Triumph Financial : Q3 2024 Earnings Release & Shareholder Letter

TFIN

October 16, 2024

Fellow Shareholders,

For the third quarter, we earned net income to common stockholders of $4.5 million, or $0.19 per diluted share.

Discussion of the Quarter

Here are the things I think investors should keep top of mind about the quarter:

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KPIs for the Quarter

The tables below outline some of our key operating metrics.

As of and for the Three Months Ended

(Dollars in thousands)

Financial Highlights:

Loans held for investment

Deposits

Net income available to common stockholders

Diluted earnings per common share

Return on average assets(1)

Yield on loans(1)

Cost of total funds(1)

Non-performing assets to total assets

ACL to total loans

Total capital to risk-weighted assets(2)

Common equity tier 1 capital to risk-weighted assets(2)

September 30,

June 30,

March 31,

December 31,

September 30,

2024

2024

2024

2023

2023

$

4,332,967

$

4,288,417

$

4,195,120

$

4,163,100

$

4,371,528

$

4,706,694

$

4,392,018

$

4,450,963

$

3,977,478

$

4,487,051

$

4,546

$

1,945

$

3,357

$

8,825

$

11,993

$

0.19

$

0.08

$

0.14

$

0.37

$

0.51

0.36%

0.19%

0.31%

0.70%

0.93%

8.85%

9.10%

9.09%

9.29%

9.16%

1.57%

1.62%

1.45%

1.47%

1.41%

2.07%

1.60%

1.61%

1.42%

1.07%

0.95%

0.92%

0.91%

0.85%

0.80%

16.62%

16.51%

16.69%

16.75%

15.77%

11.85%

11.71%

11.85%

11.94%

11.18%

September 30,

June 30,

March 31,

December 31,

September 30,

Current Quarter Q/Q

Current Year Y/Y

For the Qtr Ending

Change

% Change

Change

% Change

2024

2024

2024

2023

2023

Factoring:

Invoice Volume

1,480,824

1,432,366

1,367,625

1,404,861

1,428,463

48,458

3.4 %

52,361

3.7 %

Purchased

$

2,610,177,000

$

2,542,327,000

$

2,469,797,000

$

2,570,442,000

$

2,606,323,000

$

67,850,000

2.7 %

$

3,854,000

0.1 %

Volume

Average

$

1,724

$

1,738

$

1,771

$

1,781

$

1,772

$

(14)

(0.8)%

$

(48)

(2.7)%

Transportation

Invoice Size

Payments:

Invoice Volume

6,278,246

6,062,779

5,717,016

5,703,740

5,037,841

215,467

3.6 %

1,240,405

24.6 %

Payment Volume

$

7,091,493,000

$

6,687,587,000

$

6,379,680,000

$

6,217,323,000

$

5,329,580,000

$

403,906,000

6.0 %

$

1,761,913,000

33.1 %

Network Invoice

661,628

701,768

621,209

442,353

303,300

(40,140)

(5.7)%

358,328

118.1 %

Volume

Network Payment

$

1,063,228,000

$

1,133,118,000

$

1,035,099,000

$

740,048,000

$

510,298,000

$

(69,890,000)

(6.2)%

$

552,930,000

108.4 %

Volume

Payments

For our Payments segment discussion, we will cover the following topics:

Analysis of financial and operational performance for the quarter. The chart on the following page provides a visual demonstration of how we continue to grow revenue in our Payments segment despite the freight recession. In the chart, the line represents invoice sizes[1], while the bars represent revenue. The revenue bars highlight quickpay and fee income that can be attributed to a specific customer in a specific year and excludes other supply chain finance income and float. Noninterest income in our Payments segment grew 7.8% this quarter and is up 30.0% versus Q3 2023. This includes the fees we generate from network transactions and other highly scalable network activities.

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In the chart below, we highlight the continued revenue growth and its trend over the last eight quarters against the backdrop of our payment volumes. Our third quarter run rate was $59.5 million. We have generated a roughly 43.0% CAGR in revenue over the last two years.

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In the chart below, we highlight the trend lines in EBITDA margin relative to revenue. We crossed back into positive EBITDA margin territory in Q3 (just barely!). I expect revenue and margin to continue to improve from here, but it will not be linear. As demonstrated with product rollouts for LoadPay and FaaS, we continue to focus on product development and product fit to create value for our customers even though it puts pressure on expenses. We are firmly convinced this will create long-term shareholder value.

In the short-term, earnings performance will be impacted by the freight market, which has been a steady headwind. Despite those headwinds, you can see in the chart below that we continue to grow revenue organically. We have added over $30 million of annualized run rate revenue in the last 24 months. Bear in mind that neither LoadPay nor FaaS are yet contributing to revenue. Moreover, there are material portions of broker payment volume that we expect to further monetize in the near future. I will go into further detail on that later in this section. In sum, we remain excited to execute on the opportunity we see in front of us.

Progression towards 50% density in brokered freight target[3]. I have spoken in prior letters about the importance of density. We believe that the entire brokered market in truckload ("TL") is approximately $110 billion, annually. For the quarter, TriumphPay's invoice volume increased 3.6%, and total payment volume increased by 6.0% to $28.4 billion, annualized. Our broker clients represent $25.0 billion of that figure, while the remaining $3.4 billion is related to shipper clients. The average invoice paid by TriumphPay increased 2.4% in size. Our annualized unique broker audit dollar volume was up slightly from Q2 at $15.8 billion, and our annualized unique factor audit volume was down slightly at $11.8 billion. The unique broker and factor audit volumes coupled with our broker payment volumes, represent our network engagement[4]. In Q3, our annualized network engagement was approximately $52.5 billion in brokered freight, thus representing about 48% of that market. Of the overall market, the top 25 brokers represent approximately $52.4 billion of the total. To add density quickly, it makes sense to focus on the largest brokers. The chart below shows where we are with this cohort. Note that the largest broker, C.H. Robinson, is shown in teal, but its volume did not begin to hit the network until after the quarter ended. That volume will begin to scale in Q4.

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Once again, it is important to understand that a broker highlighted in teal does not indicate we have fully onboarded or fully monetized that relationship. It is also important for investors to understand that for some of the companies represented above, we provide our audit solution, for some we provide our payment services and for some we do both. Bringing more brokers onto the platform for both offerings is an embedded revenue opportunity. Further, some of our longest tenured customers use our legacy version of the audit product, which is priced substantially below our NextGen audit product (and has far less functionality). As more customers migrate to our NextGen product, we will deliver more value to them and enhance our revenue. Finally, we are expanding our audit and payment offering into less-than-truckload ("LTL"). That module in our audit product goes live in the fourth quarter, and we plan to onboard more customers during our general release planned for the first half of 2025. Expanding modes within our customer base is another opportunity to grow revenue. When you add all of that together, I feel confident in saying that we believe we are just scratching the surface of the revenue opportunity before us. As the ecosystem matures and network effects become more pronounced, revenue should grow and EBITDA margin will improve, and we will begin to measure net margin. It will not be overnight, but I see evidence of it happening right in front of us every quarter.

With all the good news regarding density increases and product improvements, we need to be fair and point out one metric that did not improve quarter over quarter. Total network volume decreased in Q3 over Q2 by 5.7%. The decline is attributed to the loss of one tier 1 factor on the network. The transportation industry has continued to struggle in this prolonged freight recession, and that has been particularly hard on factoring companies. Prolonged pressure of this kind requires companies to make difficult decisions. Given the overall market share held by the top 20 factors in the industry, a decision by one of our large clients can have an impact on our short-term results. I am comforted by the pipeline of volume I see coming on to the system, including the broader launch of FaaS. Based on those elements alone, I fully expect to return to network volume growth by Q1 of next year if not sooner. We now have 63 factors on TriumphPay and 37 factors on the network. Our broker quickpay penetration average was 5.6%, and we generated payment transaction fees on approximately 23.4% of our payments invoices. We also earned revenue of $2.6 million[5] on the net float generated through payments made on behalf of our clients. TriumphPay's non-interest expenses this quarter were $17.5 million, down 2.0% compared to the prior quarter.

NextGen Audit. Since I mentioned NextGen Audit in the paragraph above, it seems fitting to give investors some insights into how this product improves on our original offering. When we began offering Audit via our acquisition of HubTran, it was one of the first tools that automated invoice review and created efficiencies for brokers and factors. Earlier this year,

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we made enhancements to our original Audit product that can enable 85%+ touchless invoice processing. Additionally, our AI/ML technology is 94%+ accurate when extracting data from invoices. I will not go into specifics here about features we are releasing for competitive reasons. What I will say is that over the next few quarters, we will continue to invest, focusing on proactive features which prevent exceptions before they are created and further increase the percentage of invoices that are approved and paid without being touched.

LoadPay Update. The promise of LoadPay is to allow carriers access to a digital bank account that can receive payments without time constraints. LoadPay allows carriers to elect to receive real-time payment through any TriumphPay network source, 24 hours a day, 365 days a year, including holidays, weekends, and after hours. This means access to payments even when legacy banks have gone home and the ACH rails are closed. These capabilities are no longer confined to whiteboards and strategy sessions. They are real and the benefits are being realized every day by carriers using LoadPay. There are further details in the Factoring segment discussion below.

We believe providing carriers access to their earned working capital in this manner and allowing freight brokers and factors to pay carriers around the clock will be a key differentiator and competitive driver for our LoadPay and FaaS partners. Triumph pays billions of dollars to carriers on behalf of our TriumphPay network of brokers and from our own factoring business. This is a very large marketing funnel for LoadPay. This is important for investors to understand - many fintechs spend too much time thinking about their product and not enough thinking about their distribution. We believe we can do both well.

Our initial target market for LoadPay is the owner operator ("O/O"). An O/O is defined as a carrier who operates between 1-3 power units. Based on our data, we estimate there are about 200,000 O/O currently active in the US. This may be conservative as the Owner-Operator Independent Drivers Association publishes the number as 350,000. In the current market environment, we do not believe all of those O/O are active.

The product and distribution may be great and the market size enormous, but what about the unit economics? We believe that each O/O LoadPay account will generate about $750 of gross revenue annually at inception. We hope that number will go up over time, but even if it remains at that level of revenue, it will be very profitable to Triumph. I say "hope" because we must make some assumptions in arriving at a calculation. Those assumptions will be augmented by real world usage and become more precise over time. What I can say now is that most of the LoadPay revenue is interchange revenue generated from embedded debit cards. The second component of revenue is tied to the float generated by the accounts, which will fluctuate with interest rates. These are high value revenue streams compared to capital-intensive interest income. We have plans for other product offerings within LoadPay that should increase the revenue per client and the addressable market, but we are not ready to talk about those publicly at this time.

Factoring

Analysis of financial and operational performance for the quarter. During the third quarter, our average transportation invoice price dropped to $1,724, down $48 from the same quarter in 2023 and decreased $14 from the second quarter of 2024. Purchased volume increased 2.7% relative to the second quarter.

Factoring segment operating income was $8.0 million, or $3.3 million higher than the prior quarter. This was primarily due to lower credit loss expenses and some non-recurring items impacting last quarter. Net interest income grew just over 2% as higher purchasing activity was offset by lower average invoice prices through most of the quarter. Yield on average receivables balances was down, falling 0.57% to 13.57%. Charge-offs were in line with historical trends at 0.07%.

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Transportation Market Update. While carriers did get some relief early in the quarter, we found that the July 4 holiday was similar to previous holiday impacts where prices recovered then retreated. Invoice prices declined throughout the remainder of the quarter, hitting a low of $1,698. September was the lowest we have seen since July 2020. While lower invoice prices are usually not good for carriers (and certainly not for factors), our carriers did see some mild relief as spot rates were relatively stable and fuel prices fell from $3.87 to $3.53 from early July to late September. It is worth noting our transaction counts through this same period have held up well, as overall volumes have not seen a corresponding level of stress. Over the same 12-month period ending in Q3 2024 represented in the chart on the following page where, net of additions, client counts in our small trucker group decreased by 1,372, our number of invoices purchased increased 3.7%.

We continue to see carriers exit the market, albeit at a slower pace than required for prices to trend upwards. Our own factoring data is a good proxy for the industry. You can see the trend clearly in the chart on the following page, which details O/O client increase/decrease at Triumph Factoring. The interesting thing is that while many of these carriers may have abandoned their O/O business (and thus left Triumph Factoring), we do not believe they have left the industry. Many of these O/O have migrated and "leased on" to work for larger carriers, who generally have more stable clients and volume. We know the trend will reverse over time, and the market will become more balanced. Until that time (and even after that time comes), we intend to just keep doing the next right thing.

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Diesel prices were down for ten consecutive weeks during the quarter and reached a low that we have not seen since October 2021. As mentioned previously, diesel prices fell from $3.87 to $3.53 during the quarter. The $0.34 differential saves the carrier $51.00 on an average load without discounts. If a carrier is using our fuel program, they would have saved an additional $75.00 ($0.50 per gallon in Q3) on each 150 gallon in-network refuel. As a result, the lower invoice prices had a less negative impact on the carrier than the factor. In the short run, that is good for our clients, but not so good for us. However, we know that what is good for our clients will be good for us over the long run. Despite lower fuel costs, this revenue per mile is not enough to allow many smaller carriers to operate profitably. Last quarter, we published a chart from Raymond James demonstrating the issue. The updated chart below is materially unchanged.

Source: American Transportation Research Institute, DAT Trendlines, Internet Truckstop, U.S. Energy Information Administration, Raymond James Estimates

Technology, FaaS and TriumphPay. The further we go on the journey, bringing unique technology to our factoring and payment offerings, the more common touch points there are for our services. To assist investors in better understanding our offerings, let me offer a few bullet points.

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Banking

For discussion of our Banking segment, we will cover the following topics:

Analysis of financial and operational performance for the quarter. Banking segment operating income fell $1.2 million, or 4.0%, from the prior quarter due primarily to higher credit expense. Our core deposit base was up significantly on the quarter related to a planned influx of noninterest bearing servicing deposits sourced through the customers of our Mortgage Warehouse business. As a result, our cost of funds declined slightly by 5 basis points to 1.57%. We remain mildly asset sensitive. The Fed cut rates 50 bps in September, and as we look forward, our modeling suggests that each 25 bps rate cut would reduce our quarterly net interest income by $0.5 - 1.0 million.

Credit Update. While in line with recent quarters, credit expenses were elevated again this quarter, and we experienced some deterioration in our asset quality metrics. In prior quarters, I have mentioned our increases in the general reserve on our equipment portfolio as a catalyst for elevated credit costs this year. As expected, that did not continue this quarter. There are, I believe, four unique items this quarter, unrelated to systemic or market issues, which warrant specific mention.

Closing Thoughts on Guidance, Expenses and Capital Management

We don't give forward guidance. We do give investors near-term guidance on expenses, because that is something we largely control. We expect expenses for Q4 to be below $97 million once again. One caveat I will add to that - it is possible we will negotiate an exit with some of the tenants in our recently acquired headquarters building to accommodate our future occupancy needs. That could show up as a one-time item next quarter.

The other general piece of guidance I will give relates to Q1 2025. The freight market is soft right now. Catastrophic weather events and geopolitics will add volatility, but they alone will not be a permanent fix for the supply/demand imbalance in the market. I expect seasonality to make it softer in Q1. As a reminder, we typically see a reduction in factoring volumes in the first quarter of somewhere between 4% and 6%. At the same time, we will fight expense pressures that come up in Q1 every year tied to compensation resets, health insurance premium changes, etc. In other words, I do not expect Q1 2025 earnings to be great. We have options to make them better, but each of those would involve taking undue risk or pulling back on the investments we need to make in order to create the network we want to build. We will not do that. We will stick to the long-term plan. I know some investors with shorter investment horizons might not like that - my job is not to make it easy to like what I say, my job is to make sure you never have reason to doubt what I say.

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Disclaimer

Triumph Financial Inc. published this content on October 18, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on October 18, 2024 at 04:08:05.800.