The Same, Only Different.
Every for-profit company has the same goal of creating value for their shareholders, employees, and customers. They may use different words to express it, but that is the general thesis for everyone. Triumph’s goal is no different.
That leads to the logical question — if our goal is the same, how is Triumph different? Or is Triumph different at all? The numbers suggest we are different — our net interest margin, loan yield, and non-interest expense ratios exceed 90% of our peer banks. Our geographic coverage is wider than almost any bank of similar size. Triumph is not singularly unique, but we are definitely different from the crowd.
And who is the “crowd” (our peer group, so to speak)? We think it is twofold: community banks and (non-bank) commercial finance companies. “Community banks” generally refers to banks with less than $10 billion in assets. This includes the clear majority of the banks in the U.S. It excludes money center and regional banks like Bank of America, J.P. Morgan Chase, and Comerica Bank, although we do compete with them occasionally for deposit and loan customers.
Like banks, commercial finance companies lend to borrowers. Unlike banks, they do not take customer deposits. It is often (but not universally) true that commercial finance companies focus on specific industries.
Triumph is a hybrid of both of the above. We are a community bank. We also have a robust commercial finance division. This “best of both worlds” approach makes us different from our peers in the following ways:
First, we serve customers and markets that most community banks ignore. Our commercial finance lines of business — factoring, asset-based lending, equipment finance, and premium finance — provide credit to markets that our community bank peers often ignore or avoid. This creates a less-efficient marketplace, which improves our competitive advantage. Thus, we can satisfy the competing demands of (i) meeting the financial needs of our customers to promote their growth, and (ii) commanding margins that generate profits for our shareholders. And we have done this while generating 20% or better organic growth in our commercial finance portfolio.
Second, our assets are more diverse, and our funding is more stable than our commercial finance competition. Commercial finance companies often concentrate their lending in specific markets. This sector focus makes sense for efficiency and market expertise, but it can be disastrous when an entire industry experiences a cycle. Triumph is a community bank, so our loan portfolio is diversified to meet the needs of the communities we serve. As of December 31, 2016, our loan portfolio was approximately 40% real estate and 60% commercial, factoring, and industrial.
We also avoid geographic concentration — our single largest exposure is in the state of Texas but only 23% of our loan portfolio. Our largest states by concentration — Texas, Colorado, Illinois, and Iowa — comprise 73% of our loan portfolio.
Commercial finance companies generally borrow from banks to provide the funds that they in turn lend to their customers. This works well until it doesn’t. Perhaps the commercial finance business has a credit issue or perhaps the bank that lends to it has an issue with another customer in a related business and decides to exit the entire market. Regardless of the cause, any one of these events can starve a commercial finance business of its liquidity overnight. On the other hand, community banks have access to more secure funding through their branches. Triumph enjoys these benefits. Our branch network covers five states with 37 branches and tens of thousands of core customers. This provides stability to our business throughout the cycle.
Triumph is indeed different from most of its competition. The question for investors is whether this differentiation is creating value. That question can only be answered over the long term, but in the interim, here are some of our summary metrics and accomplishments for 2016:
Three Building Blocks for Value.
The recipe for success in banking is simple: (i) maintain credit discipline, (ii) maximize operating leverage, and (iii) focus on core deposits. Maintaining credit discipline is something we have done with success at Triumph since we acquired our predecessor bank in 2010. Over the next few years, our best opportunity to create value for our shareholders will come from improving our operating leverage and growth of our core deposit franchise.
Operating leverage is best measured by our net overhead ratio. This ratio is our operating expenses (excluding interest expense paid to our depositors) less our non-interest income (various fees and service charges we collect) divided by our total average assets. For the year ended December 31, 2016, this number for Triumph was 3.39%, which is a 16% improvement over the same period a year ago. Continuing improvement in this ratio will come from growth, which will occur organically and through acquisitions. This is our plan, and investors should expect to see continuing improvement in this ratio. Our long-term goal is to achieve a net overhead ratio of approximately 2.00%. We think this is achievable at slightly more than twice our current size — in the range of $6–8 billion in assets.
Core deposits come from the customers of our retail branch network as well as commercial customers who have deep relationships with us. The most valuable of these core deposits are transaction and other non-maturity deposits, which should prove to be a reliable and low-cost source of funds for us in any interest rate environment. In addition, these core deposit relationships often lead to broader and more profitable relationships, enabling us to offer other products such as loans, insurance, and cash management to these customers when it makes sense for the customer and for us.
Bank investors understand the value of core deposits, and a high proportion of core deposits usually leads to premium valuations for high-performing banks. The ratio of non-maturity deposits to total deposits is a reasonable (though not perfect) representation of how “core” a bank’s deposit base is. The ratio for us was 54% at the end of 2016, up from 48% a year earlier. We expect to achieve these ratios going forward through organic growth and acquisitions, such as our acquisition of Colorado East Bank & Trust (CEBT) during 2016.
We almost doubled our community banking footprint during 2016. As a result of acquiring CEBT, we gained 18 branches throughout Colorado and western Kansas and merged them into TBK Bank. We continue to operate our 18 branches in the Midwest (Iowa and Illinois) as Triumph Community Bank. We are committed to growing our community banking platform, which remains our primary source of deposits for the organization.
Each year we invest heavily in technology. In 2016, we launched mobile deposit capture and converted all of our systems onto a single core processing platform. We will continue to stay on trend, using the latest technology to leverage our community banking products and provide an outstanding customer experience as we move forward.
We continue to operate our commercial finance business under four unique operating umbrellas: factoring, asset-based lending, equipment finance, and premium finance. These businesses operate under different trade names: Triumph Business Capital (factoring), Triumph Commercial Finance (general asset-based lending and equipment lending), Triumph Healthcare Finance (specialized asset-based lending to the healthcare market), and Triumph Premium Finance (premium finance lending), all of which are subsidiaries or divisions of TBK Bank. Our commercial finance operations grew approximately $173 million, or 33.1%, in 2016 to $694 million.
Triumph Business Capital provides financing to small businesses by purchasing accounts receivable from our customers. We operate in several industry verticals, but our largest vertical by far is the transportation industry. We remain one of the nation’s leading providers of discount factoring to for-hire truckers and freight intermediaries.
Triumph Business Capital funded 330 net new factoring clients while purchasing 1.4 million invoices in 2016, a 26% increase over 2015. Our average number of clients increased by 22% to 2,266. We purchased $1.83 billion in invoices in 2016, an increase of 12.5% over 2015. During 2016, we launched TriumphPay, a web-based “reverse factoring” payments platform. This product, targeted at freight brokers, allows us to serve as their accounts payable partner and share the economics of the factoring relationship with them. It alleviates the drudgery of some of their back office operations while opening a new source of revenue.
Triumph Commercial Finance provides senior financing to small- and middle-market companies through several channels. First, we provide equipment financing to the transportation, waste disposal, and construction industries. This is a relationship-driven business model focused mainly on used equipment. Second, we provide asset-based lending to several industries, including manufacturing, distribution, and services.
Through Triumph Healthcare Finance, we provide specialized asset-based lending to smaller, middle-market healthcare companies and other service providers. Finally, through Triumph Premium Finance we provide short-term loans to insureds for property and casualty insurance policies.
Triumph Capital Advisors is a subsidiary of our holding company. It is a credit-focused institutional asset manager and a registered investment advisor providing services associated with more than $2.2 billion of fee-generating CLO assets as of December 31, 2016.
People Are Starting to Notice.
While our team members have years of experience, Triumph is still a relatively young company, especially with public investors. Since our business model is different, we know that it takes time and execution to establish credibility. With the successful deployment of the IPO capital into two acquisitions this year, we have taken steps in the right direction. We continue to look for acquisition opportunities that will accelerate our journey toward achieving our strategic goals. As our stock price has appreciated, it has broadened these discussions. I am excited about the opportunities for us in 2017.
What is Next for Triumph?
Our goal is simple: we are pursuing a core return on assets of 1.5% or greater. This would put us in about the 90th percentile of all banks. We intend to achieve these financial returns while maintaining diversity in both traditional community bank lending and commercial finance. We intend to fund our growth through core deposits as much as possible, which will enhance our enterprise value.
Thank you to our shareholders for your trust in us and to our team members for your hard work. Triumph’s management does not take our responsibility to either of you lightly. I wish you all the best for 2017!
Aaron P. Graft
Vice Chairman and Chief Executive Officer