Below is the letter to shareholders from Aaron P. Graft, Chief Executive Officer of Triumph Bancorp, Inc. View the full 2014 Triumph Annual Report.
March 16, 2015
Fellow Stakeholders,
LIKE NO OTHER. Greetings and welcome to your inaugural Triumph Bancorp (TBK) annual report. I prefer direct and simple communication, so I hope you find this letter readable and to the point.
A tag line should not require further explanation or it ceases to accomplish what it was designed to do. Instead of explaining our annual report concept, let’s just jump into the report and you can decide for yourself if we are truly “Like No Other” (and furthermore whether being different is valuable!).
Triumph’s key operating metrics and 2014 highlights include:
- Net income available to common stockholders of $16.9 million or $1.52 per diluted share
- Return on assets of 1.46%, compared with 0.92% for the aggregate of all US banks $1B to $5B(1)
- Net interest margin of 6.67%, ranking us among the highest of any U.S. bank
- Loan growth of $124.8 million (14.2%)
- Deposit growth of $120.4 million (11.5%)
- Tangible common equity to assets ratio of 14.0%
- Completed the acquisition of the Triumph Healthcare Finance team and portfolio, which created a specialized niche within our asset based lending business
- Started Triumph Insurance Group from scratch to serve the needs of our thousands of trucking clients and create another source of non-interest income for Triumph
- Closed two CLOs and began warehousing a third, thus growing Triumph Capital Advisors’ assets under management to over $1 billion
- Completed an initial public offering of our stock, culminating on November 7, 2014, when we began trading on NASDAQ under the ticker symbol “TBK”
- After being named a “Best Place to Work in Dallas” in 2013 and 2014, Triumph was named one of the “Best Companies to Work for in Texas” in 2015 by Texas Monthly magazine
The year 2014 was exceptional. We didn’t get everything right, but we got the main things right.
A FEW WORDS ABOUT OUR BUSINESS
Triumph is a young and growing company. As a result, we have product lines that are at different stages of maturity. Some, like our asset management business, just began generating revenue last year. On the other end of the spectrum, our Triumph Business Capital subsidiary, which serves the financing needs of the transportation industry, just celebrated its 10th anniversary and is among the leading providers of factoring in the industry.
While all of our product lines are related and symbiotic, it is easiest to summarize them in three different pieces — community banking, commercial finance and asset management.
Community Banking. Triumph Community Bank, our Midwest-based community bank that we acquired in October 2013 (formerly THE National Bank), makes up a substantial portion of TBK’s assets. It is also a primary source of funds for our organization’s overall loan growth. Triumph Community Bank has a stable core deposit base, which reduces Triumph’s overall cost of funds (58 basis points as of December 31, 2014), and should be even more valuable when the current low interest rate environment changes. In addition, by offering a full array of retail and business banking products, Triumph Community Bank has been able to maintain and expand its customer relationships since being acquired by Triumph. Through the name change process that occurred last summer, we emphasized that “Community” is its middle name. This is more than just a phrase — it informs the way we think. Triumph Community Bank is an organization that serves the whole community, not just private wealth customers or commercial clients. It’s what the bank has done for over 10 years and what we’ll continue to do.
In addition to Triumph Community Bank, our Texas franchise, Triumph Savings Bank, operates as a separate entity. Triumph Savings Bank is a state chartered savings bank that offers interest-bearing deposits in Dallas (where we have a single branch) and around the country. We do this primarily by offering CDs and money market accounts.
Commercial Finance. 2014 Triumph Annual Report 2Our commercial finance business is broadly separated into three components: factoring, asset based lending and equipment finance. These businesses operate under a few different trade names: Triumph Commercial Finance, Triumph Business Capital and Triumph Healthcare Finance. Despite the different names, we consolidate all of these businesses within the balance sheet of Triumph’s bank subsidiaries. This is critical to the value proposition — our commercial finance businesses provide cash to customers by (i) lending to them and/or (ii) purchasing their receivables (factoring). In order to sell the cash to customers, our commercial finance businesses have to get that cash from somewhere. Since they are part of Triumph, the cash comes from the parent banks (Triumph Community Bank and Triumph Savings Bank). Our banks, in turn, get their cash from depositors, which history has proven to be the least expensive and most stable form of funding available.
This funding advantage gives our commercial finance businesses a competitive advantage against non-bank competitors. Triumph has cut out the middleman. This is a two-way street — our banks have a higher net interest margin than peers because the assets of our commercial finance businesses generally have higher yields. Therefore, we have maximized the spread between our cost of funds and our yield on earning assets, which leads to greater profits.
Commercial finance lending is specialized — it requires policies, processes and, most importantly, people who have the experience to weather the inevitable market downturns and to ferret out the fraud risks that come with a national lending platform. I can say without equivocation that Triumph has the right people leading these businesses — the executives leading our commercial finance businesses have decades of successful experience operating these businesses. Further, Triumph has invested millions of dollars into its infrastructure to give our talented leadership the tools they need to run their business successfully.
Asset Management. Triumph Capital Advisors is a subsidiary of our holding company. It is a registered investment advisor with over $1.7 billion of assets under management as of March 2015. While we expect to expand our offerings in the future, our primary business at the current time is the issuance and management of collateralized loan obligations (CLOs). While similar in name, investors should not confuse Triumph’s CLOs (issued under the “Trinitas” name) with some of the more exotic CLOs that were near the epicenter of the financial crisis of 2008–2009. Triumph’s CLOs invest in widely syndicated senior secured bank loans, an asset class that has performed well throughout credit cycles.
Investors should know that Triumph does not consolidate CLOs on its balance sheet. From time to time, Triumph may hold a small portfolio of CLO securities (issued by us or others) if we believe it provides an attractive risk vs. reward opportunity. We never intend to hold majority equity or debt positions in an individual CLO (even if issued by us), so our credit risk in this segment is relatively small. As we have said from the beginning, we desire to participate in this market as an asset manager, for which we are paid a fee.
This fee helps answer the question some investors have asked — why is Triumph in the asset management business? The reason is that we believe we are in the process of creating a significant source of income for our investors without taking material balance sheet risk. Asset managers depend on capital — but it’s primarily relational capital. There is a proverb that says “a good name is more valuable than gold or silver.” That’s what asset managers have to sell — a good name, which requires competence and character. I always worry about people who tout their own character, so I will let our actions speak for us on that account. With respect to competence, the leadership of Triumph Capital Advisors’ team has been in the businesses for nearly 15 years and has issued and managed nearly $30 billion of CLOs over that time.
CREATING VALUE FOR OUR INVESTORS
We believe we will create the most value for our investors by producing financial returns superior to our peer group over a long period of time. Thus, our first priority is to consistently grow Triumph’s tangible book value per common share.(2) This measure tells us how we are doing at growing our investors’ money. Triumph’s recent IPO and related issuance of shares has added noise to this calculation, but we believe the trend is toward continuing growth of tangible book value per common share.
Beyond absolute financial returns, the market value of bank stocks is influenced by franchise value. There is a barrier to entry into the banking industry that has grown higher following the financial crisis of 2008–2009. Further, we believe that investors assign greater franchise value for having scale (usually around the $1 billion level) in a specific market. Accordingly, as we grow and diversify Triumph’s business, we are mindful of not focusing on one concept of value creation to the exclusion of the other.
Lastly, there is another component of value within Triumph – what is our excess capital worth? This is the “show me” part of our story. Triumph is exceptionally well capitalized. Your management team believes that an appropriate long-term goal for Triumph is to have a tangible common equity ratio to tangible assets (often called a “TCE Ratio”) between 9% and 10%. Our TCE Ratio as of December 31, 2014 was 14%. If we express that on a per share basis, it means that Triumph has “excess” capital equal to roughly $3.50 per share. This capital is available to support our organic growth as well as provide dry powder for acquisitions. If Triumph grows intelligently such that revenue growth outpaces expense growth, then investors can expect higher earnings per share due to the increase of operational efficiency, and the incremental return on that capital should be very attractive. We look forward to the show.
WHERE WE GO FROM HERE
I have spent a good portion of this letter celebrating our accomplishments, so it seems only fair to talk about where we need to improve. We need to be more efficient. We have done a tremendous amount of work building a platform that has the ability to outperform the market through the combination of a quality community banking franchise and a commercial finance platform that excels in serving small businesses. To do that, we have frontloaded expenses to hire the right people (including many members of our management team who came from multi-billion dollar institutions) and build the right infrastructure. That investment is paying off, but we are in the early stages of recognizing a return on that investment. Unlike other forms of business, financial service companies do not usually invest in fixed assets like plants and equipment. If, for example, we were a manufacturing company and investing for the future, you would expect a large portion of that investment to be capitalized — such as in building a state-of-the-art factory. At Triumph, however, our investment for the future is primarily in our people, who are categorized as operating expenses in accounting statements and represent approximately 60% of our non-interest expense in 2014. Regardless of accounting treatment, we view our investment in people as our longest-term investment and we believe in the return prospects.
Looking forward, we expect to grow in size and profitability. I know that is not unique. I suspect the vast majority of all shareholder letters tout the desire and opportunity for growth. What differentiates Triumph is the toolkit we have to achieve our goals. We have a broader product offering and a wider geographic reach than our peer group. We have an entrepreneurial spirit and a very competent team.
We know our job is to create value for our investors, clients and team members. We are honored to have that opportunity, and we look forward to a prosperous future together.
(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 most recent financial data.
(2) Tangible book value per share is defined as tangible common stockholders’ equity divided by total common shares outstanding
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Above is the letter to shareholders from Aaron P. Graft, Chief Executive Officer of Triumph Bancorp, Inc. View the full 2014 Triumph Annual Report.