July 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 June 30, 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, 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, 26,205,591 shares, as of July 17, 2019.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

TBK

NASDAQ Global Select Market

TRIUMPH BANCORP, INC.

FORM 10-Q

June 30, 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	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	77
Item 4.	Controls and Procedures	78

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 3.	Defaults Upon Senior Securities	79
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	80

PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2019 and December 31, 2018

(Dollar amounts in thousands)

	June 30,			December 31,
	2019			2018
	(Unaudited)
ASSETS
Cash and due from banks	$	74,675		$	96,218
Interest bearing deposits with other banks		134,630			138,721
Total cash and cash equivalents		209,305			234,939
Securities - equity investments		5,479			5,044
Securities - available for sale		329,991			336,423
Securities - held to maturity, fair value of $7,283 and $7,326, respectively		8,573			8,487
Loans held for sale		2,877			2,106
Loans, net of allowance for loan and lease losses of $29,416 and $27,571, respectively		3,806,487			3,581,073
Federal Home Loan Bank stock, at cost		18,037			15,943
Premises and equipment, net		84,998			83,392
Other real estate owned, net		3,351			2,060
Goodwill		158,743			158,743
Intangible assets, net		35,925			40,674
Bank-owned life insurance		40,847			40,509
Deferred tax assets, net		7,278			8,438
Other assets		71,298			41,948
Total assets	$	4,783,189		$	4,559,779
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing	$	684,223		$	724,527
Interest bearing		2,974,755			2,725,822
Total deposits		3,658,978			3,450,349
Customer repurchase agreements		12,788			4,485
Federal Home Loan Bank advances		305,000			330,000
Subordinated notes		48,983			48,929
Junior subordinated debentures		39,320			39,083
Other liabilities		74,758			50,326
Total liabilities		4,139,827			3,923,172
Commitments and contingencies - See Note 8 and Note 9
Stockholders' equity - See Note 12
Common stock, 26,198,308 and 26,949,936 shares outstanding, respectively		271			271
Additional paid-in-capital		471,145			469,341
Treasury stock, at cost		(27,468	)		(2,288	)
Retained earnings		198,004			170,486
Accumulated other comprehensive income (loss)		1,410			(1,203	)
Total stockholders’ equity		643,362			636,607
Total liabilities and stockholders' equity	$	4,783,189		$	4,559,779

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Interest and dividend income:
Loans, including fees	$	47,910	$	38,148		$	93,004	$	75,031
Factored receivables, including fees		25,558		20,791			50,114		36,094
Securities		2,667		1,179			5,311		2,489
FHLB stock		146		101			338		206
Cash deposits		1,022		1,030			1,800		1,547
Total interest income		77,303		61,249			150,567		115,367
Interest expense:
Deposits		10,010		4,631			18,228		8,908
Subordinated notes		839		838			1,678		1,675
Junior subordinated debentures		744		713			1,504		1,310
Other borrowings		2,291		1,810			4,427		3,087
Total interest expense		13,884		7,992			25,837		14,980
Net interest income		63,419		53,257			124,730		100,387
Provision for loan losses		3,681		4,906			4,695		7,454
Net interest income after provision for loan losses		59,738		48,351			120,035		92,933
Noninterest income:
Service charges on deposits		1,700		1,210			3,306		2,355
Card income		2,071		1,394			3,915		2,638
Net OREO gains (losses) and valuation adjustments		148		(528	)		357		(616	)
Net gains (losses) on sale of securities		14		—			3		(272	)
Fee income		1,519		1,121			3,131		1,921
Insurance commissions		961		819			1,880		1,533
Gain on sale of subsidiary or division		—		—			—		1,071
Other		1,210		929			2,569		1,487
Total noninterest income		7,623		4,945			15,161		10,117
Noninterest expense:
Salaries and employee benefits		28,120		20,527			54,559		39,931
Occupancy, furniture and equipment		4,502		3,014			9,024		6,068
FDIC insurance and other regulatory assessments		303		383			602		582
Professional fees		1,550		2,078			3,415		3,718
Amortization of intangible assets		2,347		1,361			4,749		2,478
Advertising and promotion		1,796		1,300			3,400		2,329
Communications and technology		4,988		3,271			9,862		6,630
Other		7,098		5,469			13,659		9,709
Total noninterest expense		50,704		37,403			99,270		71,445
Net income before income tax expense		16,657		15,893			35,926		31,605
Income tax expense		3,927		3,508			8,408		7,152
Net income		12,730		12,385			27,518		24,453
Dividends on preferred stock		—		(193	)		—		(383	)
Net income available to common stockholders	$	12,730	$	12,192		$	27,518	$	24,070
Earnings per common share
Basic	$	0.48	$	0.48		$	1.04	$	1.04
Diluted	$	0.48	$	0.47		$	1.03	$	1.02

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollar amounts in thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	12,730		$	12,385		$	27,518		$	24,453
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		1,511			(181	)		3,402			(1,889	)
Reclassification of amount realized through sale of securities		(14	)		—			(3	)		272
Tax effect		(347	)		42			(786	)		364
Total other comprehensive income (loss)		1,150			(139	)		2,613			(1,253	)
Comprehensive income	$	13,880		$	12,246		$	30,131		$	23,200

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollar amounts in thousands)

(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 option exercises, net		—		146			—		(4	)		—		—			—			—			(4	)
Dividends on preferred stock		—		—			—		—			—		—			(190	)		—			(190	)
Net income		—		—			—		—			—		—			12,068			—			12,068
Other comprehensive income (loss)		—		—			—		—			—		—			—			(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
Issuance of common stock, net of issuance costs		—		5,405,000			54		191,999			—		—			—			—			192,053
Issuance of restricted stock awards		—		39,798			1		(1	)		—		—			—			—			—
Stock based compensation		—		—			—		567			—		—			—			—			567
Forfeiture of restricted stock awards		—		(218	)		—		9			218		(9	)		—			—			—
Stock option exercises, net		—		1,220			—		—			—		—			—			—			—
Purchase of treasury stock		—		(9,524	)		—		—			9,524		(392	)		—			—			(392	)
Dividends on preferred stock		—		—			—		—			—		—			(193	)		—			(193	)
Net income		—		—			—		—			—		—			12,385			—			12,385
Other comprehensive income (loss)		—		—			—		—			—		—			—			(139	)		(139	)
Balance, June 30, 2018	$	9,658		26,260,785		$	264	$	457,980			103,267	$	(2,254	)	$	143,426		$	(1,849	)	$	607,225

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 (loss)		—		—			—		—			—		—			—			1,463			1,463
Balance, March 31, 2019	$	—		26,709,411		$	271	$	470,292			352,651	$	(9,881	)	$	185,274		$	260		$	646,216
Issuance of restricted stock awards		—		85,503			—		—			—		—			—			—			—
Stock based compensation		—		—			—		825			—		—			—			—			825
Forfeiture of restricted stock awards		—		(920	)		—		28			920		(28	)		—			—			—
Stock option exercises, net		—		368			—		—			—		—			—			—			—
Purchase of treasury stock		—		(596,054	)		—		—			596,054		(17,559	)		—			—			(17,559	)
Net income		—		—			—		—			—		—			12,730			—			12,730
Other comprehensive income (loss)		—		—			—		—			—		—			—			1,150			1,150
Balance, June 30, 2019	$	—		26,198,308		$	271	$	471,145			949,625	$	(27,468	)	$	198,004		$	1,410		$	643,362

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2019 and 2018

(Dollar amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	27,518		$	24,453
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		4,017			2,435
Net accretion on loans		(2,854	)		(5,614	)
Amortization of subordinated notes issuance costs		54			50
Amortization of junior subordinated debentures		237			226
Net amortization on securities		222			477
Amortization of intangible assets		4,749			2,478
Deferred taxes		372			518
Provision for loan losses		4,695			7,454
Stock based compensation		1,736			1,053
Net (gains) losses on sale of debt securities		(3	)		272
Net (gains) losses on equity securities		(435	)		(25	)
Net OREO (gains) losses and valuation adjustments		(357	)		616
Gain on sale of subsidiary or division		—			(1,071	)
Origination of loans held for sale		(11,703	)		—
Proceeds from sale of loans originated for sale		11,131			—
Net gains on sale of loans		(199	)		—
Net (gain) loss on transfer of loans to loans held for sale		(100	)		—
Net change in operating leases		105			—
(Increase) decrease in other assets		(7,398	)		(4,785	)
Increase (decrease) in other liabilities		2,039			1,442
Net cash provided by (used in) operating activities		33,826			29,979
Cash flows from investing activities:
Purchases of securities available for sale		(77,915	)		—
Proceeds from sales of securities available for sale		40,617			34,196
Proceeds from maturities, calls, and pay downs of securities available for sale		46,445			30,373
Proceeds from maturities, calls, and pay downs of securities held to maturity		379			368
Purchases of loans held for investment		(26,767	)		—
Proceeds from sale of loans		6,331			—
Net change in loans		(209,251	)		(250,851	)
Purchases of premises and equipment, net		(5,623	)		(8,407	)
Net proceeds from sale of OREO		1,598			7,067
Proceeds from surrender of BOLI		—			4,562
(Purchases) redemptions of FHLB stock, net		(2,094	)		(3,217	)
Cash paid for acquisitions, net of cash acquired		—			(160,183	)
Proceeds from sale of subsidiary or division, net		—			73,849
Net cash provided by (used in) investing activities		(226,280	)		(272,243	)
Cash flows from financing activities:
Net increase (decrease) in deposits		208,629			(3,795	)
Increase (decrease) in customer repurchase agreements		8,303			(979	)
Increase (decrease) in Federal Home Loan Bank advances		(25,000	)		55,000
Issuance of common stock, net of issuance costs		—			192,053
Stock option exercises, net		—			(4	)
Purchase of treasury stock		(25,112	)		(392	)
Dividends on preferred stock		—			(383	)
Net cash provided by (used in) financing activities		166,820			241,500
Net increase (decrease) in cash and cash equivalents		(25,634	)		(764	)
Cash and cash equivalents at beginning of period		234,939			134,129
Cash and cash equivalents at end of period	$	209,305		$	133,365

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2019 and 2018

(Dollar amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2019		2018
Supplemental cash flow information:
Interest paid	$	23,239	$	13,646
Income taxes paid, net	$	12,546	$	3,474
Cash paid for operating lease liabilities (See Note 1)	$	2,063	$	—
Supplemental noncash disclosures:
Loans transferred to OREO	$	2,532	$	221
Loans held for investment transferred to loans held for sale	$	6,231	$	—
Premises transferred to OREO	$	—	$	799
Lease liabilities arising from obtaining right-of-use assets (See Note 1)	$	2,149	$	—

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.

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 (“SEC”). 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 and six months ended June 30, 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 does not materially change the Company’s recognition of lease expense. See Note 5 – Leases 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 using the modified retrospective approach. 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.

The Company’s cross-functional implementation team continues to make progress in accordance with the Company’s implementation plan for adoption. The Company has developed new expected credit loss estimation models. 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 is currently finalizing and documenting new processes and controls, challenging estimated credit loss model assumptions and outputs, refining the qualitative framework as well as drafting policies and disclosures. Additionally, parallel runs will be enhanced throughout 2019 as the processes, controls and policies are finalized.

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 estimated 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

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. ICC operates out of offices located in El Paso, Texas and Santa Teresa, New Mexico and provides invoice factoring to small and medium-sized businesses.

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 historical 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 $21,302,000 at June 30, 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.

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 BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $5,479,000 and $5,044,000 at June 30, 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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2019		2018		2019		2018
Unrealized gains (losses) on equity securities still held at the reporting date	$	296	$	100	$	435	$	25
Realized gains (losses) on equity securities sold during the period		—		—		—		—
	$	296	$	100	$	435	$	25

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 estimated fair values are as follows:

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
June 30, 2019	Cost		Gains		Losses			Value
Available for sale securities:
U.S. Government agency obligations	$	79,774	$	92	$	(189	)	$	79,677
Mortgage-backed securities, residential		39,608		587		(47	)		40,148
Asset-backed securities		8,960		—		(43	)		8,917
State and municipal		62,086		376		(29	)		62,433
CLO securities		75,556		203		(10	)		75,749
Corporate bonds		57,631		812		(1	)		58,442
SBA pooled securities		4,542		83		—			4,625
Total available for sale securities	$	328,157	$	2,153	$	(319	)	$	329,991

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
Held to maturity securities:
CLO securities	$	8,573	$	—	$	(1,290	)	$	7,283

			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 securities at June 30, 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	$	96,566	$	96,543	$	—	$	—
Due from one year to five years		85,278		86,238		—		—
Due from five years to ten years		13,725		13,790		6,754		5,631
Due after ten years		79,478		79,730		1,819		1,652
		275,047		276,301		8,573		7,283
Mortgage-backed securities, residential		39,608		40,148		—		—
Asset-backed securities		8,960		8,917		—		—
SBA pooled securities		4,542		4,625		—		—
	$	328,157	$	329,991	$	8,573	$	7,283

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

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2019		2018		2019			2018
Proceeds	$	3,150	$	—	$	40,617		$	34,196
Gross gains		14		—		133			5
Gross losses		—		—		(130	)		(277	)

Debt securities with a carrying amount of approximately $70,423,000 and $80,041,000 at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
June 30, 2019	Value		Losses			Value		Losses			Value		Losses
Available for sale securities:
U.S. Government agency obligations	$	—	$	—		$	51,880	$	(189	)	$	51,880	$	(189	)
Mortgage-backed securities, residential		1,345		(12	)		6,956		(35	)		8,301		(47	)
Asset-backed securities		3,943		(12	)		4,969		(31	)		8,912		(43	)
State and municipal		4,223		(2	)		5,315		(27	)		9,538		(29	)
CLO securities		6,750		(10	)		—		—			6,750		(10	)
Corporate bonds		—		—			149		(1	)		149		(1	)
SBA pooled securities		—		—			10		—			10		—
	$	16,261	$	(36	)	$	69,279	$	(283	)	$	85,540	$	(319	)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
June 30, 2019	Value		Losses			Value		Losses			Value		Losses
Held to maturity securities:
CLO securities	$	2,813	$	(317	)	$	4,470	$	(973	)	$	7,283	$	(1,290	)


	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
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 June 30, 2019, the Company had 97 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 June 30, 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.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	June 30, 2019								December 31, 2018
	Recorded			Unpaid					Recorded			Unpaid
(Dollars in thousands)	Investment			Principal		Difference			Investment			Principal		Difference
Commercial real estate	$	1,098,279		$	1,104,946	$	(6,667	)	$	992,080		$	999,887	$	(7,807	)
Construction, land development, land		157,861			161,728		(3,867	)		179,591			183,664		(4,073	)
1-4 family residential		186,070			187,252		(1,182	)		190,185			191,852		(1,667	)
Farmland		144,594			146,675		(2,081	)		170,540			173,583		(3,043	)
Commercial		1,257,330			1,259,499		(2,169	)		1,114,971			1,118,028		(3,057	)
Factored receivables		583,131			585,080		(1,949	)		617,791			620,103		(2,312	)
Consumer		26,048			26,141		(93	)		29,822			29,956		(134	)
Mortgage warehouse		382,590			382,590		—			313,664			313,664		—
Total		3,835,903		$	3,853,911	$	(18,008	)		3,608,644		$	3,630,737	$	(22,093	)
Allowance for loan and lease losses		(29,416	)							(27,571	)
	$	3,806,487							$	3,581,073

The difference between the recorded investment and the unpaid principal balance is primarily (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $16,004,000 and $19,514,000 at June 30, 2019 and December 31, 2018, respectively, and (2) net deferred origination and factoring fees totaling $2,004,000 and $2,579,000 at June 30, 2019 and December 31, 2018, respectively.

At June 30, 2019 and December 31, 2018, the Company had $56,009,000 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 $1,041,075,000 and $847,523,000 at June 30, 2019 and December 31, 2018, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

During the three and six months ended June 30, 2019, loans with a carrying amount of $6,231,000 were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. These loans were subsequently sold prior to June 30, 2019 resulting in proceeds of $6,331,000 and net gains on sale of loans of $100,000, which were recorded as other noninterest income in the consolidated statements of income. No loans were transferred to loans held for sale or sold during the six months ended June 30, 2018, other than those included in the sale of THF. See Note 2 – Business Combinations and Divestitures for details of the THF sale and its impact on our consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 June 30, 2019	Balance		Provision		Charge-offs			Recoveries		Balance
Commercial real estate	$	5,186	$	504	$	(13	)	$	—	$	5,677
Construction, land development, land		906		125		—			4		1,035
1-4 family residential		367		43		(7	)		6		409
Farmland		578		12		—			—		590
Commercial		12,212		1,937		(334	)		84		13,899
Factored receivables		7,495		799		(1,463	)		30		6,861
Consumer		555		185		(231	)		54		563
Mortgage warehouse		306		76		—			—		382
	$	27,605	$	3,681	$	(2,048	)	$	178	$	29,416

(Dollars in thousands)	Beginning									Ending
Three months ended June 30, 2018	Balance		Provision		Charge-offs			Recoveries		Balance
Commercial real estate	$	3,468	$	337	$	(2	)	$	—	$	3,803
Construction, land development, land		998		25		—			2		1,025
1-4 family residential		248		4		(14	)		2		240
Farmland		618		91		(200	)		—		509
Commercial		9,193		964		(1	)		74		10,230
Factored receivables		4,493		3,317		(116	)		33		7,727
Consumer		719		110		(234	)		75		670
Mortgage warehouse		285		58		—			—		343
	$	20,022	$	4,906	$	(567	)	$	186	$	24,547

(Dollars in thousands)	Beginning										Ending
Six months ended June 30, 2019	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	4,493	$	1,196		$	(13	)	$	1	$	5,677
Construction, land development, land		1,134		(110	)		(78	)		89		1,035
1-4 family residential		317		82			(43	)		53		409
Farmland		535		55			—			—		590
Commercial		12,865		2,057			(1,114	)		91		13,899
Factored receivables		7,299		988			(1,472	)		46		6,861
Consumer		615		358			(509	)		99		563
Mortgage warehouse		313		69			—			—		382
	$	27,571	$	4,695		$	(3,229	)	$	379	$	29,416

(Dollars in thousands)	Beginning										Ending
Six months ended June 30, 2018	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	3,435	$	370		$	(2	)	$	—	$	3,803
Construction, land development, land		883		132			—			10		1,025
1-4 family residential		293		(44	)		(14	)		5		240
Farmland		310		399			(200	)		—		509
Commercial		8,150		2,571			(627	)		136		10,230
Factored receivables		4,597		3,786			(700	)		44		7,727
Consumer		783		194			(490	)		183		670
Mortgage warehouse		297		46			—			—		343
	$	18,748	$	7,454		$	(2,033	)	$	378	$	24,547

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
June 30, 2019	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	6,747	$	1,081,409	$	10,123	$	1,098,279	$	522	$	5,155	$	—	$	5,677
Construction, land development, land		1,016		150,205		6,640		157,861		21		1,014		—		1,035
1-4 family residential		2,386		183,155		529		186,070		142		267		—		409
Farmland		6,525		137,962		107		144,594		72		518		—		590
Commercial		14,802		1,241,582		946		1,257,330		2,016		11,879		4		13,899
Factored receivables		8,754		574,377		—		583,131		2,336		4,525		—		6,861
Consumer		448		25,600		—		26,048		9		554		—		563
Mortgage warehouse		—		382,590		—		382,590		—		382		—		382
	$	40,678	$	3,776,880	$	18,345	$	3,835,903	$	5,118	$	24,294	$	4	$	29,416

(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		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
June 30, 2019	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	974	$	997	$	522	$	5,773	$	5,897
Construction, land development, land		91		91		21		925		1,028
1-4 family residential		219		201		142		2,167		2,285
Farmland		914		900		72		5,611		5,846
Commercial		4,502		4,527		2,016		10,300		10,453
Factored receivables		8,754		8,754		2,336		—		—
Consumer		21		20		9		427		427
Mortgage warehouse		—		—		—		—		—
PCI		71		55		4		—		—
	$	15,546	$	15,545	$	5,122	$	25,203	$	25,936

	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		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

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended				Three Months Ended
	June 30, 2019				June 30, 2018
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	7,165	$	50	$	3,378	$	6
Construction, land development, land		1,018		—		140		—
1-4 family residential		1,907		11		2,251		2
Farmland		6,520		45		3,834		10
Commercial		13,800		69		29,088		174
Factored receivables		8,537		—		4,175		—
Consumer		423		2		346		—
Mortgage warehouse		—		—		—		—
PCI		71		—		40		—
	$	39,441	$	177	$	43,252	$	192

	Six Months Ended				Six Months Ended
	June 30, 2019				June 30, 2018
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	6,922	$	50	$	3,443	$	6
Construction, land development, land		553		—		138		—
1-4 family residential		2,360		12		2,404		4
Farmland		6,974		90		3,657		17
Commercial		15,978		121		28,047		664
Factored receivables		7,756		—		4,666		—
Consumer		402		2		323		1
Mortgage warehouse		—		—		—		—
PCI		71		—		40		—
	$	41,016	$	275	$	42,718	$	692

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
June 30, 2019	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	2,405	$	—	$	6,749	$	9,154
Construction, land development, land		229		—		1,016		1,245
1-4 family residential		1,973		18		2,310		4,301
Farmland		1,622		—		3,064		4,686
Commercial		5,638		—		12,261		17,899
Factored receivables		25,983		5,441		—		31,424
Consumer		682		3		448		1,133
Mortgage warehouse		—		—		—		—
PCI		4		—		3,166		3,170
	$	38,536	$	5,462	$	29,014	$	73,012

	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		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)	June 30, 2019		December 31, 2018
Nonaccrual loans⁽¹⁾	$	29,014	$	30,785
Factored receivables greater than 90 days past due		5,441		2,152
Troubled debt restructurings accruing interest		2,355		3,117
	$	36,810	$	36,054

⁽¹⁾

Includes troubled debt restructurings of $5,279,000 and $3,730,000 at June 30, 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 June 30, 2019 and December 31, 2018, based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)
June 30, 2019	Pass		Classified		PCI		Total
Commercial real estate	$	1,082,031	$	6,125	$	10,123	$	1,098,279
Construction, land development, land		150,205		1,016		6,640		157,861
1-4 family residential		183,141		2,400		529		186,070
Farmland		136,525		7,962		107		144,594
Commercial		1,239,385		16,999		946		1,257,330
Factored receivables		574,926		8,205		—		583,131
Consumer		25,595		453		—		26,048
Mortgage warehouse		382,590		—		—		382,590
	$	3,774,398	$	43,160	$	18,345	$	3,835,903

(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 $7,634,000 and $6,847,000 as of June 30, 2019 and December 31, 2018, respectively. The Company had allocated specific allowances for these loans of $649,000 and $286,000 at June 30, 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 and six months ended June 30, 2019 and 2018. The Company did not grant principal reductions on any restructured loans.

	Extended
	Amortization		Payment		AB Note		Interest Rate		Total		Number of
(Dollars in thousands)	Period		Deferrals		Restructure		Reduction		Modifications		Loans
Six months ended June 30, 2019
Commercial real estate	$	—	$	—	$	4,597	$	—	$	4,597		1
Commercial		1,096		84		—		593		1,773		5
	$	1,096	$	84	$	4,597	$	593	$	6,370		6

Three months ended June 30, 2019
Commercial real estate	$	—	$	—	$	4,597	$	—	$	4,597		1
Commercial		1,096		—		—		593		1,689		3
	$	1,096	$	—	$	4,597	$	593	$	6,286		4

Six months ended June 30, 2018
1-4 family residential	$	110	$	—	$	—	$	—	$	110		3
Commercial		75		—		—		—		75		2
	$	185	$	—	$	—	$	—	$	185		5

There were no loans modified as troubled debt restructurings during the three months ended June 30, 2018.

During the six months ended June 30, 2019, the Company had one relationship consisting of seven loans modified as troubled debt restructurings with a recorded investment of $688,000 for which there were payment defaults within twelve months following the modification. During the six months ended June 30, 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 June 30, 2019, the Company had $184,000 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 at June 30, 2019 and December 31, 2018, are as follows:

	June 30,		December 31,
	2019		2018
Contractually required principal and interest:
Real estate loans	$	21,524	$	22,644
Commercial loans		3,152		4,078
Outstanding contractually required principal and interest	$	24,676	$	26,722
Gross carrying amount included in loans receivable	$	18,345	$	20,068

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The changes in accretable yield during the three and six months ended June 30, 2019 and 2018 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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Accretable yield, beginning balance	$	5,283		$	2,442		$	5,711		$	2,793
Additions		—			—			—			—
Accretion		(358	)		(354	)		(768	)		(738	)
Reclassification from nonaccretable to accretable yield		14			17			14			50
Disposals		(146	)		—			(164	)		—
Accretable yield, ending balance	$	4,793		$	2,105		$	4,793		$	2,105

NOTE 5 – LEASES

The Company leases certain premises and equipment under operating leases. At June 30, 2019, the Company had lease liabilities totaling $22,393,000 and right-of-use assets totaling $22,493,000 related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the six months ended June 30, 2019, the weighted average remaining lease term for operating leases was 6.9 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		Six Months Ended
(Dollars in thousands)	June 30, 2019		June 30, 2019
Operating lease cost	$	1,115	$	2,168
Short-term lease cost		—		—
Variable lease cost		82		196
Total lease cost	$	1,197	$	2,364

Rent expense for the three and six months ended June 30, 2018, prior to the adoption of ASU 2016-02, was $700,000 and $1,299,000, respectively.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the six months ended June 30, 2019. At June 30, 2019, the Company did not have any leases that had not yet commenced, but will create significant rights and obligations 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)	June 30, 2019
Lease payments due:
Within one year	$	4,008
After one but within two years		4,108
After two but within three years		3,773
After three but within four years		3,325
After four but within five years		2,999
After five years		7,048
Total undiscounted cash flows		25,261
Discount on cash flows		(2,868	)
Total lease liability	$	22,393

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

(Dollars in thousands)		June 30, 2019				December 31, 2018
Goodwill		$	158,743			$	158,743

	June 30, 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	$	(19,368	)	$	24,210	$	43,578	$	(16,266	)	$	27,312
Other intangible assets		15,700		(3,985	)		11,715		15,700		(2,338	)		13,362
	$	59,278	$	(23,353	)	$	35,925	$	59,278	$	(18,604	)	$	40,674

The changes in goodwill and intangible assets during the three and six months ended June 30, 2019 and 2018 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2019			2018			2019			2018
Beginning balance	$	197,015		$	63,923		$	199,417		$	63,778
Acquired goodwill		—			42,975			—			42,975
Goodwill measurement period adjustment		—			(1,680	)		—			—
Acquired intangibles		—			13,920			—			13,935
Divestiture		—			—			—			(433	)
Amortization of intangibles		(2,347	)		(1,361	)		(4,749	)		(2,478	)
Ending balance	$	194,668		$	117,777		$	194,668		$	117,777

NOTE 7 – Variable Interest Entities

Collateralized Loan Obligation Funds – Closed

The Company holds investments in the subordinated notes of the following closed Collateralized Loan Obligation (“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 $8,573,000 and $8,487,000 at June 30, 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, will have no material effect on the Company’s consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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

	June 30, 2019						December 31, 2018
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Unused lines of credit	$	58,057	$	424,739	$	482,796	$	69,053	$	433,667	$	502,720
Standby letters of credit	$	5,012	$	4,815	$	9,827	$	2,285	$	3,931	$	6,216
Commitments to purchase loans	$	—	$	29,000	$	29,000	$	—	$	—	$	—
Mortgage warehouse commitments	$	—	$	262,226	$	262,226	$	—	$	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.

Commitments to purchase loans represent loans purchased by the Company that have not yet settled.

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 June 30, 2019 and December 31, 2018, the allowance for loan and lease losses on off-balance sheet lending-related commitments totaled $504,000 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 $2,734,000 and $3,087,000 at June 30, 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:

Form: 10-Q

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