Our theme this year is Helping People Triumph. It is not just our theme for this letter — it is our permanent brand promise. If there were ever a year when we needed to help each other, 2020 was the year.
REVIEW OF 2020
We entered 2020 feeling like the wind was at our back. We had more clarity around our strategy than ever before, our numbers looked solid, and our growth trajectory was exciting. Then, along with the rest of the world, we took a hook to the jaw from COVID-19. Things were happening fast, our stock was in free fall, and the nation was shutting down.
In late February, we decided to play some offense while the world was on defense. From the beginning of March to early May, we invested over $300 million into liquid loans and high-quality securities at distressed prices as others were forced to sell. We took some chips off the table later in the year as market prices improved dramatically, and our earnings continue to benefit from the remaining portfolio. On March 17, our stock touched its low of $19.03. All of our earnings in the first quarter were wiped out due to setting aside loss reserves. The second quarter started very slowly — our transportation businesses experienced revenue volatility. When trucks aren’t running, we aren’t generating revenue. At some point along the journey, things started to shake loose. Supply chains began to run again. The market was pulling forward a lot of demand, and we did our best to hold on for the ride.
As of February 26, 2021, our stock was up 303%, from its 52 week low on March 17, 2020. Our transportation businesses had a record year — an unbelievable outcome from where we were in April. As a company, we ended up beating our full-year forecast. If you had given me odds in March that this is where we would end up, I would have lost the bet.
As we close the year, I am grateful, sad, concerned, and hopeful all at once. I know better than to put all of my hope in people or institutions. I base the center of my hope and optimism on an eternal perspective – and that perspective gives me hope and optimism in the present that we can continue to create value and Help People Triumph.
Community banking continues to make up the largest portion of our balance sheet, and it generates consistent profitability. We have repeated the following refrain since the beginning — excellence in community banking requires a commitment to excellent customer experience along with the core tenets of (1) credit discipline, (2) relationship banking, and (3) operating efficiency. These are time-tested banking principles that shape how we think about our community bank.
COMMUNITY BANK VALUE DRIVER 1: CREDIT DISCIPLINE
The community bank credit profile continued to benefit from the reduction of risk implemented in 2019, resulting in net charge-offs of only 10 basis points. The loan portfolio held up well under the strain of COVID-19. While our borrowers were undoubtedly aided by the Paycheck Protection Program (PPP), deferrals, and other government stimulus, we were pleased to see that longer-term accommodations were limited to a handful of customers most significantly impacted by the pandemic.
COMMUNITY BANK VALUE DRIVER 2: RELATIONSHIP BANKING
Full, long-term relationships are critical to the success of any community bank. We’ve made real progress in broadening credit-only relationships and attracting clients who need and want a banking partnership that leverages all of our capabilities. This is reflected in the growth of our noninterest deposits, which was undoubtedly aided by recent federal pandemic relief payments, but actually began well before the pandemic. Our progress was also reflected in significant loan yield and margin improvement as we let lower-priced transactional loans be refinanced elsewhere. We see abundant opportunities to further cross-serve our clients, so you can expect relationship banking to be a continuing TBK priority and value driver for the long term.
COMMUNITY BANK VALUE DRIVER 3: OPERATING EFFICIENCY
I will repeat what I said last year for this value driver – I haven’t found a better way to say it. The banking industry talks a lot about the need for scale. It seems everyone believes getting bigger will improve efficiency. I am personally not so sure that is the case. There are $150 million banks that operate at high levels of efficiency, and there are much larger banks that do not. At Triumph, we are not focused on getting bigger — we are focused on getting better. From a headline number, operating efficiency remains an area of improvement for us. Our 2020 ratios reflect investments in people, systems, and products such as treasury services. On the back end of these investments, as well as the ongoing artificial intelligence and machine learning projects at Triumph Business Capital and TriumphPay, we expect operating efficiency for our entire franchise to improve over the next few years.
Commercial finance, which includes our equipment finance and asset based lending (ABL) lines of business, has been a core part of our strategy since 2012. Our commercial finance business serves multiple industries but has a concentration in transportation that aligns strategically with our transportation fintech thesis. We intend that the concentration and strategic alignment of our commercial finance businesses become even more pronounced in 2021.
Our equipment finance business withstood the pandemic disruptions to the transportation industry remarkably well and rebounded very quickly in the third and fourth quarters of 2020. We responded quickly in providing many deferrals to our equipment finance clients early in the pandemic. Very few required extensions as activity rebounded in the second half of the year. In parallel, we responded to a dramatic increase in new loan demand. This resulted in a record quarter for loan originations and the first in which we originated more than $100 million.
Our asset based lending business also weathered the pandemic very well with improving credit quality and no losses throughout 2020. We expanded and deepened our ABL underwriting team and continued building our origination team with greater emphasis on the transportation industry ABL.
Our transportation fintech platform includes Triumph Business Capital, our highly successful factoring subsidiary, and TriumphPay, our emerging transportation payment platform. Anyone who follows us knows that these compose our most significant growth opportunity. Both of these businesses benefitted from a near-record year for freight. Beyond that tailwind, however, we created material organic growth and greatly improved our product suite.
In the fourth quarter of 2020, our total payments processed was $4.034 billion. That equates to an annualized run rate of approximately $16.1 billion — or a 371% annual growth.
I want to call your attention to two goals I specified in last year’s letter:
- Triumph Business Capital to double net income in three years. In 2019, our net income before federal income taxes at Triumph Business Capital was $37.0. In 2020, our net income before federal income taxes was $47.0 million, an increase of 27%. We need to drive 25% growth per year to achieve our 2022 goal.
- TriumphPay to achieve $25 billion in run-rate payment volume. Isolating TriumphPay from Triumph Business Capital, and using the month of December 2020 numbers, our annualized run rate payment volume is $8.7 billion. That is up 297% from December 2019. I want to take this opportunity to amend this goal to reflect the changing nature of our business – our goal is to achieve a total payment volume (Triumph Business Capital and TriumphPay) of $40 billion. Our stretch goal is to achieve that exit rate by the fourth quarter of 2022.
Achieving these two goals will create more value than anything else we can do over that period. They are the catalyst for our creating above-market returns for our investors. We also have goals for community bank deposit growth, credit quality, and operating efficiency. Those are very important for the health and well-being of the bank.
As I have said before, trucking is a very large and very fragmented industry — tens of thousands of shippers utilize thousands of freight brokers to pay hundreds of thousands of carriers (truckers). These transactions happen hundreds of thousands of times per day. They are largely paper-based, non-standardized, high-touch, and small (the average invoice size is less than $1,700). This inefficient model is ripe for disruption by someone with industrial expertise, innovative technology, and access to capital. Based on the significant traction we have achieved in a short period of time, we believe we are that disruptor, and we will revolutionize billing and payments in trucking. Achieving this goal will be a win for everyone.
HELPING PEOPLE TRIUMPH
As I said at the beginning, our theme for this letter and our brand promise is Helping People Triumph. That promise doesn’t apply just to team members, customers, and shareholders — it also applies to the communities we serve. Just a few months ago, we opened The Workshop by TBK Bank. It is a “makerspace” located in Dallas, Texas, where we will train all people — students, adults, recent prison parolees, and others — to join the skilled trades of carpentry, welding, and fabrication, to name a few. We believe this is an excellent opportunity to serve individuals in need and the community as a whole by preparing workers to pursue successful careers. This past year has been a year of significance unlike any in my lifetime. Beyond the novel coronavirus, we also confronted the not-so-novel problem of inequality.
Triumph will not shirk its responsibility to be valuable in this effort. We are not a political organization – we are a for-profit, publicly-traded financial service company. Our job is to create value for all of our stakeholders. It is not our job to establish political positions. I do not view the struggle for equality as political – it is a moral obligation. I will leave it to the voters and the policymakers they elect to move us forward politically on this topic. What we can do as an organization in the meantime is make sure that we are continuing to invest in a culture that celebrates the richness of our differences. We diligently pursue an authentically welcoming atmosphere that is open and valuable to all team members and stakeholders. From our very first day of operating as a company, Triumph has had the guiding principle to “treat others the way we would like to be treated.” We continue in this mindset today. To that end, we have created the CEO’s Council on Diversity & Inclusion, which works in partnership with the Diversity & Inclusion team. We have added talented leaders to this initiative to better engage with our team members and community. This is noble work, and I am proud we are doing it!
Our commitment to Helping People Triumph was perhaps most evident to our clients through our pandemic relief efforts. We waived fees, deferred loan payments and actively participated in the Paycheck Protection Program and Main Street Lending Program. In so doing, we provided aid to 4,000 business clients with over 35,000 employees. Many of our team members worked long hours under tight deadlines and assumed new responsibilities to assist our clients. I could not be prouder of or more grateful for their efforts.
The heart behind these collective efforts comes from one of our original core values — the mission is more than money. Environmental, Social, and Governance, or “ESG,” has become a buzzword in corporate America in the last few years. We’ll all be better for its implementation if ideologues and special-interest groups do not hijack it. Whatever you call it, the biblical principle of “doing unto others as you would have them do unto you” continues to guide our thinking.
OUTLOOK FOR THE FUTURE
We have set and achieved many of our company goals since Triumph became a bank in 2010. Our shareholders and team members have benefitted from that work, and we know that our customers have triumphed in their own right. Our go-forward strategy from here includes the following:
- Community Banking Excellence. There is no replacement for excellent customer service and the core community banking disciplines of credit discipline, relationship banking, and improving efficiency. Pursuing these disciplines is a primary responsibility.
- Triumph Business Capital > 2X. Double the earnings contribution from Triumph Business Capital by 2022.
- Total Transportation Payments > $40 billion. Achieving this goal will give us a dominant market position and improve our operating efficiencies. It will also enable us to create efficiencies for the users of our TriumphPay network and customers of our Triumph Business Capital factoring operation, resulting in a better cost of capital and a more user-friendly experience.
- Resilience: Restrain Growth & Return Capital. We began repurchasing our shares in January 2019, and we acquired 8% of our shares outstanding during the year at a blended price of $30.90 per share. We continued that activity in early 2020. Given the global pandemic, the subsequent run in our stock, and some investment opportunities we are considering, we did not repurchase shares in the second half of 2020. We continue to expect modest balance sheet growth over the next three years compared to our historical growth rate. We remain opportunistic acquirers of our stock.
These continue to be exciting days for Triumph — for our team members, our customers, our communities, and our shareholders. To our customers, thank you for trusting us with your business. To our team members, thank you for making Triumph work and for rallying around an ambitious plan, and serving others along the way. To our long-term investors, thank you for your belief in what we are doing. We owe you our best, and you will get it.
Wishing you all the best in 2021 —
Aaron P. Graft
Vice Chairman and Chief Executive Officer
CLICK HERE to view the full 2020 Annual Report