Management at Triumph Bancorp isn’t afraid to zig where others zag.
The Dallas company, which owns TBK Bank, has built a business model around buying banks in less expensive, secondary markets and then using those deposits to fuel growth in factoring and other nontraditional business lines that many community banks normally avoid.
It is a strategy that other banks could copy. But Triumph’s strategy carries inherent risks, observers said. Banks need to fully understand atypical business lines while also thinking through the risks in integration of out-of-market acquisitions.
“We thought there were opportunities to build something unique,” said Aaron Graft, Triumph’s vice chairman and CEO. “We decided we wouldn’t just be just a traditional community bank. We needed to do something to differentiate ourselves.”
It is fitting that Triumph has forged a unique path with its commercial finance business. Graft is no typical community bank CEO. He started on his journey to becoming a banker after he decided he was tired of practicing law and wanted to start his own business.
He founded Triumph to buy distressed real estate assets and eventually set his sights on buying a bank. After an 18-month-long process of securing capital and regulatory approvals, he led a recapitalization of Equity Bank in Dallas in November 2010. He was 32 at the time.
Graft, now 39, concluded that regulators needed time to get comfortable with him and Triumph’s unusual business model before signing off on the deal. He needed an experienced management team to receive the regulatory OK, so he said he recruited talented bankers away from larger competitors with the promise of an opportunity to build something new and entrepreneurial.
Equity was also a troubled institution and was put under a cease-and-desist order with the Federal Deposit Insurance Corp. in 2009. That order was lifted in 2011.
“We wanted to have a nontraditional bank with a team that was led by a young CEO that was unknown to regulators,” Graft said. “It took a lot of back and forth, and I think that [the time it took to get approval] was appropriate.”
Overall Triumph, which has $2.6 billion of assets, reported a profit of $9.5 million in the second quarter, more than double from a year earlier. Its net loans jumped roughly 63% to $2.3 billion, while the net interest margin at its bank unit was 5.55%.
Roughly 40% of Triumph’s loan portfolio is commercial finance credits. This includes an equipment finance business — an area that some community banks have ventured into in recent years — and Triumph does it with a sales force in a dozen states. The company specializes in the transportation, construction and waste industries and makes loans on trucks, trailers and construction equipment such as bulldozers and cranes.
Triumph also provides factoring normally to independent owners and operators of trucking companies with fleets of 100 trucks or less. Factoring involves a business selling its invoices to a lender such as Triumph, which then collects the payment for those invoices.
There is huge potential in this area, Graft said. Spending for the logistics and transportation industry was almost $1.5 trillion in 2015, totaling 8% of the country’s annual gross domestic product, according to SelectUSA, a U.S. Department of Commerce program.
“These customers work hard but they don’t have the credit metrics you would look for to make a loan,” Graft said.
Tom Hall, president and CEO of the consulting firm Resurgent Performance, advises his clients to find specialty niches where they can develop an expertise to better serve their customers and therefore charge higher interest rates. This can lead to higher margins for banks. Having the right bankers on staff is essential to ensuring that a specialty line of business succeeds, observers said.
“[Commercial real estate] is hard to come by. The market is pretty much saturated with real estate loans,” Hall said. “It is a good idea to find those niches, and Triumph has picked some good ones.”
Factoring usually conjures up negative images – the interest rates are often high to help offset risks – but it is still a valid form of credit for businesses that struggle with cash flow, said Trent Fleming of Trent Fleming Consulting.
“We sometimes lose sight of the fact that banking is risk management, not risk aversion,” Fleming said.
To keep up with loan demand, Triumph has been creative with M&A. After taking over the bank, Graft and his team needed scale and additional deposits, so they looked for acquisitions in mostly rural markets for banks with lower loan-to-deposit ratios. Graft said that the customers at more rural banks are generally more loyal and therefore deposit levels would be more stable.
There are also generally lower overhead expenses — such as personnel expenses and the cost of land for branches — in these markets compared with cities. Additionally, at the time, Triumph was privately held so it also needed a transaction that was affordable. Triumph eventually purchased National Bancshares in Bettendorf, Iowa, in 2013.
Quote“We decided we wouldn’t just be just a traditional community bank," CEO Aaron Graft says. "We needed to do something to differentiate ourselves.”
More banks might consider a strategy similar to Triumph’s, where they look for banks in markets that have lower costs and more deposits, said Brian Johnson, managing director of the financial institutions group at Commerce Street Capital, an investment bank in Dallas. However, since deals like these are generally done for the deposits, management teams need to ensure they do not experience a significant run-off once the transaction is completed, Johnson said.
“Deposits have been on the back burner given that our clients were awash with liquidity,” Johnson said. “A lot of our urban clients have higher loan-to-deposit ratios, and the [Federal Reserve] is making some moves on rate increases. The value of the deposit franchise is trending up.”
Triumph also purchased Colorado East Bank & Trust in Lamar, Colo., last year and currently has deals pending to buy Valley Bancorp in Brighton, Colo., in addition to nine branches in Colorado from Independent Bank Group.
Triumph expects to eventually develop a branch network in Texas, Graft said. It will continue to look to buy well-established community banks in less urban markets in Texas, Colorado and adjacent to its existing Midwestern footprint.
In the meantime, Graft and his team are working to limit other banks from poaching Triumph’s lenders by ensuring the company’s culture remains attractive. For example, employees have gone on volunteer trips to El Salvador to drill water wells. Graft also allows himself to be featured in internal goofy videos, such as a “fireside chats” series where he highlights various divisions and business units. The chats are educational with hints of humor.
“My self-worth isn’t tied up in the team viewing me a certain way,” Graft said. “I would rather have them see me as approachable.”