Description

Recommendation: Buy equity in Triumph Bancorp (TBK), a commercial bank that is nursing a scalable payments network. 

Situation:

• Triumph Bancorp is a small ($5b in assets) regional commercial bank headquartered in Dallas.
• TBK originates loans for businesses, real estate, construction, residential real estate and commercial agriculture.
• TBK grew its balance sheet by 4x since 2014 through a roll-up of commercial banks in the Midwest.
• TBK operates 61 branches, concentrated primarily in Illinois, Iowa, Colorado and New Mexico.

As a commercial bank, Triumph is unusual in two ways:

• TBK’s core competency of factoring invoices for truckers (roughly 35% of the loan book) drives NIMs of 7% vs. 2% for banking peers.
• In 2018, Triumph launched a payments network for over-the-road truckers. Last year, that network grew 3x and processed $15b in payments for the trucking industry. TBK has yet to monetize this network in a meaningful way.

Thesis:

• TBK’s banking business stands to benefit disproportionately from rising rates. For most commercial banks, expanding NIMs will likely be coupled with higher default rates. However, TBK’s factoring business has a deep pool of low-risk loans with high yields. TBK is constantly migrating its loan book towards factoring and has significant runway.
• TriumphPay, the company’s trucking payment network, is worth more than TBK’s current market capitalization.
• TriumphPay eliminates 85% of the costs associated with transportation receivable factoring.
• Payments networks are natural monopolies, allowing the network’s owner to push pricing once everyone is inside the tent.
• Bank analysts struggle to understand the value of TriumphPay because they don’t understand Triumph’s pricing power or how the market values payment companies.

Risks:

• Execution risk around TriumphPay. Immature payment networks typically lose money when they are growing rapidly.
• Mean-reversion in trucker pay will cause TBK’s expense ratios to rise relative to total invoices

BACKGROUND ON CARRIER FACTORING

To understand TBK, we need to first provide a quick primer on how factoring works in the trucking industry.  Historically, commercial banks have avoided carrier factoring because it’s labor intensive and challenging to detect fraud.

• There are 3.5mm truck drivers (carriers) in the United States. In aggregate, carriers in the for-hire freight market earn $420b annually.  Carriers are paid 30-45 days after a load is delivered. Carriers incur expenses (gas, lodging, food, insurance) long before a load is delivered.
• Despite receivable factoring being cumbersome for carriers and brokers, 50% of carriers in the U.S. factor their receivables.
• In theory, factoring receivables for carriers could be a good business for banks. A carrier receivable is a 30 to 45-day loan where the counterparty is a freight broker or 3PL firm. Carriers expect ~$0.97 on the dollar for their receivables, so the loan has high yield.
• In practice, banks don’t factor carrier receivables. Banks deem carrier factoring too labor intensive relative to the ticket sizes (around $2,000/each). It’s also hard to detect fraud if you’re not a specialist.
• Carrier factoring is a fragmented industry dominated by companies that specialize in carrier factoring for the transportation industry.

The process for factoring carrier receivables:

1. Once a job is complete, the trucker (carrier) asks the recipient of the load to sign an invoice confirming the job is done. 
2. The carrier e-mails the signed invoice to a factoring firm or drops it off in person.
3. The factoring firm makes an offer to the carrier based on the invoice amount.
4. If the carrier accepts the offer, the carrier uploads supporting documents to factoring firm’s online portal.
5. The factoring firm calls the broker/3PL provider to verify the job and amount owed. A final purchase decision is made by the factoring firm. 
6. The factoring firm pays the carrier for the invoice and documents the sale of the invoice. 
7. The factoring firm e-mails paperwork to the broker/3PL provider providing proof it is now the recipient of the invoice. 
8. After 30-45 days, the factoring firm holds a pay status call with the broker/3PL provider.
9. Shortly after, the broker/3PL provider sends a check to the factoring firm. 
10. After the payment is posted, a final call is held between the factoring firm and the broker/3PL provider to verify receipt of funds.

TBK's ENTRY INTO CARRIER FACTORING

Though its acquisition of Advance Business Capital, Triumph became the first bank to make carrier factoring a core competency.  You can look at the financials below to see how factoring mix has impacted the business.

• In 2012, Triumph acquired Advance Business Capital (ABC), a carrier factoring firm  servicing the transportation industry in Texas. Shortly after the acquisition, Triumph began to take transportation receivables on balance sheet.
• To fund the growth of factoring business, Triumph began rapidly acquiring other commercial banks.
• Triumph’s foray into carrier factoring resulted in outstanding NIMs with low default rates.
• Until 2021 the company’s return on equity was good, but not spectacular because of high operating expenses.
• In 2021, TBK’s return on equity inflected from rising invoice sizes and more scale in factoring

American banks are flush with deposits but are struggling to build quality loan books. TBK does not have this problem, as the factoring business has allowed TBK to tap into a deep pocket of high-quality loans.  For other commercial banks, rates are likely to trigger a default cycle and fee revenues will be pressured lower from normalized trading and mortgage activity

TriumphPay

In 2018, TBK launched TriumphPay, which replaces the manual factoring process with an online clearinghouse for carriers, brokers and factoring firms.

• In 2015-2017, a group of computer scientists collaborated on ways to use blockchain to simplify carrier factoring.
• In early 2018, the blockchain project started to fizzle. Triumph hired individuals out of the project and asked them to build the carrier factoring network as a centralized system that could be operated by Triumph. 
• In late 2018, TriumphPay was launched. Carriers, factoring firms and brokers/3PL firms log on to TriumphPay to a
• TriumphPay grew more than 250% last year and has become the main clearinghouse for carrier factoring.
• TriumphPay is estimated to eliminate 85% of the fees associated with factoring. Carriers, brokers and factoring firms on the network are migrating to the network becaused of improved economics and usability.
• To scale rapidly, TrumphPay is charging minimal fees.  In time, it seems reasonable to assume TBK can push pricing to 0.35% on network volumes of $150b.  This fee is at the very low end of the scale for payment companies.

Thoughts on Valuation

We think about TBK as a SOTP based on core banking + TriumphPay. 

Catalyst

• Market seeing low defaults through cycle in core banking.
• Continued growth of TriumphPay.