October 19, 2022 - 10-Q: Quarterly report [Sections 13 or 15(d)]

Table of Contents

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 September 30, 2022


☐			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 x No o

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 x No o

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	x	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 o

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

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, 24,478,288 shares, as of October 17, 2022.

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

Depositary Shares Each Representing a 1/40th Interest in a Share of 7.125% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share

TBKCP

NASDAQ Global Select Market

Table of Contents

TRIUMPH BANCORP, INC.

FORM 10-Q

September 30, 2022

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	7
	Condensed Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	95

Item 4.	Controls and Procedures	96

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	96

Item 1A.	Risk Factors	96

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96

Item 3.	Defaults Upon Senior Securities	97

Item 4.	Mine Safety Disclosures	97

Item 5.	Other Information	97

Item 6.	Exhibits	97

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

Table of Contents

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2022 and December 31, 2021

(Dollar amounts in thousands)


	September 30, 2022		December 31, 2021
	(Unaudited)
ASSETS
Cash and due from banks	$	139,937	$	122,929
Interest bearing deposits with other banks	281,792		260,249
Total cash and cash equivalents	421,729		383,178
Securities - equity investments with readily determinable fair values	4,916		5,504
Securities - available for sale	238,434		182,426
Securities - held to maturity, net of allowance for credit losses of $2,430 and $2,082, respectively, fair value of $5,603 and $5,447, respectively	4,149		4,947
Loans held for sale	78		7,330
Loans, net of allowance for credit losses of $44,111 and $42,213, respectively	4,389,193		4,825,359
Federal Home Loan Bank and other restricted stock	6,213		10,146
Premises and equipment, net	104,272		105,729
Other real estate owned, net	—		524
Goodwill	233,709		233,727
Intangible assets, net	34,895		43,129
Bank-owned life insurance	41,390		40,993
Deferred tax asset, net	14,663		10,023
Indemnification asset	4,173		4,786
Other assets	144,636		98,449
Total assets	$	5,642,450	$	5,956,250
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing	$	1,897,309	$	1,925,370
Interest bearing	2,544,045		2,721,309
Total deposits	4,441,354		4,646,679
Customer repurchase agreements	13,463		2,103
Federal Home Loan Bank advances	30,000		180,000
Paycheck Protection Program Liquidity Facility	—		27,144
Subordinated notes	107,587		106,957
Junior subordinated debentures	41,016		40,602
Other liabilities	117,857		93,901
Total liabilities	4,751,277		5,097,386
Commitments and contingencies - See Note 9 and Note 10
Stockholders' equity - See Note 13
Preferred stock	45,000		45,000
Common stock, 24,478,288 and 25,158,879 shares outstanding, respectively	283		283
Additional paid-in-capital	529,804		510,939
Treasury stock, at cost	(156,949)		(104,743)
Retained earnings	481,697		399,351
Accumulated other comprehensive income (loss)	(8,662)		8,034
Total stockholders’ equity	891,173		858,864
Total liabilities and stockholders' equity	$	5,642,450	$	5,956,250

See accompanying condensed notes to consolidated financial statements.

Table of Contents

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2022 and 2021

(Dollar amounts in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest and dividend income:
Loans, including fees	$	44,928	$	44,882	$	129,906	$	139,576
Factored receivables, including fees	53,317		50,516		174,549		135,639
Securities	2,308		1,126		4,815		3,963
FHLB and other restricted stock	65		28		175		131
Cash deposits	2,607		183		3,522		467
Total interest income	103,225		96,735		312,967		279,776
Interest expense:
Deposits	2,743		1,948		7,010		7,790
Subordinated notes	1,304		2,449		3,905		5,148
Junior subordinated debentures	726		443		1,736		1,331
Other borrowings	182		124		539		434
Total interest expense	4,955		4,964		13,190		14,703
Net interest income	98,270		91,771		299,777		265,073
Credit loss expense (benefit)	2,646		(1,187)		6,048		(10,838)
Net interest income after credit loss expense (benefit)	95,624		92,958		293,729		275,911
Noninterest income:
Service charges on deposits	1,558		2,030		5,185		5,674
Card income	2,034		2,144		6,125		6,341
Net OREO gains (losses) and valuation adjustments	(19)		(9)		(133)		(376)
Net gains (losses) on sale or call of securities	—		4		2,514		5
Net gains (losses) on sale of loans	1,107		377		18,310		2,965
Fee income	6,120		5,198		18,096		11,917
Insurance commissions	1,191		1,231		4,209		3,989
Other	677		1,080		17,643		9,727
Total noninterest income	12,668		12,055		71,949		40,242
Noninterest expense:
Salaries and employee benefits	49,307		43,769		149,848		121,407
Occupancy, furniture and equipment	6,826		6,388		19,769		18,279
FDIC insurance and other regulatory assessments	386		353		1,179		1,830
Professional fees	4,263		2,362		11,529		9,959
Amortization of intangible assets	2,913		3,274		9,085		7,677
Advertising and promotion	1,929		1,403		4,916		3,534
Communications and technology	11,935		7,090		30,867		19,018
Other	9,130		8,174		26,667		22,799
Total noninterest expense	86,689		72,813		253,860		204,503
Net income before income tax expense	21,603		32,200		111,818		111,650
Income tax expense	5,374		7,771		27,068		25,316
Net income	$	16,229	$	24,429	$	84,750	$	86,334
Dividends on preferred stock	(801)		(802)		(2,404)		(2,405)
Net income available to common stockholders	$	15,428	$	23,627	$	82,346	$	83,929
Earnings per common share
Basic	$	0.64	$	0.95	$	3.36	$	3.40
Diluted	$	0.62	$	0.94	$	3.28	$	3.33

See accompanying condensed notes to consolidated financial statements.

Table of Contents

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2022 and 2021

(Dollar amounts in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	16,229	$	24,429	$	84,750	$	86,334
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	(4,806)		(378)		(13,164)		(1,303)
Tax effect	1,127		89		3,067		300
Unrealized holding gains (losses) arising during the period, net of taxes	(3,679)		(289)		(10,097)		(1,003)
Reclassification of amount realized through sale or call of securities	—		(4)		(2,514)		(5)
Tax effect	—		1		620		1
Reclassification of amount realized through sale or call of securities, net of taxes	—		(3)		(1,894)		(4)
Change in unrealized gains (losses) on securities, net of tax	(3,679)		(292)		(11,991)		(1,007)

Unrealized gains (losses) on derivative financial instruments:
Unrealized holding gains (losses) arising during the period	—		(9)		3,152		3,062
Tax effect	—		2		(754)		(729)
Unrealized holding gains (losses) arising during the period, net of taxes	—		(7)		2,398		2,333
Reclassification of amount of (gains) losses recognized into income	—		18		(9,316)		70
Tax effect	—		(4)		2,213		(17)
Reclassification of amount of (gains) losses recognized into income, net of taxes	—		14		(7,103)		53
Change in unrealized gains (losses) on derivative financial instruments	—		7		(4,705)		2,386

Total other comprehensive income (loss)	(3,679)		(285)		(16,696)		1,379
Comprehensive income	$	12,550	$	24,144	$	68,054	$	87,713

See accompanying condensed notes to consolidated financial statements.

Table of Contents

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2022 and 2021

(Dollar amounts in thousands)

(Unaudited)


	Preferred Stock		Common Stock			Additional Paid-in- Capital		Treasury Stock			Retained Earnings		Accumulated		Total Stockholders' Equity
	Liquidation Preference Amount		Shares Outstanding	Par Amount				Shares Outstanding	Cost				Other Comprehensive Income (Loss)
Balance, January 1, 2022	$	45,000	25,158,879	$	283	$	510,939	3,102,801	$	(104,743)	$	399,351	$	8,034	$	858,864
Issuance of restricted stock awards	—		5,502	—		—		—	—		—		—		—
Stock option exercises, net	—		2,021	—		(74)		—	—		—		—		(74)
Issuance of common stock pursuant to the Employee Stock Purchase Plan	—		10,585	—		688		—	—		—		—		688
Stock based compensation	—		—	—		4,952		—	—		—		—		4,952
Forfeiture of restricted stock awards	—		(487)	—		46		487	(46)		—		—		—
Purchase of treasury stock	—		(14,810)	—		—		14,810	(1,316)		—		—		(1,316)
Dividends on preferred stock	—		—	—		—		—	—		(801)		—		(801)
Net income	—		—	—		—		—	—		24,329		—		24,329
Other comprehensive income (loss)	—		—	—		—		—	—		—		23		23
Balance, March 31, 2022	$	45,000	25,161,690	$	283	$	516,551	3,118,098	$	(106,105)	$	422,879	$	8,057	886,665

Vesting of performance stock units	—		20,996	—		—		—	—		—		—		—
Stock option exercises, net	—		32	—		—		—	—		—		—		—
Stock based compensation	—		—	—		7,880		—	—		—		—		7,880
Forfeiture of restricted stock awards	—		(2,417)	—		205		2,417	(205)		—		—		—
Purchase of treasury stock	—		(722,524)	—		—		722,524	(50,614)		—		—		(50,614)
Dividends on preferred stock	—		—	—		—		—	—		(802)		—		(802)
Net income	—		—	—		—		—	—		44,192		—		44,192
Other comprehensive income (loss)	—		—	—		—		—	—		—		(13,040)		(13,040)
Balance, June 30, 2022	$	45,000	24,457,777	$	283	$	524,636	3,843,039	$	(156,924)	$	466,269	$	(4,983)	874,281
Issuance of restricted stock awards	—		6,969	—		—		—	—		—		—		—

Stock based compensation	—		—	—		4,296		—	—		—		—		4,296
Forfeiture of restricted stock awards	—		(194)	—		12		194	(12)		—		—		—
Issuance of common stock pursuant to the employee stock purchase plan	—		13,931	—		860		—	—		—		—		860
Purchase of treasury stock	—		(195)	—		—		195	(13)		—		—		(13)
Dividends declared	—		—	—		—		—	—		(801)		—		(801)
Net income	—		—	—		—		—	—		16,229		—		16,229
Other comprehensive income (loss)	—		—	—		—		—	—		—		(3,679)		(3,679)
Balance, September 30, 2022	$	45,000	24,478,288	$	283	$	529,804	3,843,428	$	(156,949)	$	481,697	$	(8,662)	$	891,173

Table of Contents


	Preferred Stock		Common Stock			Additional Paid-in- Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Liquidation Preference Amount		Shares Outstanding	Par Amount				Shares Outstanding	Cost
Balance, January 1, 2021	$	45,000	24,868,218	$	280	$	489,151	3,083,503	$	(103,052)	$	289,583	$	5,819	$	726,781
Issuance of restricted stock awards	—		4,613	—		—		—	—		—		—		—
Stock option exercises, net	—		10,205	—		191		—	—		—		—		191
Stock based compensation	—		—	—		1,350		—	—		—		—		1,350
Forfeiture of restricted stock awards	—		(107)	—		7		107	(7)		—		—		—
Dividends on preferred stock	—		—	—		—		—	—		(801)		—		(801)
Net income	—		—	—		—		—	—		33,923		—		33,923
Other comprehensive income (loss)	—		—	—		—		—	—		—		2,560		2,560
Balance, March 31, 2021	$	45,000	24,882,929	$	280	$	490,699	3,083,610	$	(103,059)	$	322,705	$	8,379	$	764,004
Issuance of restricted stock awards	—		224,287	2		(2)		—	—		—		—		—
Stock option exercises, net	—		18,934	—		(45)		—	—		—		—		(45)
Stock based compensation	—		—	—		3,386		—	—		—		—		3,386
Forfeiture of restricted stock awards	—		(2,278)	—		186		2,278	(186)		—		—		—
Purchase of treasury stock	—		(14,169)	—		—		14,169	(1,241)		—		—		(1,241)
Dividends on preferred stock	—		—	—		—		—	—		(802)		—		(802)
Net income	—		—	—		—		—	—		27,982		—		27,982
Other comprehensive income (loss)	—		—	—		—		—	—		—		(896)		(896)
Balance, June 30, 2021	$	45,000	25,109,703	$	282	$	494,224	3,100,057	$	(104,486)	$	349,885	$	7,483	$	792,388
Issuance of restricted stock awards	—		3,651	—		—		—	—		—		—		—
Stock option exercises, net	—		2,409	—		50		—	—		—		—		50
Stock based compensation	—		—	—		4,445		—	—		—		—		4,445
Forfeiture of restricted stock awards	—		(1,522)	—		114		1,522	(114)		—		—		—
Issuance of common stock pursuant to the ESPP	—		9,101	—		449		—	—		—		—		449
Dividends declared	—		—	—		—		—	—		(802)		—		(802)
Net income	—		—	—		—		—	—		24,429		—		24,429
Other comprehensive income (loss)	—		—	—		—		—	—		—		(285)		(285)
Balance, September 30, 2021	$	45,000	25,123,342	$	282	$	499,282	3,101,579	$	(104,600)	$	373,512	$	7,198	$	820,674

See accompanying condensed notes to consolidated financial statements.

Table of Contents

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2022 and 2021

(Dollar amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	84,750	$	86,334
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	9,979		8,992
Net accretion on loans	(6,631)		(7,615)
Amortization of subordinated notes issuance costs	630		1,022
Amortization of junior subordinated debentures	414		395
Net (accretion) amortization on securities	(609)		(465)
Amortization of intangible assets	9,085		7,677
Deferred taxes	524		5,432
Credit loss expense (benefit)	6,048		(10,838)
Stock based compensation	17,128		9,181
Net (gains) losses on sale or call of debt securities	(2,514)		(5)
Net (gains) losses on equity securities	(9,575)		203
Net OREO (gains) losses and valuation adjustments	133		376
Origination of loans held for sale	(10,402)		(32,645)
Purchases of loans held for sale	(6,913)		(19,001)
Proceeds from sale of loans originated or purchased for sale	17,673		50,931
Net (gains) losses on sale of loans	(18,310)		(2,965)
Net change in operating leases	272		468
(Increase) decrease in other assets	(37,308)		(19,275)
Increase (decrease) in other liabilities	9,107		11,071
Net cash provided by (used in) operating activities	63,481		89,273
Cash flows from investing activities:
Purchases of securities available for sale	(117,440)		(18,250)
Proceeds from sales of securities available for sale	40,163		—
Proceeds from maturities, calls, and pay downs of securities available for sale	23,562		76,864
Proceeds from maturities, calls, and pay downs of securities held to maturity	578		762
Purchases of loans held for investment	(133,674)		(77,571)
Proceeds from sale of loans	207,406		63,028
Net change in loans	285,854		227,650
Purchases of premises and equipment, net	(8,522)		(9,899)
Net proceeds from sale of OREO	438		807
(Purchases) redemptions of FHLB and other restricted stock, net	3,933		1,850
Net cash (paid for) received in acquisitions	—		(96,926)
Proceeds from sale of disposal group	85,923		—
Net cash provided by (used in) investing activities	388,221		168,315
Cash flows from financing activities:
Net increase (decrease) in deposits	(194,494)		105,975
Increase (decrease) in customer repurchase agreements	11,360		8,891
Increase (decrease) in Federal Home Loan Bank advances	(150,000)		(75,000)
Proceeds from other borrowings, net	—		294,854
Repayment of other borrowings	(27,144)		(370,936)
Preferred dividends	(2,404)		(2,405)
Stock option exercises, net	(74)		196
Proceeds from employee stock purchase plan common stock issuance	1,548		449
Purchase of treasury stock	(51,943)		(1,241)
Net cash provided by (used in) financing activities	(413,151)		(39,217)
Net increase (decrease) in cash and cash equivalents	38,551		218,371
Cash and cash equivalents at beginning of period	383,178		314,393
Cash and cash equivalents at end of period	421,729		532,764

See accompanying condensed notes to consolidated financial statements.

Table of Contents

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2022 and 2021

(Dollar amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Supplemental cash flow information:
Interest paid	$	11,416	$	15,551
Income taxes paid, net	$	45,035	$	36,353
Cash paid for operating lease liabilities	$	2,691	$	3,440
Supplemental noncash disclosures:
Loans transferred to OREO	$	47	$	644
Loans held for investment transferred to loans held for sale	$	197,899	$	76,976
Assets transferred to assets held for sale	$	80,819	$	—
Deposits transferred to deposits held for sale	$	10,434	$	—
Lease liabilities arising from obtaining right-of-use assets	$	5,267	$	19,404
Securities available for sale purchased, not settled	$	14,976	$	—
Indemnification reduction	$	—	$	35,633
Non-cash consideration received from sale of loan portfolio or disposal group	$	5,529	$	—

Table of Contents

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 offering a diversified line of payments, factoring and banking services. 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”). TriumphPay operates as a division of TBK Bank, SSB.

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, 2021. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Operating Segments

The Company’s reportable segments are comprised of strategic business units primarily based upon industry categories and, to a lesser extent, the core competencies relating to product origination, distribution methods, operations and servicing. Segment determination also considered organizational structure and is consistent with the presentation of financial information to the chief operating decision maker to evaluate segment performance, develop strategy, and allocate resources. The Company's chief operating decision maker is the Chief Executive Officer of Triumph Bancorp, Inc. Management has determined that the Company has four reportable segments consisting of Banking, Factoring, Payments, and Corporate.

The Banking segment includes the operations of TBK Bank. The Banking segment derives its revenue principally from investments in interest-earning assets as well as noninterest income typical for the banking industry.

The Factoring segment includes the operations of TBC with revenue derived from factoring services.

The Payments segment includes the operations of the TBK Bank's TriumphPay division, which is the payments network for presentment, audit, and payment of over-the-road trucking invoices. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a carrier a quickpay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering freight brokers the ability to settle their invoices with us on an extended term following our payment to their carriers as an additional liquidity option for such freight brokers.

The Corporate segment includes holding company financing and investment activities and management and administrative expenses to support the overall operations of the Company.

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Newly Issued, But Not Yet Effective Accounting Standards

In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-02, "Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss ("CECL") model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13"). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost".

ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements and related disclosures.

NOTE 2 — ACQUISITIONS AND DIVESTITURES

Equipment Loan Sale

During the quarter ended June 30, 2022, the Company made the decision to sell a portfolio of equipment loans for cash consideration. The sale closed on June 23, 2022. A summary of the carrying amount of the assets sold and the gain on sale is as follows:


(Dollars in thousands)
Equipment loans	$	191,167
Accrued interest receivable	$	1,587
Assets sold	$	192,754

Cash consideration	$	197,454
Return of premium liability	$	(708)
Total consideration	$	196,746
Transaction costs	$	73
Gain on sale, net of transaction costs	$	3,919

The associated agreement contains a provision that in the event that a sold loan is prepaid in full prior to the due date of the final scheduled contractual payment, the Company will return a pro-rata portion of the premium calculated as of the date of such prepayment in full. As this transaction qualified as a sale of a group of entire financial assets, management must recognize, as proceeds, any assets obtained and liabilities incurred. Thus, management recorded a $708,000 liability for the potential return of premium measured at fair value as of the date of close. Management has elected the fair value option to account for the liability. It is recorded in other liabilities in the Company's Consolidated Balance Sheet and is marked to fair value through earnings at each reporting period.

The gain on sale, net of transaction costs, was included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income and was allocated to the Banking segment.

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Factored Receivable Disposal Group

On June 30, 2022 and September 6, 2022, the Company entered into and closed two separate agreements to sell two separate portfolios of factored receivables. A summary of the carrying amounts of the assets and liabilities sold and the gains on sale are as follows:


(Dollars in thousands)	September 6, 2022		June 30, 2022		Total
Factored receivables	$	20,131	$	67,888	$	88,019
Accrued interest and fee income	17		—		17
Assets held for sale	$	20,148	$	67,888	$	88,036

Customer reserve noninterest bearing deposits	$	1,149	$	9,682	$	10,831
Liabilities held for sale	$	1,149	$	9,682	$	10,831
Net assets sold	$	18,999	$	58,206	$	77,205
Cash consideration	$	19,054	$	66,292	$	85,346
Revenue share asset	1,027		5,210		6,237
Total consideration	$	20,081	$	71,502	$	91,583
Transaction costs	49		82		131
Gain on sale, net of transaction costs	$	1,033	$	13,214	$	14,247

The June 30, 2022 agreement contains a revenue share provision that entitles the Company to an amount equal to fifteen percent of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. As this transaction qualified as a sale of a group of entire financial assets, management recognized, as proceeds, the assets obtained and liabilities incurred. Thus, management recorded a $5,210,000 asset for the contractual right to receive future cash flows from a third party measured at fair value as of the date of close. This is a financial asset for which management elected the fair value option. It is recorded in other assets in the Company's Consolidated Balance Sheet and is marked to fair value through earnings at each reporting period.

The September 6, 2022 agreement contains a revenue share provision that entitles the Company to an amount equal to a range of fifteen to twenty percent, depending on client, of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. As this transaction qualified as a sale of a group of entire financial assets, management recognized, as proceeds, the assets obtained and liabilities incurred. Thus, management recorded a $1,027,000 asset for the contractual right to receive future cash flows from a third party measured at fair value as of the date of close. This is a financial asset for which management elected the fair value option. It is recorded in other assets in the Company's Consolidated Balance Sheet and will be marked to fair value through earnings at each reporting period.

The gains on sale, net of transaction costs, were included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income and were allocated to the Factoring segment.

HubTran Inc.

On June 1, 2021, the Company, through TriumphPay, a division of the Company's wholly-owned subsidiary TBK Bank, SSB, acquired HubTran, Inc. ("HubTran"), a cloud-based provider of automation software for the trucking industry's back-office.

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


(Dollars in thousands)	Initial Values		Measurement Period Adjustments		Adjusted Values
Assets acquired:
Cash	$	170	$	—	$	170
Intangible assets - capitalized software	16,932		—		16,932
Intangible assets - customer relationship	10,360		—		10,360
Other assets	1,546		24		1,570
	29,008		24		29,032
Liabilities assumed:
Deferred income taxes	4,703		(3,248)		1,455
Other liabilities	906		16		922
	5,609		(3,232)		2,377
Fair value of net assets acquired	$	23,399	$	3,256	$	26,655
Consideration:
Cash paid	$	97,096	$	—	$	97,096
Goodwill	$	73,697	$	(3,256)	$	70,441

The Company has recognized goodwill of $70,441,000, which included measurement period adjustments related to customary settlement adjustments and the finalization of the HubTran stub period tax return and its impact on the acquired deferred tax liability. Goodwill was calculated as the excess of the fair value of consideration exchanged as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Payments segment. The goodwill in this acquisition resulted from expected synergies and progress in the development of a fully integrated open loop payments network for the transportation industry. The goodwill will not be deducted for tax purposes.

The intangible assets recognized include a capitalized software intangible asset with an acquisition date fair value of $16,932,000 which will be amortized on a straight-line basis over its four year estimated useful life and customer relationship intangible assets with an acquisition date fair value of $10,360,000 which will be amortized utilizing an accelerated method over their eleven year estimated useful lives.

Revenue and earnings of HubTran 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 $2,992,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended June 30, 2021.

Transportation Financial Solutions

On July 8, 2020, the Company, through its wholly-owned subsidiary Advance Business Capital LLC (“ABC”), acquired the transportation factoring assets (the “TFS Acquisition”) of Transport Financial Solutions (“TFS”), a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), in exchange for cash consideration of $108,375,000, 630,268 shares of the Company’s common stock valued at approximately $13,942,000, and contingent consideration of up to approximately $9,900,000 to be paid in cash following the twelve-month period ending July 31, 2021.

Subsequent to the closing of the TFS Acquisition, the Company identified that approximately $62,200,000 of the assets acquired at closing were advances against future payments to be made to three large clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements between the obligor on such contracts and such clients (and their affiliated entities) for services that had not yet been performed.

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On September 23, 2020, the Company and ABC entered into an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (the “Agreement”) with CVLG and Covenant Transport Solutions, LLC, a wholly owned subsidiary of CVLG (“CTS” and, together with CVLG, "Covenant"). Pursuant to the Agreement, the parties agreed to certain amendments to that certain Accounts Receivable Purchase Agreement (the “ARPA”), dated as of July 8, 2020, by and among ABC, as buyer, CTS, as seller, and the Company, as buyer indirect parent. Such amendments include:

•Return of the portion of the purchase price paid under the ARPA consisting of 630,268 shares of Company common stock, which will be accomplished through the sale of such shares by Covenant pursuant to the terms of the Agreement and the surrender of the cash proceeds of such sale (net of brokerage or underwriting fees and commissions) to the Company;

•Elimination of the earn-out consideration potentially payable to CTS under the ARPA; and

•Modification of the indemnity provisions under the ARPA to eliminate the existing indemnifications for breaches of representations and warranties and to replace such with a newly established indemnification by Covenant in the event ABC incurs losses related to the $62,200,000 in over-formula advances made to specified clients identified in the Agreement (the “Over-Formula Advance Portfolio”). Under the terms of the new indemnification arrangement, Covenant will be responsible for and will indemnify ABC for 100% of the first $30,000,000 of any losses incurred by ABC related to the Over-Formula Advance Portfolio, and for 50% of the next $30,000,000 of any losses incurred by ABC, for total indemnification by Covenant of $45,000,000.

Covenant’s indemnification obligations under the Agreement were secured by a pledge of equipment collateral by Covenant with an estimated net orderly liquidation value of $60,000,000 (the “Equipment Collateral”). The Company’s wholly-owned bank subsidiary, TBK Bank, SSB, has provided Covenant with a $45,000,000 line of credit, also secured by the Equipment Collateral, the proceeds of which may be drawn to satisfy Covenant’s indemnification obligations under the Agreement.

Pursuant to the Agreement, Triumph and Covenant have agreed to certain terms related to the management of the Over-Formula Advance Portfolio, and the terms by which Covenant may provide assistance to maximize recovery on the Over-Formula Advance Portfolio.

Pursuant to the Agreement, the Company and Covenant have provided mutual releases to each other related to any and all claims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio.

The indemnification asset created by the ARPA is measured separately from the related covered portfolio. It is not contractually embedded in the covered portfolio nor is it transferable with the covered portfolio should the Company choose to dispose of the portfolio or a portion of the portfolio. The indemnification asset was initially recorded in other assets in the Consolidated Balance Sheets at the time of the TFS Acquisition at a fair value of $30,959,000, measured as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio. These cash flows were discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. The amount ultimately collected for this asset will be dependent upon the performance of the underlying covered portfolio, the passage of time, and Covenant's willingness and ability to make necessary payments. The terms of the Agreement are such that indemnification has no expiration date and the Company will continue to carry the indemnification asset until ultimate resolution of the covered portfolio. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income, as appropriate, within the Consolidated Statements of Income. The value of the indemnification asset was $4,173,000 and $4,786,000 at September 30, 2022 and December 31, 2021, respectively.

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(Unaudited)

During the three months ended March 31, 2021, new adverse developments with the largest of the three Over-Formula Advance clients caused the Company to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $41,265,000; however, this net charge-off had no impact on credit loss expense for the three months ended March 31, 2021 as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed the Company for $35,633,000 of this charge-off by drawing on its secured line of credit, which was reflected on the Company's March 31, 2021 Consolidated Balance Sheet as a current and performing equipment loan held for investment. Given separate developments with the other two Over-Formula Advance clients, the Company reserved an additional $2,844,000 reflected in credit loss expense for the three months ended March 31, 2021. The $2,844,000 increase in required ACL as well as accretion of most of the fair value discount on the indemnification asset held at December 31, 2020 resulted in a $4,654,000 gain on the indemnification asset which was recorded through non-interest income. Since March 31, 2021, Covenant has paid down its secured line of credit with TBK in its entirety and carries no outstanding balance at September 30, 2022. At September 30, 2022, Covenant had remaining availability of $9,361,000 on its TBK line of credit available to cover our undiscounted indemnification balance of $4,393,000.

During the nine months ended September 30, 2022, there were no material changes in the underlying credit quality of the remaining two Over-Formula Advance clients. As such, there were no charge-offs related to these balances. One of the remaining Over-Formula Advance clients has made payments totaling $1,291,000 during the nine months ended September 30, 2022, which resulted in a dollar-for-dollar reduction in the required ACL as well as a write-off of a portion of the corresponding indemnification asset. The impact of the payment to net income available to common stockholders for the nine months ended September 30, 2022 was not significant.

NOTE 3 — SECURITIES

Equity Securities With Readily Determinable Fair Values

The Company held equity securities with readily determinable fair values of $4,916,000 and $5,504,000 at September 30, 2022 and December 31, 2021, 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 September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Unrealized gains (losses) on equity securities held at the reporting date	$	(134)	$	(231)	$	(588)	$	(203)
Realized gains (losses) on equity securities sold during the period	—		—		—		—
	$	(134)	$	(231)	$	(588)	$	(203)

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Equity Securities Without Readily Determinable Fair Values

The following table summarizes the Company's investments in equity securities without readily determinable fair values:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Equity Securities without readily determinable fair value, at cost	$	38,846	$	14,671
Upward adjustments based on observable price changes, cumulative	10,163		—
Equity Securities without readily determinable fair value, carrying value	$	49,009	$	14,671

Equity securities without readily determinable fair values include Federal Home Loan Bank and other restricted stock, which are reported separately in the Company's consolidated balance sheets, and other investments, which are included in other assets in the Company's consolidated balance sheets.

The gross realized and unrealized gains (losses) recognized on equity securities without readily determinable fair values in noninterest income in the Company’s consolidated statements of income were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Unrealized gains (losses) on equity securities still held at the reporting date	$	—	$	—	$	10,163	$	—
Realized gains (losses) on equity securities sold during the period	—		—		—		—
	$	—	$	—	$	10,163	$	—

During the three months ended June 30, 2022, the Company adjusted the fair value of an equity security without readily determinable fair value upwards due to an orderly and observable transaction for an identical investment. For further information on this transaction, see Note 6 – Equity Method Investment.

Debt Securities

Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, fair value, and allowance for credit losses of debt securities and the corresponding amounts of gross unrealized gains and losses of available for sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities:


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
September 30, 2022
Available for sale securities:
Mortgage-backed securities, residential	$	49,962	$	—	$	(5,287)	$	—	$	44,675
Asset-backed securities	6,501		—		(25)		—		6,476
State and municipal	14,485		2		(225)		—		14,262
CLO securities	175,386		25		(5,703)		—		169,708
Corporate bonds	1,270		1		(22)		—		1,249
SBA pooled securities	2,146		45		(127)		—		2,064
Total available for sale securities	$	249,750	$	73	$	(11,389)	$	—	$	238,434


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrecognized Losses		Fair Value
September 30, 2022
Held to maturity securities:
CLO securities	$	6,579	$	455	$	(1,431)	$	5,603
Allowance for credit losses	(2,430)
Total held to maturity securities, net of ACL	$	4,149

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(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
December 31, 2021
Available for sale securities:
Mortgage-backed securities, residential	$	36,885	$	720	$	(156)	$	—	$	37,449
Asset-backed securities	6,763		2		(1)		—		6,764
State and municipal	26,309		516		—		—		26,825
CLO Securities	103,579		3,109		(54)		—		106,634
Corporate bonds	1,992		64		—		—		2,056
SBA pooled securities	2,536		162		—		—		2,698
Total available for sale securities	$	178,064	$	4,573	$	(211)	$	—	$	182,426


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrecognized Losses		Fair Value
December 31, 2021
Held to maturity securities:
CLO securities	$	7,029	$	—	$	(1,582)	$	5,447
Allowance for credit losses	(2,082)
Total held to maturity securities, net of ACL	$	4,947

The amortized cost and estimated fair value of securities at September 30, 2022, 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
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	1,527	$	1,525	$	—	$	—
Due from one year to five years	3,122		3,067		—		—
Due from five years to ten years	53,433		51,539		6,579		5,603
Due after ten years	133,059		129,088		—		—
	191,141		185,219		6,579		5,603
Mortgage-backed securities, residential	49,962		44,675		—		—
Asset-backed securities	6,501		6,476		—		—
SBA pooled securities	2,146		2,064		—		—
	$	249,750	$	238,434	$	6,579	$	5,603

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Proceeds	$	—	$	—	$	40,163	$	—
Gross gains	—		—		2,512		—
Gross losses	—		—		—		—
Net gains and losses from calls of securities	—		4		2		5

Debt securities with a carrying amount of approximately $96,198,000 and $72,805,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

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Accrued interest on available for sale securities totaled $1,764,000 and $802,000 at September 30, 2022 and December 31, 2021, respectively, and was included in other assets on the Company's consolidated balance sheets. There was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2022 and 2021.

The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position:


	Less than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2022
Available for sale securities:
Mortgage-backed securities, residential	$	44,500	$	(5,287)	$	3	$	—	$	44,503	$	(5,287)
Asset-backed securities	1,479		(21)		4,996		(4)		6,475		(25)
State and municipal	12,981		(225)		—		—		12,981		(225)
CLO securities	140,066		(5,119)		9,666		(584)		149,732		(5,703)
Corporate bonds	748		(22)		—		—		748		(22)
SBA pooled securities	1,380		(127)		—		—		1,380		(127)
	$	201,154	$	(10,801)	$	14,665	$	(588)	$	215,819	$	(11,389)


	Less than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2021
Available for sale securities:
Mortgage-backed securities, residential	$	20,386	$	(155)	$	6	$	(1)	$	20,392	$	(156)
Asset-backed securities	37		—		4,999		(1)		5,036		(1)
State and municipal	30		—		—		—		30		—
CLO Securities	22,707		(54)		—		—		22,707		(54)
Corporate bonds	—		—		—		—		—		—
SBA pooled securities	—		—		—		—		—		—
	$	43,160	$	(209)	$	5,005	$	(2)	$	48,165	$	(211)

Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is 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 September 30, 2022, the Company had 140 available for sale debt securities in an unrealized loss position without an allowance for credit losses. 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. Accordingly, as of September 30, 2022, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company’s consolidated statements of income.

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The following table presents the activity in the allowance for credit losses for held to maturity debt securities:


(Dollars in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Held to Maturity CLO Securities	2022		2021		2022		2021
Allowance for credit losses:
Beginning balance	$	2,355	$	1,727	$	2,082	$	2,026
Credit loss expense	75		10		348		(289)
Allowance for credit losses ending balance	$	2,430	$	1,737	$	2,430	$	1,737

The Company’s held to maturity securities are investments in the unrated subordinated notes of collateralized loan obligation funds. These securities are the junior-most in securitization capital structures, and are subject to suspension of distributions if the credit of the underlying loan portfolios deteriorates materially. The ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At September 30, 2022 and December 31, 2021, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call. At September 30, 2022, $5,130,000 of the Company’s held to maturity securities were classified as nonaccrual.

NOTE 4 — LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans Held for Sale

The following table presents loans held for sale:


(Dollars in thousands)	September 30, 2022		December 31, 2021
1-4 family residential	$	68	$	712
Commercial	10		6,618
Total loans held for sale	$	78	$	7,330

Loans Held for Investment

Loans

The following table presents the amortized cost and unpaid principal balance of loans held for investment:


	September 30, 2022						December 31, 2021
(Dollars in thousands)	Amortized Cost		Unpaid Principal		Difference		Amortized Cost		Unpaid Principal		Difference
Commercial real estate	$	669,742	$	670,980	$	(1,238)	$	632,775	$	634,319	$	(1,544)
Construction, land development, land	75,527		75,606		(79)		123,464		123,643		(179)
1-4 family residential	122,594		122,804		(210)		123,115		123,443		(328)
Farmland	66,595		66,838		(243)		77,394		77,905		(511)
Commercial	1,282,199		1,295,015		(12,816)		1,430,429		1,440,542		(10,113)
Factored receivables	1,449,080		1,453,591		(4,511)		1,699,537		1,703,936		(4,399)
Consumer	9,506		9,509		(3)		10,885		10,883		2
Mortgage warehouse	758,061		758,061		—		769,973		769,973		—
Total loans held for investment	4,433,304		$	4,452,404	$	(19,100)	4,867,572		$	4,884,644	$	(17,072)
Allowance for credit losses	(44,111)						(42,213)
	$	4,389,193					$	4,825,359

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The difference between the amortized cost and the unpaid principal is due to (1) premiums and discounts associated with acquired loans totaling $14,263,000 and $11,723,000 at September 30, 2022 and December 31, 2021, respectively, and (2) net deferred origination and factoring fees totaling $4,837,000 and $5,349,000 at September 30, 2022 and December 31, 2021, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $16,159,000 and $14,513,000 at September 30, 2022 and December 31, 2021, respectively, and was included in other assets on the Company's consolidated balance sheets.

At September 30, 2022 and December 31, 2021, the Company had $249,729,000 and $254,970,000, 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.

At September 30, 2022 and December 31, 2021 the balance of the Over-Formula Advance Portfolio included in factored receivables was $8,785,000 and $10,077,000, respectively. These balances were fully reserved as of those respective dates.

At September 30, 2022 the Company carried a separate $19,361,000 receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest Over-Formula Advance Portfolio carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. We are a party to litigation in the United States Court of Federal Claims against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of September 30, 2022.

Loans with carrying amounts of $1,416,089,000 and $1,733,917,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity, Paycheck Protection Program Liquidity Facility borrowings and Federal Reserve Bank discount window borrowing capacity.

Allowance for Credit Losses

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The activity in the allowance for credit losses (“ACL”) related to loans held for investment is as follows:


(Dollars in thousands)	Beginning Balance		Credit Loss Expense		Charge-offs		Recoveries		Ending Balance
Three months ended September 30, 2022
Commercial real estate	$	5,167	$	(373)	$	—	$	—	$	4,794
Construction, land development, land	1,192		(198)		—		1		995
1-4 family residential	757		(16)		—		1		742
Farmland	490		(23)		—		—		467
Commercial	12,738		3,431		(208)		59		16,020
Factored receivables	22,212		183		(2,433)		172		20,134
Consumer	197		62		(106)		49		202
Mortgage warehouse	654		103		—		—		757
	$	43,407	$	3,169	$	(2,747)	$	282	$	44,111

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(Dollars in thousands)	Beginning Balance		Credit Loss Expense		Charge-offs		Recoveries		Ending Balance
Three months ended September 30, 2021
Commercial real estate	$	4,404	$	(453)	$	(17)	$	2	$	3,936
Construction, land development, land	1,490		(434)		—		1		1,057
1-4 family residential	545		(64)		(1)		5		485
Farmland	669		(59)		—		—		610
Commercial	15,674		(1,187)		(211)		—		14,276
Factored receivables	21,823		1,186		(3,597)		239		19,651
Consumer	236		153		(139)		—		250
Mortgage warehouse	853		(101)		—		—		752
	$	45,694	$	(959)	$	(3,965)	$	247	$	41,017


(Dollars in thousands)	Beginning Balance		Credit Loss Expense		Charge-offs		Recoveries		Ending Balance
Nine Months Ended September 30, 2022
Commercial real estate	$	3,961	$	881	$	(108)	$	60	$	4,794
Construction, land development, land	827		165		—		3		995
1-4 family residential	468		268		—		6		742
Farmland	562		(95)		—		—		467
Commercial	14,485		2,417		(1,192)		310		16,020
Factored receivables	20,915		2,298		(3,853)		774		20,134
Consumer	226		180		(313)		109		202
Mortgage warehouse	769		(12)		—		—		757
	$	42,213	$	6,102	$	(5,466)	$	1,262	$	44,111


(Dollars in thousands)	Beginning Balance		Credit Loss Expense		Charge-offs		Recoveries		Ending Balance
Nine months ended September 30, 2021
Commercial real estate	$	10,182	$	(6,239)	$	(17)	$	10	$	3,936
Construction, land development, land	3,418		(2,352)		(12)		3		1,057
1-4 family residential	1,225		(804)		(26)		90		485
Farmland	832		(222)		—		—		610
Commercial	22,040		(7,936)		(426)		598		14,276
Factored receivables	56,463		8,547		(45,683)		324		19,651
Consumer	542		(99)		(285)		92		250
Mortgage warehouse	1,037		(285)		—		—		752
	$	95,739	$	(9,390)	$	(46,449)	$	1,117	$	41,017

The increase in required ACL during the three months ended September 30, 2022 is a function of net charge-offs of $2,465,000 and credit loss expense of $3,169,000. The increase in required ACL during the nine months ended September 30, 2022 is a function of net charge-offs of $4,204,000 and credit loss expense of $6,102,000.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit and PPP), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. The Company also forecasts prepayments speeds for use in the DCF models with higher prepayment speeds resulting in lower required ACL levels and vice versa for shorter prepayment speeds. These assumed prepayment speeds are based upon our historical prepayment speeds by loan type adjusted for the expected impact of the current interest rate environment. Generally, the impact of these assumed prepayment speeds is lesser in magnitude than the aforementioned loss driver assumptions.

For all DCF models at September 30, 2022, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At September 30, 2022 as compared to December 31, 2021, the Company forecasted increasing national unemployment, a steeper decrease in one-year percentage change in national retail sales, a steeper decrease in one-year percentage change in the national home price index, and a steeper decrease in one-year percentage change in national gross domestic product. At September 30, 2022 for national unemployment, the Company projected a low percentage in the first quarter followed by a gradual rise in the following three quarters. For percentage change in national retail sales, the Company projected a sustained level in the first projected quarter followed by a decline to near-zero or negative levels over the last three projected quarters to a level below recent actual periods. For percentage changes in national home price index and national gross domestic product, the Company projected declines over the last three projected quarters to negative levels below recent actual periods. At September 30, 2022, the Company slowed its historical prepayment speeds in response to the rising interest rate environment in the macro economy.

The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.

For the three months ended September 30, 2022, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period did not have a significant impact on the ACL. Changes in net new required specific reserves increased the required ACL at September 30, 2022. Changes in loan volume and mix during the three months ended September 30, 2022 decreased the ACL during the period. Net charge-offs during the period were $2,465,000.

For the three months ended September 30, 2021, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period decreased the required ACL by $177,000. Further, the Company experienced a net reserve release of specific reserves. Changes in loan volume and mix during the three months ended September 30, 2021 did not have a significant impact on the ACL during the period. Non-PCD-related net charge-offs reduced the ACL by $3,718,000 during the three months ended September 30, 2021.

For the nine months ended September 30, 2022, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period increased the required ACL by $1,487,000. Changes in net new required specific reserves also increased the required ACL at September 30, 2022. Changes in loan volume and mix during the nine months ended September 30, 2022 decreased the ACL during the period. Net charge-offs during the period were $4,204,000.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the nine months ended September 30, 2021, in addition to the impact of changes to the ACL on acquired PCD Over-Formula Advances previously discussed, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period decreased the required ACL by $10,319,000. Further, the Company experienced a net reserve release of specific reserves on non-PCD loans. Changes in loan volume and mix during the nine months ended September 30, 2021 also decreased the ACL during the period. Non-PCD-related charge-offs reduced the ACL by $4,067,000 during the nine months ended September 30, 2021.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:


(Dollars in thousands)	Real Estate		Accounts Receivable		Equipment		Other		Total		ACL Allocation
September 30, 2022
Commercial real estate	$	1,240	$	—	$	—	$	142	$	1,382	$	283
Construction, land development, land	151		—		—		—		151		—
1-4 family residential	1,663		—		—		47		1,710		80
Farmland	196		—		112		106		414		—
Commercial	208		—		3,256		14,403		17,867		4,330
Factored receivables	—		47,628		—		—		47,628		13,024
Consumer	—		—		—		154		154		13
Mortgage warehouse	—		—		—		—		—		—
Total	$	3,458	$	47,628	$	3,368	$	14,852	$	69,306	$	17,730

At September 30, 2022 the balance of the Over-Formula Advance Portfolio included in factored receivables was $8,785,000 and was fully reserved. At September 30, 2022 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.


(Dollars in thousands)	Real Estate		Accounts Receivable		Equipment		Other		Total		ACL Allocation
December 31, 2021
Commercial real estate	$	2,143	$	—	$	—	$	155	$	2,298	$	283
Construction, land development, land	987		—		—		—		987		—
1-4 family residential	1,583		—		—		116		1,699		39
Farmland	1,803		—		126		116		2,045		—
Commercial	254		—		5,598		3,017		8,869		1,733
Factored receivables	—		42,863		—		—		42,863		12,640
Consumer	—		—		—		240		240		21
Mortgage warehouse	—		—		—		—		—		—
Total	$	6,770	$	42,863	$	5,724	$	3,644	$	59,001	$	14,716

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At December 31, 2021 the balance of the Over-Formula Advance Portfolio included in factored receivables was $10,077,000 and carried an ACL allocation of $10,077,000. At December 31, 2021 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.

Past Due and Nonaccrual Loans

The following tables present an aging of contractually past due loans:


(Dollars in thousands)	Past Due 30-59 Days		Past Due 60-90 Days		Past Due 90 Days or More		Total Past Due		Current		Total		Past Due 90 Days or More and Accruing
September 30, 2022
Commercial real estate	$	1,465	$	—	$	421	$	1,886	$	667,856	$	669,742	$	—
Construction, land development, land	9		—		145		154		75,373		75,527		—
1-4 family residential	984		461		819		2,264		120,330		122,594		—
Farmland	—		—		—		—		66,595		66,595		—
Commercial	288		178		3,097		3,563		1,278,636		1,282,199		48
Factored receivables	42,637		13,455		38,969		95,061		1,354,019		1,449,080		38,969
Consumer	144		28		62		234		9,272		9,506		—
Mortgage warehouse	—		—		—		—		758,061		758,061		—
Total	$	45,527	$	14,122	$	43,513	$	103,162	$	4,330,142	$	4,433,304	$	39,017


(Dollars in thousands)	Past Due 30-59 Days		Past Due 60-90 Days		Past Due 90 Days or More		Total Past Due		Current		Total		Past Due 90 Days or More and Accruing
December 31, 2021
Commercial real estate	$	1,021	$	—	$	16	$	1,037	$	631,738	$	632,775	$	—
Construction, land development, land	30		—		145		175		123,289		123,464		—
1-4 family residential	730		332		1,114		2,176		120,939		123,115		134
Farmland	378		154		977		1,509		75,885		77,394		—
Commercial	996		346		4,948		6,290		1,424,139		1,430,429		—
Factored receivables	70,109		18,302		39,134		127,545		1,571,992		1,699,537		39,134
Consumer	255		48		99		402		10,483		10,885		—
Mortgage warehouse	—		—		—		—		769,973		769,973		—
Total	$	73,519	$	19,182	$	46,433	$	139,134	$	4,728,438	$	4,867,572	$	39,268

At September 30, 2022 and December 31, 2021, total past due Over-Formula Advances recorded in factored receivables was $8,785,000 and $10,077,000, respectively, all of which was considered past due 90 days or more. Aging of the Over-Formula Advances is based upon the service month on which the advances were made by TFS prior to acquisition. At September 30, 2022 and December 31, 2021, the Misdirected Payments totaled $19,361,000, all of which was considered past due 90 days or more. Given the nature of factored receivables, these assets are disclosed as past due 90 days or more still accruing; however, the Company is not recognizing income on the assets. Historically, any income recognized on factored receivables that are past due 90 days or more has not been material.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses:


	September 30, 2022				December 31, 2021
(Dollars in thousands)	Total Nonaccrual		Nonaccrual With No ACL		Total Nonaccrual		Nonaccrual With No ACL
Commercial real estate	$	1,108	$	541	$	2,025	$	1,375
Construction, land development, land	151		151		964		964
1-4 family residential	1,710		1,604		1,683		1,582
Farmland	414		414		2,044		2,044
Commercial	17,291		3,015		8,078		3,910
Factored receivables	—		—		—		—
Consumer	154		112		240		159
Mortgage warehouse	—		—		—		—
	$	20,828	$	5,837	$	15,034	$	10,034

The following table presents accrued interest on nonaccrual loans reversed through interest income:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Commercial real estate	$	—	$	—	$	—	$	8
Construction, land development, land	—		—		2		—
1-4 family residential	1		—		1		1
Farmland	—		—		—		6
Commercial	—		—		4		23
Factored receivables	—		—		—		—
Consumer	—		3		—		3
Mortgage warehouse	—		—		—		—
	$	1	$	3	$	7	$	41

There was no interest earned on nonaccrual loans during the three and nine months ended September 30, 2022 and 2021.

The following table presents information regarding nonperforming loans:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Nonaccrual loans(1)	$	20,828	$	15,034
Factored receivables greater than 90 days past due	30,184		29,057
Other nonperforming factored receivables(2)	4,331		1,428
Troubled debt restructurings accruing interest	577		765
	$	55,920	$	46,284

(1)Includes troubled debt restructurings of $2,034,000 and $3,912,000 at September 30, 2022 and December 31, 2021, respectively.

(2)Other nonperforming factored receivables represent the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification as well as other nonperforming factored receivables less than 90 days past due. This amount is also considered Classified from a risk rating perspective.

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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.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of September 30, 2022 and December 31, 2021, based on the most recent analysis performed, the risk category of loans is as follows:


													Revolving Loans		Revolving Loans Converted To Term Loans		Total
(Dollars in thousands)	Year of Origination
September 30, 2022	2022		2021		2020		2019		2018		Prior
Commercial real estate
Pass	$	209,979	$	162,141	$	201,656	$	27,482	$	18,640	$	38,969	$	4,442	$	—	$	663,309
Classified	2,634		779		1,883		39		—		1,098		—		—		6,433
Total commercial real estate	$	212,613	$	162,920	$	203,539	$	27,521	$	18,640	$	40,067	$	4,442	$	—	$	669,742

Construction, land development, land
Pass	$	46,466	$	16,185	$	7,115	$	4,368	$	654	$	578	$	10	$	—	$	75,376
Classified	—		—		6		—		—		145		—		—		151
Total construction, land development, land	$	46,466	$	16,185	$	7,121	$	4,368	$	654	$	723	$	10	$	—	$	75,527

1-4 family residential
Pass	$	19,058	$	23,089	$	11,450	$	3,046	$	3,787	$	22,067	$	38,002	$	308	$	120,807
Classified	29		420		156		52		3		1,059		68		—		1,787
Total 1-4 family residential	$	19,087	$	23,509	$	11,606	$	3,098	$	3,790	$	23,126	$	38,070	$	308	$	122,594

Farmland
Pass	$	10,092	$	12,736	$	10,381	$	2,738	$	6,790	$	21,707	$	1,370	$	218	$	66,032
Classified	199		11		131		112		—		110		—		—		563
Total farmland	$	10,291	$	12,747	$	10,512	$	2,850	$	6,790	$	21,817	$	1,370	$	218	$	66,595

Commercial
Pass	$	300,479	$	220,970	$	181,171	$	45,579	$	7,594	$	13,283	$	473,205	$	269	$	1,242,550
Classified	14,656		10,681		3,701		2,148		110		115		8,238		—		39,649
Total commercial	$	315,135	$	231,651	$	184,872	$	47,727	$	7,704	$	13,398	$	481,443	$	269	$	1,282,199

Factored receivables
Pass	$	1,411,243	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1,411,243
Classified	17,693		—		20,144		—		—		—		—		—		37,837
Total factored receivables	$	1,428,936	$	—	$	20,144	$	—	$	—	$	—	$	—	$	—	$	1,449,080

Consumer
Pass	$	3,112	$	1,590	$	1,033	$	361	$	355	$	2,760	$	141	$	—	$	9,352
Classified	—		2		2		—		—		150		—		—		154
Total consumer	$	3,112	$	1,592	$	1,035	$	361	$	355	$	2,910	$	141	$	—	$	9,506

Mortgage warehouse
Pass	$	758,061	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	758,061
Classified	—		—		—		—		—		—		—		—		—
Total mortgage warehouse	$	758,061	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	758,061

Total loans
Pass	$	2,758,490	$	436,711	$	412,806	$	83,574	$	37,820	$	99,364	$	517,170	$	795	$	4,346,730
Classified	35,211		11,893		26,023		2,351		113		2,677		8,306		—		86,574
Total loans	$	2,793,701	$	448,604	$	438,829	$	85,925	$	37,933	$	102,041	$	525,476	$	795	$	4,433,304

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


													Revolving Loans		Revolving Loans Converted To Term Loans		Total
(Dollars in thousands)	Year of Origination
December 31, 2021	2021		2020		2019		2018		2017		Prior
Commercial real estate
Pass	$	211,088	$	249,652	$	50,223	$	25,930	$	47,447	$	37,290	$	4,595	$	—	$	626,225
Classified	2,879		3,358		41		—		16		—		256		—		6,550
Total commercial real estate	$	213,967	$	253,010	$	50,264	$	25,930	$	47,463	$	37,290	$	4,851	$	—	$	632,775

Construction, land development, land
Pass	$	56,764	$	33,756	$	4,744	$	23,696	$	1,199	$	994	$	8	$	—	$	121,161
Classified	2,150		8		—		—		—		145		—		—		2,303
Total construction, land development, land	$	58,914	$	33,764	$	4,744	$	23,696	$	1,199	$	1,139	$	8	$	—	$	123,464

1-4 family residential
Pass	$	26,840	$	15,195	$	9,485	$	6,526	$	8,591	$	22,151	$	32,210	$	318	$	121,316
Classified	273		233		53		6		64		1,089		81		—		1,799
Total 1-4 family residential	$	27,113	$	15,428	$	9,538	$	6,532	$	8,655	$	23,240	$	32,291	$	318	$	123,115

Farmland
Pass	$	14,387	$	13,396	$	7,892	$	8,040	$	10,040	$	19,792	$	1,317	$	241	$	75,105
Classified	199		612		593		333		128		298		126		—		2,289
Total farmland	$	14,586	$	14,008	$	8,485	$	8,373	$	10,168	$	20,090	$	1,443	$	241	$	77,394

Commercial
Pass	$	466,254	$	332,746	$	77,010	$	18,940	$	15,032	$	7,704	$	490,159	$	49	$	1,407,894
Classified	9,317		6,858		5,088		558		56		456		202		—		22,535
Total commercial	$	475,571	$	339,604	$	82,098	$	19,498	$	15,088	$	8,160	$	490,361	$	49	$	1,430,429

Factored receivables
Pass	$	1,667,922	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1,667,922
Classified	10,826		20,789		—		—		—		—		—		—		31,615
Total factored receivables	$	1,678,748	$	20,789	$	—	$	—	$	—	$	—	$	—	$	—	$	1,699,537

Consumer
Pass	$	3,252	$	1,794	$	669	$	553	$	2,424	$	1,882	$	70	$	—	$	10,644
Classified	5		—		—		12		119		105		—		—		241
Total consumer	$	3,257	$	1,794	$	669	$	565	$	2,543	$	1,987	$	70	$	—	$	10,885

Mortgage warehouse
Pass	$	769,973	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	769,973
Classified	—		—		—		—		—		—		—		—		—
Total mortgage warehouse	$	769,973	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	769,973

Total loans
Pass	$	3,216,480	$	646,539	$	150,023	$	83,685	$	84,733	$	89,813	$	528,359	$	608	$	4,800,240
Classified	25,649		31,858		5,775		909		383		2,093		665		—		67,332
Total loans	$	3,242,129	$	678,397	$	155,798	$	84,594	$	85,116	$	91,906	$	529,024	$	608	$	4,867,572

Troubled Debt Restructurings and Loan Modifications

The Company had troubled debt restructurings with an amortized cost of $2,611,000 and $4,677,000 as of September 30, 2022 and December 31, 2021, respectively. The Company had allocated $1,104,000 and $1,068,000 of allowance for those loans at September 30, 2022 and December 31, 2021, respectively, and had not committed to lend additional amounts.

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The following table presents the pre- and post-modification recorded investment of loans modified as troubled debt restructurings. The Company did not grant principal reductions on any restructured loans.


(Dollars in thousands)	Extended Amortization Period		Payment Deferrals		Protective Advances		Total Modifications		Number of Loans
Three months ended September 30, 2022


Commercial	$	45	$	—	$	—	$	45	1
	$	45	$	—	$	—	$	45	1

Nine months ended September 30, 2022



Commercial	$	45	$	—	$	—	$	45	1
	$	45	$	—	$	—	$	45	1






Nine months ended September 30, 2021
Commercial real estate	$	—			$	741	$	741	1



	$	—	$	—	$	741	$	741	1

There were no loans modified as troubled debt restructurings during the three months ended September 30, 2021.

During the nine months ended September 30, 2022, the Company had two loans modified as troubled debt restructurings with a recorded investment of $546,000 for which there were payment defaults within twelve months following the modification. During the nine months ended September 30, 2021, the Company had three loans modified as troubled debt restructurings with a recorded investment of $1,681,000 for which there were payment defaults within twelve months following the modification. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure.

The following table summarizes the balance of loans modified for borrowers impacted by the COVID-19 pandemic.


	Three Months Ended September 30,		Nine Months Ended September 30,
(Dollars in thousands)	2022	2021	2022	2021
Total modifications	—	—	—	10,459

These modifications primarily consisted of payment deferrals to assist customers. As these modifications related to the COVID-19 pandemic and qualify under the provisions of either Section 4013 of the CARES act or Interagency Guidance, they are not considered troubled debt restructurings. There were no loans in deferral at September 30, 2022. The following table summarized the amortized cost of loans with payments in deferral and the accrued interest related to the loans with payments in deferral at December 31, 2021:


(Dollars in thousands)	Total Loans		Balance of Loans Currently in Deferral		Percentage of Portfolio		Accrued Interest Receivable

December 31, 2021
Commercial real estate	$	632,775	$	30,212	4.8	%	$	116
Construction, land development, land	123,464		1,340		1.1	%	5
1-4 family residential	123,115		—		—	%	—
Farmland	77,394		338		0.4	%	3
Commercial	1,430,429		—		—	%	—
Factored receivables	1,699,537		—		—	%	—
Consumer	10,885		6		0.1	%	—
Mortgage warehouse	769,973		—		—	%	—
Total	$	4,867,572	$	31,896	0.7	%	$	124

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Residential Real Estate Loans In Process of Foreclosure

At September 30, 2022 and December 31, 2021, the Company had $129,000 and $301,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.

NOTE 5 — GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Goodwill	$	233,709	$	233,727


	September 30, 2022						December 31, 2021
(Dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangibles	$	43,578	$	(34,536)	$	9,042	$	43,578	$	(31,800)	$	11,778
Software intangible assets	16,932		(5,644)		11,288		16,932		(2,469)		14,463
Other intangible assets	30,410		(15,845)		14,565		29,560		(12,672)		16,888
	$	90,920	$	(56,025)	$	34,895	$	90,070	$	(46,941)	$	43,129

The changes in goodwill and intangible assets during the three and nine months ended September 30, 2022 and 2021 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Beginning balance	$	270,666	$	286,567	$	276,856	$	189,922
Acquired goodwill	—		—		—		73,697
Acquired intangible assets	851		—		851		27,292
Acquired goodwill - measurement period adjustment	—		(3,238)		(18)		(3,179)




Amortization of intangibles	(2,913)		(3,274)		(9,085)		(7,677)
Ending balance	$	268,604	$	280,055	$	268,604	$	280,055

NOTE 6 — EQUITY METHOD INVESTMENT

On October 17, 2019, the Company made a minority equity investment of $8,000,000 in Warehouse Solutions Inc. (“WSI”), purchasing 8% of the common stock of WSI and receiving warrants to purchase an additional 10% of the common stock of WSI upon exercise of the warrants at a later date. WSI provides technology solutions to help reduce supply chain costs for a global client base across multiple industries.

Although the Company held less than 20% of the voting stock of WSI, the investment in common stock was initially accounted for using the equity method as the Company’s representation on WSI’s board of directors, which was disproportionately larger in size than the common stock investment held, demonstrated that it had significant influence over the investee.

On June 10, 2022, the Company entered into two separate agreements with WSI. First, the Company entered into an Affiliate Agreement. The Affiliate Agreement canceled the Company’s outstanding warrants and modified the structure of the existing operating agreement to be consistent with TriumphPay operating as an open loop payments network. By modifying the operating agreement, the Company’s Payments segment operations now have greater ability to operate in the freight shipper audit space. As a result of the Affiliate Agreement, the Company recognized a total loss on impairment of the warrants of $3,224,000, which represented the full book balance of the warrants on the date the Affiliate Agreement was executed. The impairment loss was included in other noninterest income on the Company's consolidated statements of income during the three months ended June 30, 2022.

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Separately, the Company also entered into an Amended and Restated Investor Rights Agreement (the “Investor Rights Agreement”). The Investor Rights Agreement eliminated the Company’s representation on WSI’s board of directors making the Company a completely passive investor. The Investor Rights Agreement also provided for the Company’s purchase of an additional 10% of WSI’s common stock for $23,000,000 raising the Company’s ownership of WSI’s common stock to 18%. As a passive investor, the Company no longer holds significant influence over the investee and the investment in WSI’s common stock no longer qualifies for equity method accounting. The investment in WSI’s common stock is now accounted for as an equity investment without a readily determinable fair value measured under the measurement alternative. The measurement alternative requires the Company to remeasure its investment in the common stock of WSI only upon the execution of an orderly and observable transaction in an identical or similar instrument.

The Company's additional investment in WSI under the Investor Rights Agreement resulted in the Company discontinuing the equity method of accounting and qualified as an orderly and observable transaction for an identical investment in WSI, therefore the fair value of the Company's original 8% common stock investment was required to be adjusted from $4,925,000 at March 31, 2022 to $15,088,000, resulting in a gain of $10,163,000 that was recorded in other noninterest income on the Company's consolidated statements of income during the three months ended June 30, 2022.

The following table presents the Company’s investment in WSI:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Common stock	$	38,088	$	5,142
Warrants	—		3,224
Total investment	$	38,088	$	8,366

The investment is included in other assets on the Company’s consolidated balance sheets and has been allocated to the Payments segment. All gains and losses related to the investment are included in the Payment segment’s operating results.

NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s interest bearing deposits.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Beginning in June 2020, such derivatives were used to hedge the variable cash flows associated with interest bearing deposits.

The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminated, or treatment of the derivative as a hedge is no longer appropriate or intended. During the three months ended March 31, 2022, the Company terminated its single derivative with a notional value totaling $200,000,000, resulting in a termination value of $9,316,000. During the nine months ended September 30, 2022, the Company reclassified $465,000 into earnings through interest expense in the consolidated statements of income. On May 4, 2022, the Company terminated the hedged funding, incurring a termination fee of $732,000, which was recognized through interest expense in the consolidated statements of income, and reclassified the remaining $8,851,000 unrealized gain on the terminated derivative into earnings through other noninterest income in the consolidated statements of income.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the pre-tax impact of the terminated cash flow hedge on AOCI:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Unrealized gains on terminated hedges
Beginning Balance	$	—	$	—	$	—	$	—
Unrealized gains arising during the period	—		—		9,316		—
Reclassification adjustments for amortization of unrealized (gains) into net income	—		—		(9,316)		—
Ending Balance	$	—	$	—	$	—	$	—

The Company did not have any derivative financial instruments at September 30, 2022. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2021:

Derivative Assets

As of December 31, 2021

(Dollars in thousands)

Notional
Amount

Balance
Sheet Location

Fair Value
Total

Derivatives designated as hedging instruments:

Interest rate swaps

200,000

Other Assets

6,164

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income, net of tax:


	Amount of Gain or (Loss) Recognized in OCI on Derivative		Amount of Gain or (Loss) Recognized in OCI Included Component		Location of (Gain) or Loss Recognized from AOCI into Income	Amount of (Gain) or Loss Reclassified from AOCI into Income		Amount of (Gain) or Loss Reclassified from AOCI into Income Included Component
(Dollars in thousands)
Three Months Ended September 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	—	$	—	Interest Expense, Noninterest Income	$	—	$	—

Three Months Ended September 30, 2021
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	7	$	7	Interest Expense	$	14	$	14

Nine Months Ended September 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	(4,705)	$	(4,705)	Interest Expense, Noninterest Income	$	(7,103)	$	(7,103)

Nine Months Ended September 30, 2021
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	2,386	$	2,386	Interest Expense	$	53	$	53

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 — 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:


(Dollars in thousands)	Offering Date	Offering 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 net 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 $4,149,000 and $4,947,000 at September 30, 2022 and December 31, 2021, 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 9 — LEGAL CONTINGENCIES

Various legal claims have arisen from time to time in the normal course of business which, in the opinion of management as of September 30, 2022, will have no material effect on the Company’s consolidated financial statements.

NOTE 10 — 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:


	September 30, 2022						December 31, 2021
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Unused lines of credit	$	3,994	$	442,809	$	446,803	$	26,029	$	523,483	$	549,512
Standby letters of credit	$	13,711	$	4,920	$	18,631	$	11,090	$	5,409	$	16,499
Commitments to purchase loans	$	—	$	79,030	$	79,030	$	—	$	108,423	$	108,423
Mortgage warehouse commitments	$	—	$	851,939	$	851,939	$	—	$	823,060	$	823,060

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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 credit losses on off-balance sheet credit exposures through a charge to credit loss expense on the Company’s consolidated statements of income. At September 30, 2022 and December 31, 2021, the allowance for credit losses on off-balance sheet credit exposures totaled $3,680,000 and $4,082,000, respectively, and was included in other liabilities on the Company’s consolidated balance sheets. The following table presents credit loss expense for off balance sheet credit exposures:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Credit loss expense (benefit)	$	(598)	$	(238)	$	(402)	$	(1,159)

NOTE 11 — 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 17 of the Company’s 2021 Form 10-K.

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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 Fair Value
September 30, 2022	Level 1		Level 2		Level 3
Assets measured at fair value on a recurring basis
Securities available for sale
Mortgage-backed securities, residential	$	—	$	44,675	$	—	$	44,675
Asset-backed securities	—		6,476		—		6,476
State and municipal	—		14,262		—		14,262
CLO securities	—		169,708		—		169,708
Corporate bonds	—		1,249		—		1,249
SBA pooled securities	—		2,064		—		2,064
	$	—	$	238,434	$	—	$	238,434

Equity securities with readily determinable fair values
Mutual fund	$	4,916	$	—	$	—	$	4,916

Loans held for sale	$	—	$	78	$	—	$	78

Indemnification asset	$	—	$	—	$	4,173	$	4,173

Revenue share asset	$	—	$	—	$	6,178	$	6,178

Liabilities measured at fair value on a recurring basis
Return of premium liability	$	—	$	—	$	570	$	570


(Dollars in thousands)	Fair Value Measurements Using						Total Fair Value
December 31, 2021	Level 1		Level 2		Level 3
Assets measured at fair value on a recurring basis
Securities available for sale
Mortgage-backed securities, residential	$	—	$	37,449	$	—	$	37,449
Asset-backed securities	—		6,764		—		6,764
State and municipal	—		26,825		—		26,825
CLO Securities	—		106,634		—		106,634
Corporate bonds	—		2,056		—		2,056
SBA pooled securities	—		2,698		—		2,698
	$	—	$	182,426	$	—	$	182,426

Equity securities with readily determinable fair values
Mutual fund	$	5,504	$	—	$	—	$	5,504

Loans held for sale	$	—	$	7,330	$	—	$	7,330

Derivative financial instruments (cash flow hedges)
Interest rate swap	$	—	$	6,164	$	—	$	6,164

Indemnification asset	$	—	$	—	$	4,786	$	4,786

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(Unaudited)

There were no transfers between levels during 2022 or 2021.

Indemnification Asset

The fair value of the indemnification asset is calculated as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio. The cash flows are discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income or expense, as appropriate, within the Consolidated Statements of Income. The indemnification asset fair value is considered a Level 3 classification. At September 30, 2022 and December 31, 2021, the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio were approximately $4,393,000 and $5,038,000, respectively, and a discount rate of 5.0% and 5.0%, respectively, was applied to calculate the present value of the indemnification asset. A reconciliation of the opening balance to the closing balance of the fair value of the indemnification asset is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Beginning balance	$	4,377	$	5,246	$	4,786	$	36,225
Indemnification asset recognized in business combination	—		—		—		—
Change in fair value of indemnification asset recognized in earnings	(204)		(460)		(613)		4,194
Indemnification reduction	—		—		—		(35,633)
Ending balance	$	4,173	$	4,786	$	4,173	$	4,786

Revenue Share Asset

On June 30, 2022 and September 6, 2022, the Company entered into and closed two separate agreements to sell two separate portfolios of factored receivables. The June 30, 2022 agreement contains revenue share provisions that entitles the Company to an amount equal to fifteen percent of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. The September 6, 2022 agreement contains revenue share provisions that entitles the Company to an amount ranging from fifteen to twenty percent, depending on the client, of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. The fair value of the revenue share assets is calculated each reporting period, and changes in the fair value of the revenue share assets are recorded in noninterest income in the consolidated statements of income. The revenue share asset fair value is considered a Level 3 classification.

At September 30, 2022, the estimated cash payments expected to be received from the purchaser for the Company's share of future gross monthly revenue as $8,653,000 and a discount rate of 10.0% was applied to calculate the present value of the revenue share asset. A reconciliation of the opening balance to the closing balance of the fair value of the revenue share asset is as follows:



(Dollars in thousands)	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Beginning balance	$	5,210	$	—
Revenue share asset recognized	1,027		6,237
Change in fair value of revenue share asset recognized in earnings	171		171
Revenue share payments received	(230)		(230)
Ending balance	$	6,178	$	6,178

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Return of Premium Liability

On June 23, 2022, the Company made the decision to sell and closed on the sale of a portfolio of equipment loans for cash consideration. The associated agreement contains a provision that in the event that a sold loan is prepaid in full prior to the due date of the final scheduled contractual payment, the Company will return a pro-rata portion of the premium calculated as of the date of such prepayment in full. The fair value of the return of premium liability is calculated each reporting period, and changes in the fair value of the return of premium liability are recorded in noninterest income in the consolidated statements of income. The return of premium liability is considered a Level 3 classification. At September 30, 2022, the fair value of the estimated premium expected to be returned to the purchaser for sold loans prepaid in full was calculated as the difference between the discounted cash flows of each sold loan assuming no prepayments and the discounted cash flows of each sold loan assuming an 11.0% prepayment speed; consistent with management's expected prepayment speed. A reconciliation of the opening balance to the closing balance of the fair value of the return of premium liability is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Beginning balance	$	708	$	—	$	—	$	—
Return of premium liability recognized in business combination	—		—		708		—
Change in fair value of return of premium liability recognized in earnings	(104)		—		(104)		—
Return of premium payments made	(34)		—		(34)		—
Ending balance	$	570	$	—	$	570	$	—

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 September 30, 2022 and December 31, 2021.


(Dollars in thousands)	Fair Value Measurements Using						Total Fair Value
September 30, 2022	Level 1		Level 2		Level 3
Collateral dependent loans
Commercial real estate	$	—	$	—	$	283	$	283
1-4 family residential	—		—		25		25
Commercial	—		—		9,771		9,771
Factored receivables	—		—		34,604		34,604
Consumer	—		—		29		29


	$	—	$	—	$	44,712	$	44,712


(Dollars in thousands)	Fair Value Measurements Using						Total Fair Value
December 31, 2021	Level 1		Level 2		Level 3
Collateral dependent loans
Commercial real estate	$	—	$	—	$	366	$	366
1-4 family residential	—		—		61		61
Commercial	—		—		2,435		2,435
Factored receivables	—		—		30,224		30,224
Consumer	—		—		60		60
Other real estate owned (1)
Commercial real estate	—		—		7		7
Construction, land development, land	—		—		63		63
	$	—	$	—	$	33,216	$	33,216

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

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Collateral Dependent Loans Specific Allocation of ACL: A loan is considered to be a collateral dependent loan when, based on current information and events, the Company expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Company has determined that the borrower is experiencing financial difficulty as of the measurement date. The ACL 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 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 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.

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 ACL. 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 September 30, 2022 and December 31, 2021 were as follows:


(Dollars in thousands)	Carrying Amount		Fair Value Measurements Using						Total Fair Value
September 30, 2022			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	421,729	$	421,729	$	—	$	—	$	421,729
Securities - held to maturity	4,149		—		—		5,603		5,603
Loans not previously presented, gross	4,388,592		228,971		—		4,080,885		4,309,856
FHLB and other restricted stock	6,213		N/A		N/A		N/A		N/A
Accrued interest receivable	18,214		18,214		—		—		18,214

Financial liabilities:
Deposits	4,441,354		—		4,429,225		—		4,429,225
Customer repurchase agreements	13,463		—		13,463		—		13,463
Federal Home Loan Bank advances	30,000		—		30,000		—		30,000
Subordinated notes	107,587		—		106,327		—		106,327
Junior subordinated debentures	41,016		—		42,847		—		42,847
Accrued interest payable	2,538		2,538		—		—		2,538

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(Dollars in thousands)	Carrying Amount		Fair Value Measurements Using						Total Fair Value
December 31, 2021			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	383,178	$	383,178	$	—	$	—	$	383,178
Securities - held to maturity	4,947		—		—		5,447		5,447
Loans not previously presented, gross	4,834,426		142,962		—		4,685,058		4,828,020
FHLB and other restricted stock	10,146		N/A		N/A		N/A		N/A
Accrued interest receivable	15,319		15,319		—		—		15,319

Financial liabilities:
Deposits	4,646,679		—		4,646,552		—		4,646,552
Customer repurchase agreements	2,103		—		2,103		—		2,103
Federal Home Loan Bank advances	180,000		—		180,000		—		180,000
Paycheck Protection Program Liquidity Facility	27,144		—		27,144		—		27,144
Subordinated notes	106,957		—		110,045		—		110,045
Junior subordinated debentures	40,602		—		41,286		—		41,286
Accrued interest payable	1,951		1,951		—		—		1,951

NOTE 12 — 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 September 30, 2022 and December 31, 2021, the Company and TBK Bank meet all capital adequacy requirements to which they are subject.

As of September 30, 2022 and December 31, 2021, 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 September 30, 2022 that management believes have changed TBK Bank’s category.

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


(Dollars in thousands)	Actual			Minimum for Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
September 30, 2022	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	831,228	16.6%	$	400,592	8.0%	N/A		N/A
TBK Bank, SSB	$	781,506	15.7%	$	398,220	8.0%	$	497,775	10.0%

Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	685,113	13.6%	$	302,256	6.0%	N/A		N/A
TBK Bank, SSB	$	744,948	15.0%	$	297,979	6.0%	$	397,306	8.0%

Common equity Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	599,097	11.9%	$	226,549	4.5%	N/A		N/A
TBK Bank, SSB	$	744,948	15.0%	$	223,484	4.5%	$	322,811	6.5%

Tier 1 capital (to average assets)
Triumph Bancorp, Inc.	$	685,113	12.6%	$	217,496	4.0%	N/A		N/A
TBK Bank, SSB	$	744,948	13.7%	$	217,503	4.0%	$	271,879	5.0%

As of December 31, 2021
Total capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	769,475	14.1%	$	436,582	8.0%	N/A		N/A
TBK Bank, SSB	$	698,286	12.9%	$	433,046	8.0%	$	541,307	10.0%

Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	628,094	11.5%	$	327,701	6.0%	N/A		N/A
TBK Bank, SSB	$	665,336	12.3%	$	324,554	6.0%	$	432,739	8.0%

Common equity Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	542,492	9.9%	$	246,587	4.5%	N/A		N/A
TBK Bank, SSB	$	665,336	12.3%	$	243,416	4.5%	$	351,600	6.5%

Tier 1 capital (to average assets)
Triumph Bancorp, Inc.	$	628,094	11.1%	$	226,340	4.0%	N/A		N/A
TBK Bank, SSB	$	665,336	11.8%	$	225,538	4.0%	$	281,922	5.0%

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company elected the option to delay the estimated impact on regulatory capital of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13 as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”) was delayed for two years. After two years, the cumulative amount of the transition adjustments became fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.

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.

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The capital conservation buffer set forth by the Basel III regulatory capital framework was 2.5% at September 30, 2022 and December 31, 2021. 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 September 30, 2022 and December 31, 2021, the Company’s and TBK Bank’s risk based capital exceeded the required capital conservation buffer.

NOTE 13 — STOCKHOLDERS' EQUITY

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

Preferred Stock Series C


(Dollars in thousands, except per share amounts)	September 30, 2022			December 31, 2021
Shares authorized	51,750			51,750
Shares issued	45,000			45,000
Shares outstanding	45,000			45,000
Par value per share	$	0.01		$	0.01
Liquidation preference per share	$	1,000		$	1,000
Liquidation preference amount	$	45,000		$	45,000
Dividend rate	7.125		%	7.125		%
Dividend payment dates	Quarterly			Quarterly

Common Stock


	September 30, 2022		December 31, 2021
Shares authorized	50,000,000		50,000,000
Shares issued	28,321,716		28,261,680
Treasury shares	(3,843,428)		(3,102,801)
Shares outstanding	24,478,288		25,158,879
Par value per share	$	0.01	$	0.01

Stock Repurchase Programs

On February 7, 2022, the Company announced that its board of directors had authorized the Company to repurchase up to $50,000,000 of its outstanding common stock. This program was completed during the three months ended June 30, 2022, and on May 23, 2022, the Company announced that its board of directors had authorized the Company to repurchase up to an additional $75,000,000 of its outstanding common stock in open market transactions or through privately negotiated transactions at the Company’s discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of the Company’s common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. The repurchase program is authorized for a period of up to one year and does not require the Company to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time, at the Company’s discretion.

The following repurchases were made under the February 7, 2022 program. No shares have been purchased under the May 23, 2022 program.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Shares repurchased into treasury stock	—		—		709,795		—
Average price of shares repurchased into treasury stock	$	—	$	—	$	70.41	$	—
Total cost of shares repurchased into treasury stock	$	—	$	—	$	50,000,000	$	—

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NOTE 14 — STOCK BASED COMPENSATION

Stock based compensation expense that has been charged against income was $4,296,000 and $4,445,000 for the three months ended September 30, 2022 and 2021, respectively, and $17,128,000 and $9,181,000 for the nine months ended September 30, 2022 and 2021, 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 maximum number of shares of common stock available for issuance under the Omnibus Incentive Plan is 2,450,000 shares.

Restricted Stock Awards

A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2022 were as follows:


Nonvested RSAs	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2022	363,404	67.56
Granted	12,471	74.42
Vested	(126,203)	61.74
Forfeited	(3,098)	45.60
Nonvested at September 30, 2022	246,574	71.17

RSAs granted to employees under the Omnibus Incentive Plan typically vest immediately or over four years. Compensation expense for the RSAs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of September 30, 2022, there was $7,552,000 of unrecognized compensation cost related to the nonvested RSAs. The cost is expected to be recognized over a remaining period of 2.52 years.

Restricted Stock Units

A summary of changes in the Company’s nonvested Restricted Stock Units (“RSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2022 were as follows:


Nonvested RSUs	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2022	122,470	52.07
Granted	91,849	69.44
Vested	—	—
Forfeited	(967)	52.46
Nonvested at September 30, 2022	213,352	59.55

RSUs granted to employees under the Omnibus Incentive Plan typically vest over four to 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. As of September 30, 2022, there was $7,688,000 of unrecognized compensation cost related to the nonvested RSUs. The cost is expected to be recognized over a remaining period of 3.19 years.

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Market Based Performance Stock Units

A summary of changes in the Company’s nonvested Market Based Performance Stock Units (“Market Based PSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2022 were as follows:


Nonvested Market Based PSUs	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2022	94,984	$	43.68
Granted	33,276	84.22
Incremental shares earned	8,997	N/A
Vested	(20,996)	33.91
Forfeited	(535)	38.57
Nonvested at September 30, 2022	115,726	$	56.38

Market Based PSUs granted to employees under the Omnibus Incentive Plan vest after three to five years. The number of shares issued upon vesting will range from 0% to 175% of the Market Based 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 Market Based 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 Market Based PSUs granted is estimated using a Monte Carlo simulation. Expected volatilities were determined based on the historical volatilities of the Company and the specified peer group. The risk-free interest rate for the performance period was derived from the Treasury constant maturities yield curve on the valuation dates.

The fair value of the Market Based PSUs granted was determined using the following weighted-average assumptions:


	Nine Months Ended September 30,
	2022			2021
Grant date	May 1, 2022			May 1, 2021
Performance period	3.00 years			3.00 years
Stock price	$	69.44		$	88.63
Triumph stock price volatility	55.17		%	51.71		%
Risk-free rate	2.84		%	0.35		%

As of September 30, 2022, there was $3,343,000 of unrecognized compensation cost related to the nonvested Market Based PSUs. The cost is expected to be recognized over a remaining period of 2.21 years.

Performance Based Performance Stock Units

A summary of changes in the Company’s nonvested Performance Based Performance Stock Units (“Performance Based PSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2022 were as follows:


Nonvested Performance Based PSUs	Shares	Weighted Average Grant Date Fair Value
Nonvested at January 1, 2022	259,383	$	39.32
Granted	3,000	69.44
Vested	—	—
Forfeited	(6,349)	43.26
Nonvested at September 30, 2022	256,034	$	39.57

Performance Based PSUs granted to employees under the Omnibus Incentive Plan vest after a three year performance period. The number of shares issued upon vesting will range from 0% to 200% of the shares granted based on the Company’s cumulative diluted earnings per share over the performance period. Compensation expense for the Performance Based PSUs will be estimated each period based on the fair value of the stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the vesting period of the awards.

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During the three and nine months ended September 30, 2022, the Company recognized $298,000 and $5,433,000, respectively, of stock based compensation expense related to Performance Based PSUs. As of September 30, 2022, the maximum unrecognized compensation cost related to the nonvested Performance Based PSUs was $7,424,000, and the remaining performance period over which the cost could be recognized was 0.25 years. No compensation cost was recorded during the three and nine months ended September 30, 2021.

Stock Options

A summary of the changes in the Company’s stock options under the Omnibus Incentive Plan for the nine months ended September 30, 2022 were as follows:


Stock Options	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value (In Thousands)
Outstanding at January 1, 2022	166,755	$	33.34
Granted	35,939	69.44
Exercised	(3,797)	26.12
Forfeited or expired	—	—
Outstanding at September 30, 2022	198,897	$	40.00	6.41	$	3,976

Fully vested shares and shares expected to vest at September 30, 2022	198,897	$	40.00	6.41	$	3,976

Shares exercisable at September 30, 2022	128,958	$	29.10	5.15	$	3,401

Information related to the stock options for the nine months ended September 30, 2022 and 2021 was as follows:


	Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2022		2021
Aggregate intrinsic value of options exercised	$	280	$	2,249
Cash received from option exercises, net	(74)		196
Tax benefit realized from option exercises	59		472
Weighted average fair value per share of options granted	$	32.15	$	35.37

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. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. Beginning in 2022, expected volatilities are determined based on the Company’s historical volatility. Prior to 2022, expected volatilities were 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 the 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 the options is derived from the Treasury constant maturity yield curve on the valuation date.

The fair value of the stock options granted was determined using the following weighted-average assumptions:


	Nine Months Ended September 30,
	2022		2021
Risk-free interest rate	2.77	%	1.16	%
Expected term	6.25 years		6.25 years
Expected stock price volatility	43.33	%	39.26	%
Dividend yield	—		—

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(Unaudited)

As of September 30, 2022, there was $1,059,000 of unrecognized compensation cost related to nonvested stock options granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 3.28 years.

Employee Stock Purchase Plan

On April 1, 2019, the Company’s Board of Directors adopted the Triumph Bancorp, Inc. Employee Stock Purchase Plan (“ESPP”) and reserved 2,500,000 shares of common stock for issuance. The ESPP enables eligible employees to purchase the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six month offering period. The first offering period commenced on February 1, 2021. During the nine months ended September 30, 2022, 24,516 shares were issued under the plan. No shares were issued during the nine months ended September 30, 2021.

NOTE 15 — EARNINGS PER SHARE

The factors used in the earnings per share computation follow:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Basic
Net income to common stockholders	$	15,428	$	23,627	$	82,346	$	83,929
Weighted average common shares outstanding	24,227,020		24,759,419		24,483,054		24,719,861
Basic earnings per common share	$	0.64	$	0.95	$	3.36	$	3.40
Diluted
Net income to common stockholders	$	15,428	$	23,627	$	82,346	$	83,929
Weighted average common shares outstanding	24,227,020		24,759,419		24,483,054		24,719,861
Dilutive effects of:
Assumed exercises of stock options	85,239		121,110		95,252		129,149
Restricted stock awards	122,723		141,204		162,883		146,172
Restricted stock units	97,512		74,268		96,174		71,620
Performance stock units - market based	117,358		131,346		124,249		131,275
Performance stock units - performance based	327,016		—		109,005		—
Employee stock purchase program	2,389		616		2,245		1,914
Average shares and dilutive potential common shares	24,979,257		25,227,963		25,072,862		25,199,991
Diluted earnings per common share	$	0.62	$	0.94	$	3.28	$	3.33

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Stock options	52,878	16,939	52,878	16,939
Restricted stock awards	6,348	—	6,348	195,640
Restricted stock units	15,000	—	15,000	17,757
Performance stock units - market based	45,296	12,020	45,296	12,020
Performance stock units - performance based	—	259,383	—	259,383
Employee stock purchase program	—	—	—	—

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16 — REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. The Company presents disaggregated revenue from contracts with customers in the consolidated statements of income.

Descriptions of the Company's significant revenue-generating activities within the scope of Topic 606, which are included in non-interest income in the Company's consolidated statements of income, are as follows:

•Service charges on deposits. Service charges on deposits primarily consists of fees from the Company's deposit customers for account maintenance, account analysis, and overdraft services. Account maintenance fees and analysis fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

•Card income. Card income primarily consists of interchange fees. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized when the transaction processing services are provided to the cardholder.

•Net OREO gains (losses) and valuation adjustments. The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

•Fee income. Fee income for the Banking and Factoring segments primarily consists of transaction-based fees, including wire transfer fees, ACH and check fees, early termination fees, and other fees, earned from the Company's banking and factoring customers. Transaction based fees are recognized at the time the transaction is executed as that is the point in time the Company satisfies its performance obligations.

Fee income for the Payments segment primarily consists of TriumphPay payment and audit fees. These fees totaled $3,545,000 and $3,095,000 for the three months ended September 30, 2022 and 2021, respectively, and $10,156,000 and $4,251,000 for the nine months ended September 30, 2022 and 2021, respectively. These fees are transaction based and are recognized at the time the transaction is executed as that is the point in time that the Company satisfies its performance obligations.

•Insurance commissions. Insurance commissions are earned for brokering insurance policies. The Company's primary performance obligations for insurance commissions are satisfied and revenue is recognized when the brokered insurance policies are executed.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17 — BUSINESS SEGMENT INFORMATION

The following table presents the Company’s operating segments. The accounting policies of the reportable segments substantially the same as those described in the "Summary of Significant Accounting Policies" in Note 1 of the Company's 2021 Form 10-K. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring and Payments segments based on Federal Home Loan Bank advance rates. Credit loss expense is allocated based on the segment’s allowance for credit losses determination. Noninterest income and expense directly attributable to a segment are assigned to it. The majority of salaries and benefits expense for the Company's executive leadership team as well as certain other selling, general, and administrative shared services costs are allocated to the Banking segment. Taxes are paid on a consolidated basis and are not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC.


(Dollars in thousands)
Three months ended September 30, 2022	Banking		Factoring		Payments		Corporate		Consolidated
Total interest income	$	49,864	$	49,561	$	3,756	$	44	$	103,225
Intersegment interest allocations	2,606		(2,458)		(148)		—		—
Total interest expense	2,924		—		—		2,031		4,955
Net interest income (expense)	49,546		47,103		3,608		(1,987)		98,270
Credit loss expense (benefit)	2,388		(52)		235		75		2,646
Net interest income after credit loss expense	47,158		47,155		3,373		(2,062)		95,624
Noninterest income	6,189		2,941		3,518		20		12,668
Noninterest expense	48,648		22,896		14,066		1,079		86,689
Net income (loss) before income tax expense	$	4,699	$	27,200	$	(7,175)	$	(3,121)	$	21,603


(Dollars in thousands)
Three months ended September 30, 2021	Banking		Factoring		Payments		Corporate		Consolidated
Total interest income	$	46,175	$	47,222	$	3,295	$	43	$	96,735
Intersegment interest allocations	2,452		(2,341)		(111)		—		—
Total interest expense	2,073		—		—		2,891		4,964
Net interest income (expense)	46,554		44,881		3,184		(2,848)		91,771
Credit loss expense (benefit)	(2,399)		1,164		38		10		(1,187)
Net interest income after credit loss expense	48,953		43,717		3,146		(2,858)		92,958
Noninterest income	7,371		1,557		3,086		41		12,055
Noninterest expense	41,183		19,106		11,416		1,108		72,813
Net income (loss) before income tax expense	$	15,141	$	26,168	$	(5,184)	$	(3,925)	$	32,200


(Dollars in thousands)
Nine months ended September 30, 2022	Banking		Factoring		Payments		Corporate		Consolidated
Total interest income	$	138,286	$	161,789	$	12,760	$	132	$	312,967
Intersegment interest allocations	6,651		(6,312)		(339)		—		—
Total interest expense	7,547		—		—		5,643		13,190
Net interest income (expense)	137,390		155,477		12,421		(5,511)		299,777
Credit loss expense (benefit)	2,638		1,961		405		1,044		6,048
Net interest income after credit loss expense	134,752		153,516		12,016		(6,555)		293,729
Noninterest income	34,496		20,333		17,069		51		71,949
Noninterest expense	138,741		66,408		46,062		2,649		253,860
Net income (loss) before income tax expense	$	30,507	$	107,441	$	(16,977)	$	(9,153)	$	111,818

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(Dollars in thousands)
Nine months ended September 30, 2021	Banking		Factoring		Payments		Corporate		Consolidated
Total interest income	$	144,087	$	127,699	$	7,939	$	51	$	279,776
Intersegment interest allocations	8,117		(7,700)		(417)		—		—
Total interest expense	8,225		—		—		6,478		14,703
Net interest income (expense)	143,979		119,999		7,522		(6,427)		265,073
Credit loss expense (benefit)	(19,187)		8,091		548		(290)		(10,838)
Net interest income after credit loss expense	163,166		111,908		6,974		(6,137)		275,911
Noninterest income	25,139		10,710		4,242		151		40,242
Noninterest expense	122,497		52,433		26,393		3,180		204,503
Net income (loss) before income tax expense	$	65,808	$	70,185	$	(15,177)	$	(9,166)	$	111,650

Total assets and gross loans below include intersegment loans, which eliminate in consolidation.


(Dollars in thousands)
September 30, 2022	Banking		Factoring		Payments		Corporate		Eliminations		Consolidated
Total assets	$	5,162,380	$	1,406,367	$	354,179	$	1,041,293	$	(2,321,769)	$	5,642,450
Gross loans	$	3,849,962	$	1,330,122	$	118,958	$	—	$	(865,738)	$	4,433,304


(Dollars in thousands)
December 31, 2021	Banking		Factoring		Payments		Corporate		Eliminations		Consolidated
Total assets	$	5,568,826	$	1,679,495	$	293,212	$	1,009,998	$	(2,595,281)	$	5,956,250
Gross loans	$	4,444,136	$	1,546,361	$	153,176	$	700	$	(1,276,801)	$	4,867,572

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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, 2021. 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, offering a diversified line of payments, factoring and banking services. As of September 30, 2022, we had consolidated total assets of $5.642 billion, total loans held for investment of $4.433 billion, total deposits of $4.441 billion and total stockholders’ equity of $891.2 million.

Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services, commercial lending product lines focused on businesses that require specialized financial solutions and national lending product lines that further diversify our lending operations. Our banking operations commenced in 2010 and include a branch network developed through organic growth and acquisition, including concentrations the front range of Colorado, the Quad Cities market in Iowa and Illinois and a full-service branch in Dallas, Texas. Our traditional banking offerings include a full suite of lending and deposit products and services. These activities are focused on our local market areas and some products are offered on a nationwide basis. They generate a stable source of core deposits and a diverse asset base to support our overall operations. Our asset-based lending and equipment lending products are offered on a nationwide basis and generate attractive returns. Additionally, we offer mortgage warehouse and liquid credit lending products on a nationwide basis to provide further asset base diversification and stable deposits. Our Banking products and services share basic processes and have similar economic characteristics.

In addition to our traditional banking operations, we also operate a factoring business focused primarily on serving the over-the-road trucking industry. This business involves the provision of working capital to the trucking industry through the purchase of invoices generated by medium to large sized trucking fleets ("Carriers") at a discount to provide immediate working capital to such Carriers. We commenced these operations in 2012 through the acquisition of our factoring subsidiary, Triumph Business Capital. 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 described above. Given its acquisition, this business has a legacy and structure as a standalone company.

Our payments business, TriumphPay, is a division of our wholly owned bank subsidiary, TBK Bank, and is a payments network for the over-the-road trucking industry. TriumphPay was originally designed as a platform to manage Carrier payments for third party logistics companies, or 3PLs ("Brokers") and the manufacturers and other businesses that contract directly for the shipment of goods (“Shippers”), with a focus on increasing on-balance sheet factored receivable transactions through the offering of quickpay transactions for Carriers receiving such payments through the TriumphPay platform. During 2021, TriumphPay acquired HubTran, Inc., a software platform that offers workflow solutions for the processing and approval of Carrier Invoices for approval by Brokers or purchase by the factoring businesses providing working capital to Carriers ("Factors"). Following such acquisition, the TriumphPay strategy shifted from a capital-intensive on-balance sheet product with a greater focus on interest income to a payments network for the trucking industry with a focus on fee revenue. TriumphPay connects Brokers, Shippers, Factors and Carriers through forward-thinking solutions that help each party successfully manage the life cycle of invoice presentment for services provided by Carrier through the processing and audit of such invoice to its ultimate payment to the Carrier or the Factor providing working capital to such Carrier. TriumphPay offers supply chain finance to Brokers, allowing them to pay their Carriers faster and drive Carrier loyalty. TriumphPay provides tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. TriumphPay also operates in a highly specialized niche with unique processes and key performance indicators.

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At September 30, 2022, our business is primarily focused on providing financial services to participants in the for-hire trucking ecosystem in the United States, including Brokers, Shippers, Factors and Carriers. Within such ecosystem, we operate our TriumphPay payments platform, which connects such parties to streamline and optimize the presentment, audit and payment of transportation invoices. We also act as capital provider to the Carrier industry through our factoring subsidiary, Triumph Business Capital. Our traditional banking operations provide stable, low cost deposits to support our operations, a diversified lending portfolio to add stability to our balance sheet, and a suite of traditional banking products and services to participants in the for-hire trucking ecosystem to deepen our relationship with such clients.

We have determined our reportable segments are Banking, Factoring, Payments and Corporate. For the nine months ended September 30, 2022, our Banking segment generated 45% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 47% of our total revenue, our Payments segment generated 8% of our total revenue, and our Corporate segment generated less than 1% of our total revenue.

Third Quarter 2022 Overview

Net income available to common stockholders for the three months ended September 30, 2022 was $15.4 million, or $0.62 per diluted share, compared to net income to common stockholders for the three months ended September 30, 2021 of $23.6 million, or $0.94 per diluted share. For the three months ended September 30, 2022, our return on average common equity was 7.17% and our return on average assets was 1.13%.

Net income available to common stockholders for the nine months ended September 30, 2022 was $82.3 million, or $3.28 per diluted share, compared to net income available to common stockholders for the nine months ended September 30, 2021 of $83.9 million, or $3.33 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $86.2 million, or $3.42 per diluted share, for the nine months ended September 30, 2021. There were no such adjustment for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, our return on average common equity was 13.07% and our return on average assets was 1.95%.

At September 30, 2022, we had total assets of $5.642 billion, including gross loans held for investment of $4.433 billion, compared to $5.956 billion of total assets and $4.868 billion of gross loans held for investment at December 31, 2021. Total loans held for investment decreased $434.3 million during the nine months ended September 30, 2022. Our Banking loans, which constitute 67% of our total loan portfolio at September 30, 2022, decreased from $3.168 billion in aggregate as of December 31, 2021 to $2.984 billion as of September 30, 2022, a decrease of 5.8%. Our Factoring factored receivables, which constitute 30% of our total loan portfolio at September 30, 2022, decreased from $1.546 billion in aggregate as of December 31, 2021 to $1.330 billion as of September 30, 2022, a decrease of 14.0%. The period end balance of Factoring factored receivables was impacted by our decision to sell certain factored receivables (discussed in 2022 Items of Note) during the period. Our Payments factored receivables, which constitute 3% of our total loan portfolio at September 30, 2022, decreased from $153.2 million in aggregate as of December 31, 2021 to $119.0 million as of September 30, 2022, a decrease of 22.3%.

At September 30, 2022, we had total liabilities of $4.751 billion, including total deposits of $4.441 billion, compared to $5.097 billion of total liabilities and $4.647 billion of total deposits at December 31, 2021. Deposits decreased $205.3 million during the nine months ended September 30, 2022.

At September 30, 2022, we had total stockholders' equity of $891.2 million. During the nine months ended September 30, 2022, total stockholders’ equity increased $32.3 million, primarily due to our net income during the period, offset in part by our treasury stock purchases made under our share repurchase program. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 13.64% and 16.56%, respectively, at September 30, 2022.

The total dollar value of invoices purchased by Triumph Business Capital during the three months ended September 30, 2022 was $3.600 billion with an average invoice size of $2,141. The average transportation invoice size for the three months ended September 30, 2022 was $2,073. This compares to invoice purchase volume of $3.532 billion with an average invoice size of $2,300 and average transportation invoice size of $2,195 during the same period a year ago.

TriumphPay processed 4.7 million invoices paying Carriers a total of $5.952 billion during the three months ended September 30, 2022. This compares to processed volume of 3.8 million invoices for a total of $4.191 billion during the same period a year ago.

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2022 Items of Note

Equipment Loan Sale

During the three months ended June 30, 2022, we made the decision to sell a portfolio of equipment loans. Equipment loans totaling $191.2 million were sold resulting in a gain on sale of loans of $3.9 million.

The gain on sale, net of transaction costs, was included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income and was allocated to the Banking segment.

Factored Receivable Disposal Group

During the three months ended June 30, 2022, Factored Receivable Disposal Group factored receivables totaling $67.9 million and customer reserves totaling $9.7 million were sold resulting in a gain on sale of loans of $13.2 million. During the three months ended September 30, 2022, Factored Receivable Disposal Group factored receivables totaling $20.1 million and customer reserves totaling $1.1 million were sold resulting in a gain on sale of loans of $1.0 million.

The gains on sale, net of transaction costs, totaling $14.2 million were included in net gains (losses) on sale of loans in the Company’s Consolidated Statements of Income and were allocated to the Factoring segment.

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

Interest rate swap termination

During the three months ended March 31, 2022, we terminated our single derivative with a notional value totaling $200.0 million, resulting in a termination value of $9.3 million. During the three months ended June 30, 2022, we terminated the associated hedged funding, incurring a termination fee of $0.7 million which was recognized through interest expense in the consolidated statements of income, and reclassified the remaining $8.9 million unrealized gain on the terminated derivative into earnings through other noninterest income in the consolidated statements of income.

The gains and losses associated with this transaction were allocated to the Banking segment.

For further information on the above transaction, see Note 7 – Derivative Financial Instruments in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.

Equity Method Investment

On October 17, 2019, we made a minority equity investment of $8.0 million in Warehouse Solutions Inc. (“WSI”), purchasing 8% of the common stock of WSI and receiving warrants to purchase an additional 10% of the common stock of WSI upon exercise of the warrants at a later date. WSI provides technology solutions to help reduce supply chain costs for a global client base across multiple industries.

Although we held less than 20% of the voting stock of WSI, the investment in common stock was initially accounted for using the equity method as our representation on WSI’s board of directors, which was disproportionately larger in size than the common stock investment held, demonstrated that we had significant influence over the investee.

On June 10, 2022, we entered into two separate agreements with WSI. First, we entered into an Affiliate Agreement. The Affiliate Agreement canceled our outstanding warrants in exchange for cancellation of an exclusivity clause included in the original investment agreement executed during 2019. By cancelling the exclusivity clause, our Payments segment operations now have greater ability to operate in the freight shipper audit space. As a result of the Affiliate Agreement, we recognized a total loss on impairment of the warrants of $3.2 million, which represented the full book balance of the warrants on the date the Affiliate Agreement was executed. The impairment loss was included in other noninterest income in the consolidated statements of income during the three and nine months ended September 30, 2022.

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Separately, we also entered into an Amended and Restated Investor Rights Agreement (the “Investor Rights Agreement”). The Investor Rights Agreement eliminated our representation on WSI’s board of directors making us a completely passive investor. The Investor Rights Agreement also provided for our purchase of an additional 10% of WSI’s common stock for $23.0 million raising our ownership of WSI’s common stock to 18%. As a passive investor, we no longer hold significant influence over the investee and the investment in WSI’s common stock no longer qualifies for equity method accounting. The investment in WSI’s common stock is now accounted for as an equity investment without a readily determinable fair value measured under the measurement alternative. The measurement alternative requires us to remeasure our investment in the common stock of WSI only upon the execution of an orderly and observable transaction in an identical or similar instrument.

Our additional investment in WSI under the Investor Rights Agreement resulted in us discontinuing the equity method of accounting and qualified as an orderly and observable transaction for an identical investment in WSI, therefore the fair value of our original 8% common stock investment was required to be adjusted from $4.9 million at March 31, 2022 to $15.1 million, resulting in a gain of $10.2 million that was recorded in other noninterest income in the consolidated statements of income during the three months ended June 30, 2022.

The gains and losses associated with this transaction were allocated to the Payments segment.

For further information on the above transactions, see Note 6 – Equity Method Investment in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.

Stock Repurchase Programs

On February 7, 2022, we announced that our board of directors had authorized us to repurchase up to $50.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions at our discretion. During the three and six months ended June 30, 2022, we repurchased into treasury stock under the stock repurchase program 694,985 shares at an average price of $70.02 for a total of $48.7 million and 709,795 shares at an average price of $70.41 for a total of $50.0 million, respectively, completing this stock repurchase program.

On May 23, 2022, we announced that our board of directors had authorized us to repurchase up to an additional $75.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions at our discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of our common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. The repurchase program is authorized for a period of up to one year and does not require us to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time, at our discretion. As of September 30, 2022, no share repurchases had been made under the May 23, 2022 plan.

Items related to our July 2020 acquisition of TFS

As disclosed on our SEC Forms 8-K filed on July 8, 2020 and September 23, 2020, we acquired the transportation factoring assets of TFS, a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), and subsequently amended the terms of that transaction. There were no material developments related to that transaction that impacted our operating results for the three months ended September 30, 2022.

At September 30, 2022, the carrying value of the acquired over-formula advances was $8.8 million, the total reserve on acquired over-formula advances was $8.8 million and the balance of our indemnification asset, the value of the payment that would be due to us from CVLG in the event that these over-advances are charged off, was $4.2 million.

As of September 30, 2022 we carry a separate $19.4 million receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest over-formula advance carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. We are a party to litigation in the United States Court of Federal Claims against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of September 30, 2022. The full amount of such receivable is reflected in non-performing and past due factored receivables as of September 30, 2022 in accordance with our policy. As of September 30, 2022, the entire $19.4 million Misdirected Payments amount was greater than 90 days past due.

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2021 Items of Note

HubTran, Inc.

On June 1, 2021, we, through TriumphPay, a division of our wholly-owned subsidiary TBK Bank, SSB, entered into a definitive agreement to acquire HubTran, Inc., a cloud-based provider of automation software for the trucking industry's back-office, for $97 million in cash subject to customary purchase price adjustments.

The acquisition of HubTran enables us to create a payments network that will allow freight brokers and factors to lower costs, remove inefficiencies, reduce fraud and add value for their stakeholders. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to a payments network for the trucking industry with a focus on fee revenue.

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

Trucking transportation

The largest driver of changes in revenue at our Factoring segment is what is happening in freight markets, particularly in brokered freight, which is priced largely off the spot market and subject to variability in diesel prices.The third quarter saw continuing slow reduction in freight volume and spot rates. Volume was similar to pre-pandemic years in July and August of 2022, but September did not see the usual increase in volume. While spot rates declined, they remained above 2019 numbers and the third quarter was a good quarter for freight brokers as the differential between contract rates and spot rates remained wide. Flat bed truck activity had decreased the most by the end of the third quarter, driven by, among other items, fewer housing starts. Refrigerated van volume and rates maintained a relatively strong position, while dry vans saw dropping rates in most markets at a slow decline. Overall, there have been some dropouts of 1-5 truck firms and owner-operators. There has been a shift to shorter hauls by this segment, primarily due to diesel prices not supported within spot rates and much of the freight has shifted to contract haulers with a fuel surcharge written into the load tenders.

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Financial Highlights


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2022			2021			2022			2021
Income Statement Data:
Interest income	$	103,225		$	96,735		$	312,967		$	279,776
Interest expense	4,955			4,964			13,190			14,703
Net interest income	98,270			91,771			299,777			265,073
Credit loss expense (benefit)	2,646			(1,187)			6,048			(10,838)
Net interest income after credit loss expense (benefit)	95,624			92,958			293,729			275,911


Noninterest income	12,668			12,055			71,949			40,242
Noninterest expense	86,689			72,813			253,860			204,503
Net income (loss) before income taxes	21,603			32,200			111,818			111,650
Income tax expense (benefit)	5,374			7,771			27,068			25,316
Net income (loss)	$	16,229		$	24,429		$	84,750		$	86,334
Dividends on preferred stock	(801)			(802)			(2,404)			(2,405)
Net income available (loss) to common stockholders	$	15,428		$	23,627		$	82,346		$	83,929

Per Share Data:
Basic earnings (loss) per common share	$	0.64		$	0.95		$	3.36		$	3.40
Diluted earnings (loss) per common share	$	0.62		$	0.94		$	3.28		$	3.33
Weighted average shares outstanding - basic	24,227,020			24,759,419			24,483,054			24,719,861
Weighted average shares outstanding - diluted	24,979,257			25,227,963			25,072,862			25,199,991

Adjusted Per Share Data(1):
Adjusted diluted earnings per common share	$	0.62		$	0.94		$	3.28		$	3.42
Adjusted weighted average shares outstanding - diluted	24,979,257			25,227,963			25,072,862			25,199,991

Performance ratios - Annualized:
Return on average assets	1.13		%	1.61		%	1.95		%	1.91		%
Return on average total equity	7.16		%	11.85		%	12.77		%	14.72		%
Return on average common equity	7.17		%	12.13		%	13.07		%	15.18		%
Return on average tangible common equity (1)	10.47		%	19.21		%	19.28		%	22.12		%
Yield on loans(2)	8.95		%	7.92		%	8.77		%	7.65		%
Cost of interest bearing deposits	0.41		%	0.27		%	0.35		%	0.33		%
Cost of total deposits	0.24		%	0.16		%	0.20		%	0.21		%
Cost of total funds	0.42		%	0.38		%	0.36		%	0.38		%
Net interest margin(2)	7.71		%	6.69		%	7.69		%	6.41		%
Efficiency ratio	78.14		%	70.13		%	68.29		%	66.98		%
Adjusted efficiency ratio (1)	78.14		%	70.13		%	68.29		%	66.00		%
Net noninterest expense to average assets	5.15		%	4.00		%	4.19		%	3.63		%
Adjusted net noninterest expense to average assets (1)	5.15		%	4.00		%	4.19		%	3.57		%

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(Dollars in thousands, except per share amounts)	September 30, 2022			December 31, 2021
Balance Sheet Data:
Total assets	$	5,642,450		$	5,956,250
Cash and cash equivalents	421,729			383,178
Investment securities	247,499			192,877
Loans held for investment, net	4,389,193			4,825,359
Total liabilities	4,751,277			5,097,386
Noninterest bearing deposits	1,897,309			1,925,370
Interest bearing deposits	2,544,045			2,721,309
FHLB advances	30,000			180,000
Paycheck Protection Program Liquidity Facility	—			27,144
Subordinated notes	107,587			106,957
Junior subordinated debentures	41,016			40,602
Total stockholders’ equity	891,173			858,864
Preferred stockholders' equity	45,000			45,000
Common stockholders' equity	846,173			813,864

Per Share Data:
Book value per share	$	34.57		$	32.35
Tangible book value per share (1)	$	23.60		$	21.34
Shares outstanding end of period	24,478,288			25,158,879

Asset Quality ratios(3):
Past due to total loans	2.33		%	2.86		%
Nonperforming loans to total loans	1.26		%	0.95		%
Nonperforming assets to total assets	1.11		%	0.92		%
ACL to nonperforming loans	78.88		%	91.20		%
ACL to total loans	0.99		%	0.87		%
Net charge-offs to average loans(4)	0.09		%	0.95		%

Capital ratios:
Tier 1 capital to average assets	12.57		%	11.11		%
Tier 1 capital to risk-weighted assets	13.64		%	11.51		%
Common equity Tier 1 capital to risk-weighted assets	11.93		%	9.94		%
Total capital to risk-weighted assets	16.56		%	14.10		%
Total stockholders' equity to total assets	15.79		%	14.42		%
Tangible common stockholders' equity ratio (1)	10.75		%	9.46		%

(1)The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The non-GAAP measures used by the Company include the following:

•“Adjusted diluted earnings per common share” is defined as adjusted net income available to common stockholders divided by adjusted weighted average diluted common shares outstanding. Excluded from net income available to common stockholders are material gains and expenses related to merger and acquisition-related activities, including divestitures, net of tax. In our judgment, the adjustments made to net income available to common stockholders allow management and investors to better assess our performance in relation to our core net income by removing the volatility associated with certain acquisition-related items and other discrete items that are unrelated to our core business. Weighted average diluted common shares outstanding are adjusted as a result of changes in their dilutive properties given the gain and expense adjustments described herein.

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•"Tangible common stockholders' equity" is defined as common stockholders' equity less goodwill and other intangible assets.

•“Total tangible assets” is defined as total assets less goodwill and other intangible assets.

•“Tangible book value per share” is defined as tangible common stockholders’ equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets.

•“Tangible common stockholders’ equity ratio” is defined as the ratio of tangible common stockholders’ equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets.

•“Return on average tangible common equity” is defined as net income available to common stockholders divided by average tangible common stockholders’ equity.

•“Adjusted efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest income. Also excluded are material gains and expenses related to merger and acquisition-related activities, including divestitures. In our judgment, the adjustments made to operating revenue allow management and investors to better assess our performance in relation to our core operating revenue by removing the volatility associated with certain acquisition-related items and other discrete items that are unrelated to our core business.

•“Adjusted net noninterest expense to average total assets” is defined as noninterest expenses net of noninterest income divided by total average assets. Excluded are material gains and expenses related to merger and acquisition-related activities, including divestitures. This metric is used by our management to better assess our operating efficiency.

(2)Performance ratios include discount accretion on purchased loans for the periods presented as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2022		2021		2022		2021
Loan discount accretion	$	1,539	$	1,953	$	6,631	$	7,615

(3)Asset quality ratios exclude loans held for sale, except for non-performing assets to total assets.

(4)Net charge-offs to average loans ratios are for the nine months ended September 30, 2022 and the year ended December 31, 2021.

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GAAP Reconciliation of Non-GAAP Financial Measures

We believe the non-GAAP financial measures included above provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. The following reconciliation table provides a more detailed analysis of the non-GAAP financial measures:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2022			2021			2022			2021
Net income available to common stockholders	$	15,428		$	23,627		$	82,346		$	83,929
Transaction costs	—			—			—			2,992

Tax effect of adjustments	—			—			—			(715)
Adjusted net income available to common stockholders	$	15,428		$	23,627		$	82,346		$	86,206
Weighted average shares outstanding - diluted	24,979,257			25,227,963			25,072,862			25,199,991
Adjusted diluted earnings per common share	$	0.62		$	0.94		$	3.28		$	3.42

Average total stockholders' equity	$	898,845		$	818,022		$	887,497		$	784,019
Average preferred stock liquidation preference	(45,000)			(45,000)			(45,000)			(45,000)
Average total common stockholders' equity	853,845			773,022			842,497			739,019
Average goodwill and other intangibles	(269,417)			(284,970)			(271,350)			(231,751)
Average tangible common equity	$	584,428		$	488,052		$	571,147		$	507,268

Net income available to common stockholders	$	15,428		$	23,627		$	82,346		$	83,929
Average tangible common equity	584,428			488,052			571,147			507,268
Return on average tangible common equity	10.47		%	19.21		%	19.28		%	22.12		%

Adjusted efficiency ratio:
Net interest income	$	98,270		$	91,771		$	299,777		$	265,073
Noninterest income	12,668			12,055			71,949			40,242
Operating revenue	110,938			103,826			371,726			305,315


Total noninterest expense	$	86,689		$	72,813		$	253,860		$	204,503
Transaction costs	—			—			—			(2,992)
Adjusted noninterest expense	$	86,689		$	72,813		$	253,860		$	201,511
Adjusted efficiency ratio	78.14		%	70.13		%	68.29		%	66.00		%

Adjusted net noninterest expense to average assets ratio:
Total noninterest expense	$	86,689		$	72,813		$	253,860		$	204,503
Transaction costs	—			—			—			(2,992)
Adjusted noninterest expense	86,689			72,813			253,860			201,511
Total noninterest income	12,668			12,055			71,949			40,242


Net noninterest expenses	$	74,021		$	60,758		$	181,911		$	161,269
Average total assets	$	5,700,547		$	6,020,631		$	5,806,933		$	6,042,677
Adjusted net noninterest expense to average assets ratio	5.15		%	4.00		%	4.19		%	3.57		%

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(Dollars in thousands, except per share amounts)	September 30, 2022			December 31, 2021
Total stockholders' equity	$	891,173		$	858,864
Preferred stock	(45,000)			(45,000)
Total common stockholders' equity	846,173			813,864
Goodwill and other intangibles	(268,604)			(276,856)
Tangible common stockholders' equity	$	577,569		$	537,008
Common shares outstanding	24,478,288			25,158,879
Tangible book value per share	$	23.60		$	21.34

Total assets at end of period	$	5,642,450		$	5,956,250
Goodwill and other intangibles	(268,604)			(276,856)
Tangible assets at period end	$	5,373,846		$	5,679,394
Tangible common stockholders' equity ratio	10.75		%	9.46		%

Results of Operations

Three months ended September 30, 2022 compared with three months ended September 30, 2021.

Net Income

We earned net income of $16.2 million for the three months ended September 30, 2022 compared to net income of $24.4 million for the three months ended September 30, 2021, a decrease of $8.2 million. The decrease in net income was driven by a $13.9 million increase in noninterest expense and a $3.8 million increase in credit loss expense partially offset by a $6.5 million increase in net interest income, a $0.6 million increase in noninterest income, and a $2.4 million decrease in income tax expense.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Our operating results depend primarily on our net interest income, which is the difference between interest income on interest earning assets, including loans and securities, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of interest earning assets and interest bearing liabilities, combine to affect net interest income. Our net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing liabilities, referred to as a “rate change.”

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The following table presents the distribution of average assets, liabilities and equity, as well as interest income and fees earned on average interest earning assets and interest expense paid on average interest bearing liabilities. Average balances and interest are inclusive of assets and deposits classified as held for sale.


	Three Months Ended September 30,
	2022				2021
(Dollars in thousands)	Average Balance	Interest	Average Rate(4)		Average Balance	Interest	Average Rate(4)
Interest earning assets:
Cash and cash equivalents	452,136	2,607	2.29	%	474,122	183	0.15	%
Taxable securities	231,759	2,217	3.80	%	154,017	948	2.44	%
Tax-exempt securities	14,197	91	2.54	%	27,839	178	2.54	%
FHLB and other restricted stock	6,171	65	4.18	%	7,956	28	1.40	%
Loans (1)	4,355,132	98,245	8.95	%	4,777,409	95,398	7.92	%
Total interest earning assets	5,059,395	103,225	8.09	%	5,441,343	96,735	7.05	%
Noninterest earning assets:
Cash and cash equivalents	108,323				75,374
Other noninterest earning assets	532,829				503,914
Total assets	5,700,547				6,020,631
Interest bearing liabilities:
Deposits:
Interest bearing demand	879,851	812	0.37	%	779,625	435	0.22	%
Individual retirement accounts	77,004	97	0.50	%	86,571	126	0.58	%
Money market	524,483	313	0.24	%	417,435	225	0.21	%
Savings	524,106	209	0.16	%	479,915	185	0.15	%
Certificates of deposit	407,130	564	0.55	%	595,001	725	0.48	%
Brokered time deposits	186,856	748	1.59	%	99,116	29	0.12	%
Other brokered deposits	26,758	—	—	%	441,446	223	0.20	%
Total interest bearing deposits	2,626,188	2,743	0.41	%	2,899,109	1,948	0.27	%
Federal Home Loan Bank advances	30,000	182	2.41	%	36,522	22	0.24	%
Subordinated notes	107,477	1,304	4.81	%	114,071	2,449	8.52	%
Junior subordinated debentures	40,948	726	7.03	%	40,390	443	4.35	%
Other borrowings	13,180	—	—	%	127,946	102	0.32	%
Total interest bearing liabilities	2,817,793	4,955	0.70	%	3,218,038	4,964	0.61	%
Noninterest bearing liabilities and equity:
Noninterest bearing demand deposits	1,885,111				1,912,398
Other liabilities	98,798				72,173
Total equity	898,845				818,022
Total liabilities and equity	5,700,547				6,020,631
Net interest income		98,270				91,771
Interest spread (2)			7.39	%			6.44	%
Net interest margin (3)			7.71	%			6.69	%

(1)Balance totals include respective nonaccrual assets.

(2)Net interest spread is the yield on average interest earning assets less the rate on interest bearing liabilities.

(3)Net interest margin is the ratio of net interest income to average interest earning assets.

(4)Ratios have been annualized.

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The following table presents loan yields earned on our loan portfolios:


	Three Months Ended September 30,
(Dollars in thousands)	2022			2021
Average Banking loans	$	2,830,507		$	3,299,152
Average Factoring receivables	1,393,141			1,362,856
Average Payments receivables	131,484			115,401
Average total loans	$	4,355,132		$	4,777,409
Banking yield	6.30		%	5.40		%
Factoring yield	14.11		%	13.75		%
Payments yield	11.33		%	11.33		%
Total loan yield	8.95		%	7.92		%

We earned net interest income of $98.3 million for the three months ended September 30, 2022 compared to $91.8 million for the three months ended September 30, 2021, an increase of $6.5 million, or 7.1%, primarily driven by the following factors.

Interest income increased $6.5 million, or 6.7%, in spite of a decrease in average interest earning assets of $381.9 million, or 7.0%, and a decrease in average total loans of $422.3 million, or 8.8%. The average balance of our higher yielding Factoring factored receivables increased $30.3 million, or 2.2%, partially driving the increase in interest income along with an increase in average Payments factored receivables. This was partially offset by a decrease in average Banking loans of $468.6 million, or 14.2% due to decreases in the average balances of all Banking loan types except for general commercial, asset based lending, and liquid credit. In addition to volumes, the increase in interest income was impacted by higher average rates discussed below. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $610.8 million for the three months ended September 30, 2022 compared to $772.3 million for the three months ended September 30, 2021. Further, included in our Banking loans were PPP loans with a carrying amounts of $0.1 million and $87.4 million at September 30, 2022 and September 30, 2021, respectively. A component of interest income consists of discount accretion on acquired loan portfolios and acquired liquid credit. We recognized discount accretion on purchased loans of $1.5 million and $2.0 million for the three months ended September 30, 2022 and 2021, respectively.

Interest expense decreased $0.01 million, or 0.2%, despite a larger decrease in average interest-bearing liabilities. More specifically, average total interest bearing deposits decreased $272.9 million, or 9.4%. Average noninterest bearing demand deposits decreased $27.3 million. The change in interest expense period over period was driven by higher average rates discussed below.

Net interest margin increased to 7.71% for the three months ended September 30, 2022 from 6.69% for the three months ended September 30, 2021, an increase of 102 basis points or 15.2%.

The increase in our net interest margin was impacted by an increase in our yield on interest earning assets of 104 basis points to 8.09% for the three months ended September 30, 2022. This increase was primarily driven by higher yields on loans which increased 103 basis points to 8.95% for the same period. Factoring yield increased period over period and, average Factoring factored receivables as a percentage of the total loan portfolio increased which had a meaningful upward impact on total loan yield. Our transportation factoring balances, which generally generate a higher yield than our non-transportation factoring balances, were 96% and 90% of our Factoring portfolio at September 30, 2022 and 2021, respectively. Banking yields also increased period over period while Payments yields were flat. Non-loan yields were generally higher period over period, but had little impact on the change in our yield on interest earning assets.

The increase in our net interest margin was also impacted by an increase in our average cost of interest bearing liabilities of 9 basis points. This increase in average cost was caused by generally higher interest rates paid on our interest-bearing liabilities driven by changes in interest rates in the macro economy.

Form: 10-Q

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