the rationale for for the deal can you just give us an update on <unk>.
Where the open network.
Bill stands and maybe how long you think this will take to kind of get up and running.
At this point thanks.
Sure. So the first thing is we have to actually close on hub Tran, which.
We would expect to happen in the second quarter.
We have to get regulatory approval to do that which we don't expect to be a problem.
On the topic of how does the factoring industry responding to this well I think they respond like you you might think so they know us to be a formidable competitor through triumph business capital and all of them wanted clarity on what does this mean does this mean that our hub Tran and try and pay combined.
Enterprise is going to either take away.
Features and tools that factors currently use with hub Tran or we get is trying to take that away and try and kind of weaponized the data against us and a lot of legitimate questions and so we've been out on the road meeting face to face with.
The factoring industry in explaining number one we would never spend the kind of money. We did on hub Tran to buy something on the technology multiple to turnaround and destroy its client base just as a lead generator I mean that would make no economic sense. Secondly that we don't think we should be nor do we think the industry.
It would allow a single capital provider to meet all of its needs that that doesn't make sense and that our goal is to actually see.
Interchange fee based revenue growth and if that grows faster than our factoring business the great.
And so I think those conversations are in various stages I think we do have relational capital with the industry that we've always done what we said we would do.
And so I think what what the factoring industry is waiting on and deserves to see is the written terms of service of how this network will operate and what sort of data security will be provided and its not just them.
If there is.
A major catalyst for why try a pay will achieve its long term goals as both sides of the network freight brokers factors carriers as well they want to protect their data and their data historically has not been protected in the way, though the market operates and so we view ourselves as a bank.
With all of the obligations and regulations around our responsibility there our responsibility as a fiduciary as the appropriate place to give people.
And area to interact with each other while protecting their data so.
It's a lot in that but I would say Michael we are meeting and have met with most of the factoring companies that we know well continue the outreach to others and it's our job to demonstrate the value proposition for them.
So that day that Theyre excited about this and can see how they can grow and especially make their business more efficient and mitigate fraud risk by choosing to integrate with the network.
That's very helpful.
Maybe just just go on to pay for a SEC I noticed that the average invoice size was down a little bit more than than I was expecting any any sort of color. There I know fourth quarter was a little bit more elevated than kind of the second and third quarters of last year, just any thoughts on on expectations of where that number could shake out. Thanks.
Just to clarify are you talking about the average invoice size for triumph pay.
Or for correct.
For Tri Ed.
There's nothing.
We don't see a trend in any of that some of thats going to be seasonality. If more refrigerated trucks are moving vis vis the rest of the industry that will pull prices up if more flat beds are moving net of whole prices up.
I think what Youre seeing in there is just.
Small cyclical businesses inside of greater very cyclical industry.
I think our view right now is spot the spot market will probably not strengthened materially from here I think it's more likely that it will.
We can sum because it's been a little it's been distorted by the difference in where contractual lanes were being price versus spot rates based upon a whole year of on.
Unknowns and uncertainties. So it seems to US right now at the firm wide view for both try on pay and try and business capital is that average invoice sizes.
Appreciate it.
Upward or won't go up materially from here, but we don't think they'll go down materially either and we think utilization rates will stay very high there is just some really strong.
Secular things going on that debt appear to be setting up for a very good year for free.
Very helpful. And then just one last one for me just going back to Brad's question.
I guess, we're all trying to get on what the amortization could be maybe if you could just help us out or are you going to use like a 10 year sum of years' digits or straight line just to give us some sense of what the amortization could be on a quarterly basis. Thanks.
I don't have the number you have room for evaluation work is still being completed but it'll be an accelerated amortization method, probably some years digits probably in the range of an eight year life, but I'm I'm guessing.
To some degree here, but until that work is completed but it's probably in that range.
Okay very helpful. Thanks for taking my questions guys.
Got it.
Yes.
Thank you next question from Cmos.
E. R. Please go ahead.
Hey, good morning, guys.
Good morning, just wanted just wanted to follow up on the you guys mentioned with training paid $10 $10 billion run rate at March adding an additional tier one broker.
In the coming weeks, just kind of curious where does that tier one broker take you and is that additive to the 25 billion you have combined with hub true.
It would be yes additive to that I think youll see it would not surprise me if by the end of the second quarter, we were getting.
Getting closer to 17 of the top 25 being integrated.
The one that is in process that we thought would integrate this quarter, but slipped a few weeks for next quarter, probably brings around $5 to $600 million of volume to the network.
But we continue the dialogue with with the remaining.
On tier one brokers and of course, the midsize brokers as well.
You are correct that the run rate as of March is $10 7 billion and of course, the reason that is higher than for the entire quarter is because we on boarded a few brokers during the quarter and so what we're capturing and March was the.
The best indication of what the.
Our fully loaded run rate would be that we're starting off with for Q2.
Okay. So it sounds like with the pipeline.
<unk> to be strong in terms of additional integrations.
And then thinking about this the.
The Hunter acquisition with $25 billion run rate, but it sounds like the growth to that number will continue throughout the year.
Just kind of a fair assumption yes.
Yes, yes.
My own view here, Steve is there isn't.
It is very very likely that the freight brokerage community will continue to come because they see very easily for them the value proposition of cost savings.
Data protection all of the things we're offering.
That you need to watch for that's important and I think we will have success at it but it requires us getting out on the road and sitting down face to face with the factoring industry and helping them understand the equal value proposition for them.
And so that's that's a <unk> going forward because you need both sides of the network for a network to exist and that's what our focus is.
Great.
Very helpful. There and then just in terms of just one balance sheet item you guys talked about.
On our pipeline for equipment finance on ABL.
Thinking wondering just how to think about.
For the yields for those portfolios and just.
How do we think about growth for the full year there.
Oh.
Yes.
Hi, Good morning. This is Todd I'll answer that question so.
Yields in equipment finance have remained very steady over the last few months.
Think about that yield being in the $5 75 range and new originations coming on at that range, sometimes a little higher sometimes a little lower asset based lending is a lumpier business. So it's more deal by deal it's hard to use averages but.
Where we have carved out our niche and asset based lending we feel that we're still going to be able to get pricing in the say L. L. Plus three film L plus 350, L plus 400 range.
Okay, great well, thank you very much for everything.
Thank you. The next question is from Gary Tenner of D. A Davidson. Please go ahead.
Yeah.
Good morning, everybody.
I guess I'm going to ask you more questions about the trying to pay and Javier on integration.
From a technology perspective, I know you've been working with them.
What's the kind of time frame, assuming a second quarter close to kind of on the integration of the hub churn product with triumph pay to be able to actually offer to get them ready to offer the product to the industry, how long how long does that process yes.
Yes, Gary So the first thing is there is no one specific finish line.
What we would say is there will be things we offer almost immediately there are some things, we can do and try and pay and hub trend together.
That helped for instance, the factoring industry with cash application and some integrations, we can turn on for them.
What you are asking about I think is the ultimate end state, which you saw on slide 11, slide 11 would be effectively lights out processing.
Taken to its furthest as far as we can see.
And what that means is that our load shows up for.
For a the.
The factoring company or the carrier itself, if theyre not factored.
But generally we're talking about factoring company can see the load and you have structured data that exist before the load ever got picked up by the trucker.
And then for the whole lifecycle of the load that natus, a structured and theres only one human intervention in that entire process and that would be what you could call lights out processing, which is an efficiency that's never been seen before in our industry.
I think it's more likely that that is a first second quarter of next year.
Before that is fully completed.
We'll come on piece by piece with as freight brokers fully integrate with the system and the factoring companies fully integrate.
But to get to where a material amount of all transactions are done on a lights out basis.
I think that's probably 12 months along the way, we will be releasing enhancements and different feature sets to both freight brokers and factoring companies that will continue to improve their experience all along that journey to the end game, which I think is like I said first second quarter of next year.
Okay. Thanks for that.
And then just to go back to TFS.
PFS for for a quick second here.
The remaining $10 5 million, obviously, the $41 million relationship accelerated in terms of resolution via.
The charge off.
The remaining amount is.
Is there anything going on that would accelerate that to I know the numbers now become quite a bit smaller.
But is this still kind of a just a longer term.
Expectation for the workout.
Well that customer or the customers underlying that portion of the over advance portfolio are on it are in a different financial position than the one that we charged off and so.
Of course, there are always out looking for net growth capital for themselves and so its possible that could resolve in a favorable manner in short order. If we hadn't had any inkling debt, we thought we needed to charge it off we would've charged it off this quarter.
But like I said, it's the client the underlying client situation's different with respect to that piece of the portfolio versus what we charged off.
Yeah.
Okay, great. Thanks for that thanks for the questions.
Thank you the next question from <unk>.
Brady Gailey <unk>. Please go ahead.
Hey, Thank you good morning, guys.
And on Brady.
So Aaron with hub trend, you're at 25 billion of annualized payments.
Big do you think annualized payments can get over time.
Well.
A great question.
So brokered freight is somewhere between in our opinion, a $100 billion to $150 billion I think it's skewing to the higher end of that right now just given market conditions.
Invoice sizes are higher so I think it's skewing to the higher end.
We know that the top 25 freight brokers control, 40% of the market and the top 1000 freight brokers control, 90% of the market and then the remaining 10% is divided up amongst 7000, plus or minus very small freight brokers some of whom are subsidiaries.
Aires of carriers.
So our goal is to go after as much of the 90% of the market as we can tier one two and three freight brokers. We also will serve tier for the smallest ones, but if for if it's a volume game and trying to get to our network scale, that's who we have to go after.
There is no doubt that we won't get them all for reasons I can't even anticipate but.
We think that this the value proposition Brady is this.
Right now to pay a 1500 dollar invoice, which is historically what the average would be.
We think there are $60 of.
On liquidity and friction cost of course, we don't fix the liquidity cost I mean somebody needs to get paid their cost of capital to provide instant liquidity to the carrier who needs. It.
But setting that part aside there's 30.
Dollars plus or minus that's just friction cost to get this done.
My vision, our team's vision is at try and pay materially changes that at that $30 number.
Gets way smaller because data stays structured fraud risk is mitigated we use integrations versus emails integrations versus phone calls.
And everything's speeds up.
And so if that's true if thats the value proposition, we bring to the market I would think a lot of the market would want that no. One wants unnecessary friction they want to provide capital and liquidity and carriers want capital on liquidity and freight brokers want to provide quick pay and all of that should and will happen but.
But if we can eliminate what is roughly our estimate of $30 of just expense per invoice that's doing that's not doing anything for anyone.
On it.
We think that a large part of the market is going to want that so I can't give you an ultimate target number I can tell you were going after the top thousand freight brokers, we've got several hundred of them already and we.
We obviously want all factoring companies, who want to join the network to join the network and hopefully they see the cost savings available to them and get excited about that.
So for me to.
It doesn't feel like 100 billion of annualized payments.
Unrealistic.
Maybe it's a stretch goal but.
You guys will basically have the market. So there is 100 billion.
Some point in the future on unrealistic stretch for.
I don't I wouldn't I mean.
Yes that stretch, but I wouldn't call it unrealistic for delivering a value proposition and remember that's Brady.
Beyond brokered freight which is clearly our focus now we think the same product should work and has modified format, but should work for the shipper market, which is a $250 billion market because I know as of right now at triumph business capital for example, seven.
70% of the invoices, we purchased from truckers are brokered freight, but 30% our shippers and so obviously that means we have trucking customers who haul both in the brokered market, but they also haul directly for shippers.
Our view is if this works and with furniture further feature sets and enhancements as well where else are truckers hauling where else does this issue present itself and that would be with the larger shipper market. So that's that's a certainly two to three years down the road plan. We've got a lot of work in front of us.
Just to attack.
What is right in front of us and so in light of that additional market opportunity Brady I don't think I don't think 100 billions out of range.
Alright, and then Aaron can you just talk a little bit about kind of the strategic shift.
Wei from quick pay.
Towards.
Change income.
You know your new network I mean is it well you all.
Focus on quick pay but more of the focus will be on interchange and then on.
No it's tough but is there any way to.
Guesstimate, what debt interchange fees could be.
Once the network is mature.
A few years out.
Yeah, So let's take the first topic.
Quick pay and we're trying to pay was originally born.
Is.
Does the same thing as factory, it's reverse factoring and so in 2015 when the idea for try and pay was dreamed up by Steve Hofmann, who was our CEO of triumph business capital at the time and as we continue to work on it that was its purpose we used our balance sheet to hold quick pays on behalf of freight brokers.
Who werent capitalized are from a cost if it wasn't effective for them to hold quick pays on their balance sheet.
Try a pay can't do that the same way we started off if we're really going to convert to an open loop network that that would not be fair to the factoring industries integration.
Yeah.
Okay.
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Next question comes from Jared Shaw Wells Fargo. Please go ahead.
Hey, guys can you hear me.
I can't hear anything on your end.
I still don't hear anything coming from triumph, So I'll wait to see if that gets fixed.
Okay.
One moment I'll be quiet.
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Yeah.
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Yeah.
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Charlie here at the podium for your question. Please go ahead at this time.
Hey, guys. Thanks.
Hey, Jared.
Just I guess shifting back to the triumph business capital discussion and you know your thought that theres going to be more consolidation among some of the smaller factors. There just given the strong on ROE vs and in the system you put in place on that side of the business, what's the appetite for being part of consolidation and being an active.
Consolidator of maybe some of the less efficient capital providers out there.
Yeah, Great question, Julian I think our appetite given this conversion to the open loop is probably lower than it has ever been in the past, while we want to see is try on business capital win on an organic basis, and I think theyre doing that some of the <unk>.
<unk> that we're doing with these with the user experience and ancillary services and products that are being offered to truckers debt.
Jeff and team and frankly, working with Todd Ritterbusch on our lending team.
Really excited about frankly engaging needs factoring clients as bank customers. So we want that business to grow it is growing at a very large clip.
I think frankly, where we sit right now on this very day. It is more important to us to demonstrate to the rest of the factoring industry that we have their best interest in mind.
Then it is to go out and try to buy a bunch of competitors and.
The whole point of what we're doing here is to try to grow fee income and be valued more like a fintech payments company, which is what I think we've created for a market that's 8% of GDP and we are the largest factoring company in the history of transportation.
That's less of our goal so.
Obviously, the profitability I mean, you'd see at triumph business capital is operating in the 6% plus pre tax ROA.
So you on that pace that pays the bills around here and and and more and so we like that but I don't think youll see us aggressively be out consolidating factoring companies I think there are other players who would like to do that.
And we think will probably allow them to do that.
Now that doesn't mean, just last point on that that doesn't mean, we won't look at compelling opportunities, especially on the larger factoring companies if someone approaches us and once the merge with US of course, we will look at that but it's not our stated goal right now to go out and try to gobble up as many factoring companies as we can and one last thing.
On that I think try on pay also brings with it the ability of smaller entrants to now have a little bit of parity with the larger players to the extent they use the network to do their back office processing and so I think youll see smaller factoring companies, who are really focused on sales and really efficient and using the network.
<unk> to do what historically you had had a large staff to do I think that they've got a shot to build a nice business within this industry. So.
Yeah on all remains to be seen but those are our thoughts.
Okay, and then just circling back on <unk> question I think.
You may have got cut off.
At the end there, but when we look at hub Tran can you just walk us through or remind us what are they charging now in terms of interchange and then once you have this ramped up an approach that.
Total addressable market whatever it is where do you think where do you think that interchange goes too as they as they worked for illuminate.
Part of that $60 a friction.
So right now and you got to understand how brand as it exists is not a network and so there are things that try and pay plus hub trend as the network is going to do that or not.
Not part of the world for <unk> as it now exists, but hub trend right now charges between 50 and $1 per load to the to the freight broker community for the services. It provides.
And it charges between 50 cents on the dollar load to the factoring community for the service it provides now.
Was never able to provide full integration.
And ultimately fraud mitigation and all the things that come with having a direct pipe between the factoring company in the freight broker.
So.
This is brady's question I am sorry, we got cut off but I am going to project Jared that.
On.
Long term and we will we will continue to add feature sets as we go but I think once you get to lights out processing, where the network.
One is the risk of fraud and certain aspects because of the way. It's structured our goal would be an interchange fee that is somewhere between 25 to 50 basis points is we think will still allow adequate profitability to be remitted back to freight brokers and to factoring companies and so that all three of us win.
And we can create the scale on volume that I think our payments investors would like to see.
Okay great.
Thanks.
Again, if you have a question. Please press Star then one.
Next is a follow up question from Brady Gailey of <unk>. Please go ahead.
So I don't know what happened there guys Hey, My other question was just Aaron I know longer term you talked about.
Getting the company up to two 5% ROA or potentially higher I was just wondering do you have any updated thoughts on that just with hub trend now in the mix now.
Looking at the profitability a little different with interchange fees coming up is there any update on what the Ora way of this company it could be longer term.
Well.
On that.
The first thing so if you strip everything down right now and take the noise out on the quarter and it is my sincere hope. This is the last quarter, we have to spend for paragraphs talking about TFS.
But if you strip everything down on the ACL releases out on a core run rate, we're running between $1 65, and one 7% ROA.
And we are doing that Brady with true.
<unk> bin.
Couple of million dollar drag per quarter.
And so if we were running this business as a mature stable business, we would be at a 2% ROA right now no question in my mind, but we've chosen over the long run to invest in an ambitious project.
That is going to transform how payments are done in an industry, that's 8% of GDP and so to do that you've got to invest.
And so we're going to walk the tightrope of trying to be a top quartile earner relative to our banking peers, all the while continuing to invest in experiencing the amortization expense that comes from all of these intangibles with.
With.
Hum Tran.
So I can't give you.
In this new world of prediction on.
Steady state 2% ROA.
Run rate.
Thank you.
On the gating question to getting there is at what point.
Try and pay become accretive to earnings versus a drag on earnings and as we said we've invested $120 million with hub train included at least to build this we think the opportunity set is frankly to try and pay could be worth.
Well over $1 billion once we get to where we're going and even beyond that depending upon how you want to look at what the interchange fees will be on whether you think we can take this to the shipper market and all of those things and so for US it's acceptable to back off on what I. Previously told you about trying to get to this to pursue.
Run rate to try to incubate this fintech and give it every advantage it needs to win the race to become a ubiquitous Payment's network for this entire segment of the industry and that involves hiring good people. So.
And when that 2% ROA comms.
Is beyond 2022.
Maybe it's 2023 I really can't project Brady, what I have to do now is we have to make sure. We do everything in our power that getting this far in the process. We set try on pay up to complete the race that it started.
Yes.
Yes.
Thank the ultimate value of <unk>.
A lot higher than a 1 billion I mean, if you run the math.
100 billion of payments.
Let's say the lower end of your interchange ratio of 25 basis points.
$250 million of revenue.
I know you put a put up high teens multiple on.
On revenue, which I think it's out of the market values that I mean, that's.
Yes.
Sure.
That's a lot higher than $1 billion.
So first thing just to remember that only one out of every two invoices are 50% of the brokered freight market is currently factored and I'm not saying there won't be a way for us to deliver value on the non factored portion, but I would start with running that off of 50% financing rate.
To that market.
But yes, I mean look it took.
It took a great deal of courage for our board and our team to take this step of creating an open loop and giving to the industry specifically many of our factoring competitors. The same advantages that triumph business capital would have had and level the playing field that there was.
A lot of discussion I mean, it's it's a scary thing to disrupt your most profitable line of business.
But our ultimate conclusion was this is what the market really wants and needs and somebody's going to do this and based upon the knowledge, we built from being in this industry for 15 years, we were the best equipped to do it if we would just have the courage to go after it.
Yes.
One for you the fact that 2% ROA was the target.
I was not thinking open loop at the time, we see open loop now is the future and so thats going to delay that but I think for investors they ought to see that if we pull this off.
On the valuation, especially if you can take this beyond the brokered freight market into the shipper market.
You've got the chance to create something Thats worth many times of our current market cap and so that's what we're running for.
Yes that makes total sense. Thanks for all the color.
You got it.
This concludes our question and answer session.
Now I'd like to turn the conference back over to Mr. Aaron graft for closing remarks. Please go ahead.
Thank you all for your time today, we apologize for the technical glitch.
But we look forward to seeing you soon and for our investors hopefully in person soon everyone have a great day.
Albert has now concluded. Thank you for attending today's presentation you may now disconnect.