Triumph Bancorp (TFIN -0.19%), a niche bank that caters heavily to the trucking and factoring industries, recently reported earnings results for the fourth quarter of 2021 that fell short of estimates. Management also discussed some issues that might hold the business back this year. The stock had been sliding already, and at Friday's close, it was down 26% year to date.
But I would caution investors not to worry too much about the short-term challenges here. Triumph is building a fully integrated payments network called TriumphPay that could revolutionize the way payments flow through the trucking ecosystem; management has said it could be worth hundreds of millions of dollars. Let's take a look.
TriumphPay is built to support the trucking industry: the carriers and the shippers; the freight brokers that help connect them; and the factoring companies, which purchase trucker invoices in advance to provide carriers with immediate liquidity. TriumphPay makes all these parties more efficient by streamlining all the manual work and paperwork involved in the process, by helping with auditing, and -- eventually -- by automating the entire process from start to finish.
Naturally, building a payments system for an entire industry is no easy task. On the bank's recent earnings call, CEO Aaron Graft said that he wanted "to urge caution for 2022 earnings estimates." Graft cited the fact that expenses are rising, specifically around the need to hire more tech talent in a very tight labor market.
Graft also reminded investors and analysts that while the freight market is currently running at a very high capacity, things might start to normalize later on in 2022. This could affect invoice volume across TriumphPay, which tends to be lighter anyway in the first quarter due to seasonality. Graft also noted that the industry has been operating at such a high level, due to the increase of delivered goods since the pandemic started, that it may have disincentivized some companies from joining the TriumphPay network and changing their operations at a time when profits are surging.
Keep your eyes on the prize
Despite some near-term headwinds that could create a drag on earnings, what Triumph is doing is really considered revolutionary by those in the trucking industry. In January, TriumphPay completed its first conforming payment between a freight broker/shipper and carrier or factoring company, which Graft described on the earnings call:
What makes the conforming transaction unique is that the entire process of presentment, audit, payment, and cash application can be completed in an automated environment. You can think of this as the difference between pulling out a checkbook at the grocery store 30 years ago versus tapping a credit card today: one process is manual, the other is automated using integrations and structured data.
This removes a lot of the phone calls and manual paperwork that can slow the process of moving goods. Derek Stanley, the president of the factoring company Engaged Financial, which participated in one of Triumph's first conforming payments, told the publication Freight Waves, "This is just as exciting and impactful as the first time we landed on the moon."
So, this is clearly a big deal, and it's also expected to have a big effect on Triumph's bottom line. Currently, Triumph has a few freight brokers and shippers and about a handful of factoring companies in its test program for conforming payments. But there are 554 freight brokers, 69 factoring companies, and more than 189,000 carriers that have been processing invoices and using audit tools through TriumphPay for a while now, and volume is quickly ramping up. In the fourth quarter, TriumphPay paid out 4 million invoices for a total payment volume of $5.2 billion, which equates to an annual run rate of close to $21 billion through the network.
In 2021, TriumphPay helped the bank make a little under $20 million, which came from interest income on factored receivables and fee income from subscription fees, network fees, and syndication fees. About $7.5 million came from the fee income portion. However, Graft has said in the past that volume going through TriumphPay is expected to reach about $75 billion by 2024, which is expected to generate $100 million of fee income on the platform. Consider that fee income at Triumph Bancorp in 2021 came in at $54.5 million and total revenue came in at $423.5 million.
A lot more to come
While it has taken Triumph years to get to this point, the fruits of management's labor are just beginning to pay off. Graft said investors will start to see materially more revenue from TriumphPay in 2023. He has also said in the past that he thinks TriumphPay can become a $500 million business on more of a long-term basis.
The bank is already putting up some of the highest returns in the industry. In 2021, Triumph generated a 21.4% return on average tangible common equity, which essentially shows the profit the bank made on shareholder capital after removing intangible assets and goodwill. Return on average assets came in at 1.87%. In banking, both of those figures are elite. Keep in mind that Triumph also did this while continuing to develop TriumphPay and while expenses in 2021 jumped nearly 30% from the prior year.
The market has certainly taken notice of what Triumph is doing. Triumph currently trades at more than 4 times tangible book value, or what a bank would be worth if it were liquidated. Very few, if any banks, trade at this kind of multiple. But I think it's clear the market sees Triumph as more of a payments company, which can trade at much higher multiples than banks.
It's still early days and we still don't know how big the opportunity really is for TriumphPay. So I would reiterate that I expect any near-term headwinds to be heavily outweighed in the future by the success of TriumphPay.