Below is the letter to shareholders from Aaron P. Graft, Chief Executive Officer of Triumph Bancorp, Inc. View the full 2015 Triumph Annual Report.
March 16, 2016
Fellow Stakeholders:
Different Perspective, Different Results. Anyone who follows the banking industry can quickly spot that Triumph is different from the crowd. Our goal is not to be different; our goal is to be valuable. Placing value above industry conformity is a perspective that is easy to talk about, but more difficult to put into practice. Most banks market themselves with the one-two punch of providing “superior customer service” and “a full suite of banking services.” Of course, doing both of those things well is important to any bank, which is why every bank talks about it. But if everyone is doing it (albeit some better than others), how much value differential can it create?
The advancement of financial technology, increasingly burdensome regulation, historically low interest rates, shifting consumer patterns and commoditized banking services all but assure mediocre performance for banks that do not innovate and specialize. Because of these market realities, we have built a unique business model. We think that being unique is a good thing. Here is a summary of our 2015 results that support that conclusion:
- Net income available to common stockholders of $28.4 million or $1.57 per diluted share
- Return on assets of 1.89%, compared with .91% for the aggregate of all US banks $1B to $5B(1)
- Grew Tangible Book Value per share by $1.73 or 15.6%(2)
- Net interest margin of 6.49%, ranking us among the highest of any U.S. bank
- Loan growth of $286 million (28.4%)
- Deposit growth of $83.7 million (7.2%)
- Tangible common equity to tangible assets ratio of 13.85%
- Completed the Doral Money, Inc. acquisition, which generated a $15.1 million bargain purchase gain and added two CLOs to our asset management operations
- Completed the legal merger of our two banking franchises into a single entity
- Reduced non-performing assets to total assets by 63 basis points to 1.10%; reduced past due loans to total loans by 16 basis points to 2.41%
- Launched Triumph Premium Finance to provide short term financing solutions to independent insurance agents and their insureds
I will say here the same thing I said in last year’s report – we didn’t get everything right in 2015, but we got the main things right. Beyond our 2015 operating metrics, we made substantial progress on our journey to deliver value in the future for our shareholders, team members and customers.
Community Banking. TBK Bank, SSB is anchored by our Midwest-based community bank, which operates in that market as Triumph Community Bank. Triumph Community Bank offers a full array of retail and business banking products. We like to emphasize that “the word ‘Community’ is our middle name.” This is more than just a phrase; it speaks to how we approach the market. Triumph Community Bank serves the whole community –working-class families, small business entrepreneurs, and major manufacturers. It is what the bank has done for over 15 years and what we will continue to do going forward. TBK Bank also operates in Texas as Triumph Savings Bank. Triumph Savings Bank operates a single branch in Dallas, Texas, offering CDs and money market accounts.
Commercial Finance. Our commercial finance business is broadly separated into three components: factoring, asset based lending and equipment finance. These businesses operate under different trade names: Triumph Business Capital, Triumph Commercial Finance, Triumph Healthcare Finance and Triumph Premium Finance, all of which are divisions or subsidiaries of TBK Bank.
Our Triumph Business Capital subsidiary provides financing to small businesses by purchasing accounts receivable (factoring) from our customers. While our factoring customers are involved in several different industries, our primary focus is in transportation. We are one of the nation’s leading providers of factoring to for-hire truckers and freight intermediaries. We are committed to improving our service levels and offerings as we attempt to become the clear leader of a fragmented market that has been historically ignored by banks. For example, www.MyTriumph.com, a mobile-responsive web portal we developed, now provides over 2,000 clients with real-time account information and simplifies the process for submitting invoices (and supporting documentation) to Triumph for purchase.
Triumph Commercial Finance provides senior financing to small and middle market companies. Many of these companies would not qualify for a traditional commercial loan. We serve them through structured and innovative financial solutions and we protect ourselves through a deep understanding of our collateral and high-touch monitoring for the life of the relationship. We finance a range of clients nationwide from manufacturers to distributors and retailers, to trucking, waste disposal and construction companies.
Triumph Healthcare Finance provides asset based loans to healthcare providers including skilled nursing facilities, pharmacies, hospitals and home healthcare providers. Our healthcare finance team has years of successful industry experience. We are well positioned to grow in the area of healthcare finance.
Triumph Premium Finance provides short-term loans to insureds for property and casualty insurance policies. We market our services to independent insurance agents nationwide. This is a large market and we are excited about the growth opportunity for Triumph.
Commercial finance lending is specialized—it requires policies, processes and, most importantly, experienced people. A major difference between traditional lending and commercial finance is the importance of ongoing portfolio monitoring. Many of our commercial finance loans require continuous verification of invoices, notification of account debtors (of our lending relationship with our borrower) and the maintenance of dominion over our borrower’s cash. This is a time-intensive effort that requires experienced personnel as well as specialized systems. If a bank is only going to dip its toe into the water of commercial finance, it is not cost effective for it to hire these people and build the infrastructure. A market downturn will bring this to light. Triumph’s commercial finance team is exceptional—the executives leading these groups have decades of successful experience operating these businesses. Behind those leaders, we have a deep bench with 159 team members (out of 525) at work within our commercial finance business.
Asset Management. Triumph Capital Advisors is a subsidiary of our holding company. It is a credit-focused institutional asset manager and a registered investment advisor with over $1.8 billion of managed CLO assets as of December 31, 2015. Triumph Capital Advisors grew managed CLO assets by $1 billion in 2015 through the issuance of one CLO and the acquisition of two CLO management contracts as part of the Doral Money, Inc. transaction.
What specifically makes Triumph different? And why is different better?
Triumph is different from other banks due to our willingness to investigate, understand and finance under-served industries. This requires a different perspective from traditional banking, and it is necessary for our success. Without niche product offerings, most community banks will struggle to earn their cost of capital as they suffer from increased competition, unprecedented regulatory burdens and a currently unfavorable interest rate environment. Technology and changing consumer habits have called into question the branch-driven model of banking that has been relatively unchanged for over a century.
Despite these headwinds (some of which are likely permanent), community banks enjoy unique funding advantages over every other form of business. We believe that community banks are central to the prosperity of our nation as they provide credit and other financial services that consumers and small businesses need to thrive. Therefore, as we fulfill our mission to meet the banking needs of our local communities, we also provide specialized lending services to specific industries across the country. In addition to creating higher margins, our commercial finance activities diversify our business both by industry and geography. This is demonstrated in our 2015 results, where we have avoided the asset quality challenges seen in some of our peers with large concentrations in energy lending activities.
Simply put, our diversified business model gives us the best of both worlds—the stability of a community bank and the growth opportunity of a commercial finance business.
What does market volatility mean for Triumph?
We believe that volatile markets create opportunity. Triumph has always focused on opportunities to capitalize on instability and market dislocations. I expect this current market to be no different than past cycles. We will look at opportunities others will pass up—either because they are not looking or because they are unable to look due to their own challenges.
Even prior to the volatility of the first quarter of 2016, community banks were struggling to find the loan growth (and appropriate loan pricing) and non-interest income sources they needed to generate an acceptable return on equity. As these conditions show no signs of abating, we believe that we will see more opportunities to acquire banks with solid depository franchises that will fund our continued growth. Market volatility also has the positive effect of winnowing out part-time participants in niche lending areas. The low interest rate environment of the last several years has brought more and more banks into the commercial finance space in a search for yield. Unless they have made the investments to be in this sector of the market through the cycle, they will not be a competitor for long. Banks have a long history of under-resourced expansion into new lines of business followed by an abrupt exit when market conditions change.
Triumph is not immune to the effects of market volatility. Some borrowers will struggle to repay their obligations when market forces turn against them. No bank is immune to credit risk, but we mitigate it through ongoing monitoring and diversification. Our geographic diversity is unique for an institution of our size. Our depository franchise, based in the
Midwest between Chicago and the Quad Cities of Iowa and Illinois, provides a stable source of core funding through which we support local communities and a national lending platform. As of December 31, 2015, our non-factoring related loan portfolio was mostly concentrated in Texas (31%), Illinois (30%), and Iowa (14%). This makes up approximately 75% of our gross loans, excluding factored receivables. Approximately 82% of our factored receivables are purchased from trucking fleets and owner-operators in the transportation industry. The transportation segment is itself arguably the most diversified industry in the world, as it is a service provider for every other industry in our country. This diversity of risk and earnings has served us well to date and will continue to do so in the future.
Where do we go from here?
Triumph has generated substantial profits for its shareholders over the last five years. Much of those profits have been driven by opportunistic merger and acquisition activities. Underneath those headline numbers, our core profitability continues to improve. We are becoming more efficient as we grow and we expect this to continue. In 2015 we merged our two depository institutions into one, TBK Bank. We have projects underway to merge back office systems and capture those synergies. While it may not be easily visible to those outside our organization, I can assure you that a tremendous amount of time and energy has gone into building an infrastructure that can support our long-term plans. That investment in people and infrastructure is paying off.
We continue to evaluate acquisition opportunities that fit within our strategic plan. On March 7, 2016, we signed a definitive agreement to acquire ColoEast Bankshares, Inc., the parent of Colorado East Bank & Trust, headquartered in Lamar, Colorado. This acquisition is reminiscent of our acquisition of National Bancshares, Inc. in 2013. Colorado East an excellent community bank, with a strong core deposit platform, that is well respected in the communities in which it operates. We believe Colorado East nicely complements our existing TBK Bank franchise.
Going forward, we will continue to assess opportunities that leverage our infrastructure and further increase operational efficiencies. Acquisitions create growth, which is a good thing. For some banks, it seems to be the main thing. We don’t want to just get bigger. We want to get better. We are mindful of the returns we generate for our owners and very conscious of those metrics when we consider acquisition opportunities.
We are better today than we were a year ago. I expect we’ll be better in a year than we are now. Thank you for believing in us. We do not take it for granted.
(1) SNL U.S. Bank $1B-$5B: Includes all Major Exchange (NYSE, NYSE MKT, NASDAQ) Banks in SNL’s coverage universe with $1B to $5B in Assets as of 2/16/2016.
(2) Tangible book value per share is defined as tangible common stockholders’ equity divided by total common shares outstanding.
Above is the letter to shareholders from Aaron P. Graft, Chief Executive Officer of Triumph Bancorp, Inc. View the full 2015 Triumph Annual Report.