Garnet Capital Advisors Blog

August 24, 2017

Community Banks: Outside of the Box Lending

Excerpt: Nontraditional lines of lending and market expansion can give a boost to market share and earnings. Triumph Bancorp, for example, has doubled its earnings in the past year by focusing on lending to transportation and factoring for smaller truckers. Old National recently acquired a bank that gives it strength in the commercial and industrial portfolio and expands its market sectors. Both strategies demonstrate that banks who actively think outside of the box can succeed and prosper in today’s market environment.

Community banks throughout the U.S. are increasingly looking outside of the traditional types of lending to diversify their income streams and increase yield. Many are thinking outside of the box to grow market share and earnings in tight or shrinking markets, and to grow market share and earnings in more expansive ones.

Transportation sector spending equals $1.5 trillion, about 8% of GDP, making it a lucrative market niche for lenders.

Lending in an Unusual Market: Triumph Bancorp

One strategy is exemplified by Triumph Bancorp, the Dallas-based parent of TBK Bank, with $2.6 billion in assets. As American Banker recently reported, its business model has several out-of-the-box features. Triumph purchases banks in less costly secondary markets. That in itself is not so unusual. But what those purchases fund is.

Triumph invests in factoring and other sectors traditional banks don’t usually enter. Its factor clients are smaller trucking companies with 100 or fewer trucks in its fleet or individual truck owners. These businesses sell invoices to a bank or other lender in exchange for the lender’s collection activities. In other words, the truck operators and owners don’t collect payment on their invoices, Triumph does. 

The interest rates on factoring are often higher than market because of the risk involved in collecting payment for bills.

Triumph’s activities in the transportation industry don’t end there. It has developed a focus on the construction, transportation, and waste sectors, writing loan originations in trucking and construction equipment. 

In addition, approximately 40% of the overall loan portfolio is composed of credits in commercial finance, including equipment financing. 

Triumph’s CEO points out that this is an expansive niche for his bank to move into. Transportation sector spending hit nearly $1.5 trillion two years ago. American Banker quotes SelectUSA, a U.S. Department of Commerce program, as estimating this amount is equivalent to 8% of the U.S.’s yearly gross domestic product.

Overall, Triumph has reported a profit of $9.5 million in the second quarter, more than double from a year earlier. Net loan amounts rose approximately 63% to hit $2.3 billion. The net interest margin hit 5.55%.

Industry observers point out that development of specialty areas like Triumph has benefit lenders in several ways. First, their expertise in the area can command premium fees and interest rates above market. Second, revenue and margins rise as a result.

The purchase of Twin Cities-based Anchor Bancorp gave Old National a boost in C&I lines.

Charting a Path in the Midwest

Another path is illustrated by Indiana-based Old National. American Banker reports that the bank, with $15 billion in assets, purchased Minnesota-based Anchor Bancorp. 

The reason for the purchase was Anchor’s commercial and industrial (C&I) loans and the market niche the bank offered. The Minnesota bank had 34% of its portfolio in C&I versus Old National’s 16%. Once the banks are combined into one entity, 18% of total loans will be C&I. 

In addition to C&I loans, the purchase of Anchor expands the markets of the combined bank. Anchor's focus has been on lending to the middle market, while Old National historically targeted the upper reaches of smaller businesses. 

How Garnet Can Help Lenders Diversify 

Two banks, two different stories. But each illustrates how diversified lines and markets, expanding yields, and growing revenues and profits can help banks achieve market strength and profitability.

The seasoned loan sale advisors at Garnet Capital can help banks of any size achieve their goals toward good portfolio growth and strong portfolio performance. Browse our white papers today.