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Frogs Kiss
Frogs Kiss

Does Trinity Bank Hold the Holy Grail of Banking?

July 24, 2011 | About:

Trinity Bank (TYBT) is a bank in Fort Worth, Texas, and it blows my mind. It is a real gem of a bank run by a real gem of a CEO. The bank is actually focused on customer service, maximizing efficiency and sound lending. Unlike just about every other bank that claims to do this, Trinity Bank actually does show evidence of this when you look at the results.

I would normally expect a small bank to have a generally higher efficiency ratio than a large bank due to economies of scale, but this is a dumb assumption on my part. Their efficiency ratio is at 45%, which isn't the lowest in the world, but is still low. They also aren't operating at full capacity either (revenue should pick up if the economy improves without much additional staffing) so a normalized efficiency ratio might turn out to be lower. The bank opened in 2001 with capital raised by Jeff Harp, the current CEO. After a few years of losing money as the bank ramped up, the bank has been steadily profitable and growing to this day. They haven't lost money on a loan in their history (a handful were nonperforming, but all balances were recovered) and achieved a ROA and ROE of 1.42% and 12.90% respectively in the most recent quarter. It trades at 1.7x book value, which isn't cheap, but it's not overpriced and the bank's quality indicates it deserves a premium to book. The numbers are excellent and seemingly for all the right reasons.

The bank is hopelessly illiquid, even by the standards of... anyone. The stock hasn't traded since June 21. Maybe it's a Munger moment where I could just invest and then sit on my ass, but then I'd have nothing to do. I wonder why anyone would sell their shares at this point. The reason for celebration though is that the CEO includes a letter to shareholders with each quarter's results written in the same vein as Buffett's. Everything is pretty straightforward and simple, which is too complex of a concept for many CEOs to execute. The letters focus mainly on the three key traits of an outstanding bank: efficiency, good loans, and working with customers.

There's nothing novel or profound about any of this, but the same could be said for Berkshire (NYSE:BRK.A)(NYSE:BRK.B) letters. There is minimal non-banking commentary and I would characterize the banking commentary in the same way that Buffett comments on insurance. It's possibly too simple and doesn't equip you with the tools to go invest in banks (although this is not the point of the letters) but it puts you in the proper mindset. The CEO offers some macro commentary, but it's intentionally vague with healthy confessions of ignorance. Some choice quotes for the bank investor (the letters are all worth reading):

“It has been brought to our attention by our outside accounting firm that Trinity Bank cannot justify, based upon loss history (none) and the current level of problem loans, the amount of money we have set aside in our Allowance for Loan Losses. Therefore, you will notice that the bank did not make a provision for loan losses in the first quarter of 2011. And we probably will not be able to add any more to the Loan Loss Reserve this year unless loans start to increase.” (This is by far my favorite from an operational and irony standpoint.)

"The key is not to have zero problem loans. If that is the case, a bank is not taking any risk and is not serving its customers (and ultimately, will not prosper). The key is how much money do you get back when you make a mistake. We will make some mistakes, but we will protect the bank while working to help good people through bad times." (Pithy, but the essence of sound loan underwriting)

“All things considered, Trinity continues to perform well. However, our performance reminds me of the swimmer that won the Olympic gold medal in a very slow time – because everyone else drowned. To really meet our long-term investment objectives, we must increase the returns on your investment to the 15-20% level (Return on Equity). It is difficult to do that in a soft economic environment without taking on a lot of risk. We are trying to be patient and avoid the “vulture” tendency. The vulture tendency is an old joke about two emaciated vultures sitting on a tree limb. One of them says to the others, “Patience hell! I’m going to kill something”. He was tired of waiting around for something to do so he could get a meal. He decided to make something happen.”

“The down side to the increase in loan demand is that it is mostly from people buying assets at reduced prices. Believe me, we think these are good loans and we are finally able to obtain good equity and decent rates. But these loans typically are not putting people back to work. I would much rather be financing business expansion, i.e. new equipment purchases, working capital requirements from growth in sales, new buildings, hiring more people, etc.” (Note this is not altruistic. The bank piggybacks on the growth of its customers, which is blindingly obvious but not the focus of many banks who instead try to pitch credit cards and HELOCs - see previous quote.)

“I wish I knew what to do. Obviously, I don’t or I would be selling advice instead of trying to run a bank.”

Anyone know of any other good bank shareholder letters? I know they exist, but most are usually just corporate garbage and thin. Yes yes, I know that MTB and JPM have good letters.

Rating: 4.0/5 (12 votes)


Dealraker - 6 years ago    Report SPAM
Of course the issue with well-run banks is that at some point the "runner" steps aside. Take Bank of Granite, run by the guy Warren Buffett introduced at his late 1990's shareholder's meeting, John Forlines. Forlines worked up in his 80's then retired to do some political/volunteer work, and he left the back in the hands of a 70-year old who had nearly 30 years under him.

The bank had huge capital ratios - equity to assets of 16% or more - a return on assets of about 2% - and a very low efficiency ratio. Within 3 years of Forlines retiring the bank had collapsed.

Paying up for a well run bank has its risks.
Rgosalia - 6 years ago    Report SPAM
Although not exactly what you asked for, but one of the better books that I have read on analyzing the "small" banks is written by David B. Moore, a veteran bank investor, - "Analyzing and Investing in Community Bank Stocks"
FrogsKiss - 6 years ago    Report SPAM

Thanks for the link. That looks fantastic. I've been blogging about thrift conversions and small banks in general lately, but have so far just cobbled together a desire to understand the nuances of the financial statements and scattered banking commentary. This looks to hit that niche of information I was looking for. I look forward to reading it.


Agreed. At this price, the bank is more of an educational tool than a wealth building one for a bank investor. It is a shame that by the time you can actually figure out if management is sane, they are about to retire or the bank trades at a premium to reflect that. Although like Buffett has done with Wells Fargo, you can take advantage of broader market panic that indiscriminately punishes stocks. Trinity might be too illiquid and closely held for panic selling, but it's worth knowing about.
Dealraker - 6 years ago    Report SPAM

One of the more (to me) incredibly stimulating things is happening today in so far as small community banks. It is a glaring example of how capitalism works just barely 51% of the time. Here it goes as best as I can explain.

Tons, and I mean so many it would knock your socks off, of community banks are trading at 1/3rd to 1/2 of tangible book and these book values have fallen terrifically. Managments have an interest that far, far differs from shareholders now because although their stock was worth one, two, three million dollars at one time- it is today likely only worth one year's salary or so.

So you've got all these guys with big (relatively big for communties that have been devastated) paychecks who have relatively little value in their stockholdings. Often they've delayed TARP payments and it seems obvious they don't make loans much anymore. To my knowledge not one (and I read 20 co's SEC docs a year) has taken a salary cut.

These management guys often brought their companies public at $10 per share (all the new banks came public at $10 in my area) and now the stocks sell for $1.25, $2.50, $3.75, or something like that and they haven't split. So they've never made a panny for their shareholders, ever. But they have $1 billion or $2 billion or so of assets and they take $300,000 to $500,000 salaries plus bonuses (and still get stock options all the time). The boards continue to get paid too. It isn't uncommon for these board members to have owned local businesses that are just suffering today so that board pay isn't negligible to their life styles.

So these insiders keep the entitiy going for as long as posible ---- even if what they are doing isn't in the best interest of shareholders. What other job could they get? Hell, none that I know of. Will they sell at a higher price or sell stock at 1/3rd or 1/2 of book? They are selling stock and staying in business.

And they are losing money. Net interest income is dwindling. Loan officers certainly twiddle thumbs during the day--- you can't annoy customers but 50 times a year for business they don't want to give you.

Insiders interest seems to me to be on opposite sides of the fence from those who own or may buy stock as passive, minority, outside shareholders.

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