Our theme for 2019 is Rethink Vanilla. My goal for any shareholder letter is to do more than just recite a list of accomplishments from the prior year or tell you about financial goals for the year to come. I would like to lift the curtain and allow our stakeholders to better understand what we are doing and where we think we are going, which is far more valuable than a list of metrics. Thus, the theme of our annual report is more than just a catchy phrase; it is a summation of the company we are building. I trust this will become clear as you read on.
THE CLOSE OF AN “EPIC” CHAPTER AND A BIT OF HISTORY.
Our theme for 2018 was Just the Right Amount of Epic. We completed the acquisition of three banks and a factoring company during the year. We grew assets by 30% and deposits by 32%. We generated net income to common stockholders of $51.1 million, a 44% increase over 2017. Our diluted earnings per share grew 22 cents to a record $2.03. We also launched 72 strategic internal initiatives aimed at preparing our people and our platform for the future. The pace of growth and change was just short of frenetic, but the results have made it all worthwhile. It was indeed an epic year!
The epic part of our story began long before 2018 (and we expect it to continue long after). In November 2010, several members of the current board and management team led the recapitalization of a troubled $250 million bank based in Dallas. Since that time, we have moved as quickly as we could, creating a unique team, culture, and operating platform. As we stated with our 2016 theme — The Same, Only Different — we believe that unique is good if it leads to an above market experience for our team members, customers, investors, and regulators. Our results suggest we have accomplished the goal of out performance. For that, I am both grateful for and humbled by what our team has done.
SO, ABOUT VANILLA.
What is vanilla in the context of banking? It means fulfilling the brand promise of a community bank in a safe and sound manner. Simple to say, often difficult to do well.
Creating stakeholder value through vanilla banking requires commitment to (i) conservative and diversified credit, (ii) operating efficiency, and (iii) growing core deposits. These are not unique or new observations. These are vanilla banking principles that have stood the test of time.
For 2019, we are focused on improving these three value drivers through internal investment and execution. Notwithstanding this internal focus, M&A remains a strategic tool for us to create immediate growth in our core deposit franchise. We continuously evaluate strategic opportunities and I expect us to complete one or more transactions in 2019.
Value Driver 1: Credit Discipline. TBK’s credit performance continues on the right trajectory. A significant loss on a single asset based lending (ABL) loan in Q3 2018 turned an outstanding year into just a very good year — 23 basis points of net charge-offs to average loans is a very good metric by historical standards.
We have taken steps to decrease the risk profile of our entire loan portfolio. This includes identifying and resolving asset based lending credits with eroding trends and cleaning up loans in the community bank portfolio — especially credits we acquired through M&A. We have added senior members to the credit team with expertise in our areas of lending and will continue to enhance the personnel and systems dedicated to monitoring and evaluating the loan portfolio. We don’t know when the economy will slow or enter into a recession, but whenever it happens, we intend to enter it with the healthiest portfolio we have ever had. We closed out 2018 with a non-performing asset (“NPA”) to total assets ratio below 1% for the first time in our history. The trend is in the right direction.
Value Driver 2: Operating Efficiency. Growth is not valuable if it does not lead to improving efficiency. For a growth company like ours, efficiency improvement is a function of growing revenues faster than expenses, which can be a difficult balancing act. Further complicating this effort is the reality that what worked when we were a $2 billion bank doesn’t always work as well at $4.5 billion. Thus, we have found it necessary to rethink some of our processes. As a result of that evaluation, we have made significant investments in technology, process improvement, and talent. These investments are part of the 72 strategic initiatives I referenced earlier, which are preparing us for material and profitable growth.
Due to our business model, our efficiency ratio (non- interest expense as a percentage of revenues) tends to be higher than peers. We should achieve a 1.8% return on average assets (“ROAA”) with a 60% efficiency ratio, which almost none of our peers could do. We have a higher cost structure than most banks our size, but our revenue per dollar of assets also tends to be much higher. This enables us to deliver above-market return on average assets, in the top 10%, with an efficiency ratio in the 50th percentile.
To delve further into this, we took a sampling of 70 banks between $4 billion and $6 billion in assets and found the following:
- Total noninterest expense (“NIE”) for the year averaged $128 million and ranged from $40 million to over $500 million.
- Our $200 million NIE guidance for 2019 would be in the 91st percentile of this group.
- There is no meaningful correlation between total NIE (either absolute or as a percentage of average assets) and return on assets or return on equity.
The point is this — regardless of the business model of the bank, consistent profitability is what matters. We have improved core earnings and we continue to work toward our publicized goal of delivering a 1.8% ROAA in Q4 of 2019, which would put us in the top 5% of all banks. That goal is not the finish line, but it is a marker of achieving a core earnings performance that we view as optimized for our company.
Value Driver 3: Core Deposits. Core deposits are the lifeblood of a healthy bank. These deposits will out perform all other sources of funding over any reasonable period of time. Because of this intrinsic value, banks with stronger core deposits generally trade at higher multiples of earnings than banks that utilize more wholesale funding.
Our entire retail division is rethinking vanilla to grow core deposits. We are developing internal products to ensure the efficient operation of our branches and external products to provide the “best of breed” banking in our markets. We are training our staff to bring our customers the strongest retail team a bank has to offer. This year will bring new services, new digital banking offerings, new “rewarding” account types, and a full new product suite for our treasury management clients.
Our Midwest Division, which includes 18 branches in Iowa and Illinois, has been part of our franchise since 2013 and had one of its best years ever. Net loan growth in the market was an impressive 14% ($80 million), with substandard and non-performing loans (net of government guarantees) ending the year at 40 basis points. During 2018 we became the naming rights sponsor for the TBK Bank Sports Complex, a 77-acre youth sports facility located on Interstate 80 in Bettendorf, Iowa. With over six acres under roof, a full-service, two-story family entertainment center, and tens of thousands of visitors each month, the complex has enhanced our name recognition and the bank’s goodwill has soared in the Quad Cities. As it has for the past several years, our Midwest Division continues to provide low-cost funding and traditional community bank lending that is the core of our business.
Our Western Division and Mountain Division are the result of five transactions completed over the last three years. Both divisions’ operations are largely based in Colorado, where we are now a top-ten community bank with 37 branches and $1.39 billion in deposits. We targeted expansion in Colorado because it shares many favorable demographic and economic factors with our home market of Texas. Within Colorado, and including the adjacent states of New Mexico and Kansas, we have focused on mostly suburban, secondary, and rural markets where we benefit from leading market share and stable, low-cost funding and operations. It is an exciting time in these markets, as the TBK Bank brand is gaining increasing prominence and we are poised to deliver retail excellence in the form of new products and services.
Our Dallas-based commercial real estate team produced strong results during 2018 with loan growth of 24%. Despite stiff competition from banks and non-banks alike, the team continues to succeed due to long client relationships, creativity, and exceptional customer service.
Vanilla is Good. It Can Be Great with the Right Toppings.
Commercial finance represents 35% of our loan balances, but it represents just over 50% of our interest revenue. This portfolio is a primary differentiator of TBK from peer banks. We divide commercial finance into equipment finance, premium finance, asset based lending, and factoring.
Equipment finance is focused on the transportation, construction, and environmental sectors. This group had a watershed year in 2018, with 39% growth and excellent credit metrics. Premium finance grew by 30% through broader national distribution and the improvement in market penetration. In premium finance, our primary objective is to aid small business owners, including transportation clients, by ensuring access to critical insurance. Following a choppy year, we are retooling our ABL business. ABL is a product we must offer to be competitive in commercial finance. We have added highly experienced professionals and recommitted to operational excellence. I expect ABL to achieve healthy growth in 2019.
Triumph Business Capital is our factoring subsidiary. It has been our star performer for the past several years, and it was so again in 2018. This was, in part, aided by the acquisition of Interstate Capital Corporation, which had been a very strong competitor. Through the acquisition and organic growth, Triumph Business Capital’s clients increased from 3,158 at the end of 2017 to 6,191 at the end of 2018. The total dollar value of invoices purchased for the year was $5.1 billion, or an increase of 85.1% over the prior year. In the midst of all this growth, we completed a major data conversion to a proprietary core factoring system and the relocation of the Triumph Business Capital headquarters.
Triumph Business Capital is unlike almost any other lending business. We purchase accounts receivable from our clients and collect those receivables every 30–40 days. The invoices are small (~$1,600), the volumes are enormous (roughly 2.9 million invoices last year), and client fundings happen within hours, not days. This business is especially well-suited for technology to increase its capacity and efficiency. We have invested and will continue to invest significantly each year into optimizing this business and differentiating our offering from our competitors.
In last year’s letter, I introduced TriumphPay as “an epic bundle of potential.” I believe that now more than ever. Specifically, I believe it will become the equivalent of PayPal or Zelle for the transportation industry. TriumphPay is a tool that will significantly improve efficiency for shippers and freight brokers and lower financing costs for truckers.
TriumphPay ended 2018 with over one hundred freight brokers using the platform. In 2019, we will leverage the partnerships and integrations we built over the last two years to accelerate the onboarding of new freight broker clients. Additionally, we are adding multiple new features to the product suite, including document capture and invoice presentment, to create a user experience that will allow carriers to give up factoring and switch to TriumphPay for their working capital needs.
I believe that the revenue opportunity for this business is in the hundreds of millions of dollars. It will require talented people, continuing technology investment and time to reach that goal. We are committed to provide all three, and we will keep you apprised as we go.
In closing, we intend to deliver a vanilla year. This means we will make every effort to deliver on the three value drivers of protecting credit, improving operating efficiency, and growing core deposits. As a result of that work, we intend to deliver top of market financial performance. Our diversified and defensible commercial finance business should continue to deliver margins that are among the best in the business. Triumph Business Capital’s organic customer growth should continue, which will secure a prosperous future. Lastly, we believe that TriumphPay will achieve material milestones in its journey to becoming the payment platform in the brokered freight market. And we might do a deal or two along the way…these are exciting times for TBK!
Do well and have a blessed 2019 —
Aaron P. Graft
Vice Chairman and Chief Executive Officer