Good Match Outweighs Distance in Texas-Iowa Deal

Banking makes for strange bedfellows — especially these days.

Triumph Bancorp, a specialty lender in Dallas, announced Wednesday it would acquire National Bancshares, a community banking company in Bettendorf, Iowa. The pairing seems odd on the surface, but each recognized the other has something it needs.

Triumph is a $301 million-asset bank with a booming factoring business that seeks cheaper funding. National, meanwhile, has $945 million in assets and is dealing with lending and equity issues.

"The things we're good at will be helpful to National, and the things they're good at will be helpful to us," Triumph Chief Executive Aaron Graft said. "We have excess capital, and National Bancshares has excess liquidity."

The deal highlights how in the current M&A market, there is something for everybody — so long as buyers and sellers come with an open mind.

"This goes to show you that opportunistic buys are out there if you're willing to look," says Daniel Bass, managing director at Performance Trust Capital Partners. "This deal makes a lot of sense from both sides."

Other specialty finance companies, like CapitalSource (CSE), went on similar hunts for deposit funding at the onset of the subprime meltdown. More recently, Pacific Premier (PPBI), a community bank in Costa Mesa, Calif., solved its deposit woes by acquiring a Dallas bank that specialized in homeowners association deposits but had nearly no loans.

Like Pacific Premier, Triumph's search for liquidity stems from its success in lending. In 2012 Triumph expanded its loans 58% year over year, to $209 million. Its loan-to-deposit ratio was 92% at the end of 2012.

Triumph also pulls in a handsome profit on these loans, with a net interest margin of 9.13% and a yield on earning assets of 10.59% at yearend.

Graft founded Triumph in 2006 to be a receiver for defaulted commercial real estate debt. When that field became crowded after the financial crisis hit, Graft, a former Fulbright & Jaworski attorney, turned to niche commercial lending.

In 2010 Triumph bought the troubled Equity Bank in Dallas, using $45 million it had raised through private investors. Within a year, Graft and his team, which includes former executives of Beal Bank in Plano, Texas, and Bluebonnet Savings Bank in Dallas, were able to clear Equity's problem loans off the books and free it from regulatory actions.

In January 2012, after another capital raise, Triumph bought the freight-factoring company Advance Business Capital. Altogether, Graft and Triumph have raised more than $100 million through private investors.

But because it's not a retail bank, Triumph lacks a strong deposit base to fund its lending, making its cost of funds a relatively high 1.46%, according to data from the Federal Deposit Insurance Corp. In this interest rate environment, anything above 1% is considered high, Bass says. National's was 0.74% at the end of 2012.

The threat of higher interest rates was likely another motivation for Triumph to make the deal, Bass says.

"They can use those deposits because they have demand, but at some point — who knows when — interest rates will rise and then core deposits will be more meaningful," Bass says.

Graft says he was looking for a traditional bank that is grappling with industry pressures, such as figuring out how to exit the Troubled Asset Relief Program or how to bring in new equity.

"We're discount buyers," Graft said. "We wanted to find a healthy bank with a holding company that was overleveraged."

National Bancshares meets that description. Its subsidiary, The National Bank, has 19 branches in Iowa, Illinois and Wisconsin, and had a loan-to-deposit ratio of 74% and a net interest margin of 3.47% at yearend. Though the bank is relatively healthy, its loan portfolio has shrunk in recent years.

Moreover, the holding company still has to repay its Tarp, trust-preferred securities and other debts. Its tangible common equity of 2.58% at Dec. 31 is low; industry observers say that ratio should be closer to 7%.

To be sure, regulators could derail Triumph's agreement to buy National. They may have concerns that Triumph would be buying a bank more than three times its size and 900 miles away. But the deal's architects are upbeat.

"We've seen in recent years that capital is king, and National has a very strong capital base," National Bancshares CEO John DeDoncker said. "Once this is completed you'll have a very strong institution that has room to grow."

Graft added that the concept is simple. "You can't predict what regulators will do, but this is just one investor group buying out another investor group," he said.

Triumph plans to keep the management of National Bank following the merger.

"National needed stability, and Triumph can provide that," Bass says.