Our theme this year is The Power of &. Triumph is a bank… but we are far more than just a bank. That’s the “&” in our story. The power of an emerging transportation fintech platform housed within a community bank is unique and positions us to deliver far more than those individual components could achieve on their own. I believe you will see this unfold in 2020 more than it ever has before.
Review of 2019
The year 2019 was a difficult one in many respects, but a very successful one in others. Triumph Business Capital (“TBC”) experienced greater than anticipated headwinds as the transportation sector recalibrated following industry over expansion in 2018. As market opportunities unfolded, we elected to make significant investments into our transportation fintech platform, pulling several years of planned technology investment forward on an accelerated timeline. These factors led to a year-over- year decrease in our return on average assets. On the other hand, we improved our credit metrics, grew core deposits, made substantial progress integrating our prior acquisitions and generated significant organic growth at TriumphPay.
Community banking makes up the largest portion of our balance sheet and generates consistent profitability. We have repeated the following refrain since the beginning – excellence in community banking requires commitment to excellent customer experience along with the core tenets of (i) managing credit risk, (ii) growing core deposits and (iii) improving operating efficiency. These are time-tested banking principles that shape how we think about our community bank.
Community Bank Value Driver 1: Credit Discipline
TBK’s credit performance continues on a positive trajectory. Our ratio of non-performing assets to total assets for all lines of lending finished the year at 87 bps, which is relatively flat year-over-year. Net charge-offs for the year were 17 bps, which is excellent by historical standards. Beyond these metrics, we made the decision to tighten our credit discipline and reduced our risk appetite in 2019. I expect that trend to continue for 2020. While this decision was partially related to being late in the economic cycle, it was also enabled by the decision to transform our business model. This transformation toward a transportation-centric financial technology provider has given us the luxury to be selective in the amount of credit risk we take in traditional lines of business.
Community Bank Value Driver 2: Core Deposits
Core deposits are the lifeblood of a healthy bank. These deposits will outperform all other sources of funding over any reasonable period of time. Our deposit franchise has never been healthier, which I attribute to two factors. First, we have chosen to limit our asset growth. This has eased pressure on our deposit base and is consistent with stricter credit underwriting as I discussed earlier. The second (and far more compelling) factor is the progress we have made in building more complete banking relationships with our credit clients. This was driven by significant progress in cross-serving credit-only clients with our new treasury services platform. Commercial deposits with treasury management services grew $120 million, or 190%, for the year and contributed to lowering our cost of funds by 5 bps from the 2nd to the 4th quarter this year. Further, we have revamped our products, training and incentive plans to focus our team on growing retail and commercial deposits. As we closed 2019, we saw headway on this front that we expect to continue in 2020.
Community Bank Value Driver 3: Operating Efficiency
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 2019 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 TBC and TriumphPay, we expect operating efficiency for our entire franchise to improve over the next three years.
Transportation Fintech & Commercial Finance
Commercial finance, which includes our asset based lending, equipment finance and factoring lines of business, has been a core part of our strategy since 2012. Our commercial finance business serves multiple industries, but by far our deepest concentration is in transportation.
Our transportation fintech platform includes TBC, our highly successful factoring subsidiary, and TriumphPay, our emerging transportation payment platform. Both of these businesses run on market-leading proprietary technology. We do not just depend on differentiated technology, however. We also offer a full suite of complementary products including equipment finance, insurance brokerage, fuel programs and specialized deposit products for our trucker clients. The ability to deliver innovative technology and to meet a broad spectrum of our clients’ needs augments our dominant market position and lays the foundation for accelerated growth.
TBC was founded in 2004. Since we acquired it in 2012 it has grown to become one of the largest factoring companies in the transportation industry. Over that period, we have continued to drive down delivery costs as we built scale. Five years ago, we began to explore the possibility of moving beyond incremental improvements to a disruptive leap forward in operating efficiency via supply chain integration with freight logistics providers. That led us to the creation of TriumphPay. TriumphPay provides near-instant liquidity and supply chain optimization for freight brokers and shippers. We now effectively provide traditional factoring and reverse factoring to two distinct (yet deeply connected) client segments, and the results have been impressive. In 2019, TBC and TriumphPay together processed nearly $6 billion in transportation payments. More importantly, I expect our 2020 volume to more than double that of 2019 as we continue to enjoy a warm market reception.
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 that we will revolutionize billing and payments in trucking.
As recently as last year, I believed the primary use case for TriumphPay would be via blockchain integration (e.g., serving an emerging digital supply chain for freight). While I believe that idea still has long-term merit, the “golden era” of a distributed ledger and digital freight contracts is not yet a ripple in trucking. Seizing on the continuing void, we modified our strategy and have been rewarded with significant momentum. As I said above, we believe that TriumphPay will become the primary nexus for billing and payment in brokered freight. We will improve efficiency and optimize cash management for freight brokers, carriers and other factors. As a result of these efforts, by the year 2022 we expect to process a greater volume of transportation carrier payments than any company in the United States. Achieving that goal is more than just a bragging right — it positions us to provide unique value to our clients and unique insight to the market as a whole about the state of transportation, which is usually a harbinger for the overall economy.
Helping People Triumph
Our brand promise is to Help People Triumph. That promise doesn’t just apply to team members, customers and shareholders — it also applies to the communities we serve. This year, we will open 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 a great opportunity to serve individuals in need and the community as a whole by preparing workers to pursue successful careers.
The heart behind this project comes from one of our original core principles — the mission is more than money. Environmental, Social and Governance or “ESG,” has become a buzz word in corporate America the last few years, and we’ll all be better for its implementation if it is not hijacked by ideologues and special interest groups. 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
The Power of & is real. Triumph is doing something unique, and people are beginning to take notice. Our go- forward strategy is built upon several key pillars, which I would like to share with you here:
- Community Banking Excellence. There is no replacement for great customer service and the core community banking disciplines of (i) conservative and diversified credit, (ii) growing core deposits and (iii) improving operating efficiency. Pursuing these disciplines is a primary responsibility.
- Triumph Business Capital > 2X. TBC’s goal is to at least double its 2019 net income over the next 3 years. Among other initiatives, we believe we can achieve this through machine learning, artificial intelligence and deeper integration with TriumphPay to improve efficiencies. TBC addresses a fragmented market with a leading brand position, superior technology and a suite of products available only in a bank. By way of example, we are investing approximately $6 million in document processing as well as automated verification, purchasing and treasury functions in 2020. We expect to achieve a ROI over 100% on that investment through 2022.
- TriumphPay > $25 billion. We believe that TriumphPay can grow to $25 billion in annualized payments in the next 3–4 years. We will do this by keeping our focus on providing a seamless end-to-end payment system that meets the needs of our clients and users. We will continue to invest in technology, build our sales and integration teams, and leverage both our own in-house products and our partnerships in the industry. We added more than $1 billion of run- rate payment volume to TriumphPay in 2019, and we expect to capitalize on a full integration pipeline to accelerate this growth trend in 2020. We anticipate TriumphPay will begin to achieve the network effect as the most frictionless form of payment in transactions between freight brokers and carriers in the U.S. over the next 3–5 years.
- #defensible. The fast-paced and global nature of business today makes moats difficult to build and hard to sustain. As we sit today, we are already well- positioned in transportation, with a diverse palette of products and services, industry knowledge, a seasoned team and credibility with industry players. As I have said above, all of those resources have helped us build a solution that will create significant new value for clients, reduce transactional friction, rapidly build scale and place us at the center of a large ecosystem. This will be difficult for others to replicate.
- 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 have continued that activity in 2020, and we expect to continue to return capital to shareholders through repurchases, assuming the market continues to under- appreciate our view of the value proposition of our platform. We expect modest balance sheet growth over the next 3 years compared to our historical rate of growth, which we believe is appropriate given the late-cycle dynamics and our commitment to credit discipline. This is also congruent with our desire to repurchase more of the company.
We intend to execute this plan with precision and at battle speed. These are 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…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 2020 —
Aaron P. Graft
Vice Chairman and Chief Executive Officer
CLICK HERE to view the full 2019 Annual Report.