A Clear Path Forward

REVIEW OF 2021

The dictionary defines remarkable as “worthy of attention or striking.” There should be a picture of Triumph’s 2021 results next to that definition. 2021 was the single best year Triumph has had since its inception. Here are just a few of the highlights:

Overall company revenue was up 15.6 % over 2020 to $442 million.

• At $4.35 earnings per share, TBK broke profitability records despite investing heavily in the development of TriumphPay.

Triumph Business Capital (“TBC) ” grew revenue by 69 % to $194 million.

• For the full year 2021 purchases were $13.1 billion, up 83% YOY.

TriumphPay experienced parabolic growth.

• TriumphPay revenue grew 325% to $19.5 million.
  • Q4 2021 annualized revenue run rate was $29 million.

• TriumphPay invoices processed grew over 200%.
  • Full-year payment volumes grew over 250%.
  • Q4 2021 annualized exit rate payment volumes were $21 billion, up 173% over the exit rate of 2020.
• TriumphPay successfully completed the acquisition and integration of HubTran.

A lot has changed at Triumph in the 700+ days since COVID- 19 first impacted our lives. While questions about COVID dominated 2020, 2021 brought one of the most strategic shifts in our history. Last year, my shareholder letter laid out goals for Triumph to reach $40 billion in combined annualized payment volume^[1] by the end of 2022. At the end of 2021, we had already achieved a $37 billion run rate. I could not have foreseen that at the time. We had remarkable tailwinds and a remarkable team to hold the sail and catch as much of the wind as possible. As I said above, it was a remarkable year.

A CLEAR PATH FORWARD — WHAT, WHY, WHO, AND HOW

TriumphPay

Banking is not a new or particularly entrepreneurial business. There are new banks and entrepreneurs in the industry, but the business itself is the same: banks buy money from depositors and sell it to borrowers. From that foundation, banks often expand into related financial services such as investment banking and asset management, but generally go no further.

I point this out because what Triumph has set out to do is beyond the scope of anything I just described. I don’t think anything like what we have done has ever been done in banking (although someone with more knowledge may correct me on that).

What exactly is it we are doing? Triumph intends to create the payments network for the trucking industry. Specifically, we want to use platform integrations to curate data in a structured^[2] format between payors and payees to improve efficiency and mitigate fraud. To accomplish the “what” described requires a level of complexity that is hard to overstate. We have invested $150 million and tens of thousands of hours to get here, and we still have plenty more of both to invest.

Why is Triumph doing this? The logic is fairly straightforward: a payments network is one of the most powerful and useful tools in modern finance. Payments networks create long-term customer engagement and are recession-resistant by their very nature. As a result, earnings from payments networks receive much higher valuations than traditional bank multiples.

The second aspect of the “why” is the size of the market we are addressing. Trucking is approximately 8% of gross domestic product. We are targeting the for-hire trucking market within that space, which represents roughly $420 billion in annualized freight spend. Brokered freight, which is currently our primary area of focus, accounts for approximately $170 billion of that total. The same carriers and capital providers who serve the brokered freight market also operate in the $250 billion contract shipping segment. We are exploring ways to better serve that very large part of the market. In sum, the answer to “why” is that we have an opportunity to create something disruptive and valuable to a large industry without incumbent competition while serving our shareholders and team members with value creation beyond our peer group.

The follow-up question is whether Triumph is the right “who” to make this work. I believe the answer is unequivocally yes for the following reasons:

The Winning Formula: The best teams have a clear vision, a healthy culture, and the best athletes. We have absolute clarity on our vision.

There is no such thing as a perfect culture, but if you ask our team members, many will say Triumph is the best place they have ever worked. Finally, we have an exceptional team. The level of operational and technical talent at our organization would rival a bank 10x our size, and we continue to add to our numbers daily.

Industrial Knowledge: We pay more truckers than anyone in the United States of America. Each month we do the following:

TriumphPay

• Handles nearly 1.5 million invoices
• Pays nearly $2 billion to carriers, factors, and brokers
• Pays approximately 36% of all active carriers or roughly 90,000 distinct carriers and growing

Triumph Business Capital

• Purchases about 575,000 invoices, or $1.4 billion from over 12,000 active clients

Proper Capital Structure: I recently saw a version of this (in a tweet of all places), and it resonated with me. The best companies:

• Invest capital: Turn cash into things
• Earn a return: Turn those things into more cash
• Distribute or reinvest the return

Triumph generates a significant amount of earnings (cash). In 2021, our return on assets was in the upper decile^[3] of banking peers despite investing heavily into TriumphPay. We self-fund the venture capital required to fund TriumphPay’s growth, and we don’t have to dilute our shareholders to do it. This allows us to invest beyond the horizon of almost any peer or potential competitor.

Illustrative to this point is our acquisition of HubTran in Q2 2021. We paid approximately $97 million and did so in cash from our retained earnings. That acquisition has delivered over $500 million of enterprise value to our shareholders (who were not diluted in the original transaction). As we continue to build our cash position, investors should know that our deployment of that cash will be either (i) an agile response to a market pullback, or (ii) an acquisition that moves us closer to our end goal of being the payments network for trucking. Our preference, of course, is for the latter if the right opportunity presents itself. It may be that a future acquisition will require the use of stock as well, but where we can do so, our preference is to use cash because we believe wholeheartedly in our future.

Market Alignment: “Freightech” is currently all the rage and rightly so. It has all the hallmarks of an industry ripe for disruption: an enormous addressable market that is highly fragmented and inefficient. When private equity or venture capital backed firms come into this market, they want to improve efficiencies and access data. One of the things they can do with data — especially in the 3PL^[4] market — is to use it to give them an advantage in understanding predictive capacity. This is, at best, a conflict of interest with and, at worst, a massive threat to the incumbent freight brokers who are among our core clients. If you can predict where trucks are going, then you can outcompete the very 3PLs you were promising to serve. Triumph does not present this type of risk to freight brokers — we are a bank. We don’t move freight; we move money.

This alignment is one of the many reasons 17 of the 30 largest freight brokers use us for audit, payment, or both.

TINA: (There Is No Alternative): Triumph is 100% committed to this strategy. Doing hard things requires institutional focus. Without it, we will get lost on detours that take us off the clear path forward. We have called our shot with TriumphPay, and now it is incumbent upon us to execute. We will invest and work until we get there.

In sum, we (the “who” ) believe we have the ability to win based on what we already do in trucking. We have defined the “what” — a ubiquitous and invisible tollway that reduces friction costs for payors and payees. All that remains to discuss is the “how.”

An in-depth examination of how our payments network functions is beyond the scope of a shareholder letter. What I can tell you is that we are in the growth stage of the operation. We continue to add shippers, 3PLs, and factors as clients of our audit and payment offerings. An increasing number of these clients are participating in “conforming transactions.” In a conforming transaction, the payor and payee use APIs^[5] to transmit and receive structured data to present, audit, pay, and streamline cash applications for a given invoice. To make this work, participants use the full suite of TriumphPay products to create an automated payment process. The more integrations we complete, the larger the conforming transaction universe becomes. The larger that universe becomes, the greater the incentive for parties on both sides of the transaction to apply our technology to their operational workflows. Factors and brokers benefit from these efficiencies. Carriers have greater visibility into payment status to optimize their working capital. In a time of strained capacity and rising prices, delivering a product that creates value through automation without a negative impact on margins or the consumer is a unique opportunity.

We are currently focusing on the brokered freight and contract shipping markets, representing about 52% of the U.S.’s $800 billion total transportation market. About 10.2 billion tons of freight is moved in a year. A standard 18-wheeler carries about 21 tons. Therefore, the opportunity set we are pursuing could impact ~250 million loads per year. Beyond that, the less-than-truckload (“LTL”) and parcel segments are also significant opportunities for expansion.

TRIUMPH BUSINESS CAPITAL (“TBC”)

Triumph Business Capital had an extraordinary year. Demand for freight remains elevated to historic levels. Q4 2021 actual invoice volumes (not dollar values) were 40% higher than the same period in 2020. That means that independent of invoice price inflation, our factoring business grew by nearly half last year from an already substantial baseline. Including the impact of the freight spot market^[6] forces that we don’t control, revenues over the same period grew 64%.

We have and will continue to invest in our teams, technology, and service offerings for TBC. The integrations we are developing within the MyTriumph portal will give truckers visibility into all aspects of their relationship with TBK, including payments, equipment loans, bank accounts, insurance and cash management. We will continue innovating to improve the lives of carriers and take the headache out of managing their business. They want to drive. We want to make it as easy and painless as possible for them to do so profitably.

TBK BANK

The community bank continues to do everything we ask of it. In 2019, we prioritized building deposit relationships rather than continuing to grow loans. Since then, we’ve added about $1.2 billion of non-interest bearing funding, while our asset mix has shifted toward the shorter duration, lower credit risk, and higher quality transportation factoring assets. Our team has done a great job maintaining quality business customers who want full banking relationships with us. I’m pleased to say credit quality has never been cleaner at TBK. I couldn’t be prouder of this team as they grow deposits, maintain pricing disciplines, and improve asset quality.

OUR PURPOSE

It has been said that “the purpose of a company is to profitably solve the world’s problems.” In this letter, I have laid out our plan to do that very thing. In addition to our strategy as it relates to the market, we desire to be a force for good in our communities and for our team. I am conflicted in writing too much about this — it is not in our DNA to virtue signal or seek praise for doing good works. The whole idea is to do good works because they are the right thing to do regardless of whether others know about them. This is true whether we are talking about fostering a culture that welcomes all people who want to work with excellence, implementing programs to help prison parolees reintegrate with society, or helping high school graduates from low-income areas access opportunities for fulfilling careers. Those things, and many more, are happening at Triumph and will continue to happen.

CONCLUDING THOUGHTS

Triumph is in a transition period from a community bank with a commercial finance platform to a financial technology leader. A true payments network within a bank has not been done before, but the virtues that our structure bring to the table and the progress we have made are harbingers of future success.

Undergirding that unique vision, we have a stable platform, diverse revenue sources, and very healthy profitability. The future is bright, and we are grateful for the opportunity we have. Our job is to deliver value to the markets we serve, the team members with whom we journey, and the investors who entrust us with their capital. We take that obligation seriously, and you will get our very best effort.

With all sincerity —

Aaron P. Graft

Vice Chairman and Chief Executive Officer

CLICK HERE to view the full 2021 Annual Report

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[1] This calculation was based on the dollar volume of invoices paid by TriumphPay and purchased from clients by Triumph Business Capital.
[2] Structured data is data that exists in a predefined format. This makes it clearly defined and searchable by field.
[3] Source: S&P CapIQ, 208 public banks over $500 million market cap.
[4] “3PL” is short for 3rd party logistics provider. This refers to companies that handle the outsourcing of ecommerce logistics processes to a third party business, including inventory management, warehousing, and fulfillment.
[5] Application programming interface — a software intermediary that allows two applications to communicate with each other.
[6] The spot market, as opposed to the contract market, is priced on one-time fees that a shipper pays to move a load (or shipment) at current market pricing. Spot rates are a form of short-term, transactional freight pricing that reflects the real-time balance of carrier supply and shipper demand in the market.