Here, our next fireside chat with Triumph Financial, based in Dallas, Texas. Triumph Financial is a financial and technology company focused on payments, factoring, intelligence, and banking. Their goal is to modernize and simplify freight transactions. TFIN's brands include Triumph, TBK Bank, and LoadPay. With us from the company is CEO Aaron Graft. Aaron, thank you for being here. Thank you. Let's just start off with TFIN. What is TFIN? Why do we exist? What do we do? Yeah. Yeah. We are a community bank, which is why you cover us. We do not look like most of your other banks. What we have built over the last 13 years is we audit and pay more truckers than anyone in the world. We audit more invoices and pay more invoices on behalf of freight brokers and shippers than anyone in the world. Really, it is beyond just providing financing and payments. We believe modernizing the infrastructure of how the trucking market gets paid, which is a massive market. A community bank that is on the bleeding edge of technology as it relates to the auditing and payment of invoices and trucking. Let's dig into that. There's the network, the platform, the intelligence business. They're all related. They're similar but different. Just how much do they overlap? Help us appreciate kind of how they're unique. Yeah. Look, I think the term network, platform, those can get overused, right? What do we mean when we say that? What we mean is we are on both sides of the transaction, right? If you think about trucking, you've got tens of thousands of manufacturing companies, distribution companies who need to move goods from point A to point B. A lot of times, they'll have their own trucking fleet. They'll hire large carriers directly. Many times, though, they'll use freight brokers, third-party logistics companies, intermediaries, whatever you would like to call them, to move that freight on their behalf. There's 10,000 freight brokers, but there's like 1,000 that control 90% of the market, right, of that portion of the market. Those 1,000 companies are doing business with about 130,000 trucking companies, small trucking companies, some large, all in the for-hire market. We touch 70% of all of those transactions. We pay half of them, but we also audit about 65% going on 70%. That means we serve both the payor side, which would be the freight broker, the person hiring the service done, and we touch the payee side, which is the carrier themselves who actually perform the service and needs to get paid. A network is a place where parties on both sides of the transaction can come together and reduce friction for the purposes of making these payments more efficient. I mean, you need to understand the average invoice in trucking right now is something around $1,500. These are not large payments. When they are $1,500, you do not have time or margin for a lot of friction to be involved. What we are trying to do is reduce friction on both sides of the parties to make sure the invoice is real, the invoice that the delivery showed up, and that it's timely paid. That is what our network does. As a result of having so much network density, we've been building that for going on six years right now, and have invested hundreds of millions of our own retained earnings into that. Businesses are starting to use that network to build their own platform. The largest freight broker in the world, C.H. Robinson, is building their financial services platform or their financial services offering on top of our network. It's called C.H. Robinson Financial. The second largest freight broker in America, RXO, is building their financial services business on top of our network. We are providing a platform for these businesses. That's where the network gives rise to other businesses to go innovate using our platform. They're similar, but they're not exactly the same. You said we're building this now, and we're in year six of this transformation. Let's roll forward another 5, 10 years. Ultimately, what are we trying to build at the end of the day? Yeah. I mean, I think the first thing is you should only endeavor to do this if you believe that in doing so, you can create defensible earnings that are above what you could get as a community bank. Otherwise, why are we doing it? We're not doing it for practice. What are we after? I mean, we believe that if you go look at network businesses or platform businesses that control or are involved in a significant portion of all transactions in a certain subset of the economy, those are very high-margin businesses, right? Because you get really good, really efficient, really plugged in. Your interfaces are built. You've integrated with everyone. What we want to ultimately be is we think we want to be the place where when parties do business to move freight, that we provide audit, we provide payment, we provide intelligence related to each one of those transactions embedded into the parties' workflow, embedded into the financial infrastructure of how these parties do business with each other. As a result, we think you end up with a bank that outperforms its cohort of other publicly traded banks because they do not have that same go-to-market strategy or that same scalability inside a known ecosystem where we touch all the parties. To start off as a bank by itself years ago, it's transformed much beyond a bank. What is the bank's role today? How is that part of the whole flywheel that you talk about? Yeah. I mean, there are advantages, huge advantages to being a bank. I mean, number one, when you're talking about we make remittances. Think about Visa and MasterCard don't move money. They provide remittance instructions to the underlying banks who actually move money. Triumph moves over $50 billion a year on behalf of very large counterparties. Again, C.H. Robinson, six of the top 10 brokers in America. We're moving the funds on their behalf. Being a bank is super important for access to the payment rails and also just, frankly, for if a large company is going to outsource their payments to you and you're making payments to their largest vendor set, which in freight brokerage world, that's paying carriers. That's their biggest expense. Being a bank is really important. I think it's, A, just by nature of what a bank is, we don't compete, right? We're not in the business of moving freight. We move data and we move money. B, the access to the payment rails is really important because what we've been able to build, and if you're following along with us, if you're making all these payments on behalf of the payors, right, they say, "This invoice is due and payable. Remit these funds to this party because the load was delivered." Now we've built a digital account, and it's more than just a digital bank account, but it's really a digital financial companion for the trucking industry. We've put that in the hands of thousands of truckers. I think by next year, you'll see it in 10,000 truckers' hands and beyond. Ultimately, going back to that addressable market of 120,000-130,000 for-hire carriers, offering a bank account to the payee, if you're making the payments for the payor, it's a way to move money 24 by 7 by 365 through a journal entry inside of Triumph's ecosystem. It's very profitable for us and very cost-effective for the end user. There are just structural advantages to being a bank that are really important, not the least of which from an investor perspective who looks at us not just as a proxy for the transportation industry, but we generate $110 million of operating income in our core community bank, which is a great bulwark in a cyclical industry, right? That gives us the ability. We are in the longest freight recession since the deregulation of trucking in 1980. It has ended the life cycle of many companies. We have been able to power through that because we still generate a significant portion of our revenue and profitability as a diversified stream away from transportation. I think transportation is the largest area of growth, but it has been important for us as we have been building this because it is a very hard thing to do to build a startup inside a publicly traded bank. You have watched us do it since it was an idea to bringing it to reality to a significant amount of investment. That is why we think it is important for us to be a bank to deliver the brand promise, not only to the transportation industry, but also to our investors that it is not just asymmetric risk tied to one industry. Yeah. You mentioned we're still in this downturn of the last several years. You see almost half the freight in the industry, see the unique view that others may not have. Any color you can share? Any signs of improvement? Anything that you can see in the data in recent weeks and months? I mean, yeah. We're in a goods recession, right? I mean, tonnages are falling. That could be there's a lot of drivers, and that's the housing market. It's a lot of things. Unquestionably, the amount of freight being shipped is going down. Whether that hearkens a larger recession, I'm not an economist, and I can't speak to. COVID was the worst and best thing to ever happen to Triumph and the trucking industry. I mean, and I would say more worse than best. I mean, it drove our stock to exceptionally high prices, but it caused the industry to wave in a bunch of capacity that did not go through the normal channels. A significant portion of the for-hire market is not properly licensed, not properly documented, and not properly operating. Now, do we have the political will to deal with that? I don't know. I mean, we're saying the right things. It would be good for truckers who are abiding by the rules to see the truckers who are not abiding by the rules regulated properly. We got to see whether that's enforced. A lot has been said, and some has been done in the last 60 days. Normally, when you see a supply-demand imbalance, it normally gets fixed on the demand side, right? It's hard for the attrition to happen on the supply side. People hang on. They don't want to leave the industry. I don't see any great catalyst for a rebound in demand. On the supply side, you're seeing people either exit because they can't earn their cost of capital, or you're seeing regulatory enforcement of rules that have been on the books for 15 years that haven't been enforced start to be enforced. If that continues, you will see the supply side shrink. You touched on it. Let's dive more into the non-domiciled commercial drivers. What percentage of drivers today do you think are non-domiciled? How does that compare to what you thought previously as you kind of studied this issue more? Yeah. I want to be clear. Just because you're a non-domiciled commercial driver's license holder does not mean you're not operating in a legal or ethical way, right? Don't conflate the two. If there are 200,000 non-domiciled CDL holders, and the number all of you will hear the administration talks about is there's 3.8 million commercial drivers in the United States. That's true. Really, there's about 1 to 1.25 million drivers who work in the for-hire market, right? We don't talk about Walmart's fleet or Costco's fleet. Those are commercial CDL holders, but they would have gone through an entirely different licensing training protocol because of the risk management practices of Fortune 500 companies. When you get into the for-hire market, which is much more fragmented, much more nimble, much more entrepreneurial, you also have much less regulation. I would argue to you that of the drivers, the non-domiciled CDL holders, the vast majority are there in that for-hire market. If you take 200,000 as a percentage of 1 million-1.25 million, you're talking about a statistically significant number of drivers. Even set that piece aside, these CDL mills where you could buy a driver's license, whether you're non-domiciled or not, in 24 hours, that doesn't work in a large fleet that has full risk management services. They're never going to allow that to happen. To the extent you have capacity that's operating in the shadow market, it is largely in the for-hire market. The other thing to be aware of, and the government tried to fix things. There was a highly publicized wreck involving Tracy Morgan, I think, from Saturday Night Live, and he was hit by a driver who fell asleep. That became the catalyst for electronic logging devices. The idea behind an electronic logging device is that it limits the hours of service a trucker can be on the road, right? The idea is they're driving 80,000-pound guided missiles. You want the person to be awake as they're operating. It's the same thing as you think about an airline transport pilot has a certain number of hours of service. The ELD industry, people were allowed to self-certify their ELD technology. You can put this in writing. You can put my name on it. Most of them have back doors built into them, and they're being reset from afar. Most drivers are driving far more than the ELD requires. Very few are built to the level to accomplish what the government's after. Now, what does that do? That creates shadow capacity that it makes it really hard for law-abiding truck drivers and trucking companies to compete because the second largest expense, or the largest expense for any trucking company, is driver wages. If I can force my drivers to drive further than they're supposed to, then I'm stretching the dollars on that asset. Between improperly licensed and improperly monitored on the road, the for-hire market is you've created more capacity there than should be there. That is why, in my opinion, we are beginning year four of a freight recession. That is why you still have this supply-demand imbalance because people are able to operate on extremely thin margins because they're bending the rules. We've been talking about this for years. If the government wants to step in and enforce the laws that are written, then I think that would be good for every law-abiding trucking company, even if it does drive transportation costs up. That's where they need to go. These people are not generally earning their cost of capital. Just to clarify, are you seeing any enforcement yet of the improperly licensed drivers? Is this impacting anything yet, or is this more just in theory? I'm seeing news stories, but I don't see it in the numbers yet. I'll pause there if there's any follow-ups in the audience that want to hit on some of these topics we've hit on so far. Okay. The TFIN story has been evolving over the last few years. We've talked more about the value chain for your customers and trying to make that more clear and more direct. Tell us kind of what the recent reorg, what it encompasses to make it more customer-centric. Yeah. If any people who've run companies and acquired businesses and put them together, it's really easy to fall into the trap of assembling your teams around product development roadmap, especially when you're a technology company. We spend on a $380 million expense base. We spend $125 million on technology. We're not just talking about it. We live it. We have five products in our value chain: audit, payment, liquidity solutions, digital banking, plus an intelligence. All of those businesses either started with us or started somewhere else. Product teams were working on them. If you want to be great and you want to translate really great product that we've built, and I think I can speak that our product is greater, it wouldn't be used by as many people as it's used by. If you want to really excel, you need to put the customer at the center, not the product at the center, and figure out how, for a carrier of my five products, how do I make liquidity solutions real for them, digital banking plus real for them, intelligence real for them? If I put a broker at the center, how do I make payments and audit and intelligence real for them? In an effort to, first and foremost, and by a wide margin, make the customer the hero of the story and us a supporting actor, we're reorganizing around customer-centric go-to-market strategy versus segment reporting and product. Number two, in so doing, it is allowing us to find cost efficiencies. Because look, for the last, as we built this, we have been given permission by our investors, and we had a lot of tailwinds early on in this journey to experiment, to develop, and figure out what the freight market wanted, right? We have gone out and done it at the expense of short-term earnings, right? That is not an easy thing to do in public banking. Now I can sit here and say, I can see how the value chain, I can see what customers will pay for because I have tested it, been told no, been told yes, been told build this. Now, as we go to market with a customer-centric viewpoint, we are also able to eliminate a lot of redundancies and reduce a lot of expenses, which we started with the last quarter and which we told the street we will continue to do. Because ultimately, you can build really great product. You can make the customer the hero, but at the end of the day, the investor wants to see it show up in earnings per share, freight recession or no freight recession. That is why we did it, because we think it's the better way to go to market, and it makes us more efficient. Within that value chain, you have a goal now of 20% top-line growth. How do we get there? Give us some steps of how we get there within that. We're assuming the bank, the community bank, the operating income of the community bank spend between $110 million and $120 million, and we would think that that would continue to stay in that range. We run it with a lot of stability. You can see our cost of funds and a lot of our metrics. Because we do not push for unnecessary growth, we're able to run a very efficient bank. When we talk about revenue growth, we're talking about transportation. I have to talk about it the way you all are used to seeing it. There are three segments, right? There is factoring, there is payments, and there is intelligence. Intelligence is a $10 million business. We made an acquisition last year. We have worked since that acquisition to reposition that product, and we will be taking it to market full scale starting Q1. That business needs to grow the most because the denominator is the smallest, right? It needs to grow well above the 20% target. Next is payments. If you follow us, you've seen that payments grew 25%-30% last quarter. Nothing grows 25%-30% every quarter, but I think that growth rate in revenue is demonstrative of our ability to take legacy clients and demonstrate to them the value we've delivered and price them at something different than five years ago when we were begging for business. We've actually been able to help them be much more efficient, and we just won a lot of market share. You should see that grow above that 20% number. That leaves factoring, which is the largest business from a revenue perspective, $155 million at last quarter end. I mean, I think that business needs to grow very low double digits in order to, on a blended basis, get you to that 20% number. That is the target with flat to decreasing expenses, which if you do those two things, you're obviously going to drive earnings per share growth. Question is a quick question on your comment about 25% or whatever that was in payments. How much of that was due to monetizing legacy contracts versus the onboarding of C.H. Robinson and RXO? Probably 75%-80% legacy. What we disclosed in the last quarter was there was $42 million of revenue infill. If you took every legacy client and priced them to rack-rated pricing, that will not happen. I want to be clear, you never get to 100%. What you will see over the next few quarters is also as a result of working with our customers of, "Look, you have been with us five years. We have done all these things for you. It is time to walk that forward." Layered in, there is a pipeline behind it, right? I mean, you also have to remember that we make 47% of all payments in for-hire trucking, but we touch 65% of all invoices. That is an 18% delta between things we audit and things we pay. We want to cross-sell that audit business, our payments business. There's what they currently consume and bringing that up to market levels. Number two, providing them our other products. And then number three, the rest of the industry that doesn't currently use us. Yeah. Two-part question. First, I noticed today in the filing that UPS made on their Q that they are factoring. They're factoring $248 million or $249 million of their receivables, which I guess first question is, is that the business that you're seeing? And then the second question would be, I think they have like $6 billion or $8 billion on their balance sheet. Why would a company like UPS be paying 10% in factoring when they could borrow money at 6% or 7%? If you can help me out. Man, can I take you on the road with me and let's go have this discussion with them? Exactly, right? I've made this case to the brokerage industry, made it with C.H. Robinson, RXO, and others. You run a balance sheet-like business, a very efficient business model. Why would you, the capital charge against factoring, why would you ever hold that on your balance sheet? We saw the same thing you did. We're not involved with that. What I would say is it is not a new thing for brokers or people who do business with carriers to try to monetize the payment experience. That's supply chain finance. It's a tale as old as time. The reason most bank, and if you think about how supply chain finance works in the manufacturing business, like if you're a supplier to a big retailer, they're going to have a supply chain finance program administered by a bulge bracket bank, and they're going to say, "If you want to get paid by us in day zero, you're going to get paid this. And day 30, it's this. Day 60, day 90." Supply chain finance, as it's organized from a commercial banking standpoint, has never been effectively applied in our marketplace because a billion-dollar broker, which is not that, I mean, it's a big broker, but not that big of a broker, probably does business with 40,000 vendors, all the trucking companies who are one and done. Supply chain finance programs as administered by commercial banks are not equipped to deal with onboarding 40,000 vendors, some of which you'll only see once. UPS is doing this, I presume, and I only know literally what I saw in the five minutes between my last meeting and this one. They have that data. They are facilitating those payments to the carriers. How they are funding that internally on their line, I don't know. I can tell you that the people who have built platform business onto our platform, C.H. Robinson, RXO, they use our cost of capital, our balance sheet because we're a bank. I think that's working great. We'll continue to allow them to scale. That's a lot of that's margin that accretes to the bottom line for them, which is what it's designed to do. That's what I know about that. Just maybe not that much, but in concept. Yeah. Thank you. LoadPay is another new-ish offering, I guess, for the company. Tell us more about kind of LoadPay and how much more penetration can you make? Yeah. I mean, so look, there are, it's very hard in our value chain of five things: audit, payment, liquidity solutions, digital banking, plus an intelligence. In three of those five products, there are well-established incumbents, right? In audit, we compete with new technology companies, existing technology companies. In payments, we have a very wide margin. There's not a true incumbent that we go head-to-head with in payments, right? Because nobody, for the reason I just told you about, supply chain finance had not really come into the freight industry. In liquidity solutions or factoring, it's 400 factoring companies. It's a very competitive space. In digital banking, there are a lot of digital banks and there are a lot of legacy banks, but nobody has created a banking product and distributed it at scale for the trucking industry. Imagine a LoadPay account in which I can see my account balance. I can see that my invoices that are due for payment. I can see how I can factor those invoices if I want to convert them into immediate cash. I can see my insurance premium. I can see the way in which I can finance my insurance premium over time tied to my power units. I can also obtain equipment financing. Lastly, I can see intelligence related to any zip code to zip code. I want to enter into a level of intelligence of where the market is, the transportation market, on a rate per mile basis is. If all that lived in a financial companion for the trucking industry, that's a really compelling thing. We are way down the road on building that and distributing it. As we said, we would end the year between 5,000 and 8,000 customers. We're still in beta because I don't want to wide-scale distribute that until all of those features live together and work for the benefit of the carrier to help them understand their margins and what they need to do to succeed. That architecture will largely be complete in Q1, Q2, probably more like Q2 of next year, in which case I think you'll see us accelerate what we're doing. That is the harmony of the value chain. You can see multiple things that live together in a product that puts the carrier at the center and makes the carrier the hero of the story. I am very excited about LoadPay. The economics of LoadPay, you monetize a lot of this through the use of the debit card, of which we are both the issuing bank and the program sponsor. The interchange fees we earn are approaching 1.7%, which is at no cost to the carrier, right? It is to the carrier's vendors. Also embedding fuel cards into that. We are not in the fuel card business, but a digital wallet where those can live. I think that is a, it is going to be a great product. It is a great product, and it continues to get better. I have very high hopes on what that product can do. In recent months, you did a larger restructuring internally. We saw some benefit on the expense side in the third quarter. We'll see more in the fourth quarter. Would love to hear more about this and what the focus has been, what it is now. I think you mentioned to me this morning, this is not just a one-and-done event. This is a kind of a core focus of yours. Maybe kind of expand on that a little bit more. Yeah. I alluded to it earlier. We have been given the permission, and I don't take it for granted, to spend a significant portion of the last five years to do far more technological and market-based experimentation than most public banks ever get the opportunity to do. Eventually, that comes to an end, and you've learned what you need to know to go to battle with what you have. That's where we are. We're at an inflection point in our history where next quarter, you're not going to hear about a new product. You're going to hear, I hope, about revenue growth and expense reduction in what we currently have because we feel like we have tested and understand how our value chain works together. We need to make it more harmonious, no question. All five things need to seamlessly work together. That's in flight. We made some commitments about revenue growth for the total year and expenses to be flat to down over a full-year basis, which a lot of things happen over the course of a year. No, it's not one and done. We continue to work to find more efficiencies in places where we can be more lean in how we're structured. Part of that was the reorganization. Ultimately, we need to demonstrate, and we fully intend to demonstrate, that we can run a very profitable bank as a financial technology player to the transportation industry, even if the transportation industry is suffering a prolonged downturn. Our job is to be valuable to our customers and our shareholders, irrespective of what the market is doing. If we get tailwinds along the way, I mean, you've seen our numbers in the past. We're highly correlated to that. Every $100 move in invoice prices drops about $7.5 million pre-tax to the bottom line at current factoring percentages of total overall asset allocation, right? I mean, there was a time when we saw $2,400 invoices. I don't expect we're going back there, but I also don't think we'll stay at $1,600 forever. I can see what that's doing to the trucking industry, and it needs to go higher. On the credit front, there were a handful of credit issues that impacted the banking industry in the third quarter. Triumph was not immune to this. You had a credit to try to get a true clue, I guess we're calling this. On the October call, it sounds like there would not be much material loss content. Any other update you can provide for us as any loss content to that credit? No. I mean, if I knew something, we would have already disclosed it. It is all out there. What I can say overall is it is our intent for the community bank to stay out of the headlines, right? That serves no one well. Generally speaking, if you look at credit quality and charge-offs in our community bank over a long period of time, it has been very strong, and we intend to be there. As headlines come, we will work through that, but there is nothing more to add on that credit at this time. Okay. What about on the capital front? You've spent some capital on M&A over the last few years. By bank capital ratios, you're in your CET1s now with 8.6, TCs around 7.9. Give us your thoughts on kind of the capital with respect to M&A, share repurchase. I think you've got some sub-debt that can be refinanced in the future. Just kind of where's your head on capital these days? The first thing is we do not intend to grow our balance sheet, right? We may be the only bank in America that would say that. We intend to grow revenue and profitability, but growing our balance sheet is not in the cards for us. That is not the way forward. I do not need capital to support asset growth in the way banks that are trying to grow their way into greater efficiency would. Number two, at these prices for our stock price, while we trade at a high multiple to tangible book value, at these prices, we have no interest in diluting ourselves or our existing shareholders, right? I can see what is in front of us. Issuing capital for a transaction is very, very unlikely. I'll go back to the last thing I said or what I said earlier, which is we have the product roadmap in front of us. That does not mean there will not be potential for tuck-in acquisitions, but it just is not very high on my radar. We are going to run with the team and the product we have. We have a tremendous amount of engineering talent, developers working on making these products better, enhancing and expanding their reach. What I would expect a year from now, if we execute on everything we are telling you about, revenue growth, expense management, and a balance sheet that is roughly static, you are going to be accreting income back into capital, and our capital ratios will grow, which we think is great. Yep. About a time. Any other questions from the audience? Yeah. How does one make big mistakes in factoring? The biggest mistake in factoring is so it's two types of risk, right? The trucker is your fraud risk. The account debtor, the party for whom they hold, is your credit risk. If the average invoice size is $1,600, and to get concentrated exposure to a trucker, i.e., a fraud risk, means you're dealing with someone who has a large fleet. Failing to do verification calls, verification emails that those loads actually moved is how you would get yourself in risk of just being sold a bunch of bad invoices because you know pretty fast, right? It turns every 35 days. You see dilution start to creep up within two months. The other way you can get yourself in trouble is not managing account debtor risk. When you think about our largest concentrations, it's going to be to companies that move a lot of freight, frankly, companies that move a lot of water because it's so heavy. Nestlé, Anheuser-Busch, C.H. Robinson would be a freight broker. I mean, the large freight brokers are obviously going to be our counterparties. Companies who move a lot of heavy things consistently, Niagara. Just managing those account debtor exposures. Going back to 2012, we've owned this business since 2012 and grown it about 25x over that time. The average charge-offs in the business have been about 25 basis points, which is pretty strong given the yield profile. There's a tremendous amount of work that goes into buying every invoice to verify and to do collections. I think if you skimp on that and you start to take things on face value without verifying that loads have moved, you set yourself up for fraudsters to come in.