April 19, 2019 - 10-Q: Quarterly report [Sections 13 or 15(d)]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-36722

TRIUMPH BANCORP, INC.

(Exact name of registrant as specified in its charter)

Texas

20-0477066

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(Address of principal executive offices)

(214) 365-6900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock — $0.01 par value, 26,705,437 shares, as of April 17, 2019

TRIUMPH BANCORP, INC.

FORM 10-Q

March 31, 2019

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Condensed Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	64
Item 4.	Controls and Procedures	66

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67

PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2019 and December 31, 2018

(Dollar amounts in thousands, except per share amounts)

	March 31,			December 31,
	2019			2018
	(Unaudited)
ASSETS
Cash and due from banks	$	61,726		$	96,218
Interest bearing deposits with other banks		110,224			138,721
Total cash and cash equivalents		171,950			234,939
Securities - equity investments		5,183			5,044
Securities - available for sale		339,465			336,423
Securities - held to maturity, fair value of $7,278 and $7,326, respectively		8,499			8,487
Loans held for sale		610			2,106
Loans, net of allowance for loan and lease losses of $27,605 and $27,571, respectively		3,585,264			3,581,073
Federal Home Loan Bank stock, at cost		21,191			15,943
Premises and equipment, net		84,931			83,392
Other real estate owned, net		3,073			2,060
Goodwill		158,743			158,743
Intangible assets, net		38,272			40,674
Bank-owned life insurance		40,667			40,509
Deferred tax assets, net		7,608			8,438
Other assets		64,327			41,948
Total assets	$	4,529,783		$	4,559,779
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing	$	667,597		$	724,527
Interest bearing		2,646,843			2,725,822
Total deposits		3,314,440			3,450,349
Customer repurchase agreements		3,727			4,485
Federal Home Loan Bank advances		405,000			330,000
Subordinated notes		48,956			48,929
Junior subordinated debentures		39,200			39,083
Other liabilities		72,244			50,326
Total liabilities		3,883,567			3,923,172
Commitments and contingencies - See Note 8 and Note 9
Stockholders' equity - See Note 12
Common stock, 26,709,411 and 26,949,936 shares outstanding, respectively		271			271
Additional paid-in-capital		470,292			469,341
Treasury stock, at cost		(9,881	)		(2,288	)
Retained earnings		185,274			170,486
Accumulated other comprehensive income (loss)		260			(1,203	)
Total stockholders’ equity		646,216			636,607
Total liabilities and stockholders' equity	$	4,529,783		$	4,559,779

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Interest and dividend income:
Loans, including fees	$	45,094		$	36,883
Factored receivables, including fees		24,556			15,303
Securities		2,644			1,310
FHLB stock		192			105
Cash deposits		778			517
Total interest income		73,264			54,118
Interest expense:
Deposits		8,218			4,277
Subordinated notes		839			837
Junior subordinated debentures		760			597
Other borrowings		2,136			1,277
Total interest expense		11,953			6,988
Net interest income		61,311			47,130
Provision for loan losses		1,014			2,548
Net interest income after provision for loan losses		60,297			44,582
Noninterest income:
Service charges on deposits		1,606			1,145
Card income		1,844			1,244
Net OREO gains (losses) and valuation adjustments		209			(88	)
Net gains (losses) on sale of securities		(11	)		(272	)
Fee income		1,612			800
Insurance commissions		919			714
Gain on sale of subsidiary or division		—			1,071
Other		1,359			558
Total noninterest income		7,538			5,172
Noninterest expense:
Salaries and employee benefits		26,439			19,404
Occupancy, furniture and equipment		4,522			3,054
FDIC insurance and other regulatory assessments		299			199
Professional fees		1,865			1,640
Amortization of intangible assets		2,402			1,117
Advertising and promotion		1,604			1,029
Communications and technology		4,874			3,359
Other		6,561			4,240
Total noninterest expense		48,566			34,042
Net income before income tax		19,269			15,712
Income tax expense		4,481			3,644
Net income		14,788			12,068
Dividends on preferred stock		—			(190	)
Net income available to common stockholders	$	14,788		$	11,878
Earnings per common share
Basic	$	0.55		$	0.57
Diluted	$	0.55		$	0.56

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Net income	$	14,788		$	12,068
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		1,893			(1,708	)
Reclassification of amount realized through sale of securities		11			272
Tax effect		(441	)		322
Total other comprehensive income (loss)		1,463			(1,114	)
Comprehensive income	$	16,251		$	10,954

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Preferred Stock		Common Stock								Treasury Stock								Accumulated
	Liquidation							Additional											Other			Total
	Preference		Shares			Par		Paid-in-			Shares					Retained			Comprehensive			Stockholders'
	Amount		Outstanding			Amount		Capital			Outstanding		Cost			Earnings			Income (Loss)			Equity
Balance, January 1, 2018	$	9,658		20,820,445		$	209	$	264,855			91,951	$	(1,784	)	$	119,356		$	(596	)	$	391,698
Issuance of restricted stock awards		—		5,492			—		—			—		—			—			—			—
Stock based compensation		—		—			—		486			—		—			—			—			486
Forfeiture of restricted stock awards		—		(1,574	)		—		69			1,574		(69	)		—			—			—
Stock options exercised		—		146			—		(4	)		—		—			—			—			(4	)
Series A Preferred dividends		—		—			—		—			—		—			(90	)		—			(90	)
Series B Preferred dividends		—		—			—		—			—		—			(100	)		—			(100	)
Net income		—		—			—		—			—		—			12,068			—			12,068
Other comprehensive income		—		—			—		—			—		—			—			(1,114	)		(1,114	)
Balance, March 31, 2018	$	9,658		20,824,509		$	209	$	265,406			93,525	$	(1,853	)	$	131,234		$	(1,710	)	$	402,944

Balance, January 1, 2019	$	—		26,949,936		$	271	$	469,341			104,063	$	(2,288	)	$	170,486		$	(1,203	)	$	636,607
Issuance of restricted stock awards		—		8,063			—		—			—		—			—			—			—
Stock based compensation		—		—			—		911			—		—			—			—			911
Forfeiture of restricted stock awards		—		(1,276	)		—		40			1,276		(40	)		—			—			—
Purchase of treasury stock		—		(247,312	)		—		—			247,312		(7,553	)		—			—			(7,553	)
Net income		—		—			—		—			—		—			14,788			—			14,788
Other comprehensive income		—		—			—		—			—		—			—			1,463			1,463
Balance, March 31, 2019	$	—		26,709,411		$	271	$	470,292			352,651	$	(9,881	)	$	185,274		$	260		$	646,216

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	14,788		$	12,068
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		1,961			1,216
Net accretion on loans		(1,557	)		(1,977	)
Amortization of subordinated notes issuance costs		27			25
Amortization of junior subordinated debentures		117			111
Net amortization on securities		174			331
Amortization of intangible assets		2,402			1,117
Deferred taxes		389			439
Provision for loan losses		1,014			2,548
Stock based compensation		911			486
Net (gains) losses on sale of debt securities		11			272
Net (gains) losses on equity securities		(139	)		75
Origination of loans held for sale		(4,010	)		—
Proceeds from sale of loans originated for sale		5,594			—
Net gains on sale of loans		(88	)		—
Net OREO (gains) losses and valuation adjustments		(209	)		88
Gain on sale of subsidiary or division		—			(1,071	)
Net change in operating leases		30			—
(Increase) decrease in other assets		(948	)		(1,780	)
Increase (decrease) in other liabilities		301			(4,498	)
Net cash provided by (used in) operating activities		20,768			9,450
Cash flows from investing activities:
Purchases of securities available for sale		(60,146	)		—
Proceeds from sales of securities available for sale		37,467			34,196
Proceeds from maturities, calls, and pay downs of securities available for sale		21,122			21,210
Proceeds from maturities, calls, and pay downs of securities held to maturity		220			185
Net change in loans		(4,452	)		(62,509	)
Purchases of premises and equipment, net		(3,500	)		(1,181	)
(Purchases) redemptions of FHLB stock, net		(5,248	)		(502	)
Proceeds from sale of subsidiary or division, net		—			73,849
Net cash provided by (used in) investing activities		(14,537	)		65,248
Cash flows from financing activities:
Net increase (decrease) in deposits		(135,909	)		(87,850	)
Increase (decrease) in customer repurchase agreements		(758	)		(4,737	)
Increase (decrease) in Federal Home Loan Bank advances		75,000			(10,000	)
Stock option exercises		—			(4	)
Purchase of treasury stock		(7,553	)		—
Dividends on preferred stock		—			(190	)
Net cash provided by (used in) financing activities		(69,220	)		(102,781	)
Net increase (decrease) in cash and cash equivalents		(62,989	)		(28,083	)
Cash and cash equivalents at beginning of period		234,939			134,129
Cash and cash equivalents at end of period	$	171,950		$	106,046

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2019		2018
Supplemental cash flow information:
Interest paid	$	10,164	$	7,562
Income taxes paid, net	$	42	$	48
Cash paid for operating lease liabilities (See Note 1)	$	1,023	$	—
Supplemental noncash disclosures:
Loans transferred to OREO	$	804	$	83
Lease liabilities arising from obtaining right-of-use assets (See Note 1)	$	530	$	—

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Triumph Bancorp, Inc. (collectively with its subsidiaries, “Triumph”, or the “Company” as applicable) is a financial holding company headquartered in Dallas, Texas. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Triumph CRA Holdings, LLC (“TCRA”), TBK Bank, SSB (“TBK Bank”), TBK Bank’s wholly owned subsidiary Advance Business Capital LLC, which currently operates under the d/b/a of Triumph Business Capital (“TBC”), and TBK Bank’s wholly owned subsidiary Triumph Insurance Group, Inc. (“TIG”).

On March 16, 2018, the Company sold the assets of Triumph Healthcare Finance (“THF”) and exited its healthcare asset-based lending line of business. THF operated within the Company’s TBK Bank subsidiary. See Note 2 – Business Combinations and Divestitures for details of the THF sale and its impact on our consolidated financial statements.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, the condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The Company has three reportable segments consisting of Banking, Factoring, and Corporate. The Company’s Chief Executive Officer uses segment results to make operating and strategic decisions.

Premises and Equipment

The Company leases certain properties and equipment under operating leases. For leases in effect upon adoption of Accounting Standards Update 2016-02, “Leases (Topic 842)” at January 1, 2019 and for any leases commencing thereafter, the Company recognizes a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during the lease term, the “right-of-use asset”. The lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the right-of-use asset.

Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations.

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and nonlease components as a single component and account for it as a lease.

The Company’s leases are not complex; therefore there were no significant assumptions or judgements made in applying the requirements of Topic 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and nonlease components, and the determination of the discount rates for the leases.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The new standard was adopted by the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $21,918,000 and the recognition of right-of-use assets totaling $22,123,000 as of the date of adoption. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. The initial balance sheet gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has no finance leases or material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. Adoption of ASU 2016-02 is not expected to materially change the Company’s recognition of lease expense in future periods. See Note 5 – Premises and Equipment for additional disclosures related to leases.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. The Company will adopt ASU 2016-13 on January 1, 2020. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018, however, the Company does not currently plan to early adopt the ASU. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow (DCF) method, loss-rate method and roll-rate method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a DCF method or a loss-rate method to estimate expected credit losses. The Company expects ASU 2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

NOTE 2 – Business combinations AND DIVESTITURES

First Bancorp of Durango, Inc. and Southern Colorado Corp.

Effective September 8, 2018 the Company acquired (i) First Bancorp of Durango, Inc. (“FBD”) and its community banking subsidiaries, The First National Bank of Durango and Bank of New Mexico and (ii) Southern Colorado Corp. (“SCC”) and its community banking subsidiary, Citizens Bank of Pagosa Springs, in all-cash transactions. The acquisitions expanded the Company’s market in Colorado and into New Mexico and further diversified the Company’s loan, customer, and deposit base.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of the estimate fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

(Dollars in thousands)	FBD		SCC		Total
Assets acquired:
Cash and cash equivalents	$	151,973	$	14,299	$	166,272
Securities		237,183		33,477		270,660
Loans held for sale		1,238		—		1,238
Loans		256,384		31,454		287,838
FHLB stock		786		129		915
Premises and equipment		7,495		840		8,335
Other real estate owned		213		—		213
Intangible assets		11,915		2,154		14,069
Other assets		2,715		403		3,118
		669,902		82,756		752,658
Liabilities assumed:
Deposits		601,194		73,464		674,658
Federal Home Loan Bank advances		737		—		737
Other liabilities		1,313		64		1,377
		603,244		73,528		676,772
Fair value of net assets acquired		66,658		9,228		75,886
Cash consideration transferred		134,667		13,294		147,961
Goodwill	$	68,009	$	4,066	$	72,075

The Company has recognized goodwill of $72,075,000, which was calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in these acquisitions resulted from expected synergies and expansion in the Colorado market and into the New Mexico market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transactions will be amortized utilizing an accelerated method over their ten year estimated useful lives. The initial accounting for the acquisitions has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

In connection with the acquisitions, the Company acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan and lease losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without credit impairment at acquisition. The following table presents details of the estimated fair value of acquired loans at the acquisition date:

	Loans Excluding PCI Loans						PCI Loans						Total Loans
(Dollars in thousands)	FBD		SCC		Total		FBD		SCC		Total		Acquired
Commercial real estate	$	140,955	$	11,894	$	152,849	$	832	$	200	$	1,032	$	153,881
Construction, land development, land		13,949		5,229		19,178		3,081		—		3,081		22,259
1-4 family residential properties		59,228		10,180		69,408		75		—		75		69,483
Farmland		5,709		1,207		6,916		—		—		—		6,916
Commercial		26,125		2,121		28,246		1,020		—		1,020		29,266
Factored receivables		—		—		—		—		—		—		—
Consumer		5,410		623		6,033		—		—		—		6,033
Mortgage warehouse		—		—		—		—		—		—		—
	$	251,376	$	31,254	$	282,630	$	5,008	$	200	$	5,208	$	287,838

Revenue and earnings of FBD and SCC since the acquisition date have not been disclosed as the acquired companies were merged into the Company and separate financial information is not readily available.

Expenses related to the acquisitions, including professional fees and other transaction costs, totaling $5,871,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended September 30, 2018.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Interstate Capital Corporation

A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	75
Factored receivables		131,017
Premises and equipment		279
Intangible assets		13,920
Other assets		144
		145,435
Liabilities assumed:
Deposits		7,389
Other liabilities		763
		8,152
Fair value of net assets acquired		137,283
Consideration:
Cash paid		160,258
Contingent consideration		20,000
Total consideration		180,258
Goodwill	$	42,975

ICC’s net assets acquired were allocated to the Company’s Factoring segment whose factoring operations were significantly expanded as a result of the transaction. The Company has recognized goodwill of $42,975,000, which was calculated as the excess of both the fair value of cash consideration exchanged and the fair value of the contingent liability assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Factoring segment. The goodwill in this acquisition resulted from expected synergies and expansion in the factoring market. The goodwill will be deducted for tax purposes. The intangible assets recognized include a customer relationship intangible asset with an acquisition date fair value of $13,500,000 which will be amortized utilizing an accelerated method over its eight year estimated useful life and a trade name intangible asset with an acquisition date fair value of $420,000 which will be amortized on a straight-line basis over its three year estimated useful life.

Consideration paid included contingent consideration with an acquisition date fair value of $20,000,000. The contingent consideration is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition and is correlated to monthly movements in average invoice prices historically experienced by ICC. At the end of a 30 month earnout period, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price. Final contingent consideration payout will range from $0 to $22,000,000, and the fair value of the associated liability will be remeasured each reporting period with changes in fair value recorded in noninterest income in the consolidated statements of income. The fair value of the contingent consideration was $21,006,000 at March 31, 2019.

Revenue and earnings of ICC since the acquisition date have not been disclosed as the acquired company was merged into the Company and separate financial information is not readily available. The initial accounting for the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $1,094,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended June 30, 2018.

Triumph Healthcare Finance

On January 19, 2018, the Company entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Healthcare Finance (“THF”) and exit its healthcare asset-based lending line of business. At December 31, 2017, the carrying amount of the Disposal Group was transferred to assets held for sale. The sale closed on March 16, 2018.

A summary of the carrying amount of the assets in the Disposal Group and the gain on sale is as follows:

(Dollars in thousands)
Carrying amount of assets in the disposal group:
Loans	$	70,147
Premises and equipment, net		19
Goodwill		1,457
Intangible assets, net		958
Other assets		197
Total carrying amount		72,778
Total consideration received		74,017
Gain on sale of division		1,239
Transaction costs		168
Gain on sale of division, net of transaction costs	$	1,071

The Disposal Group was included in the Banking segment, and the loans in the Disposal Group were previously included in the commercial loan portfolio.

NOTE 3 - SECURITIES

Equity Securities With Readily Determinable Fair Values

The Company held equity securities with fair values of $5,183,000 and $5,044,000 at March 31, 2019 and December 31, 2018, respectively. The gross realized and unrealized losses recognized on equity securities with readily determinable fair values in noninterest income in the Company’s consolidated statements of income were as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2019		2018
Unrealized gains (losses) on equity securities still held at the reporting date	$	139	$	(75	)
Realized gains (losses) on equity securities sold during the period		—		—
	$	139	$	(75	)

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Debt Securities

Debt securities have been classified in the financial statements as available for sale or held to maturity. The amortized cost of debt securities and their approximate fair values are as follows:

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
March 31, 2019	Cost		Gains		Losses			Value
Available for sale securities:
U.S. Government agency obligations	$	88,850	$	11	$	(517	)	$	88,344
U.S. Treasury notes		1,960		—		(12	)		1,948
Mortgage-backed securities, residential		39,691		366		(252	)		39,805
Asset backed securities		9,552		1		(37	)		9,516
State and municipal		76,371		266		(96	)		76,541
CLO securities		58,986		92		(49	)		59,029
Corporate bonds		59,034		596		(24	)		59,606
SBA pooled securities		4,682		11		(17	)		4,676
Total available for sale securities	$	339,126	$	1,343	$	(1,004	)	$	339,465

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
Held to maturity securities:
CLO securities	$	8,499	$	—	$	(1,221	)	$	7,278

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
December 31, 2018	Cost		Gains		Losses			Value
Available for sale securities:
U.S. Government agency obligations	$	93,500	$	9	$	(861	)	$	92,648
U.S. Treasury notes		1,956		—		(24	)		1,932
Mortgage-backed securities, residential		39,971		222		(457	)		39,736
Asset backed securities		10,165		11		(31	)		10,145
State and municipal		118,826		175		(550	)		118,451
Corporate bonds		68,804		150		(167	)		68,787
SBA pooled securities		4,766		5		(47	)		4,724
Total available for sale securities	$	337,988	$	572	$	(2,137	)	$	336,423

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
Held to maturity securities:
CLO securities	$	8,487	$	—	$	(1,161	)	$	7,326

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and estimated fair value of debt securities at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale Securities				Held to Maturity Securities
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Due in one year or less	$	98,739	$	98,551	$	—	$	—
Due from one year to five years		105,580		105,998		—		—
Due from five years to ten years		16,864		16,872		6,665		5,667
Due after ten years		64,018		64,047		1,834		1,611
		285,201		285,468		8,499		7,278
Mortgage-backed securities, residential		39,691		39,805		—		—
Asset backed securities		9,552		9,516		—		—
SBA pooled securities		4,682		4,676		—		—
	$	339,126	$	339,465	$	8,499	$	7,278

Proceeds from sales of debt securities and the associated gross gains and losses are as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2019			2018
Proceeds	$	37,467		$	34,196
Gross gains	$	119		$	5
Gross losses	$	(130	)	$	(277	)

Debt securities with a carrying amount of approximately $67,624,000 and $80,041,000 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

Information pertaining to debt securities with gross unrealized and unrecognized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are summarized as follows:

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2019	Value		Losses			Value		Losses			Value		Losses
Available for sale securities:
U.S. Government agency obligations	$	4,965	$	(1	)	$	80,393	$	(516	)	$	85,358	$	(517	)
U.S. Treasury notes		—		—			1,948		(12	)		1,948		(12	)
Mortgage-backed securities, residential		2,510		(31	)		15,851		(221	)		18,361		(252	)
Asset backed securities		2,843		(7	)		4,970		(30	)		7,813		(37	)
State and municipal		3,442		(14	)		8,320		(82	)		11,762		(96	)
CLO securities		14,684		(49	)		—		—			14,684		(49	)
Corporate bonds		1,964		(3	)		5,140		(21	)		7,104		(24	)
SBA pooled securities		673		(5	)		2,304		(12	)		2,977		(17	)
	$	31,081	$	(110	)	$	118,926	$	(894	)	$	150,007	$	(1,004	)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
March 31, 2019	Value		Losses			Value		Losses			Value		Losses
Held to maturity securities:
CLO securities	$	2,815	$	(301	)	$	4,463	$	(920	)	$	7,278	$	(1,221	)

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2018	Value		Losses			Value		Losses			Value		Losses
Available for sale securities:
U.S. Government agency obligations	$	17,203	$	(83	)	$	72,471	$	(778	)	$	89,674	$	(861	)
U.S. Treasury notes		—		—			1,932		(24	)		1,932		(24	)
Mortgage-backed securities, residential		9,334		(97	)		13,910		(360	)		23,244		(457	)
Asset backed securities		197		(1	)		4,970		(30	)		5,167		(31	)
State and municipal		31,142		(201	)		22,478		(349	)		53,620		(550	)
Corporate bonds		41,874		(166	)		149		(1	)		42,023		(167	)
SBA pooled securities		2,602		(20	)		1,451		(27	)		4,053		(47	)
	$	102,352	$	(568	)	$	117,361	$	(1,569	)	$	219,713	$	(2,137	)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
December 31, 2018	Value		Losses			Value		Losses			Value		Losses
Held to maturity securities:
CLO securities	$	2,861	$	(242	)	$	4,465	$	(919	)	$	7,326	$	(1,161	)

Management evaluates debt securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2019, the Company had 144 debt securities in an unrealized loss position. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2019, management believes that the unrealized losses detailed in the previous table are temporary and no other than temporary impairment loss has been recognized in the Company’s consolidated statements of income.

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the recorded investment and unpaid principal for loans:

	March 31, 2019								December 31, 2018
	Recorded			Unpaid					Recorded			Unpaid
(Dollars in thousands)	Investment			Principal		Difference			Investment			Principal		Difference
Commercial real estate	$	1,093,882		$	1,101,549	$	(7,667	)	$	992,080		$	999,887	$	(7,807	)
Construction, land development, land		145,002			148,883		(3,881	)		179,591			183,664		(4,073	)
1-4 family residential properties		194,067			195,639		(1,572	)		190,185			191,852		(1,667	)
Farmland		156,299			158,743		(2,444	)		170,540			173,583		(3,043	)
Commercial		1,117,640			1,120,297		(2,657	)		1,114,971			1,118,028		(3,057	)
Factored receivables		570,663			572,898		(2,235	)		617,791			620,103		(2,312	)
Consumer		27,941			28,056		(115	)		29,822			29,956		(134	)
Mortgage warehouse		307,375			307,375		—			313,664			313,664		—
Total		3,612,869		$	3,633,440	$	(20,571	)		3,608,644		$	3,630,737	$	(22,093	)
Allowance for loan and lease losses		(27,605	)							(27,571	)
	$	3,585,264							$	3,581,073

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The difference between the recorded investment and the unpaid principal is primarily (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $17,861,000 and $19,514,000 at March 31, 2019 and December 31, 2018, respectively, and (2) net deferred origination and factoring fees totaling $2,710,000 and $2,579,000 at March 31, 2019 and December 31, 2018, respectively.

At March 31, 2019 and December 31, 2018, the Company had $54,295,000 and $58,566,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.

Loans with carrying amounts of $971,582,000 and $847,523,000 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

Allowance for Loan and Lease Losses

The activity in the allowance for loan and lease losses (“ALLL”) is as follows:

(Dollars in thousands)	Beginning										Ending
Three months ended March 31, 2019	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	4,493	$	692		$	—		$	1	$	5,186
Construction, land development, land		1,134		(235	)		(78	)		85		906
1-4 family residential properties		317		39			(36	)		47		367
Farmland		535		43			—			—		578
Commercial		12,865		120			(780	)		7		12,212
Factored receivables		7,299		189			(9	)		16		7,495
Consumer		615		173			(278	)		45		555
Mortgage warehouse		313		(7	)		—			—		306
	$	27,571	$	1,014		$	(1,181	)	$	201	$	27,605

(Dollars in thousands)	Beginning										Ending
Three months ended March 31, 2018	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	3,435	$	33		$	—		$	—	$	3,468
Construction, land development, land		883		107			—			8		998
1-4 family residential properties		293		(48	)		—			3		248
Farmland		310		308			—			—		618
Commercial		8,150		1,420			(439	)		62		9,193
Factored receivables		4,597		469			(584	)		11		4,493
Consumer		783		271			(443	)		108		719
Mortgage warehouse		297		(12	)		—			—		285
	$	18,748	$	2,548		$	(1,466	)	$	192	$	20,022

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents loans individually and collectively evaluated for impairment, as well as purchased credit impaired (“PCI”) loans, and their respective ALLL allocations:

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
March 31, 2019	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	7,583	$	1,075,768	$	10,531	$	1,093,882	$	532	$	4,654	$	—	$	5,186
Construction, land development, land		1,020		137,186		6,796		145,002		21		885		—		906
1-4 family residential properties		1,427		191,536		1,104		194,067		165		202		—		367
Farmland		6,515		149,064		720		156,299		72		506		—		578
Commercial		12,797		1,103,877		966		1,117,640		1,859		10,349		4		12,212
Factored receivables		8,319		562,344		—		570,663		2,750		4,745		—		7,495
Consumer		397		27,544		—		27,941		9		546		—		555
Mortgage warehouse		—		307,375		—		307,375		—		306		—		306
	$	38,058	$	3,554,694	$	20,117	$	3,612,869	$	5,408	$	22,193	$	4	$	27,605

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
December 31, 2018	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	7,097	$	974,280	$	10,703	$	992,080	$	487	$	4,006	$	—	$	4,493
Construction, land development, land		91		172,709		6,791		179,591		21		1,113		—		1,134
1-4 family residential properties		2,333		186,664		1,188		190,185		125		192		—		317
Farmland		7,424		162,735		381		170,540		72		463		—		535
Commercial		17,153		1,096,813		1,005		1,114,971		1,958		10,903		4		12,865
Factored receivables		6,759		611,032		—		617,791		1,968		5,331		—		7,299
Consumer		355		29,467		—		29,822		22		593		—		615
Mortgage warehouse		—		313,664		—		313,664		—		313		—		313
	$	41,212	$	3,547,364	$	20,068	$	3,608,644	$	4,653	$	22,914	$	4	$	27,571

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of information pertaining to impaired loans. PCI loans that have not deteriorated subsequent to acquisition are not considered impaired and therefore do not require an allowance and are excluded from these tables.

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
March 31, 2019	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	5,717	$	5,747	$	532	$	1,866	$	1,876
Construction, land development, land		91		91		21		929		1,032
1-4 family residential properties		265		248		165		1,162		1,280
Farmland		914		900		72		5,601		5,844
Commercial		4,628		4,644		1,859		8,169		8,365
Factored receivables		8,319		8,319		2,750		—		—
Consumer		26		24		9		371		371
Mortgage warehouse		—		—		—		—		—
PCI		71		55		4		—		—
	$	20,031	$	20,028	$	5,412	$	18,098	$	18,768

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
December 31, 2018	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	5,610	$	5,614	$	487	$	1,487	$	1,520
Construction, land development, land		91		91		21		—		—
1-4 family residential properties		225		216		125		2,108		2,255
Farmland		914		900		72		6,510		6,979
Commercial		5,235		5,254		1,958		11,918		12,089
Factored receivables		6,759		6,759		1,968		—		—
Consumer		63		57		22		292		296
Mortgage warehouse		—		—		—		—		—
PCI		71		55		4		—		—
	$	18,968	$	18,946	$	4,657	$	22,315	$	23,139

The following table presents average impaired loans and interest recognized on impaired loans:

	Three Months Ended				Three Months Ended
	March 31, 2019				March 31, 2018
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	7,340	$	—	$	947	$	—
Construction, land development, land		555		—		137		—
1-4 family residential properties		1,880		1		2,485		2
Farmland		6,969		45		3,977		7
Commercial		14,975		52		27,657		490
Factored receivables		7,539		—		4,234		—
Consumer		376		—		406		1
Mortgage warehouse		—		—		—		—
PCI		71		—		—		—
	$	39,705	$	98	$	39,843	$	500

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Past Due and Nonaccrual Loans

The following is a summary of contractually past due and nonaccrual loans:

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
March 31, 2019	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	2,320	$	—	$	7,583	$	9,903
Construction, land development, land		120		—		1,020		1,140
1-4 family residential properties		1,298		142		1,349		2,789
Farmland		870		—		3,077		3,947
Commercial		8,464		—		10,468		18,932
Factored receivables		38,122		3,821		—		41,943
Consumer		936		—		397		1,333
Mortgage warehouse		—		—		—		—
PCI		11		—		4,082		4,093
	$	52,141	$	3,963	$	27,976	$	84,080

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
December 31, 2018	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	2,625	$	397	$	7,096	$	10,118
Construction, land development, land		1,003		—		91		1,094
1-4 family residential properties		2,103		—		1,588		3,691
Farmland		308		—		4,059		4,367
Commercial		3,728		999		14,071		18,798
Factored receivables		41,135		2,152		—		43,287
Consumer		1,005		11		355		1,371
Mortgage warehouse		—		—		—		—
PCI		788		—		3,525		4,313
	$	52,695	$	3,559	$	30,785	$	87,039

The following table presents information regarding nonperforming loans:

(Dollars in thousands)	March 31, 2019		December 31, 2018
Nonaccrual loans⁽¹⁾	$	27,976	$	30,785
Factored receivables greater than 90 days past due		3,821		2,152
Troubled debt restructurings accruing interest		2,408		3,117
	$	34,205	$	36,054

⁽¹⁾

Includes troubled debt restructurings of $2,971,000 and $3,730,000 at March 31, 2019 and December 31, 2018, respectively.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Quality Information

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:

Pass – Pass rated loans have low to average risk and are not otherwise classified.

Classified – Classified loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Certain classified loans have the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

PCI – At acquisition, PCI loans had the characteristics of classified loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.

As of March 31, 2019 and December 31, 2018, based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)
March 31, 2019	Pass		Classified		PCI		Total
Commercial real estate	$	1,079,042	$	4,309	$	10,531	$	1,093,882
Construction, land development, land		137,186		1,020		6,796		145,002
1-4 family residential		191,364		1,599		1,104		194,067
Farmland		147,671		7,908		720		156,299
Commercial		1,100,564		16,110		966		1,117,640
Factored receivables		563,145		7,518		—		570,663
Consumer		27,539		402		—		27,941
Mortgage warehouse		307,375		—		—		307,375
	$	3,553,886	$	38,866	$	20,117	$	3,612,869

(Dollars in thousands)
December 31, 2018	Pass		Classified		PCI		Total
Commercial real estate	$	977,548	$	3,829	$	10,703	$	992,080
Construction, land development, land		172,709		91		6,791		179,591
1-4 family residential		187,251		1,746		1,188		190,185
Farmland		161,565		8,594		381		170,540
Commercial		1,093,759		20,207		1,005		1,114,971
Factored receivables		612,577		5,214		—		617,791
Consumer		29,461		361		—		29,822
Mortgage warehouse		313,664		—		—		313,664
	$	3,548,534	$	40,042	$	20,068	$	3,608,644

Troubled Debt Restructurings

The Company had a recorded investment in troubled debt restructurings of $5,379,000 and $6,847,000 as of March 31, 2019 and December 31, 2018, respectively. The Company had allocated specific allowances for these loans of $331,000 and $286,000 at March 31, 2019 and December 31, 2018, respectively, and had not committed to lend additional amounts.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the pre- and post-modification recorded investment of loans modified as troubled debt restructurings during the three months ended March 31, 2019 and 2018. The Company did not grant principal reductions or interest rate concessions on any restructured loans.

	Extended
	Amortization		Payment		Total		Number of
(Dollars in thousands)	Period		Deferrals		Modifications		Loans
March 31, 2019
Commercial	$	—	$	84	$	84		2
March 31, 2018
1-4 family residential properties	$	110	$	—	$	110		3
Commercial		75		—		75		2
	$	185	$	—	$	185		5

During the three months ended March 31, 2019, the Company had one relationship consisting of seven loans modified as a troubled debt restructuring with a recorded investment of $688,000 for which there was a payment default within twelve months following the modification. During the three months ended March 31, 2018, the Company had one loan modified as a troubled debt restructuring with a recorded investment of $156,000 for which there was a payment default within twelve months following the modification. Default is determined at 90 or more days past due.

Residential Real Estate Loans In Process of Foreclosure

At March 31, 2019, the Company had $748,000 in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.

Purchased Credit Impaired Loans

The Company has loans that were acquired, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding contractually required principal and interest and the carrying amount of these loans included in the balance sheet amounts of loans are as follows:

	March 31,		December 31,
	2019		2018
Contractually required principal and interest:
Real estate loans	$	22,643	$	22,644
Commercial loans		4,021		4,078
Outstanding contractually required principal and interest	$	26,664	$	26,722
Gross carrying amount included in loans receivable	$	20,117	$	20,068

The changes in accretable yield in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

	Three Months Ended March 31,
	2019			2018
Accretable yield, beginning balance	$	5,711		$	2,793
Additions		—			—
Accretion		(411	)		(384	)
Reclassification from nonaccretable to accretable yield		—			33
Disposals		(17	)		—
Accretable yield, ending balance	$	5,283		$	2,442

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – PREMISES AND EQUIPMENT

The Company leases certain premises and equipment under operating leases. At March 31, 2019, the Company had lease liabilities totaling $21,609,000 and right-of-use assets totaling $21,793,000 related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2019, the weighted average remaining lease term for operating leases was 6.7 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.4%.

Lease costs were as follows:

	Three Months Ended
(Dollars in thousands)	March 31, 2019
Operating lease cost	$	1,053
Short-term lease cost		—
Variable lease cost		114
Total lease cost	$	1,167

Rent expense for the three months ended March 31, 2018, prior to the adoption of ASU 2016-02, was $599,000.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2019. At March 31, 2019, the Company had leases that had not yet commenced, but will create approximately $1,500,000 of additional lease liabilities and right-of-use assets for the Company.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

(Dollars in thousands)	March 31, 2019
Lease payments due:
Within one year	$	3,899
After one but within two years		4,104
After two but within three years		3,761
After three but within four years		3,385
After four but within five years		2,970
After five years		6,181
Total undiscounted cash flows		24,300
Discount on cash flows		(2,691	)
Total lease liability	$	21,609

NOTE 6 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

(Dollars in thousands)		March 31, 2019				December 31, 2018
Goodwill		$	158,743			$	158,743

	March 31, 2019							December 31, 2018
	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
(Dollars in thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Core deposit intangibles	$	43,578	$	(17,829	)	$	25,749	$	43,578	$	(16,266	)	$	27,312
Other intangible assets		15,700		(3,177	)		12,523		15,700		(2,338	)		13,362
	$	59,278	$	(21,006	)	$	38,272	$	59,278	$	(18,604	)	$	40,674

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The changes in goodwill and intangible assets are as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2019			2018
Beginning balance	$	199,417		$	63,778
Acquired goodwill, measurement period adjustment		—			1,680
Acquired intangibles		—			15
Divestiture		—			(433	)
Amortization of intangibles		(2,402	)		(1,117	)
Ending balance	$	197,015		$	63,923

NOTE 7 – Variable Interest Entities

Collateralized Loan Obligation Funds – Closed

The Company holds investments in the subordinated notes of the following closed CLO funds:

	Offering	Offering
(Dollars in thousands)	Date	Amount
Trinitas CLO IV, LTD (Trinitas IV)	June 2, 2016	$	406,650
Trinitas CLO V, LTD (Trinitas V)	September 22, 2016	$	409,000
Trinitas CLO VI, LTD (Trinitas VI)	June 20, 2017	$	717,100

The carrying amounts of the Company’s investments in the subordinated notes of the CLO funds, which represent the Company’s maximum exposure to loss as a result of its involvement with the CLO funds, totaled $8,499,000 and $8,487,000 at March 31, 2019 and December 31, 2018, respectively, and are classified as held to maturity securities within the Company’s consolidated balance sheets.

The Company performed a consolidation analysis to confirm whether the Company was required to consolidate the assets, liabilities, equity or operations of the closed CLO funds in its financial statements. The Company concluded that the closed CLO funds were variable interest entities and that the Company holds variable interests in the entities in the form of its investments in the subordinated notes of entities. However, the Company also concluded that the Company does not have the power to direct the activities that most significantly impact the entities’ economic performance. As a result, the Company was not the primary beneficiary and therefore was not required to consolidate the assets, liabilities, equity, or operations of the closed CLO funds in the Company’s financial statements.

NOTE 8 - Legal Contingencies

Various legal claims have arisen from time to time in the normal course of business which, in the opinion of management, do not have a material effect on the Company’s consolidated financial statements.

NOTE 9 - OFF-BALANCE SHEET LOAN COMMITMENTS

From time to time, the Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The contractual amounts of financial instruments with off-balance sheet risk were as follows:

	March 31, 2019						December 31, 2018
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Unused lines of credit	$	207,197	$	318,911	$	526,108	$	69,053	$	433,667	$	502,720
Standby letters of credit		1,807		4,063		5,870		2,285		3,931		6,216
Mortgage warehouse commitments		—		306,508		306,508		—		266,458		266,458

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

Mortgage warehouse commitments are unconditionally cancellable and represent the unused capacity on mortgage warehouse facilities the Company has approved. The Company reserves the right to refuse to buy any mortgage loans offered for sale by a customer, for any reason, at the Company’s sole and absolute discretion.

The Company records an allowance for loan and lease losses on off-balance sheet lending-related commitments through a charge to other noninterest expense on the Company’s consolidated statements of income. At March 31, 2019 and December 31, 2018, the allowance for loan and lease losses on off-balance sheet lending-related commitments totaled $537,000 and $538,000, respectively, and was included in other liabilities on the Company’s consolidated balance sheets.

In addition to the commitments above, the Company had overdraft protection available in the amounts of $2,776,000 and $3,087,000 at March 31, 2019 and December 31, 2018, respectively.

NOTE 10 - Fair Value Disclosures

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with the methodologies disclosed in Note 15 of the Company’s 2018 Form 10-K.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Assets and liabilities measured at fair value on a recurring basis are summarized in the table below.

(Dollars in thousands)	Fair Value Measurements Using						Total
March 31, 2019	Level 1		Level 2		Level 3		Fair Value
Assets measured at fair value on a recurring basis
Securities available for sale
U.S. Government agency obligations	$	—	$	88,344	$	—	$	88,344
U.S. Treasury notes		—		1,948		—		1,948
Mortgage-backed securities, residential		—		39,805		—		39,805
Asset backed securities		—		9,516		—		9,516
State and municipal		—		76,541		—		76,541
CLO securities		—		59,029		—		59,029
Corporate bonds		—		59,606		—		59,606
SBA pooled securities		—		4,676		—		4,676
	$	—	$	339,465	$	—	$	339,465

Equity securities
Mutual fund	$	5,183	$	—	$	—	$	5,183

Loans held for sale	$	—	$	610	$	—	$	610

Liabilities measured at fair value on a recurring basis
ICC Contingent consideration	$	—	$	—	$	21,006	$	21,006

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2018	Level 1		Level 2		Level 3		Fair Value
Assets measured at fair value on a recurring basis
Securities available for sale
U.S. Government agency obligations	$	—	$	92,648	$	—	$	92,648
U.S. Treasury notes		—		1,932		—		1,932
Mortgage-backed securities, residential		—		39,736		—		39,736
Asset backed securities		—		10,145		—		10,145
State and municipal		—		118,451		—		118,451
Corporate bonds		—		68,787		—		68,787
SBA pooled securities		—		4,724		—		4,724
	$	—	$	336,423	$	—	$	336,423

Equity securities
Mutual fund	$	5,044	$	—	$	—	$	5,044

Loans held for sale	$	—	$	2,106	$	—	$	2,106

Liabilities measured at fair value on a recurring basis
ICC Contingent consideration	$	—	$	—	$	20,745	$	20,745

There were no transfers between levels during 2019 or 2018.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On June 2, 2018, the Company acquired substantially all of the operating assets of, and assumed certain liabilities associated with, Interstate Capital Corporation’s (“ICC”) accounts receivable factoring business and other related financial services. Consideration for the acquisition included contingent consideration, which is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition. The index is calculated by a third party data analytics firm and is correlated to monthly movements in average invoice prices historically experienced by ICC. At the end of a 30 month earnout period after closing, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price, with a payout ranging from $0 to $22,000,000. The fair value of the contingent consideration is calculated each reporting period, and changes in the fair value of the contingent consideration are recorded in noninterest income in the consolidated statements of income. At March 31, 2019 and December 31, 2018, the ICC contingent consideration liability was the only recurring fair value measurement with Level 3 unobservable inputs. At March 31, 2019 and December 31, 2018, the fair value calculation of the contingent consideration resulted in a payout of $22,000,000, and discount rates of 2.6% and 2.9%, respectively, were applied to calculate the present value of the contingent consideration. A reconciliation of the opening balance to the closing balance of the fair value of the contingent consideration is as follows:

	Three Months Ended
(Dollars in thousands)	March 31, 2019
Beginning balance	$	20,745
Contingent consideration recognized in business combination		—
Change in fair value of contingent consideration recognized in earnings		261
Consideration settlement payments		—
Ending balance	$	21,006

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2019 and December 31, 2018.

(Dollars in thousands)	Fair Value Measurements Using						Total
March 31, 2019	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	5,185	$	5,185
Construction, land development, land		—		—		70		70
1-4 family residential properties		—		—		100		100
Farmland		—		—		842		842
Commercial		—		—		2,769		2,769
Factored receivables		—		—		5,569		5,569
Consumer		—		—		17		17
PCI		—		—		67		67
Other real estate owned⁽¹⁾
Commercial real estate		—		—		58		58
1-4 family residential properties		—		—		22		22
	$	—	$	—	$	14,699	$	14,699

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2018	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	5,123	$	5,123
Construction, land development, land		—		—		70		70
1-4 family residential properties		—		—		100		100
Farmland		—		—		842		842
Commercial		—		—		3,277		3,277
Factored receivables		—		—		4,791		4,791
Consumer		—		—		41		41
PCI		—		—		67		67
Other real estate owned⁽¹⁾
Commercial real estate		—		—		1,095		1,095
	$	—	$	—	$	15,406	$	15,406

⁽¹⁾ Represents the fair value of OREO that was adjusted during the period and subsequent to its initial classification as OREO

Impaired Loans with Specific Allocation of ALLL: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the impaired loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the impaired loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

OREO: OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ALLL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value.

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at March 31, 2019 and December 31, 2018 were as follows:

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
March 31, 2019	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	171,950	$	171,950	$	—	$	—	$	171,950
Securities - held to maturity		8,499		—		—		7,278		7,278
Loans not previously presented, gross		3,592,838		—		—		3,567,297		3,567,297
FHLB stock		21,191	N/A		N/A		N/A		N/A
Accrued interest receivable		19,035		19,035		—		—		19,035

Financial liabilities:
Deposits		3,314,440		—		3,309,683		—		3,309,683
Customer repurchase agreements		3,727		—		3,727		—		3,727
Federal Home Loan Bank advances		405,000		—		405,000		—		405,000
Subordinated notes		48,956		—		52,500		—		52,500
Junior subordinated debentures		39,200		—		41,000		—		41,000
Accrued interest payable		8,368		8,368		—		—		8,368

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
December 31, 2018	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	234,939	$	234,939	$	—	$	—	$	234,939
Securities - held to maturity		8,487		—		—		7,326		7,326
Loans not previously presented, gross		3,589,676		—		—		3,505,724		3,505,724
FHLB stock		15,943	N/A		N/A		N/A		N/A
Accrued interest receivable		19,094		19,094		—		—		19,094

Financial liabilities:
Deposits		3,450,349		—		3,440,570		—		3,440,570
Customer repurchase agreements		4,485		—		4,485		—		4,485
Federal Home Loan Bank advances		330,000		—		330,000		—		330,000
Subordinated notes		48,929		—		50,500		—		50,500
Junior subordinated debentures		39,083		—		40,808		—		40,808
Accrued interest payable		6,722		6,722		—		—		6,722

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 - Regulatory Matters

The Company (on a consolidated basis) and TBK Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and TBK Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and TBK Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity Tier 1, and Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Management believes, as of March 31, 2019 and December 31, 2018, the Company and TBK Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2019 and December 31, 2018, TBK Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” TBK Bank must maintain minimum total risk based, common equity Tier 1 risk based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since March 31, 2019 that management believes have changed TBK Bank’s category.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The actual capital amounts and ratios for the Company and TBK Bank are presented in the following table.

								To Be Well
								Capitalized Under
				Minimum for Capital				Prompt Corrective
(Dollars in thousands)	Actual			Adequacy Purposes				Action Provisions
As of March 31, 2019	Amount		Ratio	Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	564,354	13.6%	$	331,473		8.0%	N/A		N/A
TBK Bank, SSB	$	515,835	12.8%	$	322,160		8.0%	$	402,700		10.0%

Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	487,256	11.8%	$	248,606		6.0%	N/A		N/A
TBK Bank, SSB	$	487,700	12.1%	$	241,621		6.0%	$	322,161		8.0%

Common equity Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	448,056	10.8%	$	186,453		4.5%	N/A		N/A
TBK Bank, SSB	$	487,700	12.1%	$	181,216		4.5%	$	261,756		6.5%

Tier 1 capital (to average assets)
Triumph Bancorp, Inc.	$	487,256	11.3%	$	172,189		4.0%	N/A		N/A
TBK Bank, SSB	$	487,700	11.4%	$	170,878		4.0%	$	213,598		5.0%

As of December 31, 2018
Total capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	552,398	13.4%	$	330,970		8.0%	N/A		N/A
TBK Bank, SSB	$	496,526	12.4%	$	320,856		8.0%	$	401,071		10.0%

Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	475,359	11.5%	$	248,227		6.0%	N/A		N/A
TBK Bank, SSB	$	468,500	11.7%	$	240,642		6.0%	$	320,856		8.0%

Common equity Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	436,276	10.5%	$	186,170		4.5%	N/A		N/A
TBK Bank, SSB	$	468,500	11.7%	$	180,482		4.5%	$	260,696		6.5%

Tier 1 capital (to average assets)
Triumph Bancorp, Inc.	$	475,359	11.1%	$	171,619		4.0%	N/A		N/A
TBK Bank, SSB	$	468,500	11.0%	$	170,092		4.0%	$	212,615		5.0%

Dividends paid by TBK Bank are limited to, without prior regulatory approval, current year earnings and earnings less dividends paid during the preceding two years.

Beginning in January 2016, the implementation of the capital conservation buffer set forth by the Basel III regulatory capital framework was effective for the Company starting at 0.625% of risk weighed assets above the minimum risk based capital ratio requirements and increasing 0.625% each year thereafter, until it reached 2.5% on January 1, 2019. The capital conservation buffer was 2.5% and 1.875% at March 31, 2019 and December 31, 2018, respectively. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. At March 31, 2019 and December 31, 2018, the Company’s and TBK Bank’s risk based capital exceeded the required capital conservation buffer.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – STOCKHOLDERS’ EQUITY

The following summarizes the capital structure of Triumph Bancorp, Inc.

Common Stock

	March 31, 2019			December 31, 2018
Shares authorized		50,000,000			50,000,000
Shares issued		27,062,062			27,053,999
Treasury shares		(352,651	)		(104,063	)
Shares outstanding		26,709,411			26,949,936
Par value per share	$	0.01		$	0.01

Common Stock Offering

On April 12, 2018, the Company completed an underwritten common stock offering issuing 5,405,000 shares of the Company’s common stock, including 705,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at $37.50 per share for total gross proceeds of $202,688,000. Net proceeds from the offering, after deducting the underwriting discount and offering expenses, were $192,053,000.

Stock Repurchase Program

On October 29, 2018, the Company announced that its board of directors had authorized the repurchase of up to $25,000,000 of its outstanding common stock in open market transactions or through privately negotiated transactions. During the three months ended March 31, 2019, the Company repurchased 247,312 shares into treasury stock at an average price of $30.51. No repurchases were made under this program during the three months ended March 31, 2018.

Preferred Stock

The Company has 50,000 shares of Preferred Stock Series A and 115,000 shares of Preferred Stock Series B authorized to be issued.

On October 26, 2018, the 45,500 Preferred Stock Series A shares outstanding with a liquidation value of $4,550,000 were converted to 315,773 shares of common stock at the option of the holders at their preferred to common stock conversion ratio of 6.94008, and the 51,076 Preferred Stock Series B shares outstanding with a liquidation value of $5,108,000 were converted to 354,463 shares of common stock at the option of the holders at their preferred to common stock conversion ratio of 6.94008.

There were no preferred shares issued or outstanding at December 31, 2018 or March 31, 2019.

NOTE 13 – STOCK BASED COMPENSATION

Stock based compensation expense that has been charged against income was $911,000 and $486,000 for the three months ended March 31, 2019 and 2018, respectively.

2014 Omnibus Incentive Plan

The Company’s 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”) provides for the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards that may be settled in, or based upon the value of, the Company’s common stock. The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 1,200,000 shares.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Stock Awards

A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the three months ended March 31, 2019 were as follows:

				Weighted-Average
				Grant-Date
Nonvested RSAs	Shares			Fair Value
Nonvested at January 1, 2019		101,213		$	31.47
Granted		8,063			31.25
Vested		(7,028	)		30.88
Forfeited		(1,276	)		30.65
Nonvested at March 31, 2019		100,972		$	31.50

RSAs granted to employees under the Omnibus Incentive Plan typically vest over three to four years, but vesting periods may vary. Compensation expense for RSAs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. At March 31, 2019, there was $1,417,000 of unrecognized compensation cost related to nonvested RSAs. The cost is expected to be recognized over a remaining weighted average period of 2.69 years.

Restricted Stock Units

A summary of changes in the Company’s nonvested Restricted Stock Units (“RSUs”) under the Omnibus Incentive Plan for the three months ended March 31, 2019 were as follows:

				Weighted Average
				Grant Date
Nonvested RSUs	Shares			Fair Value
Nonvested at January 1, 2019		59,658		$	38.75
Granted		—			—
Vested		—			—
Forfeited		(1,258	)		38.75
Nonvested at March 31, 2019		58,400		$	38.75

RSUs granted to employees under the Omnibus Incentive Plan vest after five years. Compensation expense for the RSUs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. At March 31, 2019, there was $1,848,000 of unrecognized compensation cost related to the nonvested RSUs. The cost is expected to be recognized over a remaining period of 4.09 years.

Performance Stock Units

A summary of changes in the Company’s nonvested Performance Stock Units (“PSUs”) under the Omnibus Incentive Plan for the three months ended March 31, 2019 were as follows:

				Weighted Average
				Grant Date
Nonvested PSUs	Shares			Fair Value
Nonvested at January 1, 2019		59,658		$	38.57
Granted		—			—
Vested		—			—
Forfeited		(1,258	)		38.57
Nonvested at March 31, 2019		58,400		$	38.57

PSUs granted to employees under the Omnibus Incentive Plan vest after five years. The number of shares issued upon vesting will range from 0% to 175% of the PSUs granted based on the Company’s relative total shareholder return (“TSR”) as compared to the TSR of a specified group of peer banks. Compensation expense for the PSUs will be recognized over the vesting period of the awards based on the fair value of the award at the grant date. The fair value of PSUs granted is estimated using a Monte Carlo simulation. Expected volatilities are determined based on the historical volatilities of the Company and the specified peer group. The risk-free interest rate for the performance period is derived from the Treasury constant maturities yield curve on the valuation date.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2019, there was $1,839,000 of unrecognized compensation cost related to the nonvested PSUs. The cost is expected to be recognized over a remaining period of 4.09 years.

Stock Options

A summary of changes in the Company’s stock options under the Omnibus Incentive Plan for the three months ended March 31, 2019 were as follows:

						Weighted-Average
						Remaining		Aggregate
				Weighted-Average		Contractual Term		Intrinsic Value
Stock Options	Shares			Exercise Price		(In Years)		(In Thousands)
Outstanding at January 1, 2019		231,467		$	23.43
Granted		—			—
Exercised		—			—
Forfeited or expired		(3,082	)		28.78
Outstanding at March 31, 2019		228,385		$	23.36		7.68	$	1,852

Fully vested shares and shares expected to vest at March 31, 2019		228,385		$	23.36		7.68	$	1,852

Shares exercisable at March 31, 2019		75,550		$	17.73		7.09	$	881

Information related to the stock options for the three months ended March 31, 2019 and 2018 was as follows:

	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2019		2018
Aggregate intrinsic value of options exercised	$	—	$	10
Cash received from option exercises	$	—	$	—
Tax benefit realized from option exercises	$	—	$	2
Weighted average fair value of options granted	$	—	$	—

Stock options awarded to employees under the Omnibus Incentive Plan are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant, vest over four years, and have ten year contractual terms. Contractual terms of exercisable options may be shortened due to termination of a participant’s employment. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. Expected volatilities are determined based on a blend of the Company’s historical volatility and historical volatilities of a peer group of companies with a similar size, industry, stage of life cycle, and capital structure. The expected term of options granted is determined based on the SEC simplified method, which calculates the expected term as the mid-point between the weighted average time to vesting and the contractual term. The risk-free interest rate for the expected term of options is derived from the Treasury constant maturity yield curve on the valuation date.

At March 31, 2019, there was $496,000 of unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a remaining weighted average period of 2.68 years.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

	Three Months Ended March 31,
(Dollars in thousands)	2019		2018
Basic
Net income to common stockholders	$	14,788	$	11,878
Weighted average common shares outstanding		26,679,724		20,721,363
Basic earnings per common share	$	0.55	$	0.57
Diluted
Net income to common stockholders	$	14,788	$	11,878
Dilutive effect of preferred stock		—		190
Net income to common stockholders - diluted	$	14,788	$	12,068
Weighted average common shares outstanding		26,679,724		20,721,363
Dilutive effects of:
Assumed conversion of Preferred A		—		315,773
Assumed conversion of Preferred B		—		354,471
Assumed exercises of stock options		64,166		83,872
Restricted stock awards		49,795		85,045
Restricted stock units		—		—
Performance stock units		—		—
Average shares and dilutive potential common shares		26,793,685		21,560,524
Diluted earnings per common share	$	0.55	$	0.56

Shares that were not considered in computing diluted earnings per common share because they were antidilutive are as follows:

	Three Months Ended March 31,
	2019		2018
Shares assumed to be converted from Preferred Stock Series A		—		—
Shares assumed to be converted from Preferred Stock Series B		—		—
Stock options		50,752		—
Restricted stock awards		13,290		—
Restricted stock units		58,400		—
Performance stock units		58,400		—

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 15 – BUSINESS SEGMENT INFORMATION

The following table presents the Company’s operating segments. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2018 Form 10-K. Transactions between segments consist primarily of borrowed funds. Beginning in 2019, intersegment interest expense is allocated to the Factoring segment based on Federal Home Loan Bank advance rates. Prior to 2019, intersegment interest was calculated based on the Company’s prime rate. The provision for loan loss is allocated based on the segment’s allowance for loan loss determination. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis but not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC. General factoring services not originated through TBC are included in the Banking segment.

(Dollars in thousands)
Three Months Ended March 31, 2019	Banking		Factoring			Corporate			Consolidated
Total interest income	$	49,121	$	23,803		$	340		$	73,264
Intersegment interest allocations		2,638		(2,638	)		—			—
Total interest expense		10,354		—			1,599			11,953
Net interest income (expense)		41,405		21,165			(1,259	)		61,311
Provision for loan losses		954		136			(76	)		1,014
Net interest income after provision		40,451		21,029			(1,183	)		60,297
Noninterest income		6,297		1,077			164			7,538
Noninterest expense		34,385		13,295			886			48,566
Operating income (loss)	$	12,363	$	8,811		$	(1,905	)	$	19,269

(Dollars in thousands)
Three Months Ended March 31, 2018	Banking		Factoring			Corporate			Consolidated
Total interest income	$	38,905	$	14,780		$	433		$	54,118
Intersegment interest allocations		2,932		(2,932	)		—			—
Total interest expense		5,554		—			1,434			6,988
Net interest income (expense)		36,283		11,848			(1,001	)		47,130
Provision for loan losses		2,144		393			11			2,548
Net interest income after provision		34,139		11,455			(1,012	)		44,582
Gain on sale of subsidiary or division		1,071		—			—			1,071
Other noninterest income		3,588		590			(77	)		4,101
Noninterest expense		26,538		6,854			650			34,042
Operating income (loss)	$	12,260	$	5,191		$	(1,739	)	$	15,712

(Dollars in thousands)
March 31, 2019	Banking		Factoring		Corporate		Eliminations			Consolidated
Total assets	$	4,448,216	$	614,690	$	741,736	$	(1,274,859	)	$	4,529,783
Gross loans held for investment	$	3,517,939	$	534,420	$	1,760	$	(441,250	)	$	3,612,869

(Dollars in thousands)
December 31, 2018	Banking		Factoring		Corporate		Eliminations			Consolidated
Total assets	$	4,458,399	$	688,245	$	737,530	$	(1,324,395	)	$	4,559,779
Gross loans held for investment	$	3,523,850	$	588,750	$	10,795	$	(514,751	)	$	3,608,644

item 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this discussion for further information on forward-looking statements.

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act. Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services as well as commercial finance product lines focused on businesses that require specialized financial solutions. Our banking operations include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines include accounts receivable factoring, asset based lending, equipment lending and premium finance products offered on a nationwide basis. As of March 31, 2019, we had consolidated total assets of $4.530 billion, total loans held for investment of $3.613 billion, total deposits of $3.314 billion and total stockholders’ equity of $646.2 million.

A key element of our strategy is to supplement the asset generation capacity in our community banking markets with commercial finance product lines which are offered on a nationwide basis and which serve to enhance the overall yield of our portfolio. These products include our factoring services, provided principally in the transportation sector, and our asset based lending, equipment finance, and premium finance products. Our aggregate outstanding balances for these products decreased $69.3 million, or 5.5%, to $1.187 billion as of March 31, 2019, primarily as a result of a decrease in our ending period factored receivables balance as well as a decrease in our asset based lending portfolio.

The following table sets forth our commercial finance product lines:

	March 31,		December 31,
(Dollars in thousands)	2019		2018
Commercial finance
Equipment	$	364,447	$	352,037
Asset based lending (general)		174,447		214,110
Premium finance		77,389		72,302
Factored receivables		570,663		617,791
Total commercial finance loans	$	1,186,946	$	1,256,240

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary, Triumph Business Capital, operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products. This business also has a legacy and structure as a standalone company. We have determined our reportable segments are Banking, Factoring, and Corporate. For the three months ended March 31, 2019, our Banking segment generated 68% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 31% of our total revenue, and our Corporate segment generated 1% of our total revenue.

First Quarter 2019 Overview

Net income available to common stockholders for the three months ended March 31, 2019 was $14.8 million, or $0.55 per diluted share, compared to net income available to common stockholders for the three months ended March 31, 2018 of $11.9 million, or $0.56 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $11.1 million, or $0.52 per diluted share, for the three months ended March 31, 2018. There were no merger and acquisition related activities during the three months ended March 31, 2019. For the three months ended March 31, 2019, our return on average common equity was 9.30% and our return on average assets was 1.33%.

At March 31, 2019, we had total assets of $4.530 billion, including gross loans held for investment of $3.613 billion, compared to $4.560 billion of total assets and $3.609 billion of gross loans held for investment at December 31, 2018. Organic loan growth totaled $4.2 million during the three months ended March 31, 2019. Our commercial finance product lines decreased from $1,256.2 million in aggregate as of December 31, 2018 to $1.187 billion as of March 31, 2019, a decrease of 5.5%, and constitute 33% of our total loan portfolio at March 31, 2019.

At March 31, 2019, we had total liabilities of $3.884 billion, including total deposits of $3.314 billion, compared to $3.923 billion of total liabilities and $3.450 billion of total deposits at December 31, 2018. Deposits decreased $135.9 million during the three months ended March 31, 2019.

At March 31, 2019, we had total stockholders' equity of $646.2 million. During the three months ended March 31, 2019, total stockholders’ equity increased $9.6 million, primarily due to our net income for the period, offset in part by common stock repurchased during the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 11.76% and 13.62%, respectively, at March 31, 2019.

At March 31, 2019, there were 130 clients utilizing the TriumphPay platform, which is an increase of 17 clients, or 15.0%. For the quarter ended March 31, 2019, TriumphPay processed 114,066 invoices paying 22,932 distinct carriers a total of $141.0 million.

2019 Items of Note

Stock Repurchase Program

On October 29, 2018, the Company announced that its board of directors had authorized the repurchase of up to $25.0 million of its outstanding common stock in open market transactions or through privately negotiated transactions. No repurchases were made under this program during the year ended December 31, 2018; however, during the three months ended March 31, 2019, we repurchased 247,312 shares into treasury stock under our stock repurchase program at an average price of $30.51, for a total of $7.6 million.

2018 Items of Note

First Bancorp of Durango, Inc. and Southern Colorado Corp.

Effective September 8, 2018, we acquired First Bancorp of Durango, Inc. (“FBD”) and its two community banking subsidiaries, The First National Bank of Durango and Bank of New Mexico, which were merged into TBK Bank upon closing, in an all-cash transaction for $134.7 million. On the same date, we acquired Southern Colorado Corp. (“SCC”) and its community banking subsidiary, Citizens Bank of Pagosa Springs, which was merged into TBK Bank upon closing, in an all-cash transaction for $13.3 million. As part of the FBD and SCC acquisitions, we acquired a combined $287.8 million of loans held for investment, assumed a combined $674.7 million of deposits, and recorded a combined $14.1 million of core deposit intangible assets and $72.1 million of goodwill.

Interstate Capital Corporation

On June 2, 2018 we acquired substantially all of the operating assets of, and assumed certain liabilities associated with, Interstate Capital Corporation’s (“ICC”) accounts receivable factoring business and other related financial services for total consideration of $180.3 million, which was comprised of $160.3 million in cash and contingent consideration with an initial fair value of $20.0 million. As part of the ICC acquisition, we acquired $131.0 million of factored receivables and recorded $13.9 million of intangible assets and $43.0 million of goodwill.

Common Stock Offering

On April 12, 2018, we completed an underwritten common stock offering issuing 5.4 million shares of our common stock, including 0.7 million shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares, at $37.50 per share for total gross proceeds of $202.7 million. Net proceeds after underwriting discounts and offering expenses were $192.1 million. A significant portion of the net proceeds of this offering were used to fund the FBD, SCC and ICC acquisitions and for general corporate purposes.

Triumph Healthcare Finance

On January 19, 2018, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Healthcare Finance (“THF”) and exit the healthcare asset-based lending line of business. The decision to sell THF was made prior to the end of the fourth quarter of 2017, and at December 31, 2017, the fair value of the Disposal Group exceeded its carrying amount. As a result of this decision, the $71.4 million carrying amount of the Disposal Group was transferred to assets held for sale as of December 31, 2017. The sale was finalized on March 16, 2018 and resulted in a net pre-tax contribution to earnings for the three months ended March 31, 2018 of $1.1 million, or approximately $0.8 million net of tax.

For further information on the above transactions, see Note 2 – Business Combinations and Divestitures in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.

Financial Highlights

	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2019			2018
Income Statement Data:
Interest income	$	73,264		$	54,118
Interest expense		11,953			6,988
Net interest income		61,311			47,130
Provision for loan losses		1,014			2,548
Net interest income after provision		60,297			44,582
Gain on sale of subsidiary or division		—			1,071
Other noninterest income		7,538			4,101
Noninterest income		7,538			5,172
Noninterest expense		48,566			34,042
Net income before income taxes		19,269			15,712
Income tax expense		4,481			3,644
Net income		14,788			12,068
Dividends on preferred stock		—			(190	)
Net income available to common stockholders	$	14,788		$	11,878

Per Share Data:
Basic earnings per common share	$	0.55		$	0.57
Diluted earnings per common share	$	0.55		$	0.56
Weighted average shares outstanding - basic		26,679,724			20,721,363
Weighted average shares outstanding - diluted		26,793,685			21,560,524

Adjusted Per Share Data⁽¹⁾:
Adjusted diluted earnings per common share	$	0.55		$	0.52
Adjusted weighted average shares outstanding - diluted		26,793,685			21,560,524

Performance ratios - Annualized:
Return on average assets		1.33	%		1.43	%
Return on average total equity		9.30	%		12.20	%
Return on average common equity		9.30	%		12.30	%
Return on average tangible common equity⁽¹⁾		13.43	%		14.75	%
Yield on loans⁽²⁾		7.99	%		7.65	%
Cost of interest bearing deposits		1.24	%		0.86	%
Cost of total deposits		0.99	%		0.68	%
Cost of total funds		1.28	%		0.95	%
Net interest margin⁽²⁾		6.15	%		6.06	%
Efficiency ratio		70.54	%		65.09	%
Adjusted efficiency ratio⁽¹⁾		70.54	%		66.45	%
Net noninterest expense to average assets		3.70	%		3.43	%
Adjusted net noninterest expense to average assets⁽¹⁾		3.70	%		3.56

Form: 10-Q

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