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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

☒

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

 

For the quarterly period ended March 31, 2020

OR

 

☐

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

 

For the transition period from              to            

Commission File Number 001-36722

 

TRIUMPH BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

 

20-0477066

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(Address of principal executive offices)

(214) 365-6900

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

☒

Accelerated filer

☐

 

 

 

 

Non-accelerated filer

☐ 

Smaller reporting company

☐

 

 

 

 

Emerging growth company

☐

 

 

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

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

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

Common Stock — $0.01 par value, 24,097,487 shares, as of April 16, 2020

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

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

TBK

 

NASDAQ Global Select Market

 

 

 

 

 

TRIUMPH BANCORP, INC.

FORM 10-Q

March 31, 2020

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

    Item 1.

 

Financial Statements

 

 

 

   Consolidated Balance Sheets

2

 

 

   Consolidated Statements of Income

3

 

 

   Consolidated Statements of Comprehensive Income

4

 

 

   Consolidated Statements of Changes in Stockholders’ Equity

5

 

 

   Consolidated Statements of Cash Flows

6

 

 

   Condensed Notes to Consolidated Financial Statements

8

 

    Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

 

    Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

76

 

    Item 4.

 

Controls and Procedures

77

 

 

PART II — OTHER INFORMATION

 

 

    Item 1.

 

Legal Proceedings

77

 

    Item 1A.

 

Risk Factors

78

 

    Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

79

 

    Item 3.

 

Defaults Upon Senior Securities

79

 

    Item 4.

 

Mine Safety Disclosures

79

 

    Item 5.

 

Other Information

79

 

    Item 6.

 

Exhibits

80

 

 

 

 

i

 

PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

 

 

 

 

1

 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2020 and December 31, 2019

(Dollar amounts in thousands, except per share amounts)

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

56,649

 

 

$

67,747

 

Interest bearing deposits with other banks

 

 

151,765

 

 

 

130,133

 

Total cash and cash equivalents

 

 

208,414

 

 

 

197,880

 

Securities - equity investments

 

 

5,678

 

 

 

5,437

 

Securities - available for sale

 

 

302,122

 

 

 

248,820

 

Securities - held to maturity, net of allowance for credit losses of $126 and $0, respectively, fair value of $6,742 and $6,907, respectively

 

 

8,217

 

 

 

8,417

 

Loans held for sale

 

 

4,431

 

 

 

2,735

 

Loans, net of allowance for credit losses of $44,732 and $29,092, respectively

 

 

4,275,816

 

 

 

4,165,420

 

Assets held for sale

 

 

97,895

 

 

 

—

 

Federal Home Loan Bank and other restricted stock, at cost

 

 

37,080

 

 

 

19,860

 

Premises and equipment, net

 

 

98,363

 

 

 

96,595

 

Other real estate owned, net

 

 

2,540

 

 

 

3,009

 

Goodwill

 

 

158,743

 

 

 

158,743

 

Intangible assets, net

 

 

29,465

 

 

 

31,543

 

Bank-owned life insurance

 

 

41,122

 

 

 

40,954

 

Deferred tax assets, net

 

 

9,457

 

 

 

3,812

 

Other assets

 

 

74,386

 

 

 

77,072

 

Total assets

 

$

5,353,729

 

 

$

5,060,297

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

846,412

 

 

$

809,696

 

Interest bearing

 

 

2,835,603

 

 

 

2,980,210

 

Total deposits

 

 

3,682,015

 

 

 

3,789,906

 

Customer repurchase agreements

 

 

3,693

 

 

 

2,033

 

Federal Home Loan Bank advances

 

 

850,000

 

 

 

430,000

 

Subordinated notes

 

 

87,347

 

 

 

87,327

 

Junior subordinated debentures

 

 

39,689

 

 

 

39,566

 

Other liabilities

 

 

101,638

 

 

 

74,875

 

Total liabilities

 

 

4,764,382

 

 

 

4,423,707

 

Commitments and contingencies - See Note 7 and Note 8

 

 

 

 

 

 

 

 

Stockholders' equity - See Note 11

 

 

 

 

 

 

 

 

Common stock, 24,101,120 and 24,964,961 shares outstanding, respectively

 

 

272

 

 

 

272

 

Additional paid-in-capital

 

 

474,441

 

 

 

473,251

 

Treasury stock, at cost

 

 

(102,677

)

 

 

(67,069

)

Retained earnings

 

 

222,809

 

 

 

229,030

 

Accumulated other comprehensive income (loss)

 

 

(5,498

)

 

 

1,106

 

Total stockholders’ equity

 

 

589,347

 

 

 

636,590

 

Total liabilities and stockholders' equity

 

$

5,353,729

 

 

$

5,060,297

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

2

 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Loans, including fees

 

$

48,323

 

 

$

45,094

 

Factored receivables, including fees

 

 

24,292

 

 

 

24,556

 

Securities

 

 

2,107

 

 

 

2,644

 

FHLB and other restricted stock

 

 

204

 

 

 

192

 

Cash deposits

 

 

488

 

 

 

778

 

Total interest income

 

 

75,414

 

 

 

73,264

 

Interest expense:

 

 

 

 

 

 

 

 

Deposits

 

 

9,677

 

 

 

8,218

 

Subordinated notes

 

 

1,347

 

 

 

839

 

Junior subordinated debentures

 

 

646

 

 

 

760

 

Other borrowings

 

 

1,244

 

 

 

2,136

 

Total interest expense

 

 

12,914

 

 

 

11,953

 

Net interest income

 

 

62,500

 

 

 

61,311

 

Credit loss expense

 

 

17,361

 

 

 

1,014

 

Net interest income after credit loss expense

 

 

45,139

 

 

 

60,297

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

1,588

 

 

 

1,606

 

Card income

 

 

1,800

 

 

 

1,844

 

Net OREO gains (losses) and valuation adjustments

 

 

(257

)

 

 

209

 

Net gains (losses) on sale of securities

 

 

38

 

 

 

(11

)

Fee income

 

 

1,686

 

 

 

1,612

 

Insurance commissions

 

 

1,051

 

 

 

919

 

Other

 

 

1,571

 

 

 

1,359

 

Total noninterest income

 

 

7,477

 

 

 

7,538

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

30,722

 

 

 

26,439

 

Occupancy, furniture and equipment

 

 

5,182

 

 

 

4,522

 

FDIC insurance and other regulatory assessments

 

 

315

 

 

 

299

 

Professional fees

 

 

2,107

 

 

 

1,865

 

Amortization of intangible assets

 

 

2,078

 

 

 

2,402

 

Advertising and promotion

 

 

1,292

 

 

 

1,604

 

Communications and technology

 

 

5,501

 

 

 

4,874

 

Other

 

 

10,493

 

 

 

6,561

 

Total noninterest expense

 

 

57,690

 

 

 

48,566

 

Net income (loss) before income tax

 

 

(5,074

)

 

 

19,269

 

Income tax expense (benefit)

 

 

(624

)

 

 

4,481

 

Net income (loss)

 

$

(4,450

)

 

$

14,788

 

Earnings (loss) per common share

 

 

 

 

 

 

 

 

Basic

 

$

(0.18

)

 

$

0.55

 

Diluted

 

$

(0.18

)

 

$

0.55

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

3

 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net income (loss)

 

$

(4,450

)

 

$

14,788

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(8,586

)

 

 

1,893

 

Reclassification of amount realized through sale of securities

 

 

(38

)

 

 

11

 

Tax effect

 

 

2,020

 

 

 

(441

)

Total other comprehensive income (loss)

 

 

(6,604

)

 

 

1,463

 

Comprehensive income (loss)

 

$

(11,054

)

 

$

16,251

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

4

 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Shares

 

 

Par

 

 

Paid-in-

 

 

Shares

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Outstanding

 

 

Amount

 

 

Capital

 

 

Outstanding

 

 

Cost

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance, January 1, 2019

 

 

26,949,936

 

 

$

271

 

 

$

469,341

 

 

 

104,063

 

 

$

(2,288

)

 

$

170,486

 

 

$

(1,203

)

 

$

636,607

 

Issuance of restricted stock awards

 

 

8,063

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Stock based compensation

 

 

—

 

 

 

—

 

 

 

911

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

911

 

Forfeiture of restricted stock awards

 

 

(1,276

)

 

 

—

 

 

 

40

 

 

 

1,276

 

 

 

(40

)

 

 

—

 

 

 

—

 

 

 

—

 

Purchase of treasury stock

 

 

(247,312

)

 

 

—

 

 

 

—

 

 

 

247,312

 

 

 

(7,553

)

 

 

—

 

 

 

—

 

 

 

(7,553

)

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14,788

 

 

 

—

 

 

 

14,788

 

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,463

 

 

 

1,463

 

Balance, March 31, 2019

 

 

26,709,411

 

 

$

271

 

 

$

470,292

 

 

 

352,651

 

 

$

(9,881

)

 

$

185,274

 

 

$

260

 

 

$

646,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2020

 

 

24,964,961

 

 

$

271

 

 

$

473,251

 

 

 

2,198,681

 

 

$

(67,068

)

 

$

229,030

 

 

$

1,106

 

 

$

636,590

 

Impact of adoption of ASU 2016-13

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,771

)

 

 

—

 

 

 

(1,771

)

Issuance of restricted stock awards

 

 

8,079

 

 

 

1

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Stock based compensation

 

 

—

 

 

 

—

 

 

 

1,168

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,168

 

Forfeiture of restricted stock awards

 

 

(601

)

 

 

—

 

 

 

23

 

 

 

601

 

 

 

(23

)

 

 

—

 

 

 

—

 

 

 

—

 

Purchase of treasury stock

 

 

(871,319

)

 

 

—

 

 

 

—

 

 

 

871,319

 

 

 

(35,586

)

 

 

—

 

 

 

—

 

 

 

(35,586

)

Net income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,450

)

 

 

—

 

 

 

(4,450

)

Other comprehensive income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,604

)

 

 

(6,604

)

Balance, March 31, 2020

 

 

24,101,120

 

 

$

272

 

 

$

474,441

 

 

 

3,070,601

 

 

$

(102,677

)

 

$

222,809

 

 

$

(5,498

)

 

$

589,347

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

5

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

  

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,450

)

 

$

14,788

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

2,232

 

 

 

1,961

 

Net accretion on loans

 

 

(2,134

)

 

 

(1,557

)

Amortization of subordinated notes issuance costs

 

 

20

 

 

 

27

 

Amortization of junior subordinated debentures

 

 

123

 

 

 

117

 

Net amortization on securities

 

 

(79

)

 

 

174

 

Amortization of intangible assets

 

 

2,078

 

 

 

2,402

 

Deferred taxes

 

 

(3,083

)

 

 

389

 

Credit loss expense

 

 

17,361

 

 

 

1,014

 

Stock based compensation

 

 

1,168

 

 

 

911

 

Net (gains) losses on sale of debt securities

 

 

(38

)

 

 

11

 

Net (gains) losses on equity securities

 

 

(241

)

 

 

(139

)

Origination of loans held for sale

 

 

(7,775

)

 

 

(4,010

)

Purchases of loans held for sale

 

 

(7,737

)

 

 

—

 

Proceeds from sale of loans originated for sale

 

 

14,233

 

 

 

5,594

 

Net gains on sale of loans

 

 

(181

)

 

 

(88

)

Net (gains) losses on loans transferred to loans held for sale

 

 

(594

)

 

 

—

 

Net OREO (gains) losses and valuation adjustments

 

 

257

 

 

 

(209

)

Net change in operating leases

 

 

49

 

 

 

30

 

(Increase) decrease in other assets

 

 

1,470

 

 

 

(948

)

Increase (decrease) in other liabilities

 

 

1,416

 

 

 

301

 

Net cash provided by (used in) operating activities

 

 

14,095

 

 

 

20,768

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(63,674

)

 

 

(60,146

)

Proceeds from sales of securities available for sale

 

 

—

 

 

 

37,467

 

Proceeds from maturities, calls, and pay downs of securities available for sale

 

 

26,069

 

 

 

21,122

 

Proceeds from maturities, calls, and pay downs of securities held to maturity

 

 

295

 

 

 

220

 

Purchases of loans held for investment

 

 

(123,718

)

 

 

—

 

Proceeds from sale of loans

 

 

31,296

 

 

 

—

 

Net change in loans

 

 

(130,951

)

 

 

(4,452

)

Net proceeds from sale of OREO

 

 

212

 

 

 

—

 

Purchases of premises and equipment, net

 

 

(4,053

)

 

 

(3,500

)

(Purchases) redemptions of FHLB stock, net

 

 

(17,220

)

 

 

(5,248

)

Net cash provided by (used in) investing activities

 

 

(281,744

)

 

 

(14,537

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

(107,891

)

 

 

(135,909

)

Increase (decrease) in customer repurchase agreements

 

 

1,660

 

 

 

(758

)

Increase (decrease) in Federal Home Loan Bank advances

 

 

420,000

 

 

 

75,000

 

Purchase of treasury stock

 

 

(35,586

)

 

 

(7,553

)

Net cash provided by (used in) financing activities

 

 

278,183

 

 

 

(69,220

)

Net increase (decrease) in cash and cash equivalents

 

 

10,534

 

 

 

(62,989

)

Cash and cash equivalents at beginning of period

 

 

197,880

 

 

 

234,939

 

Cash and cash equivalents at end of period

 

$

208,414

 

 

$

171,950

 

See accompanying condensed notes to consolidated financial statements.

 


 

6

 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

12,874

 

 

$

10,164

 

Income taxes paid, net

 

$

18

 

 

$

42

 

Cash paid for operating lease liabilities

 

$

1,049

 

 

$

1,023

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Loans transferred to OREO

 

$

—

 

 

$

804

 

Lease liabilities arising from obtaining right-of-use assets

 

$

7

 

 

$

530

 

Securities available for sale purchased, not settled

 

$

24,425

 

 

$

—

 

Loans transferred to loans held for sale

 

$

30,938

 

 

$

—

 

Assets transferred to assets held for sale

 

$

97,895

 

 

$

—

 

 

 

 

 

 

7

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Principles of Consolidation and Basis of Presentation

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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

Risks and Uncertainties

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company.  The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.  

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s fee income could be reduced due to COVID-19.  In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc.  These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis.  At this time, the Company is unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact its fee income in future periods.

 

8

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s interest income could be reduced due to COVID-19.  In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.  The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt.  If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt.

The Company maintains access to multiple sources of liquidity.  Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile.  If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.  If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. 

Processes, controls and business continuity plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy.  No material operational or internal control challenges or risks have been identified to date.  The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19.  The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its commercial lending clients that are adversely affected by the pandemic.  Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days.  As of April 15, 2020, the Company has executed 404 of these deferrals on outstanding loan balances of $233,000,000.  The Company had 397 additional deferral requests representing $276,000,000 in outstanding balances that were in process.  In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program.  PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  As of April 17, 2020, the Company has closed or approved with the SBA 732 PPP loans representing $158,000,000 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Further, in sensitivity and service to its communities during this unprecedented time, the Company is waiving late payment and overdraft fees and has temporarily suspended collection efforts on past due loans.

Credit

The Company is working with customers directly affected by COVID-19.  The Company is prepared to offer short-term assistance in accordance with regulator guidelines.  As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses (“ACL”) and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Held to Maturity Securities

At March 31, 2020, the Company held $8,343,000 in subordinated notes of CLO securities managed by its former subsidiary.  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.  Thus, the Company may not receive the full amount of cash distributions it expects to receive, which would cause it to record additional allowance for credit losses with a corresponding charge to credit loss expense through earnings.

Transportation

The Company’s transportation businesses may be affected by COVID-19 and the additional impact from low oil prices.  The global supply disruption from China, in combination with the U.S. supply chain challenges due to business closures, shelter in place orders and an overall decrease in consumer demand could have a material impact on freight volumes in the U.S., as early as the second quarter of 2020.  

Debt Securities

The Company determines the classification of debt securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Debt securities not classified as held to maturity or trading are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity using the interest method, except for premiums on callable debt securities, which are amortized to their earliest call date.

The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in other assets in the consolidated balance sheets. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is reversed against interest income. There was no accrued interest related to debt securities reversed against interest income for the three months ended March 31, 2020 and 2019.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Allowance for Credit Losses – Available for Sale Securities

For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable is excluded from the estimate of credit losses.

Allowance for Credit Losses – Held to Maturity Securities

The allowance for credit losses on held to maturity securities is estimated on a collective basis by major security type. At March 31, 2020 and December 31, 2019, the Company’s held to maturity securities consisted of investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a loss rate methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Accrued interest receivable is excluded from the estimate of credit losses.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their amortized cost basis, which is the unpaid principal balance outstanding, net of unearned income, deferred loan fees and costs, premiums and discounts associated with acquisition date fair value adjustments on acquired loans, and any direct principal charge-offs. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in other assets on consolidated balance sheets.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the remaining life of the loan without anticipating prepayments.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. The accrual of interest income on loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or if full collection of interest or principal becomes uncertain. Consumer loans are typically charged off no later than 120 days past due. All interest accrued but not received for a loan placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Factored Receivables

The Company purchases invoices from its factoring clients in schedules or batches.  Cash is advanced to the client to the extent of the applicable advance rate, less fees, as set forth in the individual factoring agreements.  The face value of the invoices purchased are recorded by the Company as factored receivables, and the unadvanced portions of the invoices purchased, less fees, are considered client reserves.  The client reserves are held to settle any payment disputes or collection shortfalls, may be used to pay clients’ obligations to various third parties as directed by the client, are periodically released to or withdrawn by clients, and are reported as deposits in the consolidated balance sheets.  

Unearned factoring fees and unearned net origination fees are deferred and recognized over the weighted average collection period for each client.  Subsequent factoring fees are recognized in interest income as incurred by the client and deducted from the clients’ reserve balances.

Other factoring-related fees, which include wire transfer fees, carrier payment fees, fuel advance fees, and other similar fees, are reported by the Company as non-interest income as incurred by the client.

Acquired Loans

Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”). PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” were not recognized on the balance sheet and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. Valuation allowances on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

For acquired loans not deemed purchased credit deteriorated at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense.

The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

Allowance for Credit Losses – Loans

Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with US GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method or a loss-rate method to estimate expected credit losses.

The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to historical loss information on a straight line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:

Commercial Real Estate — This category of loans consists of the following loan types:

Non-farm Non-residential — This category includes real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. This category also includes investment real estate loans that are primarily secured by office and industrial buildings, warehouses, small retail shopping centers and various special purpose properties. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions.

Multi-family residential — Investment real estate loans are primarily secured by non-owner occupied apartment or multifamily residential buildings. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions.

Construction, land development, land —This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied residential and commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt.

1-4 family residential — This category of loans includes both first and junior liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans.

Farmland — These loans are principally loans to purchase farmland.

Commercial — Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, agriculture operating loans and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other business assets.

A portion of the commercial loan portfolio consists of specialty commercial finance products as follows:

Equipment — Equipment finance loans are commercial loans primarily secured by new or used revenue producing, essential-use equipment from major manufacturers that is movable, may be used in more than one type of business, and generally has broad resale markets. Core markets include transportation, construction, and waste. Loan terms do not exceed the economic life of the equipment and typically are 60 months or less.

Asset-based Lending — These loans are originated to borrowers to support general working capital needs. The asset-based loan structure involves advances of loan proceeds against a borrowing base which typically consists of accounts receivable, identified readily marketable inventory, or other collateral of the borrower. The maximum amount a customer may borrow at any time is fixed as a percentage of the borrowing base outstanding.

A portion of the commercial loan portfolio also consists of national lending products as follows:

Liquid Credit — Broadly syndicated leveraged loans secured by a variety of collateral types.

Premium Finance — Loans that provide customized premium financing solutions for the acquisition of property and casualty insurance coverage. In effect, these short term premium finance loans allow insureds to pay their insurance premiums over the life of the underlying policy, instead of paying the entire premium at the outset.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Factored Receivables — The Company operates as a factor by purchasing accounts receivable from its clients, then collecting the receivable from the account debtor. The Company’s smaller factoring relationships are typically structured as “non-recourse” relationships (i.e., the Company retains the credit risk associated with the ability of the account debtor on a purchased invoice to ultimately make payment) and the Company’s larger factoring relationships are typically structured as “recourse” relationships (i.e., the Company’s client agrees to repurchase any invoices for which payment is not ultimately received from the account debtor). Advances initially made to the client to acquire the receivables are typically at a discount to the invoice value. The discount balance is held in client reserves, net of the Company’s compensation. The client reserves are held to settle any payment disputes or collection shortfalls, may be used to pay clients’ obligations to various third parties as directed by the client, are periodically released to or withdrawn by clients, and are reported as deposits.

Consumer — Loans used for personal use typically on an unsecured basis.

Mortgage Warehouse — Mortgage Warehouse facilities are provided to unaffiliated mortgage origination companies and are collateralized by 1-4 family residential loans. The originator closes new mortgage loans with the intent to sell these loans to third party investors for a profit. The Company provides funding to the mortgage companies for the period between the origination and their sale of the loan. The Company has a policy that requires that it separately validate that each residential mortgage loan was underwritten consistent with the underwriting requirements of the final investor or market standards prior to advancing funds. The Company is repaid with the proceeds received from sale of the mortgage loan to the final investor.

Discounted Cash Flow Method

The Company uses the discounted cash flow method to estimate expected credit losses for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit and premium finance), and consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.  For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as a loss driver. Management also utilizes and forecasts either one-year percentage change in national retail sales, one-year percentage change in the national home price index, or one-year percentage change in national gross domestic product 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.

For all DCF models, management 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. Management 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 management when developing the forecast metrics.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

Loss-Rate Method

The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, premium finance, 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 management'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.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Collateral Dependent Financial Assets

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

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.

A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commitments to purchase broadly syndicated loans, and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.

Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis and disclosures about them. The new current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow (“DCF”) method, loss-rate method and roll-rate method. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net reduction of retained earnings of $1,771,000 upon adoption. The transition adjustment includes an increase in the allowance for credit losses on loans of $269,000, an increase in the allowance for credit losses on held to maturity debt securities of $126,000, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $1,918,000, net of the corresponding increases in deferred tax assets of $542,000.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the life of the loans.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).  ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grands a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 4 of the condensed footnotes to the consolidated financial statements for disclosure of the impact to date.

 

 

17

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – Business DIVESTITURE

Triumph Premium Finance

On April 20, 2020, the Company entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit its premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of the Disposal Group was transferred to assets held for sale.

A summary of the carrying amount of the assets in the Disposal Group transferred to held for sale at March 31, 2020 is as follows:

(Dollars in thousands)

 

March 31, 2020

 

Carrying amount of assets in the disposal group:

 

 

 

 

Loans

 

$

97,839

 

Premises and equipment, net

 

 

53

 

Other assets

 

 

3

 

Total carrying amount

 

$

97,895

 

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

NOTE 3 - SECURITIES

Equity Securities With Readily Determinable Fair Values

The Company held equity securities with fair values of $5,678,000 and $5,437,000 at March 31, 2020 and December 31, 2019, respectively. The gross realized and unrealized losses recognized on equity securities with readily determinable fair values in noninterest income in the Company’s consolidated statements of income were as follows:

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Unrealized gains (losses) on equity securities still held at the reporting date

 

$

241

 

 

$

139

 

Realized gains (losses) on equity securities sold during the period

 

 

—

 

 

 

—

 

 

 

$

241

 

 

$

139

 

 

18

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Debt Securities

Debt securities have been classified in the financial statements as available for sale or held to maturity. The 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:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Allowance

 

 

 

 

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

for Credit

 

 

Fair

 

March 31, 2020

 

Cost

 

 

Gains

 

 

Losses

 

 

Losses

 

 

Value

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

28,715

 

 

$

341

 

 

$

—

 

 

$

—

 

 

$

29,056

 

Mortgage-backed securities, residential

 

 

34,803

 

 

 

1,218

 

 

 

(42

)

 

 

—

 

 

 

35,979

 

Asset backed securities

 

 

7,688

 

 

 

—

 

 

 

(145

)

 

 

—

 

 

 

7,543

 

State and municipal

 

 

51,858

 

 

 

1,011

 

 

 

(6

)

 

 

—

 

 

 

52,863

 

CLO securities

 

 

136,007

 

 

 

—

 

 

 

(9,623

)

 

 

—

 

 

 

126,384

 

Corporate bonds

 

 

46,386

 

 

 

226

 

 

 

(216

)

 

 

—

 

 

 

46,396

 

SBA pooled securities

 

 

3,850

 

 

 

77

 

 

 

(26

)

 

 

—

 

 

 

3,901

 

Total available for sale securities

 

$

309,307

 

 

$

2,873

 

 

$

(10,058

)

 

$

—

 

 

$

302,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Unrecognized

 

 

Unrecognized

 

 

Fair

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO securities

 

$

8,343

 

 

$

—

 

 

$

(1,601

)

 

$

6,742

 

 

 

 

 

Allowance for credit losses

 

 

(126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net of ACL

 

$

8,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2019

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

39,679

 

 

$

115

 

 

$

(34

)

 

$

39,760

 

Mortgage-backed securities, residential

 

 

37,324

 

 

 

728

 

 

 

(36

)

 

 

38,016

 

Asset-backed securities

 

 

8,039

 

 

 

—

 

 

 

(80

)

 

 

7,959

 

State and municipal

 

 

31,746

 

 

 

327

 

 

 

(8

)

 

 

32,065

 

CLO Securities

 

 

75,592

 

 

 

39

 

 

 

(358

)

 

 

75,273

 

Corporate bonds

 

 

50,889

 

 

 

695

 

 

 

(1

)

 

 

51,583

 

SBA pooled securities

 

 

4,112

 

 

 

53

 

 

 

(1

)

 

 

4,164

 

Total available for sale securities

 

$

247,381

 

 

$

1,957

 

 

$

(518

)

 

$

248,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrecognized

 

 

Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO securities

 

$

8,417

 

 

$

—

 

 

$

(1,510

)

 

$

6,907

 

  

 

19

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The amortized cost and estimated fair value of debt securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   

 

Available for Sale Securities

 

 

Held to Maturity Securities

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Due in one year or less

 

$

66,466

 

 

$

66,604

 

 

$

—

 

 

$

—

 

Due from one year to five years

 

 

32,330

 

 

 

32,813

 

 

 

—

 

 

 

—

 

Due from five years to ten years

 

 

29,017

 

 

 

29,110

 

 

 

8,343

 

 

 

6,742

 

Due after ten years

 

 

135,153

 

 

 

126,172

 

 

 

—

 

 

 

—

 

 

 

 

262,966

 

 

 

254,699

 

 

 

8,343

 

 

 

6,742

 

Mortgage-backed securities, residential

 

 

34,803

 

 

 

35,979

 

 

 

—

 

 

 

—

 

Asset backed securities

 

 

7,688

 

 

 

7,543

 

 

 

—

 

 

 

—

 

SBA pooled securities

 

 

3,850

 

 

 

3,901

 

 

 

—

 

 

 

—

 

 

 

$

309,307

 

 

$

302,122

 

 

$

8,343

 

 

$

6,742

 

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

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Proceeds

 

$

—

 

 

$

37,467

 

Gross gains

 

$

—

 

 

$

119

 

Gross losses

 

$

—

 

 

$

(130

)

Net gains and losses from calls of securities

 

$

38

 

 

$

—

 

Debt securities with a carrying amount of approximately $49,205,000 and $48,237,000 at March 31, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

Accrued interest on available for sale securities totaled $2,129,000 and $1,685,000 at March 31, 2020 and December 31, 2019, respectively, and was included in other assets in the consolidated balance sheets.

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

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

March 31, 2020

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities, residential

 

$

3,492

 

 

$

(36

)

 

$

481

 

 

$

(6

)

 

$

3,973

 

 

$

(42

)

Asset backed securities

 

 

555

 

 

 

(3

)

 

 

6,988

 

 

 

(142

)

 

 

7,543

 

 

 

(145

)

State and municipal

 

 

1,395

 

 

 

(1

)

 

 

1,898

 

 

 

(5

)

 

 

3,293

 

 

 

(6

)

CLO securities

 

 

70,039

 

 

 

(9,159

)

 

 

2,281

 

 

 

(464

)

 

 

72,320

 

 

 

(9,623

)

Corporate bonds

 

 

17,680

 

 

 

(215

)

 

 

149

 

 

 

(1

)

 

 

17,829

 

 

 

(216

)

SBA pooled securities

 

 

1,137

 

 

 

(26

)

 

 

8

 

 

 

—

 

 

 

1,145

 

 

 

(26

)

 

 

$

94,298

 

 

$

(9,440

)

 

$

11,805

 

 

$

(618

)

 

$

106,103

 

 

$

(10,058

)

 

 

20

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(Dollars in thousands)

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

December 31, 2019

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

—

 

 

$

—

 

 

$

12,331

 

 

$

(34

)

 

$

12,331

 

 

$

(34

)

Mortgage-backed securities, residential

 

 

3,549

 

 

 

(29

)

 

 

777

 

 

 

(7

)

 

 

4,326

 

 

 

(36

)

Asset-backed securities

 

 

2,986

 

 

 

(36

)

 

 

4,973

 

 

 

(44

)

 

 

7,959

 

 

 

(80

)

State and municipal

 

 

562

 

 

 

—

 

 

 

3,426

 

 

 

(8

)

 

 

3,988

 

 

 

(8

)

CLO Securities

 

 

58,160

 

 

 

(358

)

 

 

—

 

 

 

—

 

 

 

58,160

 

 

 

(358

)

Corporate bonds

 

 

—

 

 

 

—

 

 

 

149

 

 

 

(1

)

 

 

149

 

 

 

(1

)

SBA pooled securities

 

 

354

 

 

 

—

 

 

 

9

 

 

 

(1

)

 

 

363

 

 

 

(1

)

 

 

$

65,611

 

 

$

(423

)

 

$

21,665

 

 

$

(95

)

 

$

87,276

 

 

$

(518

)

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 March 31, 2020, the Company had 97 available for sale debt securities in an unrealized loss position without an allowance for credit losses. The majority of the unrealized losses at March 31, 2020 were from 17 CLO securities that represent investments in highly rated instruments for which the Company holds a favorable position in the cash flow waterfall. 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 March 31, 2020, 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.

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

(Dollars in thousands)

 

Held to Maturity

 

Three months ended March 31, 2020

 

CLO Securities

 

Allowance for credit losses:

 

 

 

 

Beginning balance

 

$

—

 

Impact of adopting ASC 326

 

 

126

 

Credit loss expense

 

 

—

 

Allowance for credit losses ending balance

 

$

126

 

The Company’s held to maturity securities are investments in the unrated subordinated notes of collateralized loan obligation funds. There were no past due or nonaccrual held to maturity securities at March 31, 2020.

NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans Held for Sale

The following table presents loans held for sale:

(Dollars in thousands)

 

March 31, 2020

 

 

December 31, 2019

 

1-4 family residential

 

$

4,180

 

 

$

2,735

 

Commercial

 

 

251

 

 

 

—

 

Total loans held for sale

 

$

4,431

 

 

$

2,735

 

 

21

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Loans Held for Investment

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

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Amortized

 

 

Unpaid

 

 

 

 

 

 

Amortized

 

 

Unpaid

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Principal

 

 

Difference

 

 

Cost

 

 

Principal

 

 

Difference

 

Commercial real estate

 

$

985,757

 

 

$

990,063

 

 

$

(4,306

)

 

$

1,046,961

 

 

$

1,051,684

 

 

$

(4,723

)

Construction, land development, land

 

 

198,050

 

 

 

199,638

 

 

 

(1,588

)

 

 

160,569

 

 

 

162,335

 

 

 

(1,766

)

1-4 family residential

 

 

169,703

 

 

 

170,506

 

 

 

(803

)

 

 

179,425

 

 

 

180,340

 

 

 

(915

)

Farmland

 

 

133,579

 

 

 

134,507

 

 

 

(928

)

 

 

154,975

 

 

 

156,995

 

 

 

(2,020

)

Commercial

 

 

1,412,822

 

 

 

1,416,913

 

 

 

(4,091

)

 

 

1,342,683

 

 

 

1,346,444

 

 

 

(3,761

)

Factored receivables

 

 

661,100

 

 

 

663,105

 

 

 

(2,005

)

 

 

619,986

 

 

 

621,697

 

 

 

(1,711

)

Consumer

 

 

20,326

 

 

 

20,383

 

 

 

(57

)

 

 

21,925

 

 

 

21,994

 

 

 

(69

)

Mortgage warehouse

 

 

739,211

 

 

 

739,211

 

 

 

—

 

 

 

667,988

 

 

 

667,988

 

 

 

—

 

Total

 

 

4,320,548

 

 

$

4,334,326

 

 

$

(13,778

)

 

 

4,194,512

 

 

$

4,209,477

 

 

$

(14,965

)

Allowance for credit losses

 

 

(44,732

)

 

 

 

 

 

 

 

 

 

 

(29,092

)

 

 

 

 

 

 

 

 

 

 

$

4,275,816

 

 

 

 

 

 

 

 

 

 

$

4,165,420

 

 

 

 

 

 

 

 

 

  

The difference between the amortized cost and the unpaid principal is primarily (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans totaling $13,419,000 and $13,573,000 at March 31, 2020 and December 31, 2019, respectively, and (2) net deferred origination and factoring fees totaling $359,000 and $1,392,000 at March 31, 2020 and December 31, 2019, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $16,957,000 and $18,553,000 at March 31, 2020 and December 31, 2019, respectively, and was included in other assets in the consolidated balance sheets.

At March 31, 2020 and December 31, 2019, the Company had $55,549,000 and $66,754,000, respectively, of customer reserves associated with factored receivables, which are held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.

Loans with carrying amounts of $1,282,907,000 and $1,301,851,000 at March 31, 2020 and December 31, 2019, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

During the three months ended March 31, 2020, loans with carrying amounts of $30,938,000 were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. During the three months ended March 31, 2020, loans transferred to held for sale were sold resulting in proceeds of $31,296,000 and net gains on transfers and sales of loans, which were recorded as other noninterest income in the consolidated statements of income, of $594,000. There were no loans transferred from held to investment to loans held for sale during the three months ended March 31, 2019.

 

22

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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:

  

 

 

 

 

 

 

Impact of

 

 

Credit

 

 

 

 

 

 

 

 

 

 

Reclassification

 

 

 

 

 

(Dollars in thousands)

 

Beginning

 

 

Adopting

 

 

Loss

 

 

 

 

 

 

 

 

 

 

to Held

 

 

Ending

 

Three months ended March 31, 2020

 

Balance

 

 

ASC 326

 

 

Expense

 

 

Charge-offs

 

 

Recoveries

 

 

For Sale

 

 

Balance

 

Commercial real estate

 

$

5,353

 

 

$

1,372

 

 

$

5,027

 

 

$

—

 

 

$

1

 

 

$

—

 

 

$

11,753

 

Construction, land development, land

 

 

1,382

 

 

 

(187

)

 

 

1,983

 

 

 

—

 

 

 

1

 

 

 

—

 

 

 

3,179

 

1-4 family residential

 

 

308

 

 

 

513

 

 

 

259

 

 

 

(21

)

 

 

28

 

 

 

—

 

 

 

1,087

 

Farmland

 

 

670

 

 

 

437

 

 

 

(86

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,021

 

Commercial

 

 

12,566

 

 

 

(184

)

 

 

8,233

 

 

 

(306

)

 

 

285

 

 

 

(449

)

 

 

20,145

 

Factored receivables

 

 

7,657

 

 

 

(1,630

)

 

 

1,463

 

 

 

(1,394

)

 

 

38

 

 

 

—

 

 

 

6,134

 

Consumer

 

 

488

 

 

 

(52

)

 

 

411

 

 

 

(204

)

 

 

31

 

 

 

—

 

 

 

674

 

Mortgage warehouse

 

 

668

 

 

 

—

 

 

 

71

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

739

 

 

 

$

29,092

 

 

$

269

 

 

$

17,361

 

 

$

(1,925

)

 

$

384

 

 

$

(449

)

 

$

44,732

 

 

(Dollars in thousands)

 

Beginning

 

 

Credit Loss

 

 

 

 

 

 

 

 

 

 

Ending

 

Three months ended March 31, 2019

 

Balance

 

 

Expense

 

 

Charge-offs

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

4,493

 

 

$

692

 

 

$

—

 

 

$

1

 

 

$

5,186

 

Construction, land development, land

 

 

1,134

 

 

 

(235

)

 

 

(78

)

 

 

85

 

 

 

906

 

1-4 family residential

 

 

317

 

 

 

39

 

 

 

(36

)

 

 

47

 

 

 

367

 

Farmland

 

 

535

 

 

 

43

 

 

 

—

 

 

 

—

 

 

 

578

 

Commercial

 

 

12,865

 

 

 

120

 

 

 

(780

)

 

 

7

 

 

 

12,212

 

Factored receivables

 

 

7,299

 

 

 

189

 

 

 

(9

)

 

 

16

 

 

 

7,495

 

Consumer

 

 

615

 

 

 

173

 

 

 

(278

)

 

 

45

 

 

 

555

 

Mortgage warehouse

 

 

313

 

 

 

(7

)

 

 

—

 

 

 

—

 

 

 

306

 

 

 

$

27,571

 

 

$

1,014

 

 

$

(1,181

)

 

$

201

 

 

$

27,605

 

 

The ACL as of March 31, 2020 was estimated using the current expected credit loss model. The primary reason for the increase in required ACL is significant projected deterioration of the loss drivers that the Company forecasts to calculate expected losses and, to a much lesser extent, increases in qualitative loss factors.

 

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 premium finance), 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.

 

 

23

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For all DCF models at March 31, 2020, 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 March 31, 2020 the Company forecasted a significant increase in national unemployment, significant decrease in one-year percentage change in national retail sales, significant decrease in one-year percentage change in the national home price index, and a significant decrease in one-year percentage change in national gross domestic product for the first forecasted quarter. With the exception of percentage change in the national home price index, the Company projected gradual improvement in the loss drivers over the next three quarters with these loss drivers remaining significantly worse compared to recent historical trends over the past several years. Percentage change in home price index is expected to decrease each of the next four projected quarters.

 

The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, premium finance, 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.

The projected economic impact of COVID-19 on the Company’s loss drivers over the reasonable and supportable forecast period created the need for $10,500,000 of additional ACL. The increase in required ACL was also driven by net charge-offs of $1,500,000 (which carried reserves of $700,000 at the time of charge-off), net new specific allowances recorded on individual loans of $3,000,000, and growth and changes in mix in the underlying portfolio.

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)

 

 

 

 

 

Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

ACL

 

March 31, 2020

 

Real Estate

 

 

Receivable

 

 

Equipment

 

 

Other

 

 

Total

 

Allocation

 

Commercial real estate

 

$

17,142

 

 

$

—

 

 

$

—

 

 

$

301

 

 

$

17,443

 

$

948

 

Construction, land development, land

 

 

4,611

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,611

 

 

271

 

1-4 family residential

 

 

2,436

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,436

 

 

24

 

Farmland

 

 

5,778

 

 

 

—

 

 

 

157

 

 

 

—

 

 

 

5,935

 

 

—

 

Commercial

 

 

3,857

 

 

 

4,471

 

 

 

7,730

 

 

 

4,582

 

 

 

20,640

 

 

3,457

 

Factored receivables

 

 

—

 

 

 

19,977

 

 

 

—

 

 

 

—

 

 

 

19,977

 

 

2,677

 

Consumer

 

 

—

 

 

 

—

 

 

 

—

 

 

 

391

 

 

 

391

 

 

63

 

Mortgage warehouse

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

—

 

Total

 

$

33,824

 

 

$

24,448

 

 

$

7,887

 

 

$

5,274

 

 

$

71,433

 

$

7,440

 

The following table presents loans individually and collectively evaluated for impairment, as well as purchased credit impaired (“PCI”) loans, and their respective allowance for credit loss allocations as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

(Dollars in thousands)

 

Loan Evaluation

 

 

ACL Allocations

 

December 31, 2019

 

Individually

 

 

Collectively

 

 

PCI

 

 

Total loans

 

 

Individually

 

 

Collectively

 

 

PCI

 

 

Total ACL

 

Commercial real estate

 

$

7,455

 

 

$

1,030,439

 

 

$

9,067

 

 

$

1,046,961

 

 

$

344

 

 

$

5,009

 

 

$

—

 

 

$

5,353

 

Construction, land development, land

 

 

2,138

 

 

 

155,985

 

 

 

2,446

 

 

 

160,569

 

 

 

271

 

 

 

1,111

 

 

 

—

 

 

 

1,382

 

1-4 family residential

 

 

1,728

 

 

 

177,189

 

 

 

508

 

 

 

179,425

 

 

 

33

 

 

 

275

 

 

 

—

 

 

 

308

 

Farmland

 

 

6,638

 

 

 

148,233

 

 

 

104

 

 

 

154,975

 

 

 

—

 

 

 

670

 

 

 

—

 

 

 

670

 

Commercial

 

 

15,618

 

 

 

1,326,515

 

 

 

550

 

 

 

1,342,683

 

 

 

1,278

 

 

 

11,284

 

 

 

4

 

 

 

12,566

 

Factored receivables

 

 

15,947

 

 

 

604,039

 

 

 

—

 

 

 

619,986

 

 

 

3,178

 

 

 

4,479

 

 

 

—

 

 

 

7,657

 

Consumer

 

 

327

 

 

 

21,598

 

 

 

—

 

 

 

21,925

 

 

 

9

 

 

 

479

 

 

 

—

 

 

 

488

 

Mortgage warehouse

 

 

—

 

 

 

667,988

 

 

 

—

 

 

 

667,988

 

 

 

—

 

 

 

668

 

 

 

—

 

 

 

668

 

 

 

$

49,851

 

 

$

4,131,986

 

 

$

12,675

 

 

$

4,194,512

 

 

$

5,113

 

 

$

23,975

 

 

$

4

 

 

$

29,092

 

 

24

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents information pertaining to impaired loans as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

 

 

 

Impaired Loans and Purchased Credit

 

 

Impaired Loans

 

 

 

Impaired Loans With a Valuation Allowance

 

 

Without a Valuation Allowance

 

(Dollars in thousands)

 

Amortized

 

 

Unpaid

 

 

Related

 

 

Amortized

 

 

Unpaid

 

December 31, 2019

 

Cost

 

 

Principal

 

 

Allowance

 

 

Cost

 

 

Principal

 

Commercial real estate

 

$

878

 

 

$

907

 

 

$

344

 

 

$

6,577

 

 

$

6,643

 

Construction, land development, land

 

 

935

 

 

 

935

 

 

 

271

 

 

 

1,203

 

 

 

1,305

 

1-4 family residential

 

 

35

 

 

 

22

 

 

 

33

 

 

 

1,693

 

 

 

1,799

 

Farmland

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,638

 

 

 

6,819

 

Commercial

 

 

6,032

 

 

 

6,053

 

 

 

1,278

 

 

 

9,586

 

 

 

9,751

 

Factored receivables

 

 

15,940

 

 

 

15,940

 

 

 

3,178

 

 

 

7

 

 

 

7

 

Consumer

 

 

17

 

 

 

16

 

 

 

9

 

 

 

310

 

 

 

311

 

Mortgage warehouse

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCI

 

 

71

 

 

 

55

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

$

23,908

 

 

$

23,928

 

 

$

5,117

 

 

$

26,014

 

 

$

26,635

 

The following table presents average impaired loans, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three months ended March 31, 2019:

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

 

Average

 

 

Interest

 

(Dollars in thousands)

 

Impaired Loans

 

 

Recognized

 

Commercial real estate

 

$

7,340

 

 

$

—

 

Construction, land development, land

 

 

555

 

 

 

—

 

1-4 family residential

 

 

1,880

 

 

 

1

 

Farmland

 

 

6,969

 

 

 

45

 

Commercial

 

 

14,975

 

 

 

52

 

Factored receivables

 

 

7,539

 

 

 

—

 

Consumer

 

 

376

 

 

 

—

 

Mortgage warehouse

 

 

—

 

 

 

—

 

PCI

 

 

71

 

 

 

—

 

 

 

$

39,705

 

 

$

98

 

 

Past Due and Nonaccrual Loans

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due 90

 

(Dollars in thousands)

 

Past Due

 

 

Past Due

 

 

Past Due 90

 

 

Total

 

 

 

 

 

 

 

 

 

 

Days or More

 

March 31, 2020

 

30-59 Days

 

 

60-90 Days

 

 

Days or More

 

 

Past Due

 

 

Current

 

 

Total

 

 

and Accruing

 

Commercial real estate

 

$

1,172

 

 

$

540

 

 

$

3,723

 

 

$

5,435

 

 

$

980,322

 

 

$

985,757

 

 

$

—

 

Construction, land development, land

 

 

1,927

 

 

 

—

 

 

 

1,183

 

 

 

3,110

 

 

 

194,940

 

 

 

198,050

 

 

 

—

 

1-4 family residential

 

 

1,614

 

 

 

578

 

 

 

1,011

 

 

 

3,203

 

 

 

166,500

 

 

 

169,703

 

 

 

200

 

Farmland

 

 

871

 

 

 

310

 

 

 

1,755

 

 

 

2,936

 

 

 

130,643

 

 

 

133,579

 

 

 

—

 

Commercial

 

 

5,867

 

 

 

8,659

 

 

 

10,993

 

 

 

25,519

 

 

 

1,387,303

 

 

 

1,412,822

 

 

 

717

 

Factored receivables

 

 

28,678

 

 

 

9,448

 

 

 

6,849

 

 

 

44,975

 

 

 

616,125

 

 

 

661,100

 

 

 

6,849

 

Consumer

 

 

408

 

 

 

140

 

 

 

264

 

 

 

812

 

 

 

19,514

 

 

 

20,326

 

 

 

—

 

Mortgage warehouse

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

739,211

 

 

 

739,211

 

 

 

—

 

Total

 

$

40,537

 

 

$

19,675

 

 

$

25,778

 

 

$

85,990

 

 

$

4,234,558

 

 

$

4,320,548

 

 

$

7,766

 

 

 

25

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due 90

 

(Dollars in thousands)

 

Past Due

 

 

Past Due

 

 

Past Due 90

 

 

Total

 

 

 

 

 

 

 

 

 

 

Days or More

 

December 31, 2019

 

30-59 Days

 

 

60-90 Days

 

 

Days or More

 

 

Past Due

 

 

Current

 

 

Total

 

 

and Accruing

 

Commercial real estate

 

$

1,752

 

 

$

1,328

 

 

$

1,759

 

 

$

4,839

 

 

$

1,042,122

 

 

$

1,046,961

 

 

$

—

 

Construction, land development, land

 

 

1,785

 

 

 

842

 

 

 

361

 

 

 

2,988

 

 

 

157,581

 

 

 

160,569

 

 

 

—

 

1-4 family residential

 

 

1,396

 

 

 

723

 

 

 

554

 

 

 

2,673

 

 

 

176,752

 

 

 

179,425

 

 

 

286

 

Farmland

 

 

52

 

 

 

132

 

 

 

2,376

 

 

 

2,560

 

 

 

152,415

 

 

 

154,975

 

 

 

—

 

Commercial

 

 

4,444

 

 

 

4,154

 

 

 

9,555

 

 

 

18,153

 

 

 

1,324,530

 

 

 

1,342,683

 

 

 

808

 

Factored receivables

 

 

29,118

 

 

 

7,182

 

 

 

4,226

 

 

 

40,526

 

 

 

579,460

 

 

 

619,986

 

 

 

4,226

 

Consumer

 

 

508

 

 

 

429

 

 

 

183

 

 

 

1,120

 

 

 

20,805

 

 

 

21,925

 

 

 

49

 

Mortgage warehouse

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

667,988

 

 

 

667,988

 

 

 

—

 

Total

 

$

39,055

 

 

$

14,790

 

 

$

19,014

 

 

$

72,859

 

 

$

4,121,653

 

 

$

4,194,512

 

 

$

5,369

 

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:

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

Nonaccrual

 

 

 

 

 

 

Nonaccrual

 

(Dollars in thousands)

 

Nonaccrual

 

 

With No ACL

 

 

Nonaccrual

 

 

With No ACL

 

Commercial real estate

 

$

14,645

 

 

$

7,162

 

 

$

7,501

 

 

$

6,623

 

Construction, land development, land

 

 

3,819

 

 

 

2,904

 

 

 

3,922

 

 

 

2,987

 

1-4 family residential

 

 

1,971

 

 

 

1,935

 

 

 

1,730

 

 

 

1,694

 

Farmland

 

 

5,714

 

 

 

5,714

 

 

 

6,494

 

 

 

6,494

 

Commercial

 

 

20,589

 

 

 

11,974

 

 

 

16,080

 

 

 

9,977

 

Factored receivables

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Consumer

 

 

391

 

 

 

196

 

 

 

327

 

 

 

310

 

Mortgage warehouse

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

$

47,129

 

 

$

29,885

 

 

$

36,054

 

 

$

28,085

 

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

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Commercial real estate

 

$

62

 

 

$

8

 

Construction, land development, land

 

 

—

 

 

 

9

 

1-4 family residential

 

 

8

 

 

 

2

 

Farmland

 

 

—

 

 

 

1

 

Commercial

 

 

16

 

 

 

26

 

Factored receivables

 

 

—

 

 

 

—

 

Consumer

 

 

2

 

 

 

—

 

Mortgage warehouse

 

 

—

 

 

 

—

 

 

 

$

88

 

 

$

46

 

There was no interest earned on nonaccrual loans during the three months ended March 31, 2020 and 2019.

The following table presents information regarding nonperforming loans:

(Dollars in thousands)

 

March 31, 2020

 

 

December 31, 2019

 

Nonaccrual loans(1)

 

$

47,129

 

 

$

36,054

 

Factored receivables greater than 90 days past due

 

 

6,849

 

 

 

4,226

 

Troubled debt restructurings accruing interest

 

 

327

 

 

 

333

 

 

 

$

54,305

 

 

$

40,613

 

 

(1)

Includes troubled debt restructurings of $17,034,000 and $4,888,000 at March 31, 2020 and December 31, 2019, respectively.

 

26

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Information

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

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

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

PCI (Prior to the Adoption of ASU 2016-13) – At acquisition, PCI loans had the characteristics of classified loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.

 

27

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 reunderwritten at the point of renewal and considered current period originations for purposes of the table below. As of March 31, 2020 and December 31, 2019, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving

 

 

Converted

 

 

 

 

 

March 31, 2020

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Loans

 

 

To Term Loans

 

 

Total

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

163,579

 

 

$

203,382

 

 

$

202,464

 

 

$

185,099

 

 

$

92,427

 

 

$

108,488

 

 

$

9,867

 

 

$

2,762

 

 

$

968,068

 

Classified

 

 

9,368

 

 

 

3,197

 

 

 

448

 

 

 

152

 

 

 

1,578

 

 

 

2,946

 

 

 

—

 

 

 

—

 

 

 

17,689

 

Total commercial real estate

 

$

172,947

 

 

$

206,579

 

 

$

202,912

 

 

$

185,251

 

 

$

94,005

 

 

$

111,434

 

 

$

9,867

 

 

$

2,762

 

 

$

985,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development, land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

68,211

 

 

$

48,414

 

 

$

56,695

 

 

$

12,743

 

 

$

1,541

 

 

$

2,895

 

 

$

3,208

 

 

$

499

 

 

$

194,206

 

Classified

 

 

894

 

 

 

2,588

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

307

 

 

 

55

 

 

 

—

 

 

 

3,844

 

Total construction, land development, land

 

$

69,105

 

 

$

51,002

 

 

$

56,695

 

 

$

12,743

 

 

$

1,541

 

 

$

3,202

 

 

$

3,263

 

 

$

499

 

 

$

198,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

5,076

 

 

$

26,406

 

 

$

27,342

 

 

$

17,323

 

 

$

13,795

 

 

$

39,262

 

 

$

36,985

 

 

$

1,409

 

 

$

167,598

 

Classified

 

 

174

 

 

 

71

 

 

 

435

 

 

 

30

 

 

 

372

 

 

 

848

 

 

 

175

 

 

 

—

 

 

 

2,105

 

Total 1-4 family residential

 

$

5,250

 

 

$

26,477

 

 

$

27,777

 

 

$

17,353

 

 

$

14,167

 

 

$

40,110

 

 

$

37,160

 

 

$

1,409

 

 

$

169,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

16,292

 

 

$

22,822

 

 

$

23,211

 

 

$

16,122

 

 

$

17,630

 

 

$

24,532

 

 

$

2,073

 

 

$

478

 

 

$

123,160

 

Classified

 

 

2,745

 

 

 

1,284

 

 

 

1,534

 

 

 

1,589

 

 

 

1,043

 

 

 

1,324

 

 

 

900

 

 

 

—

 

 

 

10,419

 

Total farmland

 

$

19,037

 

 

$

24,106

 

 

$

24,745

 

 

$

17,711

 

 

$

18,673

 

 

$

25,856

 

 

$

2,973

 

 

$

478

 

 

$

133,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

179,268

 

 

$

348,914

 

 

$

196,152

 

 

$

70,812

 

 

$

18,368

 

 

$

12,701

 

 

$

532,877

 

 

$

12,099

 

 

$

1,371,191

 

Classified

 

 

599

 

 

 

9,813

 

 

 

9,895

 

 

 

3,790

 

 

 

668

 

 

 

353

 

 

 

16,513

 

 

 

—

 

 

 

41,631

 

Total commercial

 

$

179,867

 

 

$

358,727

 

 

$

206,047

 

 

$

74,602

 

 

$

19,036

 

 

$

13,054

 

 

$

549,390

 

 

$

12,099

 

 

$

1,412,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Factored receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

644,774

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

644,774

 

Classified

 

 

9,477

 

 

 

6,849

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

16,326

 

Total factored receivables

 

$

654,251

 

 

$

6,849

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

661,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,135

 

 

$

5,042

 

 

$

2,483

 

 

$

5,735

 

 

$

3,986

 

 

$

1,382

 

 

$

168

 

 

$

—

 

 

$

19,931

 

Classified

 

 

—

 

 

 

—

 

 

 

18

 

 

 

89

 

 

 

230

 

 

 

58

 

 

 

—

 

 

 

—

 

 

 

395

 

Total consumer

 

$

1,135

 

 

$

5,042

 

 

$

2,501

 

 

$

5,824

 

 

$

4,216

 

 

$

1,440

 

 

$

168

 

 

$

—

 

 

$

20,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

739,211

 

 

$

—

 

 

$

739,211

 

Classified

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total mortgage warehouse

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

739,211

 

 

$

—

 

 

$

739,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,078,335

 

 

$

654,980

 

 

$

508,347

 

 

$

307,834

 

 

$

147,747

 

 

$

189,260

 

 

$

1,324,389

 

 

$

17,247

 

 

$

4,228,139

 

Classified

 

 

23,257

 

 

 

23,802

 

 

 

12,330

 

 

 

5,650

 

 

 

3,891

 

 

 

5,836

 

 

 

17,643

 

 

 

—

 

 

 

92,409

 

Total loans

 

$

1,101,592

 

 

$

678,782

 

 

$

520,677

 

 

$

313,484

 

 

$

151,638

 

 

$

195,096

 

 

$

1,342,032

 

 

$

17,247

 

 

$

4,320,548

 

 

28

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Pass

 

 

Classified

 

 

PCI

 

 

Total

 

Commercial real estate

 

$

1,030,358

 

 

$

7,536

 

 

$

9,067

 

 

$

1,046,961

 

Construction, land development, land

 

 

155,985

 

 

 

2,138

 

 

 

2,446

 

 

 

160,569

 

1-4 family residential

 

 

177,177

 

 

 

1,740

 

 

 

508

 

 

 

179,425

 

Farmland

 

 

144,777

 

 

 

10,094

 

 

 

104

 

 

 

154,975

 

Commercial

 

 

1,313,042

 

 

 

29,091

 

 

 

550

 

 

 

1,342,683

 

Factored receivables

 

 

604,774

 

 

 

15,212

 

 

 

—

 

 

 

619,986

 

Consumer

 

 

21,594

 

 

 

331

 

 

 

—

 

 

 

21,925

 

Mortgage warehouse

 

 

667,988

 

 

 

—

 

 

 

—

 

 

 

667,988

 

 

 

$

4,115,695

 

 

$

66,142

 

 

$

12,675

 

 

$

4,194,512

 

Troubled Debt Restructurings

The Company had troubled debt restructurings with an amortized cost of $17,361,000 and $5,221,000 as of March 31, 2020 and December 31, 2019, respectively. The Company had allocated $1,302,000 and $718,000 of allowance for those loans at March 31, 2020 and December 31, 2019, respectively, and had not committed to lend additional amounts.

The following table presents the pre- and post-modification amortized cost of loans modified as troubled debt restructurings during the three months ended March 31, 2020 and 2019. The Company did not grant principal reductions or interest rate concessions on any restructured loans.

 

 

Extended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

Payment

 

 

Total

 

 

Number of

 

(Dollars in thousands)

 

Period

 

 

Deferrals

 

 

Modifications

 

 

Loans

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development, land

 

$

8

 

 

$

—

 

 

$

8

 

 

 

1

 

Farmland

 

 

3,486

 

 

 

—

 

 

 

3,486

 

 

 

1

 

Commercial

 

 

4,547

 

 

 

5,793

 

 

 

10,340

 

 

 

3

 

 

 

$

8,041

 

 

$

5,793

 

 

$

13,834

 

 

 

5

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

—

 

 

$

84

 

 

$

84

 

 

 

2

 

During the three months ended March 31, 2020, the Company had three loans modified as troubled debt restructurings with a recorded investment of $610,000 for which there was a payment default within twelve months following the modification. During the three months ended March 31, 2019, the Company had one relationship consisting of seven loans modified as a troubled debt restructurings with a recorded investment of $688,000 for which there was a payment default within twelve months following the modification. Default is determined at 90 or more days past due, charge-off, or foreclosure.  

As of April 15, 2020, we had executed 404 principal and interest deferrals on outstanding loan balances of $233,000,000 in connection with the COVID-19 relief provided by the CARES Act. These deferrals were generally no more than six months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

Residential Real Estate Loans In Process of Foreclosure

At March 31, 2020 and December 31, 2019, the Company had $177,000 and $87,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.

 

29

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Purchased Credit Impaired Loans (Prior to the Adoption of ASU 2016-13)

The following table summarizes information pertaining to loans that were identified as purchased credit impaired prior to the adoption of ASU 2016-13:

  

 

 

 

December 31,

 

 

 

 

2019

 

Contractually required principal and interest:

 

 

 

 

 

Real estate loans

 

 

$

14,015

 

Commercial loans

 

 

 

677

 

Outstanding contractually required principal and interest

 

 

$

14,692

 

Gross carrying amount included in loans receivable

 

 

$

12,675

 

 

 

The changes in accretable yield related to loans that were identified as purchased credit impaired prior to the adoption of ASU 2016-13 were as follows:

 

 

 

Three Months Ended

 

 

 

 

March 31, 2019

 

Accretable yield, beginning balance

 

 

$

5,711

 

Additions

 

 

 

—

 

Accretion

 

 

 

(411

)

Reclassification from nonaccretable to accretable yield

 

 

 

—

 

Disposals

 

 

 

(17

)

Accretable yield, ending balance

 

 

$

5,283

 

  

NOTE 5 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

(Dollars in thousands)

 

March 31, 2020

 

 

December 31, 2019

 

Goodwill

 

$

158,743

 

 

$

158,743

 

 

  

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

(Dollars in thousands)

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Core deposit intangibles

 

$

43,578

 

 

$

(23,591

)

 

$

19,987

 

 

$

43,578

 

 

$

(22,258

)

 

$

21,320

 

Other intangible assets

 

 

15,700

 

 

 

(6,222

)

 

 

9,478

 

 

 

15,700

 

 

 

(5,477

)

 

 

10,223

 

 

 

$

59,278

 

 

$

(29,813

)

 

$

29,465

 

 

$

59,278

 

 

$

(27,735

)

 

$

31,543

 

 

The changes in goodwill and intangible assets are as follows:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Beginning balance

 

$

190,286

 

 

$

199,417

 

Amortization of intangibles

 

 

(2,078

)

 

 

(2,402

)

Ending balance

 

$

188,208

 

 

$

197,015

 

 

 

30

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – Variable Interest Entities

Collateralized Loan Obligation Funds – Closed

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

Offering

 

Offering

 

(Dollars in thousands)

Date

 

Amount

 

Trinitas CLO IV, LTD (Trinitas IV)

June 2, 2016

 

$

406,650

 

Trinitas CLO V, LTD (Trinitas V)

September 22, 2016

 

$

409,000

 

Trinitas CLO VI, LTD (Trinitas VI)

June 20, 2017

 

$

717,100

 

The carrying amounts of the Company’s investments in the subordinated notes of the CLO funds, which represent the Company’s maximum exposure to loss as a result of its involvement with the CLO funds, totaled $8,217,000 and $8,417,000 at March 31, 2020 and December 31, 2019, 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 7 - Legal Contingencies

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

NOTE 8 - 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:

  

 

 

March 31, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

Unused lines of credit

 

$

50,742

 

 

$

399,373

 

 

$

450,115

 

 

$

49,057

 

 

$

444,028

 

 

$

493,085

 

Standby letters of credit

 

 

3,151

 

 

 

4,120

 

 

 

7,271

 

 

 

3,017

 

 

 

3,781

 

 

 

6,798

 

Commitments to purchase loans

 

 

—

 

 

 

112,059

 

 

 

112,059

 

 

 

—

 

 

 

22,004

 

 

 

22,004

 

Mortgage warehouse commitments

 

 

—

 

 

 

285,789

 

 

 

285,789

 

 

 

—

 

 

 

340,502

 

 

 

340,502

 

 

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.

 

31

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

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 other noninterest expense on the Company’s consolidated statements of income. At March 31, 2020 and December 31, 2019, the allowance for credit losses on off-balance sheet credit exposures totaled $5,492,000 and $638,000, respectively, and was included in other liabilities on the Company’s consolidated balance sheets. For the three months ended March 31, 2020 and 2019, credit loss expense for off balance sheet credit exposures was $2,937,000 and a credit of $2,000, respectively, and was included in other noninterest expense on the Company’s consolidated statements of income.

In addition to the commitments above, the Company had overdraft protection available in the amounts of $2,600,000 and $2,639,000 at March 31, 2020 and December 31, 2019, respectively.

NOTE 9 - 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 16 of the Company’s 2019 Form 10-K.

 

32

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

March 31, 2020

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets measured at fair value on a recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

—

 

 

$

29,056

 

 

$

—

 

 

$

29,056

 

Mortgage-backed securities, residential

 

 

—

 

 

 

35,979

 

 

 

—

 

 

 

35,979

 

Asset backed securities

 

 

—

 

 

 

7,543

 

 

 

—

 

 

 

7,543

 

State and municipal

 

 

—

 

 

 

52,863

 

 

 

—

 

 

 

52,863

 

CLO securities

 

 

—

 

 

 

126,384

 

 

 

—

 

 

 

126,384

 

Corporate bonds

 

 

—

 

 

 

46,396

 

 

 

—

 

 

 

46,396

 

SBA pooled securities

 

 

—

 

 

 

3,901

 

 

 

—

 

 

 

3,901

 

 

 

$

—

 

 

$

302,122

 

 

$

—

 

 

$

302,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund

 

$

5,678

 

 

$

—

 

 

$

—

 

 

$

5,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

 

$

4,431

 

 

$

—

 

 

$

4,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities measured at fair value on a recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ICC Contingent consideration

 

$

—

 

 

$

—

 

 

$

21,927

 

 

$

21,927

 

 

 

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

December 31, 2019

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets measured at fair value on a recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

—

 

 

$

39,760

 

 

$

—

 

 

$

39,760

 

Mortgage-backed securities, residential

 

 

—

 

 

 

38,016

 

 

 

—

 

 

 

38,016

 

Asset-backed securities

 

 

—

 

 

 

7,959

 

 

 

—

 

 

 

7,959

 

State and municipal

 

 

—

 

 

 

32,065

 

 

 

—

 

 

 

32,065

 

CLO Securities

 

 

—

 

 

 

75,273

 

 

 

—

 

 

 

75,273

 

Corporate bonds

 

 

—

 

 

 

51,583

 

 

 

—

 

 

 

51,583

 

SBA pooled securities

 

 

—

 

 

 

4,164

 

 

 

—

 

 

 

4,164

 

 

 

$

—

 

 

$

248,820

 

 

$

—

 

 

$

248,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund

 

$

5,437

 

 

$

—

 

 

$

—

 

 

$

5,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

 

$

2,735

 

 

$

—

 

 

$

2,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities measured at fair value on a recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ICC Contingent consideration

 

$

—

 

 

$

—

 

 

$

21,622

 

 

$

21,622

 

 

There were no transfers into or out of Level 3 of the fair value hierarchy during 2020 or 2019.  

 

33

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On June 2, 2018, the Company acquired substantially all of the operating assets of, and assumed certain liabilities associated with, Interstate Capital Corporation’s (“ICC”) accounts receivable factoring business and other related financial services. Consideration for the acquisition included contingent consideration, which is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition. The index is calculated by a third party data analytics firm and is correlated to monthly movements in average invoice prices historically experienced by ICC. At the end of a 30 month earnout period after closing, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price, with a payout ranging from $0 to $22,000,000. The fair value of the contingent consideration is calculated each reporting period, and changes in the fair value of the contingent consideration are recorded in noninterest income in the consolidated statements of income. At March 31, 2020 and December 31, 2019, the ICC contingent consideration liability was the only recurring fair value measurement with Level 3 unobservable inputs. At March 31, 2020 and December 31, 2019, the fair value calculation of the contingent consideration resulted in a payout of $22,000,000, and discount rates of 0.4% and 1.7%, respectively, were applied to calculate the present value of the contingent consideration. A reconciliation of the opening balance to the closing balance of the fair value of the contingent consideration is as follows:

 

 

Three Months Ended

 

(Dollars in thousands)

 

March 31, 2020

 

 

March 31, 2019

 

Beginning balance

 

$

21,622

 

 

$

20,745

 

Contingent consideration recognized in business combination

 

 

—

 

 

 

—

 

Change in fair value of contingent consideration recognized in earnings

 

 

305

 

 

 

261

 

Consideration settlement payments

 

 

—

 

 

 

—

 

Ending balance

 

$

21,927

 

 

$

21,006

 

 

 

34

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019.

  

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

March 31, 2020

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Collateral dependent loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

—

 

 

$

—

 

 

$

6,535

 

 

$

6,535

 

Construction, land development, land

 

 

—

 

 

 

—

 

 

 

644

 

 

 

644

 

1-4 family residential

 

 

—

 

 

 

—

 

 

 

3

 

 

 

3

 

Commercial

 

 

—

 

 

 

—

 

 

 

5,033

 

 

 

5,033

 

Factored receivables

 

 

—

 

 

 

—

 

 

 

17,300

 

 

 

17,300

 

Consumer

 

 

—

 

 

 

—

 

 

 

132

 

 

 

132

 

Other real estate owned (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

—

 

 

 

—

 

 

 

1,061

 

 

 

1,061

 

 

 

$

—

 

 

$

—

 

 

$

30,708

 

 

$

30,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

December 31, 2019

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

—

 

 

$

—

 

 

$

534

 

 

$

534

 

Construction, land development, land

 

 

—

 

 

 

—

 

 

 

664

 

 

 

664

 

1-4 family residential

 

 

—

 

 

 

—

 

 

 

2

 

 

 

2

 

Commercial

 

 

—

 

 

 

—

 

 

 

4,754

 

 

 

4,754

 

Factored receivables

 

 

—

 

 

 

—

 

 

 

12,762

 

 

 

12,762

 

Consumer

 

 

—

 

 

 

—

 

 

 

8

 

 

 

8

 

PCI

 

 

—

 

 

 

—

 

 

 

67

 

 

 

67

 

Other real estate owned (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

—

 

 

 

—

 

 

 

388

 

 

 

388

 

1-4 family residential

 

 

—

 

 

 

—

 

 

 

89

 

 

 

89

 

 

 

$

—

 

 

$

—

 

 

$

19,268

 

 

$

19,268

 

 

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

Collateral Dependent Loans with an ACL (Impaired Loans with Specific Reserves prior to the adoption of ASC 326):    For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. 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.

 

35

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

OREO:    OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the 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 March 31, 2020 and December 31, 2019 were as follows:

  

(Dollars in thousands)

 

Carrying

 

 

Fair Value Measurements Using

 

 

Total

 

March 31, 2020

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

208,414

 

 

$

208,414

 

 

$

—

 

 

$

—

 

 

$

208,414

 

Securities - held to maturity

 

 

8,217

 

 

 

—

 

 

 

—

 

 

 

6,742

 

 

 

6,742

 

Loans not previously presented, gross

 

 

4,290,901

 

 

 

148,022

 

 

 

—

 

 

 

4,047,464

 

 

 

4,195,486

 

FHLB stock

 

 

37,080

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Accrued interest receivable

 

 

19,095

 

 

 

19,095

 

 

 

—

 

 

 

—

 

 

 

19,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,682,015

 

 

 

—

 

 

 

3,693,593

 

 

 

—

 

 

 

3,693,593

 

Customer repurchase agreements

 

 

3,693

 

 

 

—

 

 

 

3,693

 

 

 

—

 

 

 

3,693

 

Federal Home Loan Bank advances

 

 

850,000

 

 

 

—

 

 

 

850,000

 

 

 

—

 

 

 

850,000

 

Subordinated notes

 

 

87,347

 

 

 

—

 

 

 

88,409

 

 

 

—

 

 

 

88,409

 

Junior subordinated debentures

 

 

39,689

 

 

 

—

 

 

 

39,935

 

 

 

—

 

 

 

39,935

 

Accrued interest payable

 

 

9,230

 

 

 

9,230

 

 

 

—

 

 

 

—

 

 

 

9,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Carrying

 

 

Fair Value Measurements Using

 

 

Total

 

December 31, 2019

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

197,880

 

 

$

197,880

 

 

$

—

 

 

$

—

 

 

$

197,880

 

Securities - held to maturity

 

 

8,417

 

 

 

—

 

 

 

—

 

 

 

6,907

 

 

 

6,907

 

Loans not previously presented, gross

 

 

4,170,604

 

 

 

83,454

 

 

 

—

 

 

 

4,086,597

 

 

 

4,170,051

 

FHLB and other restricted stock

 

 

19,860

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Accrued interest receivable

 

 

20,322

 

 

 

20,322

 

 

 

—

 

 

 

—

 

 

 

20,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,789,906

 

 

 

—

 

 

 

3,793,603

 

 

 

—

 

 

 

3,793,603

 

Customer repurchase agreements

 

 

2,033

 

 

 

—

 

 

 

2,033

 

 

 

—

 

 

 

2,033

 

Federal Home Loan Bank advances

 

 

430,000

 

 

 

—

 

 

 

430,000

 

 

 

—

 

 

 

430,000

 

Subordinated notes

 

 

87,327

 

 

 

—

 

 

 

93,877

 

 

 

—

 

 

 

93,877

 

Junior subordinated debentures

 

 

39,566

 

 

 

—

 

 

 

40,700

 

 

 

—

 

 

 

40,700

 

Accrued interest payable

 

 

9,367

 

 

 

9,367

 

 

 

—

 

 

 

—

 

 

 

9,367

 

 

 

36

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 - Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and TBK Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity Tier 1, and Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Management believes, as of March 31, 2020 and December 31, 2019, the Company and TBK Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2020 and December 31, 2019, TBK Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” TBK Bank must maintain minimum total risk based, common equity Tier 1 risk based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since March 31, 2020 that management believes have changed TBK Bank’s category.

 

37

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

  

  

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

Minimum for Capital

 

 

Prompt Corrective

 

(Dollars in thousands)

 

Actual

 

 

Adequacy Purposes

 

 

Action Provisions

 

As of March 31, 2020

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Total capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

585,157

 

 

11.6%

 

 

$

403,557

 

 

 

8.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

557,478

 

 

11.3%

 

 

$

394,675

 

 

 

8.0%

 

 

$

493,343

 

 

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

454,349

 

 

9.0%

 

 

$

302,899

 

 

 

6.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

514,024

 

 

10.4%

 

 

$

296,552

 

 

 

6.0%

 

 

$

395,403

 

 

 

8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

414,660

 

 

8.2%

 

 

$

227,557

 

 

 

4.5%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

514,024

 

 

10.4%

 

 

$

222,414

 

 

 

4.5%

 

 

$

321,265

 

 

 

6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

454,349

 

 

9.6%

 

 

$

189,312

 

 

 

4.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

514,024

 

 

10.9%

 

 

$

188,633

 

 

 

4.0%

 

 

$

235,791

 

 

 

5.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

604,832

 

 

12.8%

 

 

$

378,020

 

 

 

8.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

555,213

 

 

12.0%

 

 

$

370,142

 

 

 

8.0%

 

 

$

462,678

 

 

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

487,775

 

 

10.3%

 

 

$

284,141

 

 

 

6.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

525,490

 

 

11.4%

 

 

$

276,574

 

 

 

6.0%

 

 

$

368,765

 

 

 

8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

448,209

 

 

9.5%

 

 

$

212,310

 

 

 

4.5%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

525,490

 

 

11.4%

 

 

$

207,430

 

 

 

4.5%

 

 

$

299,621

 

 

 

6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

487,775

 

 

10.0%

 

 

$

195,110

 

 

 

4.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

525,490

 

 

10.9%

 

 

$

192,840

 

 

 

4.0%

 

 

$

241,050

 

 

 

5.0%

 

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company has 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”) will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become 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.

 

38

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The capital conservation buffer set forth by the Basel III regulatory capital framework was 2.5% of risk weighted assets above the minimum risk based capital ratio requirements at March 31, 2020 and December 31, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. At March 31, 2020 and December 31, 2019, the Company’s and TBK Bank’s risk based capital exceeded the required capital conservation buffer.

NOTE 11 – STOCKHOLDERS’ EQUITY

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

Common Stock

 

March 31, 2020

 

 

December 31, 2019

 

Shares authorized

 

 

50,000,000

 

 

 

50,000,000

 

Shares issued

 

 

27,171,721

 

 

 

27,163,642

 

Treasury shares

 

 

(3,070,601

)

 

 

(2,198,681

)

Shares outstanding

 

 

24,101,120

 

 

 

24,964,961

 

Par value per share

 

$

0.01

 

 

$

0.01

 

Stock Repurchase Programs

During the three months ended March 31, 2020, the Company repurchased 871,319 shares into treasury stock under the Company’s stock repurchase program at an average price of $40.81, for a total of $35,600,000, effectively completing the $50,000,000 stock repurchase program authorized by the Company’s board of directors on October 16, 2019.

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

NOTE 12 – STOCK BASED COMPENSATION

Stock based compensation expense that has been charged against income was $1,168,000 and $911,000 for the three months ended March 31, 2020 and 2019, respectively.

2014 Omnibus Incentive Plan

The Company’s 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”) provides for the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards that may be settled in, or based upon the value of, the Company’s common stock. The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 2,000,000 shares.

Restricted Stock Awards

A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the three months ended March 31, 2020 were as follows:

  

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant-Date

 

Nonvested RSAs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2020

 

 

148,349

 

 

$

31.86

 

Granted

 

 

8,079

 

 

 

39.65

 

Vested

 

 

(8,079

)

 

 

39.65

 

Forfeited

 

 

(601

)

 

 

36.08

 

Nonvested at March 31, 2020

 

 

147,748

 

 

$

31.84

 

 

39

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

RSAs granted to employees under the Omnibus Incentive Plan typically vest over three to four years, but vesting periods may vary. Compensation expense for RSAs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. At March 31, 2020, there was $1,894,000 of unrecognized compensation cost related to nonvested RSAs. The cost is expected to be recognized over a remaining weighted average period of 2.73 years.

Restricted Stock Units

A summary of changes in the Company’s nonvested Restricted Stock Units (“RSUs”) under the Omnibus Incentive Plan for the three months ended March 31, 2020 were as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date

 

Nonvested RSUs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2020

 

 

55,228

 

 

$

38.75

 

Granted

 

 

—

 

 

 

—

 

Vested

 

 

—

 

 

 

—

 

Forfeited

 

 

—

 

 

 

—

 

Nonvested at March 31, 2020

 

 

55,228

 

 

$

38.75

 

RSUs granted to employees under the Omnibus Incentive Plan vest after five years. Compensation expense for the RSUs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. At March 31, 2020, there was $1,291,000 of unrecognized compensation cost related to the nonvested RSUs. The cost is expected to be recognized over a remaining period of 3.08 years.

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 three months ended March 31, 2020 were as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date

 

Nonvested PSUs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2020

 

 

67,707

 

 

$

37.71

 

Granted

 

 

—

 

 

 

—

 

Vested

 

 

—

 

 

 

—

 

Forfeited

 

 

—

 

 

 

—

 

Nonvested at March 31, 2020

 

 

67,707

 

 

$

37.71

 

 

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 PSUs granted based on the Company’s relative total shareholder return (“TSR”) as compared to the TSR of a specified group of peer banks. Compensation expense for the PSUs will be recognized over the vesting period of the awards based on the fair value of the award at the grant date. The fair value of PSUs granted were 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 rates for the performance periods were derived from the Treasury constant maturities yield curve on the valuation dates.

At March 31, 2020, there was $1,579,000 of unrecognized compensation cost related to the nonvested Market Based PSUs. The cost is expected to be recognized over a remaining period of 2.90 years.

 

40

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 three months ended March 31, 2020 were as follows:

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date

 

Nonvested Performance Based PSUs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2020

 

 

254,000

 

 

$

38.02

 

Granted

 

 

—

 

 

 

—

 

Vested

 

 

—

 

 

 

—

 

Forfeited

 

 

—

 

 

 

—

 

Nonvested at March 31, 2020

 

 

254,000

 

 

$

38.02

 

Performance Based PSUs granted to employees under the Omnibus Incentive Plan vest after three years. 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. As of March 31, 2020, the maximum unrecognized compensation cost related to the nonvested Performance Based PSUs was $19,314,000, and the remaining performance period over which the cost could be recognized was 2.75 years. No compensation cost was recorded during the three months ended March 31, 2020.

Stock Options

A summary of changes in the Company’s stock options under the Omnibus Incentive Plan for the three months ended March 31, 2020 were as follows:

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

 

Weighted-Average

 

 

Contractual Term

 

 

Intrinsic Value

 

Stock Options

 

Shares

 

 

Exercise Price

 

 

(In Years)

 

 

(In Thousands)

 

Outstanding at January 1, 2020

 

 

225,055

 

 

$

24.10

 

 

 

 

 

 

 

 

 

Granted

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Exercised

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2020

 

 

225,055

 

 

$

24.10

 

 

 

6.92

 

 

$

1,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully vested shares and shares expected to vest at March 31, 2020

 

 

225,055

 

 

$

24.10

 

 

 

6.92

 

 

$

1,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares exercisable at March 31, 2020

 

 

118,537

 

 

$

20.20

 

 

 

6.42

 

 

$

836

 

 

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

At March 31, 2020, there was $270,000 of unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a remaining weighted average period of 2.35 years.

 

41

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Employee Stock Purchase Plan

During the year ended December 31, 2019, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the Triumph Bancorp, Inc. 2019 Employee Stock Purchase Plan (“ESPP”). Under the ESPP, 2,500,000 shares of common stock were reserved 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 has not yet commenced. 

NOTE 13 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Basic

 

 

 

 

 

 

 

 

Net income (loss) to common stockholders

 

$

(4,450

)

 

$

14,788

 

Weighted average common shares outstanding

 

 

24,314,329

 

 

 

26,679,724

 

Basic earnings (loss) per common share

 

$

(0.18

)

 

$

0.55

 

Diluted

 

 

 

 

 

 

 

 

Net income (loss) to common stockholders

 

$

(4,450

)

 

$

14,788

 

Weighted average common shares outstanding

 

 

24,314,329

 

 

 

26,679,724

 

Dilutive effects of:

 

 

 

 

 

 

 

 

Assumed exercises of stock options

 

 

—

 

 

 

64,166

 

Restricted stock awards

 

 

—

 

 

 

49,795

 

Restricted stock units

 

 

—

 

 

 

—

 

Performance stock units - market based

 

 

—

 

 

 

—

 

Performance stock units - performance based

 

 

—

 

 

 

—

 

Average shares and dilutive potential common shares

 

 

24,314,329

 

 

 

26,793,685

 

Diluted earnings (loss) per common share

 

$

(0.18

)

 

$

0.55

 

 

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

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Stock options

 

 

225,055

 

 

 

50,752

 

Restricted stock awards

 

 

147,748

 

 

 

13,290

 

Restricted stock units

 

 

55,228

 

 

 

58,400

 

Performance stock units - market based

 

 

67,707

 

 

 

58,400

 

Performance stock units - performance based

 

 

254,000

 

 

 

—

 

 

 

42

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 14 – BUSINESS SEGMENT INFORMATION

The following table presents the Company’s operating segments. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2019 Form 10-K. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment 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. Taxes are paid on a consolidated basis but not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC. General factoring services not originated through TBC are included in the Banking segment.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

51,666

 

 

$

23,497

 

 

$

251

 

 

$

75,414

 

Intersegment interest allocations

 

 

3,074

 

 

 

(3,074

)

 

 

—

 

 

 

—

 

Total interest expense

 

 

10,921

 

 

 

—

 

 

 

1,993

 

 

 

12,914

 

Net interest income (expense)

 

 

43,819

 

 

 

20,423

 

 

 

(1,742

)

 

 

62,500

 

Credit loss expense

 

 

15,818

 

 

 

1,544

 

 

 

(1

)

 

 

17,361

 

Net interest income after credit loss expense

 

 

28,001

 

 

 

18,879

 

 

 

(1,741

)

 

 

45,139

 

Noninterest income

 

 

6,280

 

 

 

1,296

 

 

 

(99

)

 

 

7,477

 

Noninterest expense

 

 

44,572

 

 

 

12,063

 

 

 

1,055

 

 

 

57,690

 

Operating income (loss)

 

$

(10,291

)

 

$

8,112

 

 

$

(2,895

)

 

$

(5,074

)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

49,121

 

 

$

23,803

 

 

$

340

 

 

$

73,264

 

Intersegment interest allocations

 

 

2,638

 

 

 

(2,638

)

 

 

—

 

 

 

—

 

Total interest expense

 

 

10,354

 

 

 

—

 

 

 

1,599

 

 

 

11,953

 

Net interest income (expense)

 

 

41,405

 

 

 

21,165

 

 

 

(1,259

)

 

 

61,311

 

Credit loss expense

 

 

954

 

 

 

136

 

 

 

(76

)

 

 

1,014

 

Net interest income after credit loss expense

 

 

40,451

 

 

 

21,029

 

 

 

(1,183

)

 

 

60,297

 

Noninterest income

 

 

6,297

 

 

 

1,077

 

 

 

164

 

 

 

7,538

 

Noninterest expense

 

 

34,385

 

 

 

13,295

 

 

 

886

 

 

 

48,566

 

Operating income (loss)

 

$

12,363

 

 

$

8,811

 

 

$

(1,905

)

 

$

19,269

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

5,276,926

 

 

$

714,006

 

 

$

723,327

 

 

$

(1,360,530

)

 

$

5,353,729

 

Gross loans held for investment

 

$

4,227,563

 

 

$

641,366

 

 

$

800

 

 

$

(549,181

)

 

$

4,320,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

4,976,009

 

 

$

662,002

 

 

$

771,048

 

 

$

(1,348,762

)

 

$

5,060,297

 

Gross loans held for investment

 

$

4,108,735

 

 

$

573,372

 

 

$

1,519

 

 

$

(489,114

)

 

$

4,194,512

 

 

 

 

 

 

 

 

 

43

 

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, 2019. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this discussion for further information on forward-looking statements.

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act. Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services, commercial finance product lines focused on businesses that require specialized financial solutions, and national lending product lines that further diversify our lending operations. Our traditional banking offerings include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines generate attractive returns and include factoring, asset-based lending, and equipment lending products offered on a nationwide basis. Our national lending product lines provide further asset base diversification and include mortgage warehouse, liquid credit, and premium finance offered on a nationwide basis. As of March 31, 2020, we had consolidated total assets of $5.354 billion, total loans held for investment of $4.321 billion, total deposits of $3.682 billion and total stockholders’ equity of $589.3 million.

A key element of our strategy is to supplement the asset generation capacity in our community banking markets with commercial finance product lines which are offered on a nationwide basis and which serve to enhance the overall yield of our portfolio. These products include our factoring services, provided principally in the transportation sector, our asset-based lending and equipment finance products. Our aggregate outstanding balances for these products increased $135.1 million, or 10.8%, to $1.386 billion as of March 31, 2020, due to organic growth. The following table sets forth our commercial finance product lines:

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Commercial finance

 

 

 

 

 

 

 

 

Commercial - Equipment

 

$

479,483

 

 

$

461,555

 

Commercial - Asset-based lending

 

 

245,001

 

 

 

168,955

 

Factored receivables

 

 

661,100

 

 

 

619,986

 

Total commercial finance loans

 

$

1,385,584

 

 

$

1,250,496

 

Our national lending product lines include mortgage warehouse, liquid credit, and premium finance. Mortgage warehouse lending provides portfolio diversification by allowing unaffiliated mortgage originators to close one-to-four family real estate loans in their own name and manage cash flow needs until the loans are sold to investors. Our liquid credit portfolio, which consists of broadly syndicated shared national credits, provides an accordion feature allowing us to opportunistically scale our loan portfolio. Premium finance provides a lending product that complements our commercial finance products. The following table sets forth our national lending lines:

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

National lending

 

 

 

 

 

 

 

 

Mortgage warehouse

 

$

739,211

 

 

$

667,988

 

Commercial - Liquid credit

 

 

172,380

 

 

 

81,353

 

Commercial - Premium finance

 

 

—

 

 

 

101,015

 

Total national lending loans

 

$

911,591

 

 

$

850,356

 

 

44

 

On April 20, 2020, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit our premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of the Disposal Group, primarily consisting of $98.3 million of premium finance loans, was transferred to assets held for sale.

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary, Triumph Business Capital, operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products. This business also has a legacy and structure as a standalone company. We have determined our reportable segments are Banking, Factoring, and Corporate. For the three months ended March 31, 2020, our Banking segment generated 69% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 30% of our total revenue, and our Corporate segment generated 1% of our total revenue.  

First Quarter 2020 Overview

We incurred a net loss for the three months ended March 31, 2020 of $4.5 million, or $(0.18) per diluted share, compared to net income for the three months ended March 31, 2019 of $14.8 million, or $0.55 per diluted share. For the three months ended March 31, 2020, our return on average common equity was (2.85%) and our return on average assets was (0.36%).

At March 31, 2020, we had total assets of $5.354 billion, including gross loans held for investment of $4.321 billion, compared to $5.060 billion of total assets and $4.195 billion of gross loans held for investment at December 31, 2019. Loan growth totaled $126.0 million during the three months ended March 31, 2020, including $91.0 million of growth in our liquid credit portfolio. Excluding premium finance loans, loan growth totaled $227.1 million. Our commercial finance product lines increased from $1.250 billion in aggregate as of December 31, 2019 to $1.386 billion as of March 31, 2020, an increase of 10.8%, and constitute 32% of our total loan portfolio at March 31, 2020. Our national lending lines increased from $850.4 million in aggregate as of December 31, 2019 to $911.6 million as of March 31, 2020, an increase of 7.2%, and constitute 21% of our total loan portfolio at March 31, 2020. Excluding premium finance loans, our national lending lines increased $162.3 million, or 19.1%. Our community bank lending lines decreased from $2.094 billion in aggregate as of December 31, 2019 to $2.023 billion as of March 31, 2020, a decrease of 3.4%, and constitute 47% of our total loan portfolio at March 31, 2020.

At March 31, 2020, we had total liabilities of $4.764 billion, including total deposits of $3.682 billion, compared to $4.424 billion of total liabilities and $3.790 billion of total deposits at December 31, 2019. Deposits decreased $107.9 million during the three months ended March 31, 2020.

At March 31, 2020, we had total stockholders' equity of $589.3 million. During the three months ended March 31, 2020, total stockholders’ equity decreased $47.3 million, primarily due to common stock repurchased during the period and our net loss for the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 9.03% and 11.63%, respectively, at March 31, 2020.

For the quarter ended March 31, 2020, TriumphPay processed 504,250 invoices paying 44,568 distinct carriers a total of $530.8 million.

2020 Items of Note

Triumph Premium Finance

On April 20, 2020, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit our premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of the Disposal Group, primarily consisting of $98.3 million of premium finance loans, was transferred to assets held for sale.

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

Stock Repurchase Program

During the three months ended March 31, 2020, we repurchased 871,319 shares into treasury stock under our stock repurchase program at an average price of $40.81, for a total of $35.6 million, effectively completing the $50.0 million stock repurchase program authorized by our board of directors on October 16, 2019.

 

45

 

2019 Items of Note

Stock Repurchase Program

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

Recent Developments: COVID-19 and the CARES Act

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

Financial position and results of operations

Pertaining to our March 31, 2020 financial condition and results of operations, COVID-19 had a material impact on our allowance for credit losses (“ACL”). While we have not yet experienced any charge-offs related to COVID-19, our ACL calculation and resulting provision for credit losses are significantly impacted by changes in forecasted economic conditions. Given that forecasted economic scenarios have darkened significantly since the pandemic was declared in early March, our need for additional reserve for credit loss increased significantly. Refer to our discussion of the ACL in Note 1 and Note 4 of our unaudited financial statements as well as further discussion later on in MD&A. Should economic conditions worsen, we could experience further increases in our required ACL and record additional credit loss expense. The execution of the payment deferral program discussed in the following commentary assisted our ratio of past due loans to total loans. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Our fee income could be reduced due to COVID-19.  In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc.  These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis.  At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.

Our interest income could be reduced due to COVID-19.  In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and liquidity

As of March 31, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements.  While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses.  We rely on cash on hand as well as dividends from our subsidiary bank to service our debt.  If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

We maintain access to multiple sources of liquidity.  Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile.  If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.  If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

 

46

 

Asset valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

As of March 31, 2020, our goodwill was not impaired. While our stock was trading above book value for most of the first quarter of 2020 and at quarter end, COVID-19 could cause a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At March 31, 2020 we had goodwill of $158.7 million, representing approximately 27% of equity.

As of March 31, 2020 we did not have any impairment with respect to our intangible assets, premises and equipment or other long-lived assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At March 31, 2020 we had intangible assets of $29.5 million, representing approximately 5% of equity.

Our processes, controls and business continuity plan

The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics.  Upon the WHO’s pandemic declaration, the Company’s Enterprise Risk Management team, in coordination with representatives from the Office of the CEO, Information Technology, Communications, Human Resources, and Facilities, invoked its Board approved Pandemic Preparedness Plan.  Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts – including customer relief efforts.  The Company’s preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19.  Prior technology planning resulted in the successful deployment of the majority of our operational teams to a remote environment.  Due to the nature of their functions, a few team members continue to operate from physical Company locations, while effectively employing social distancing standards.  To achieve implementation of the remote working strategy, during the first quarter of 2020, we incurred a technology spend of approximately $60 thousand to provide additional laptops to team members who required them to work remotely.  We do not anticipate incurring additional material cost related to our continued deployment of the remote working strategy.  No material operational or internal control challenges or risks have been identified to date.  To prepare for potential staffing shortages resulting from an anticipated peak in COVID-19 cases, the Enterprise Risk Management team has assessed critical team members and determined appropriate contingency and succession plans are in place to ensure continued operations.  Our COVID-19 Response Team continues to meet daily to anticipate and respond to any future COVID-19 interruptions or developments.  As of March 31, 2020, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19.  The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing a payment deferral program for our commercial lending clients that are adversely affected by the pandemic.  Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days.  As of April 15, 2020, the Company has executed 404 of these deferrals on outstanding loan balances of $233 million.  We had 397 additional deferral requests representing $276 million in outstanding balances that were in process.  In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company is actively participating in assisting our customers with applications for resources through the program.  PPP loans have a two-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  As of April 17, 2020, we have closed or approved with the SBA 732 PPP loans representing $158 million in funding. It is our understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

 

47

 

Further, in sensitivity and service to our communities during this unprecedented time, the Company is waiving late payment and overdraft fees and has temporarily suspended collection efforts on past due loans.

Credit

While all industries have and will continue to experience adverse impacts as a result of COVID-19 virus, we had exposures (on balance sheet loans and commitments to lend) in the following loan categories considered to be “at-risk” of significant impact as of March 31, 2020.

Retail Lending:

The Company’s exposure to retail at March 31, 2020 equated to approximately $195.5 million, or 4.5% of total loans, summarized as follows:

 

 

•

35% retail real estate

 

•

22% new and used vehicle lending; mostly dealer floorplan

 

•

20% grocery stores, pet stores, pharmacies, gas stations and convenience stores

 

•

7% liquid credit; mostly acquired during March 2020 as a result of market dislocation

 

•

6% factoring

 

•

10% other types of retail lending

Energy Lending:

The Company’s exposure to energy at March 31, 2020 equated to approximately $133.1 million, or 3.1% of total loans, summarized as follows:

 

 

•

39% factoring consisting of purchased invoices from energy-related loads in our factoring operations.  The Company typically collects out of these exposures in 30 - 90 days and continuously evaluates the credit worthiness of the ultimate account debtor, TBK’s source of repayment.

 

•

37% equipment finance; this portfolio consisted primarily of fully amortizing fixed rate loans on multi-use assets like trucks, trailers and cranes.

 

•

9% asset-based lending

 

•

16% other types of energy lending

At March 31, 2020, the Company did not have exposure to Exploration and Production (“E&P”) or Reserve-Based lending and only had minimal exposure to specialized equipment lending.  

Hospitality Lending:

The Company’s exposure to hospitality at March 31, 2020 equated to approximately $128.9 million, or 3.0% of total loans.  These were mostly smaller loans purchased through our bank acquisitions and secured by hotels.  The majority of the Company’s hospitality borrowers have historically exhibited strong operating cash flows.  

Restaurants:

The Company’s exposure to restaurants at March 31, 2020 equated to approximately $55.1 million, or 1.3% of total loans.  Approximately 32% of the balances are related purchases in our liquid credit group during the market dislocation in March.  The remainder of these balances are mostly smaller loans and the Company had mortgages on the vast majority of the borrowers as opposed to leasehold improvements.

Health Care and Senior Care Lending:

The Company’s exposure to health care and senior care at March 31, equated to just $41.6 million, or less than 1% of total loans.

We are working with customers directly affected by COVID-19.  We are prepared to offer short-term assistance in accordance with regulator guidelines.  As a result of the current economic environment caused by the COVID-19 virus, we are engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise.

 

48

 

Held to Maturity Securities

At March 31, 2020, we held $8.3 million in subordinated notes of CLO securities managed by our former subsidiary.  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.  Thus, we may not receive the full amount of cash distributions we expect to receive, which would cause us to record additional allowance for credit losses with a corresponding charge to credit loss expense through earnings.

Retail operations

The Company is committed to assisting our customers and communities in this time of need. Most branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members. The branches with lobbies open have been retrofitted with sneeze guard protective screens and our branches have been supplied with gloves and disinfectant materials for lobby, drive through and ATM equipment.  All of our facilities are being deep cleaned daily. We are introducing temporary changes to help with the financial hardship caused by COVID-19 for both our customers and non-customers. This includes waiving select deposit account fees including overdraft fees, ATM fees and excessive withdrawal fees for savings and money market accounts. Daily deposit limits for ATMs and Mobile will be increased. We will also be providing check-cashing services for government issued stimulus checks for both customers and non-customers. We continue to support the communities we serve as demonstrated by local teams making donations to those in need and buying meals for first responders.

We continue to serve our customers that need emergency branch access for account issues, safe deposit access and similar items by appointment.  The Company has been able to open and close accounts effectively, through its drive through facility, and our Customer Care 800 access is successfully managing the volume of incoming calls.  Additionally, the Company has effectively waived account service charges during this period in an effort to assist all of our customers that may be in need including our small business and commercial customers.

The Company continues to monitor the safety of our staff.  With reduced access to the lobby, our staffing is adequate to address the requests for time off by any of our employees who are impacted by health or child care issues.  For our retail staff being asked to work during this event, a 30% pay increase was implemented in appreciation for their service.

Transportation

The Company’s transportation businesses may be affected by COVID-19 and the additional impact from low oil prices.  The most significant transportation-related impact of COVID-19 on the first quarter of 2020 was a 21% decrease year-over-year in exports from China to the U.S.  The impact of this dynamic was offset by strength in other sectors of Triumph Business Capital’s (“TBC”) business in the first quarter of 2020, as freight volumes remained on par with seasonal expectations.  However, the aforementioned global supply disruption from China, in combination with the U.S. supply chain challenges due to business closures, shelter in place orders and an overall decrease in consumer demand could have a material impact on freight volumes in the U.S., as early in the second quarter of 2020.  Current estimates project significant and dramatic decreases in second  quarter 2020 GDP and average freight during the second quarter of 2020.  The U.S. east and west coasts are expected to bear the brunt of this with a decline of approximately 20% in volumes.  Current market forecasts do not anticipate a freight volume recovery until the first half of 2021, unless the US returns to full production early in the third quarter of 2020.  

Our transportation businesses may experience payment disruption related to COVID-19.  Overall payments may be deferred or slower than historical days-to-pay.  The Company expects an increase in Chapter 11 bankruptcy filings related to the increased limits established by the government for small firm bankruptcy treatment. The portfolio may contract with fewer loads hauled in some verticals, while some growth may occur with new firms seeking working capital assistance.

 

49

 

Financial Highlights

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands, except per share amounts)

 

2020

 

 

2019

 

Income Statement Data:

 

 

 

 

 

 

 

 

Interest income

 

$

75,414

 

 

$

73,264

 

Interest expense

 

 

12,914

 

 

 

11,953

 

Net interest income

 

 

62,500

 

 

 

61,311

 

Credit loss expense

 

 

17,361

 

 

 

1,014

 

Net interest income after credit loss expense

 

 

45,139

 

 

 

60,297

 

Noninterest income

 

 

7,477

 

 

 

7,538

 

Noninterest expense

 

 

57,690

 

 

 

48,566

 

Net income (loss) before income taxes

 

 

(5,074

)

 

 

19,269

 

Income tax expense (benefit)

 

 

(624

)

 

 

4,481

 

Net income (loss)

 

$

(4,450

)

 

$

14,788

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

(0.18

)

 

$

0.55

 

Diluted earnings per common share

 

$

(0.18

)

 

$

0.55

 

Weighted average shares outstanding - basic

 

 

24,314,329

 

 

 

26,679,724

 

Weighted average shares outstanding - diluted

 

 

24,314,329

 

 

 

26,793,685

 

 

 

 

 

 

 

 

 

 

Performance ratios - Annualized:

 

 

 

 

 

 

 

 

Return on average assets

 

 

(0.36

%)

 

 

1.33

%

Return on average total equity

 

 

(2.85

%)

 

 

9.30

%

Return on average tangible common equity (1)

 

 

(4.09

%)

 

 

13.43

%

Yield on loans(2)

 

 

7.22

%

 

 

7.99

%

Cost of interest bearing deposits

 

 

1.34

%

 

 

1.24

%

Cost of total deposits

 

 

1.05

%

 

 

0.99

%

Cost of total funds

 

 

1.23

%

 

 

1.28

%

Net interest margin(2)

 

 

5.63

%

 

 

6.15

%

Efficiency ratio

 

 

82.44

%

 

 

70.54

%

Net noninterest expense to average assets

 

 

4.12

%

 

 

3.70

%

  

 

50

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands, except per share amounts)

 

2020

 

 

2019

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

Total assets

 

$

5,353,729

 

 

$

5,060,297

 

Cash and cash equivalents

 

 

208,414

 

 

 

197,880

 

Investment securities, net of ACL

 

 

316,017

 

 

 

262,674

 

Loans held for investment, net of ACL

 

 

4,275,816

 

 

 

4,165,420

 

Total liabilities

 

 

4,764,382

 

 

 

4,423,707

 

Noninterest bearing deposits

 

 

846,412

 

 

 

809,696

 

Interest bearing deposits

 

 

2,835,603

 

 

 

2,980,210

 

FHLB advances

 

 

850,000

 

 

 

430,000

 

Subordinated notes

 

 

87,347

 

 

 

87,327

 

Junior subordinated debentures

 

 

39,689

 

 

 

39,566

 

Total stockholders’ equity

 

 

589,347

 

 

 

636,590

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

Book value per share

 

$

24.45

 

 

$

25.50

 

Tangible book value per share (1)

 

$

16.64

 

 

$

17.88

 

Shares outstanding end of period

 

 

24,101,120

 

 

 

24,964,961

 

 

 

 

 

 

 

 

 

 

Asset Quality ratios(3):

 

 

 

 

 

 

 

 

Past due to total loans(4)

 

 

1.99

%

 

 

1.74

%

Nonperforming loans  to total loans

 

 

1.26

%

 

 

0.97

%

Nonperforming assets to total assets

 

 

1.09

%

 

 

0.87

%

ACL to nonperforming loans(5)

 

 

82.37

%

 

 

71.63

%

ACL to total loans(5)

 

 

1.04

%

 

 

0.69

%

Net charge-offs to average loans(6)

 

 

0.04

%

 

 

0.17

%

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

Tier 1 capital to average assets

 

 

9.62

%

 

 

10.03

%

Tier 1 capital to risk-weighted assets

 

 

9.03

%

 

 

10.29

%

Common equity Tier 1 capital to risk-weighted assets

 

 

8.24

%

 

 

9.46

%

Total capital to risk weighted assets

 

 

11.63

%

 

 

12.76

%

Total stockholders' equity to total assets

 

 

11.01

%

 

 

12.58

%

Tangible common stockholders' equity ratio (1)

 

 

7.77

%

 

 

9.16

%

  

 

(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.

 

 

•

“Tangible common stockholders’ equity” is 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.

 

 

51

 

 

•

“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. 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 core operating efficiency.  

 

 

(2)

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

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Loan discount accretion

 

$

2,134

 

 

$

1,557

 

 

(3)

Asset quality ratios exclude loans held for sale.

 

 

(4)

Past due ratio has been revised to exclude nonaccrual loans with contractual payments less than 30 days past due.

 

 

(5)

Beginning January 1, 2020, the allowance for credit losses was calculated in accordance with Accounting Standards Codification Topic 326, “Financial Instruments – Credit Losses” (“ASC 326”).

 

 

(6)

Net charge-offs to average loans ratios are for the three months ended March 31, 2020 and the year ended December 31, 2019.

 

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 March 31,

 

(Dollars in thousands, except per share amounts)

 

2020

 

 

2019

 

Average total stockholders' equity

 

$

627,369

 

 

$

644,960

 

Average goodwill and other intangibles

 

 

(189,359

)

 

 

(198,389

)

Average tangible common equity

 

$

438,010

 

 

$

446,571

 

 

 

 

 

 

 

 

 

 

Net income

 

$

(4,450

)

 

$

14,788

 

Average tangible common equity

 

 

438,010

 

 

 

446,571

 

Return on average tangible common equity

 

 

(4.09

%)

 

 

13.43

%

  

 

52

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands, except per share amounts)

 

2020

 

 

2019

 

Total stockholders' equity

 

$

589,347

 

 

$

636,590

 

Goodwill and other intangibles

 

 

(188,208

)

 

 

(190,286

)

Tangible common stockholders' equity

 

$

401,139

 

 

$

446,304

 

Common shares outstanding

 

 

24,101,120

 

 

 

24,964,961

 

Tangible book value per share

 

$

16.64

 

 

$

17.88

 

 

 

 

 

 

 

 

 

 

Total assets at end of period

 

$

5,353,729

 

 

$

5,060,297

 

Goodwill and other intangibles

 

 

(188,208

)

 

 

(190,286

)

Adjusted total assets at period end

 

$

5,165,521

 

 

$

4,870,011

 

Tangible common stockholders' equity ratio

 

 

7.77

%

 

 

9.16

%

Results of Operations

Three months ended March 31, 2020 compared with three months ended March 31, 2019

Net Income

We incurred a net loss of $4.5 million for the three months ended March 31, 2020 compared to net income of $14.8 million for the three months ended March 31, 2019, a decrease of $19.3 million.

The decrease was primarily the result of a $16.4 million increase in credit loss expense and a $9.1 million increase in noninterest expense, and a $0.1 million decrease in noninterest income offset by a $1.2 million increase in net interest income and a $5.1 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 deposits and other borrowed funds, referred to as a “rate change.”

 

 

53

 

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:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Rate(4)

 

 

Balance

 

 

Interest

 

 

Rate(4)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

141,123

 

 

$

488

 

 

 

1.39

%

 

$

126,372

 

 

$

778

 

 

 

2.50

%

Taxable securities

 

 

228,996

 

 

 

1,955

 

 

 

3.43

%

 

 

275,642

 

 

 

2,169

 

 

 

3.19

%

Tax-exempt securities

 

 

25,925

 

 

 

152

 

 

 

2.36

%

 

 

88,667

 

 

 

475

 

 

 

2.17

%

FHLB and other restricted stock

 

 

21,098

 

 

 

204

 

 

 

3.89

%

 

 

17,860

 

 

 

192

 

 

 

4.36

%

Loans (1)

 

 

4,045,842

 

 

 

72,615

 

 

 

7.22

%

 

 

3,535,043

 

 

 

69,650

 

 

 

7.99

%

Total interest earning assets

 

 

4,462,984

 

 

 

75,414

 

 

 

6.80

%

 

 

4,043,584

 

 

 

73,264

 

 

 

7.35

%

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

60,979

 

 

 

 

 

 

 

 

 

 

 

91,218

 

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

 

382,584

 

 

 

 

 

 

 

 

 

 

 

366,958

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,906,547

 

 

 

 

 

 

 

 

 

 

$

4,501,760

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

$

586,671

 

 

$

344

 

 

 

0.24

%

 

$

606,096

 

 

$

374

 

 

 

0.25

%

Individual retirement accounts

 

 

103,351

 

 

 

402

 

 

 

1.56

%

 

 

113,636

 

 

 

405

 

 

 

1.45

%

Money market

 

 

441,815

 

 

 

1,031

 

 

 

0.94

%

 

 

408,953

 

 

 

1,331

 

 

 

1.32

%

Savings

 

 

363,888

 

 

 

124

 

 

 

0.14

%

 

 

370,067

 

 

 

123

 

 

 

0.13

%

Certificates of deposit

 

 

1,068,023

 

 

 

6,006

 

 

 

2.26

%

 

 

834,515

 

 

 

3,965

 

 

 

1.93

%

Brokered deposits

 

 

344,847

 

 

 

1,770

 

 

 

2.06

%

 

 

353,829

 

 

 

2,020

 

 

 

2.32

%

Total interest bearing deposits

 

 

2,908,595

 

 

 

9,677

 

 

 

1.34

%

 

 

2,687,096

 

 

 

8,218

 

 

 

1.24

%

Subordinated notes

 

 

87,323

 

 

 

1,347

 

 

 

6.20

%

 

 

48,940

 

 

 

839

 

 

 

6.95

%

Junior subordinated debentures

 

 

39,609

 

 

 

646

 

 

 

6.56

%

 

 

39,125

 

 

 

760

 

 

 

7.88

%

Other borrowings

 

 

361,996

 

 

 

1,244

 

 

 

1.38

%

 

 

336,667

 

 

 

2,136

 

 

 

2.57

%

Total interest bearing liabilities

 

 

3,397,523

 

 

 

12,914

 

 

 

1.53

%

 

 

3,111,828

 

 

 

11,953

 

 

 

1.56

%

Noninterest bearing liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

 

810,654

 

 

 

 

 

 

 

 

 

 

 

679,538

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

71,001

 

 

 

 

 

 

 

 

 

 

 

65,434

 

 

 

 

 

 

 

 

 

Total equity

 

 

627,369

 

 

 

 

 

 

 

 

 

 

 

644,960

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,906,547

 

 

 

 

 

 

 

 

 

 

$

4,501,760

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

62,500

 

 

 

 

 

 

 

 

 

 

$

61,311

 

 

 

 

 

Interest spread (2)

 

 

 

 

 

 

 

 

 

 

5.27

%

 

 

 

 

 

 

 

 

 

 

5.79

%

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

5.63

%

 

 

 

 

 

 

 

 

 

 

6.15

%

(1) 

Balance totals include nonaccrual loans.

(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.

The following table presents loan yields earned on our community banking and commercial finance loan portfolios:

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Average community banking

 

$

2,041,256

 

 

$

2,103,816

 

Average commercial finance

 

 

1,292,749

 

 

 

1,123,978

 

Average national lending

 

 

711,837

 

 

 

307,249

 

Average total loans

 

$

4,045,842

 

 

$

3,535,043

 

Community banking yield

 

 

5.67

%

 

 

5.91

%

Commercial finance yield

 

 

11.00

%

 

 

12.50

%

National lending yield

 

 

4.80

%

 

 

5.73

%

Total loan yield

 

 

7.22

%

 

 

7.99

%

 

54

 

We earned net interest income of $62.5 million for the three months ended March 31, 2020 compared to $61.3 million for the three months ended March 31, 2019, an increase of $1.2 million, or 2.0%, primarily driven by the following factors.

Interest income increased $2.2 million, or 2.9% as a result of an increase in total average interest earning assets of $419 million, or 10.4%, which was attributable to growth in our overall loan portfolio partially offset by lower yields discussed below. The average balance of our higher yielding commercial finance loans increased $168.8 million, or 15.0%, from $1.124 billion for the three months ended March 31, 2019 to $1.293 billion for the three months ended March 31, 2020 as a result of the continued execution of our growth strategy for such products. The average balance of mortgage warehouse lending, a lower yielding product, was $513.4 million for the quarter compared to $235.5 million for the three months ended March 31, 2019. We also experienced smaller fluctuations in average balances in our other community banking lending products, including commercial real estate and general commercial and industrial loans. A component of interest income consists of discount accretion on acquired loan portfolios.  We recognized discount accretion on purchased loans of $2.1 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively.  Growth in interest income was also partially offset by a decrease in interest income on securities driven by lower average balances.

Interest expense increased $1.0 million or 8.0% as a result of growth in customer deposits and other borrowings as well as higher average rates on customer deposits. Average total interest bearing deposits increased $221.5 million, or 8.2%, primarily due to growth in our certificates of deposit as this higher cost deposit product was used to fund our growth period over period.  Also contributing to an increase in total interest expense is an increase in interest expense on subordinated notes driven primarily by a full quarter impact of the issuance of $38.3 million in subordinated notes during the fourth quarter of 2019. We increased our use of other interest bearing borrowings, consisting primarily of FHLB advances, period over period however, the increase in the average balance was more than offset by a decrease in average rate.  

Net interest margin decreased to 5.63% for the three months ended March 31, 2020 from 6.15% for the three months ended March 31, 2019, a decrease of 52 basis points or 8.5%.

The decrease in our net interest margin primarily resulted from a decrease in yields on our interest earning assets.  Our average yield on interest earning assets decreased 55 basis points to 6.80% for the three months ended March 31, 2020 from 7.35% for the three months ended March 31, 2019, primarily due to a change in the mix within our loan portfolio period over period. The average commercial finance products as a percentage of the average total portfolio increased slightly from 31.8% for the three months ended March 31, 2019 to 32.0% for the three months ended March 31, 2020 however, higher yielding average factored receivables as a percentage of the average total commercial finance portfolio decreased from 51.0% at March 31, 2019 to 47.6% at March 31, 2020 contributing to the decrease in yields on our interest earning assets. This effect was compounded by a decrease in yield on our factored receivable portfolio period over period.  The decreased yield resulting from the change in the mix of our loan portfolio was positively impacted by a change in our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances. These transportation factoring balances increased as a percentage of the overall factoring portfolio to 80% at March 31, 2020 compared to 76% at March 31, 2019.

Also impacting our net interest margin was a decrease in our average cost of interest bearing liabilities of 3 basis points. This decrease was caused by lower rates on short term and floating FHLB advances and lower rates on most of our deposit products as a result of lower rates in the macro economy. This decrease was partially offset by an increased use of higher rate certificates of deposit.

 

55

 

The following table shows the effects changes in average balances (volume) and average interest rates (rate) had on the interest earned in our interest earning assets and the interest incurred on our interest bearing liabilities:

 

 

Three Months Ended

 

 

 

March 31, 2020 vs. 2019

 

 

 

Increase (Decrease) Due to:

 

 

 

 

 

(Dollars in thousands)

 

Rate

 

 

Volume

 

 

Net Increase

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

(341

)

 

$

51

 

 

$

(290

)

Taxable securities

 

 

184

 

 

 

(398

)

 

 

(214

)

Tax-exempt securities

 

 

45

 

 

 

(368

)

 

 

(323

)

FHLB and other restricted stock

 

 

(19

)

 

 

31

 

 

 

12

 

Loans

 

 

(6,203

)

 

 

9,168

 

 

 

2,965

 

Total interest income

 

 

(6,334

)

 

 

8,484

 

 

 

2,150

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

 

(19

)

 

 

(11

)

 

 

(30

)

Individual retirement accounts

 

 

37

 

 

 

(40

)

 

 

(3

)

Money market

 

 

(377

)

 

 

77

 

 

 

(300

)

Savings

 

 

3

 

 

 

(2

)

 

 

1

 

Certificates of deposit

 

 

728

 

 

 

1,313

 

 

 

2,041

 

Brokered deposits

 

 

(204

)

 

 

(46

)

 

 

(250

)

Total interest bearing deposits

 

 

168

 

 

 

1,291

 

 

 

1,459

 

Subordinated notes

 

 

(84

)

 

 

592

 

 

 

508

 

Junior subordinated debentures

 

 

(122

)

 

 

8

 

 

 

(114

)

Other borrowings

 

 

(979

)

 

 

87

 

 

 

(892

)

Total interest expense

 

 

(1,017

)

 

 

1,978

 

 

 

961

 

Change in net interest income

 

$

(5,317

)

 

$

6,506

 

 

$

1,189

 

Credit Loss Expense

Credit loss expense is the amount of expense that, based on our judgment, is required to maintain the allowances for credit losses (“ACL”) at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to the financial statements for detailed discussion regarding ACL methodologies for available for sale debt securities, held to maturity securities and loans held for investment.

Upon and subsequent to adoption of ASC 326, for available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. At January 1, 2020 and March 31, 2020, the Company determined that all impaired available for sale securities experienced a decline in fair value below the amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at those respective dates and there was no credit loss expense recognized by the Company during the three months ended March 31, 2020.

Upon and subsequent to adoption of ASC 326, the ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At March 31, 2020 and December 31, 2019, the Company’s held to maturity securities consisted of investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a loss rate methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At January 1, 2020 and March 31, 2020, the Company carried $8.4 million and $8.3 million of HTM securities at amortized cost, respectively. The ACL on these balances was $0.1 million at both measurement dates and no credit loss expense was recognized during the three months ended March 31, 2020.

Our ACL on loans was $44.7 million at March 31, 2020 compared to $29.1 million at December 31, 2019, representing an ACL to total loans ratio of 1.04% and 0.69%, respectively. Upon adoption of ASC 326, management booked an increase of $0.3 million to the ACL and a decrease to retained earnings net of the deferred tax impact. The Day 1 adjustment upon adoption raised the ACL balance to $29.4 million on January 1, 2020.

 

56

 

Our credit loss expense was $17.4 million for the three months ended March 31, 2020 compared to $1.0 million for the three months ended March 31, 2019, an increase of $16.4 million, or 1640.0%.

The increased credit loss expense was primarily the result of significant projected deterioration of the loss drivers that the Company forecasts to calculate expected losses and, to a much lesser extent, increases in qualitative loss factors. This deterioration was brought on by the projected economic impact of COVID-19 on the Company’s loss drivers over the reasonable and supportable forecast period. See further discussion in the allowance for credit loss section below. The deterioration of forecasted loss assumptions resulted in approximately $10.5 million of credit loss expense for the three months ended March 31, 2020. For the three months ended March 31, 2019, changes to loss factors under the incurred loss allowance methodology had an insignificant impact on credit loss expense.

Increased loan growth and change in mix also contributed to the increase in credit loss expense period over period. Excluding premium finance loans, during the three months ended March 31, 2020, outstanding loans increased $227.1 million from December 31, 2019. During the three months ended March 31, 2019, outstanding loans increased $4.2 million from December 31, 2018. For the three months ended March 31, 2020, changes in loan volume and mix resulted in approximately $3.0 million of credit loss expense. Changes in loan volume and mix had an insignificant impact on credit loss expense for the three months ended March 31, 2019.

The increase in credit loss expense was further driven by net new specific reserves. We recorded net new specific reserves of $3.0 million during the three months ended March 31, 2020 compared to $1.2 million during the three months ended March 31, 2019. We experienced higher total net charge-offs of $1.5 million in the three months ended March 31, 2020 compared to $1.0 million for the same period in 2019.  Approximately $0.7 million and $0.5 million of the charge-offs for the three months ended March 31, 2020 and 2019, respectively, had specific reserves previously recorded and as such, the impact of net charge-offs on the change in provision period over period was minimal.

Noninterest Income

The following table presents the major categories of noninterest income:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Service charges on deposits

 

$

1,588

 

 

$

1,606

 

 

$

(18

)

 

 

(1.1

%)

Card income

 

 

1,800

 

 

 

1,844

 

 

 

(44

)

 

 

(2.4

%)

Net OREO gains (losses) and valuation adjustments

 

 

(257

)

 

 

209

 

 

 

(466

)

 

 

(223.0

%)

Net gains (losses) on sale of securities

 

 

38

 

 

 

(11

)

 

 

49

 

 

 

445.5

%

Fee income

 

 

1,686

 

 

 

1,612

 

 

 

74

 

 

 

4.6

%

Insurance commissions

 

 

1,051

 

 

 

919

 

 

 

132

 

 

 

14.4

%

Other

 

 

1,571

 

 

 

1,359

 

 

 

212

 

 

 

15.6

%

Total noninterest income

 

$

7,477

 

 

$

7,538

 

 

$

(61

)

 

 

(0.8

%)

Noninterest income decreased $0.1 million, or 0.8%. Changes in selected components of noninterest income in the above table are discussed below.

 

•

Net OREO gains (losses) and valuation adjustments. Net OREO gains (losses) and valuation adjustments, which represents gains and losses on loans transferred to OREO, gains and losses on the sale of OREO, and valuation adjustments recorded due to the subsequent change in fair value less costs to sell of OREO, increased losses of $0.5 million. OREO activity on individual repossessed assets during the three months ended March 31, 2020 and 2019 was not significant.

 

•

Other.  Other noninterest income, including income associated with bank-owned life insurance and other miscellaneous activities, increased $0.2 million, or 15.6%. The increase is primarily driven by a $0.6 million increase in gain on sale of loans during the three months ended March 31, 2020. During the three months ended March 31, 2019, the bank benefited from a $0.4 million gain related to an interest in the sale of a property owned by a borrower which partially offset the increase in other noninterest income. There were no other significant increases or decreases in the components of other noninterest income period over period.

 

57

 

Noninterest Expense

The following table presents the major categories of noninterest expense:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

30,722

 

 

$

26,439

 

 

$

4,283

 

 

 

16.2

%

Occupancy, furniture and equipment

 

 

5,182

 

 

 

4,522

 

 

 

660

 

 

 

14.6

%

FDIC insurance and other regulatory assessments

 

 

315

 

 

 

299

 

 

 

16

 

 

 

5.4

%

Professional fees

 

 

2,107

 

 

 

1,865

 

 

 

242

 

 

 

13.0

%

Amortization of intangible assets

 

 

2,078

 

 

 

2,402

 

 

 

(324

)

 

 

(13.5

%)

Advertising and promotion

 

 

1,292

 

 

 

1,604

 

 

 

(312

)

 

 

(19.5

%)

Communications and technology

 

 

5,501

 

 

 

4,874

 

 

 

627

 

 

 

12.9

%

Travel and entertainment

 

 

994

 

 

 

1,025

 

 

 

(31

)

 

 

(3.0

%)

Credit loss expense - off balance sheet credit exposures

 

 

2,937

 

 

 

(2

)

 

 

2,939

 

 

N/M

 

Other

 

 

6,562

 

 

 

5,538

 

 

 

1,024

 

 

 

18.5

%

Total noninterest expense

 

$

57,690

 

 

$

48,566

 

 

$

9,124

 

 

 

18.8

%

N/M – Not meaningful  

Noninterest expense increased $9.1 million, or 18.8%. Details of the more significant changes in the various components of noninterest expense are further discussed below.

 

•

Salaries and Employee Benefits. Salaries and employee benefits expenses increased $4.3 million, or 16.2%.  While our average full-time equivalent employees were relatively flat at 1,115.3 and 1,131.5 for the three months ended March 31, 2020 and 2019, respectively, we experienced an increase in salaries and employee benefits due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense.

 

•

Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $0.7 million, or 14.6%, primarily due to expenses associated with the infrastructure and facilities added to accommodate our growth in operations.

 

•

Amortization of intangible assets. Amortization of intangible assets decreased $0.3 million, or 13.5%, due to lower amortizable intangible asset balances during the three months ended March 31, 2020 compared to the same period during 2019.

 

•

Advertising and promotion. Advertising and promotion expenses decreased $0.3 million, or 19.5%. Advertising and promotion expense during the three months ended March 31, 2019 was impacted by advertising and brand-awareness activities in connection with the FBD and SCC acquisitions that closed during the fourth quarter of 2018. With no acquisition activity during 2019 or 2020 year-to-date, such initiatives were not required during the three months ended March 31, 2020.

 

•

Communications and Technology. Communications and technology expenses increased $0.6 million, or 12.9% as a result of increased usage and transaction volumes resulting from growth in our factoring and loan operations.

 

•

Credit Loss Expense – Off Balance Sheet Credit Exposures. Credit Loss Expense – Off Balance Sheet Credit Exposures increased $2.9 million, primarily due to increased assumed loss rates on estimated funding as a result of the COVID-19 virus. The Company also experienced an increase in commitments to fund.

 

•

Other. Other noninterest expense includes loan-related expenses, software amortization, training and recruiting, postage, insurance, business travel and subscription services.  Other noninterest expense increased $1.0 million or 18.5% primarily due to increased operations driven by Company growth.  There were no significant increases or decreases in the individual components of other noninterest expense period over period.

 

58

 

Income Taxes

The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income, the statutory rate and the effect of changes in valuation allowances maintained against deferred tax benefits.

Income tax expense decreased $5.1 million, or 113.3%, from an expense of $4.5 million for the three months ended March 31, 2019 to an income tax benefit $0.6 million for the three months ended March 31, 2020. The decrease in income tax expense period over period is consistent with the decrease in pre-tax income for the same periods. The effective tax rate decreased from 23% for the three months ended March 31, 2019 to 12% for the three months ended March 31, 2020. The decrease in our effective tax rate was primarily driven by an adjustment to state taxes. Our effective tax rate is expected to return to approximately 24% in future periods.

Operating Segment Results

Our reportable segments are Banking, Factoring, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. Our Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Banking segment also includes certain factored receivables which are purchased by TBK Bank. The Factoring segment includes the operations of Triumph Business Capital with revenue derived from factoring services. Corporate includes holding company financing and investment activities and management and administrative expenses to support the overall operations of the Company.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Furthermore, changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2019 Form 10-K. Transactions between segments consist primarily of borrowed funds.  Intersegment interest expense is allocated to the Factoring segment based on Federal Home Loan Bank advance rates. Credit loss expense is allocated based on the segment’s ACL determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned accordingly. Taxes are paid on a consolidated basis and are not allocated for segment purposes.

The following tables present our primary operating results for our operating segments:  

   

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

51,666

 

 

$

23,497

 

 

$

251

 

 

$

75,414

 

Intersegment interest allocations

 

 

3,074

 

 

 

(3,074

)

 

 

—

 

 

 

—

 

Total interest expense

 

 

10,921

 

 

 

—

 

 

 

1,993

 

 

 

12,914

 

Net interest income (expense)

 

 

43,819

 

 

 

20,423

 

 

 

(1,742

)

 

 

62,500

 

Credit loss expense

 

 

15,818

 

 

 

1,544

 

 

 

(1

)

 

 

17,361

 

Net interest income after credit loss expense

 

 

28,001

 

 

 

18,879

 

 

 

(1,741

)

 

 

45,139

 

Noninterest income

 

 

6,280

 

 

 

1,296

 

 

 

(99

)

 

 

7,477

 

Noninterest expense

 

 

44,572

 

 

 

12,063

 

 

 

1,055

 

 

 

57,690

 

Operating income (loss)

 

$

(10,291

)

 

$

8,112

 

 

$

(2,895

)

 

$

(5,074

)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

49,121

 

 

$

23,803

 

 

$

340

 

 

$

73,264

 

Intersegment interest allocations

 

 

2,638

 

 

 

(2,638

)

 

 

—

 

 

 

—

 

Total interest expense

 

 

10,354

 

 

 

—

 

 

 

1,599

 

 

 

11,953

 

Net interest income (expense)

 

 

41,405

 

 

 

21,165

 

 

 

(1,259

)

 

 

61,311

 

Credit loss expense

 

 

954

 

 

 

136

 

 

 

(76

)

 

 

1,014

 

Net interest income after credit loss expense

 

 

40,451

 

 

 

21,029

 

 

 

(1,183

)

 

 

60,297

 

Noninterest income

 

 

6,297

 

 

 

1,077

 

 

 

164

 

 

 

7,538

 

Noninterest expense

 

 

34,385

 

 

 

13,295

 

 

 

886

 

 

 

48,566

 

Operating income (loss)

 

$

12,363

 

 

$

8,811

 

 

$

(1,905

)

 

$

19,269

 

 

59

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

5,276,926

 

 

$

714,006

 

 

$

723,327

 

 

$

(1,360,530

)

 

$

5,353,729

 

Gross loans held for investment

 

$

4,227,563

 

 

$

641,366

 

 

$

800

 

 

$

(549,181

)

 

$

4,320,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

4,976,009

 

 

$

662,002

 

 

$

771,048

 

 

$

(1,348,762

)

 

$

5,060,297

 

Gross loans held for investment

 

$

4,108,735

 

 

$

573,372

 

 

$

1,519

 

 

$

(489,114

)

 

$

4,194,512

 

Banking

(Dollars in thousands)

 

Three Months Ended March 31,

 

Banking

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

51,666

 

 

$

49,121

 

 

$

2,545

 

 

 

5.2

%

Intersegment interest allocations

 

 

3,074

 

 

 

2,638

 

 

 

436

 

 

 

16.5

%

Total interest expense

 

 

10,921

 

 

 

10,354

 

 

 

567

 

 

 

5.5

%

Net interest income (expense)

 

 

43,819

 

 

 

41,405

 

 

 

2,414

 

 

 

5.8

%

Credit loss expense

 

 

15,818

 

 

 

954

 

 

 

14,864

 

 

 

1558.1

%

Net interest income (expense) after credit loss expense

 

 

28,001

 

 

 

40,451

 

 

 

(12,450

)

 

 

(30.8

%)

Noninterest income

 

 

6,280

 

 

 

6,297

 

 

 

(17

)

 

 

(0.3

%)

Noninterest expense

 

 

44,572

 

 

 

34,385

 

 

 

10,187

 

 

 

29.6

%

Operating income (loss)

 

$

(10,291

)

 

$

12,363

 

 

$

(22,654

)

 

 

(183.2

%)

Our Banking segment’s operating income decreased $22.7 million, or 183.2%.

Interest income increased primarily as a result of increases in the balances of our interest earning assets, primarily loans, due to the continued growth of our commercial finance products, including equipment loans and asset based loans.  Average loans in our Banking segment increased 14.1% from $3.462 billion for the three months ended March 31, 2019 to $3.952 billion for the three months ended March 31, 2020. Growth in average loans was partially offset lower yields on our Banking segment products.

Interest expense increased primarily as a result of growth in customer deposits and other borrowings as well as higher average rates on customer deposits. Average total interest bearing deposits increased $221.5 million, or 8.2%, primarily due to growth in our certificates of deposit as this higher cost deposit product was used to fund our growth period over period.  We increased our use of other interest bearing borrowings, consisting primarily of FHLB advances, period over period however, the increase in the average balance was more than offset by a decrease in average rate.

The increased credit loss expense for our Banking segment was primarily the result of significant expected deterioration in the loss drivers that the Company forecasts to calculate expected losses and, to a much lesser extent, increases in qualitative loss factors previously discussed. The deterioration in forecasted loss assumptions resulted in approximately $10.5 million of credit loss expense for the three months ended March 31, 2020. For the three months ended March 31, 2019, changes to loss factors under the incurred loss allowance methodology had an insignificant impact on credit loss expense at our Banking segment. Increased loan growth and change in mix at our Banking segment also contributed to the increase in credit loss expense period over period. Excluding premium finance loans, during the three months ended March 31, 2020, outstanding loans at our Banking segment increased $219.8 million from December 31, 2019. During the three months ended March 31, 2019, outstanding loans at our Banking segment increased $67.6 million from December 31, 2018. For the three months ended March 31, 2020, changes in loan volume and mix resulted in approximately $2.3 million of credit loss expense. Changes in loan volume and mix had an insignificant impact on credit loss expense for the three months ended March 31, 2019. The increase in the credit loss expense at our Banking segment was further driven by net new specific reserves. We recorded net new specific reserves at our Banking segment of $2.8 million during the three months ended March 31, 2020 compared to $0.5 million during the three months ended March 31, 2019. We experienced lower total net charge-offs at our Banking segment of $0.2 million during the three months ended March 31, 2020 compared to $1.0 million for the same period in 2019.  Charge-offs during the three months ended March 31, 2020 did not have previously established reserves. Approximately $0.5 million of the charge-offs for the three months ended March 31, 2019 had specific reserves previously recorded.

 

60

 

Noninterest income at our Banking segment was flat period over period. There were no significant fluctuations in service charges, fee income or card income. Included in other non-interest income at our Banking segment for the three months ended March 31, 2020 is a $0.6 million increase in gain on sale of loans over the same period in 2019. During the three months ended March 31, 2019, the Banking segment benefited from a $0.4 million gain related to an interest in the sale of a property owned by a borrower which did not recur during the same period in 2020. There were no other significant increases or decreases in the components of noninterest income at our Banking segment period over period.

Noninterest expense increased due to incremental costs associated with the growth in our operations. In addition, increases due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense contributed to the increase. Furthermore, our reserve for off balance sheet credit exposures at our Banking segment increased $2.9 million, primarily due to increased assumed loss rates on estimated funding as a result of the COVID-19 virus. The Company also experienced an increase in commitments to fund.

Factoring

(Dollars in thousands)

 

Three Months Ended March 31,

 

Factoring

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

23,497

 

 

$

23,803

 

 

$

(306

)

 

 

(1.3

%)

Intersegment interest allocations

 

 

(3,074

)

 

 

(2,638

)

 

 

(436

)

 

 

(16.5

%)

Total interest expense

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net interest income (expense)

 

 

20,423

 

 

 

21,165

 

 

 

(742

)

 

 

(3.5

%)

Credit loss expense

 

 

1,544

 

 

 

136

 

 

 

1,408

 

 

 

1035.3

%

Net interest income (expense) after credit loss expense

 

 

18,879

 

 

 

21,029

 

 

 

(2,150

)

 

 

(10.2

%)

Noninterest income

 

 

1,296

 

 

 

1,077

 

 

 

219

 

 

 

20.3

%

Noninterest expense

 

 

12,063

 

 

 

13,295

 

 

 

(1,232

)

 

 

(9.3

%)

Operating income (loss)

 

$

8,112

 

 

$

8,811

 

 

$

(699

)

 

 

(7.9

%)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Factored receivable period end balance

 

$

641,366,000

 

 

$

534,420,000

 

Yield on average receivable balance

 

 

16.13

%

 

 

17.96

%

Rolling twelve quarter annual charge-off rate

 

 

0.42

%

 

 

0.39

%

Factored receivables - transportation concentration

 

 

80

%

 

 

81

%

 

 

 

 

 

 

 

 

 

Interest income, including fees

 

$

23,497,000

 

 

$

23,803,000

 

Non-interest income

 

 

1,296,000

 

 

 

1,077,000

 

Factored receivable total revenue

 

 

24,793,000

 

 

 

24,880,000

 

Average net funds employed

 

 

537,138,000

 

 

 

490,241,000

 

Yield on average net funds employed

 

 

18.56

%

 

 

20.58

%

 

 

 

 

 

 

 

 

 

Accounts receivable purchased

 

$

1,450,618,000

 

 

$

1,325,140,000

 

Number of invoices purchased

 

 

878,767

 

 

 

789,838

 

Average invoice size

 

$

1,651

 

 

$

1,678

 

Average invoice size - transportation

 

$

1,481

 

 

$

1,541

 

Average invoice size - non-transportation

 

$

4,061

 

 

$

3,276

 

Our Factoring segment’s operating income decreased $0.7 million, or 7.9%.

Our average invoice size decreased 1.6% from $1,678 for the three months ended March 31, 2019 to $1,651 for the three months ended March 31, 2020, however the number of invoices purchased increased 11.3% period over period.

 

61

 

Net interest income at our Factoring segment decreased in spite of a 9.6% increase in overall average net funds employed (“NFE”) during the three months ended March 31, 2020 compared to the same period in 2019. This is primarily due to decreased yield on average NFE driven by greater focus on larger lower yielding fleets and competitive pricing pressure. The increase in NFE was the result of organic growth in the factored receivables portfolio as we execute our strategy to expand our factoring operations and slower collections near quarter end. After record transportation invoice prices in 2018, 2019 trended toward the longer term levels. The impact of COVID-19 on the three months ended March 31, 2020 was uneven. There was a significant decline in imports from China, in durable goods and in energy service related transportation, but a surge in food products and other consumer staples.  In aggregate, the change in freight mix did not have a significant impact on our Factoring segment’s results of operations during the three months ended March 31, 2020. However, overall we did see the normal first quarter seasonal slowdown in the total freight market. See further discussion under the Recent Developments: COVID-19 and the CARES Act section. Our transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances, as a percentage of the overall Factoring segment portfolio were down 1% year over year from 81% during the three months ended March 31, 2019 to 80% during the three months ended March 31, 2020.

The increased credit loss expense was primarily the result of an increase in period end factored receivables growth period over period. During the three months ended March 31, 2020, outstanding factored receivables increased $68.0 million from December 31, 2019.  During the three months ended March 31, 2019, outstanding factored receivables at our Factoring segment decreased $54.3 million from December 31, 2018.  The increase in the factored receivable balance within the three months ended March 31, 2020 compared to the contraction in factored receivables within the three months ended March 31, 2019 was the primary contributor to the increase in credit loss expense. Charge-off activity also contributed to the increase in credit loss expense. We recorded $1.4 million of net charge-off at our Factoring segment for the three months ended March 31, 2020 compared to no net charge-offs for the three months ended March 31, 2019. Approximately $0.7 million of the charge-offs for the three months ended March 31, 2020 had specific reserves previously recorded.  The increase in credit loss expense was partially offset by a decrease in net new specific reserves at our Factoring segment. We recorded net new specific reserves of $0.2 million during the three months ended March 31, 2020 compared to $0.8 million during the three months ended March 31, 2019.

The decrease in noninterest expense was driven primarily by reduced personnel, operating and technology costs reflecting improved productivity and lower consulting spend. The increase in noninterest income was result of continued growth in the client portfolio as well as decline in the impact of the contingent payout associated with the Interstate Capital asset purchase.

Corporate

(Dollars in thousands)

 

Three Months Ended March 31,

 

Corporate

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

251

 

 

$

340

 

 

$

(89

)

 

 

(26.2

%)

Intersegment interest allocations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total interest expense

 

 

1,993

 

 

 

1,599

 

 

 

394

 

 

 

24.6

%

Net interest income (expense)

 

 

(1,742

)

 

 

(1,259

)

 

 

(483

)

 

 

(38.4

%)

Credit loss expense

 

 

(1

)

 

 

(76

)

 

 

75

 

 

 

98.7

%

Net interest income (expense) after credit loss expense

 

 

(1,741

)

 

 

(1,183

)

 

 

(558

)

 

 

(47.2

%)

Other noninterest income

 

 

(99

)

 

 

164

 

 

 

(263

)

 

 

(160.4

%)

Noninterest expense

 

 

1,055

 

 

 

886

 

 

 

169

 

 

 

19.1

%

Operating income (loss)

 

$

(2,895

)

 

$

(1,905

)

 

$

(990

)

 

 

(52.0

%)

The Corporate segment reported an operating loss of $2.9 million for the three months ended March 31, 2020 compared to an operating loss of $1.9 million for the three months ended March 31, 2019 with no significant fluctuations in accounts period over period.

Financial Condition

Assets

Total assets were $5.354 billion at March 31, 2020, compared to $5.060 billion at December 31, 2019, an increase of $293.4 million, the components of which are discussed below.  

 

62

 

Loan Portfolio

Loans held for investment were $4.321 billion at March 31, 2020, compared with $4.195 billion at December 31, 2019.

The following table shows our total loan portfolio by portfolio segments as of March 31, 2020 and December 31, 2019:

   

 

March 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

 

$ Change

 

 

% Change

 

Commercial real estate

 

$

985,757

 

 

 

23

%

 

$

1,046,961

 

 

 

25

%

 

$

(61,204

)

 

 

(5.8

%)

Construction, land development, land

 

 

198,050

 

 

 

5

%

 

 

160,569

 

 

 

4

%

 

 

37,481

 

 

 

23.3

%

1-4 family residential

 

 

169,703

 

 

 

4

%

 

 

179,425

 

 

 

4

%

 

 

(9,722

)

 

 

(5.4

%)

Farmland

 

 

133,579

 

 

 

3

%

 

 

154,975

 

 

 

4

%

 

 

(21,396

)

 

 

(13.8

%)

Commercial

 

 

1,412,822

 

 

 

33

%

 

 

1,342,683

 

 

 

31

%

 

 

70,139

 

 

 

5.2

%

Factored receivables

 

 

661,100

 

 

 

15

%

 

 

619,986

 

 

 

15

%

 

 

41,114

 

 

 

6.6

%

Consumer

 

 

20,326

 

 

 

0

%

 

 

21,925

 

 

 

1

%

 

 

(1,599

)

 

 

(7.3

%)

Mortgage warehouse

 

 

739,211

 

 

 

17

%

 

 

667,988

 

 

 

16

%

 

 

71,223

 

 

 

10.7

%

Total Loans

 

$

4,320,548

 

 

 

100

%

 

$

4,194,512

 

 

 

100

%

 

$

126,036

 

 

 

3.0

%

Commercial Real Estate Loans. Our commercial real estate loans decreased $61.2 million, or 5.8%, due to paydowns for the period that outpaced new loan origination activity.

Construction and Development Loans. Our construction and development loans increased $37.5 million, or 23.3%, due to origination activity that outpaced paydowns during the quarter.

Residential Real Estate Loans. Our one-to-four family residential loans decreased $9.7 million, or 5.4%, due to paydowns for the period that outpaced new loan origination activity.

Farmland Loans. Our farmland loans decreased $21.4 million, or 13.8%, due to paydowns for the period that outpaced new loan origination activity.

Commercial Loans. Our commercial loans held for investment increased $70.1 million, or 5.2%, due to growth in equipment finance, asset-based lending, and liquid credit loans as we continue to execute on our growth strategy for such products. Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, increased $1.1 million, or 0.3%.  We experienced a decrease in our agriculture loan and our premium finance loans were moved to held for sale. The following table shows our commercial loans:

 

 

March 31,

 

 

December 31,

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

$

479,483

 

 

$

461,555

 

 

$

17,928

 

 

 

3.9

%

Asset-based lending

 

 

245,001

 

 

 

168,955

 

 

 

76,046

 

 

 

45.0

%

Liquid credit

 

 

172,380

 

 

 

81,353

 

 

 

91,027

 

 

 

111.9

%

Premium finance

 

 

—

 

 

 

101,015

 

 

 

(101,015

)

 

 

(100.0

%)

Agriculture

 

 

110,955

 

 

 

125,912

 

 

 

(14,957

)

 

 

(11.9

%)

Other commercial lending

 

 

405,003

 

 

 

403,893

 

 

 

1,110

 

 

 

0.3

%

Total commercial loans

 

$

1,412,822

 

 

$

1,342,683

 

 

 

70,139

 

 

 

5.2

%

Factored Receivables. Our factored receivables increased $41.1 million, or 6.6%. See discussion of our factoring subsidiary in the Operating Segment Results for analysis of the key drivers impacting the change in the ending factored receivables balance during the period.

Consumer Loans. Our consumer loans decreased $1.6 million, or 7.3%, due to paydowns for the period that outpaced new loan origination activity.

Mortgage Warehouse. Our mortgage warehouse facilities increased $71.2 million, or 10.7%, due to higher utilization by our clients despite typical seasonality associated with the mortgage business during the period. Mortgage warehouse average balance for the quarter was $513.4 million compared to an average balance of $527.4 million during the three months ended December 31, 2019.

 

63

 

Client utilization of mortgage warehouse facilities may experience significant fluctuation on a day-to-day basis given mortgage origination market conditions.

The following tables set forth the contractual maturities, including scheduled principal repayments, of our loan portfolio and the distribution between fixed and floating interest rate loans.  

 

  

 

March 31, 2020

 

(Dollars in thousands)

 

One Year or

Less

 

 

After One

but within

Five Years

 

 

After Five

Years

 

 

Total

 

Commercial real estate

 

$

126,135

 

 

$

611,849

 

 

$

247,773

 

 

$

985,757

 

Construction, land development, land

 

 

81,634

 

 

 

101,433

 

 

 

14,983

 

 

 

198,050

 

1-4 family residential properties

 

 

20,353

 

 

 

41,806

 

 

 

107,544

 

 

 

169,703

 

Farmland

 

 

5,608

 

 

 

52,283

 

 

 

75,688

 

 

 

133,579

 

Commercial

 

 

372,737

 

 

 

879,688

 

 

 

160,397

 

 

 

1,412,822

 

Factored receivables

 

 

661,100

 

 

 

—

 

 

 

—

 

 

 

661,100

 

Consumer

 

 

3,083

 

 

 

10,966

 

 

 

6,277

 

 

 

20,326

 

Mortgage warehouse

 

 

739,211

 

 

 

—

 

 

 

—

 

 

 

739,211

 

 

 

$

2,009,861

 

 

$

1,698,025

 

 

$

612,662

 

 

$

4,320,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sensitivity of loans to changes in interest rates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predetermined (fixed) interest rates

 

 

 

 

 

$

1,107,858

 

 

$

235,374

 

 

 

 

 

Floating interest rates

 

 

 

 

 

 

590,167

 

 

 

377,288

 

 

 

 

 

Total

 

 

 

 

 

$

1,698,025

 

 

$

612,662

 

 

 

 

 

  

As of March 31, 2020, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Texas (26%), Colorado (19%), Illinois (13%), and Iowa (6%) make up 64% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2019, the states of Texas (27%), Colorado (23%), Illinois (13%) and Iowa (7%) made up 70% of the Company’s gross loans, excluding factored receivables.

Further, a majority (80%) of our factored receivables, representing approximately 12% of our total loan portfolio as of March 31, 2020, are transportation receivables. Although such concentration may cause our future interest income with respect to our factoring operations to be correlated with demand for the transportation industry in the United States generally, and small-to-mid-sized operators in such industry specifically, we feel that the credit risk with respect to our outstanding portfolio is appropriately mitigated as we limit the amount of receivables acquired from individual debtors and creditors thereby achieving diversification across a number of companies and industries. At December 31, 2019, 77% of our factored receivables, representing approximately 11% of our total loan portfolio, were receivables purchased from trucking fleets, owner-operators, and freight brokers in the transportation industry.

Nonperforming Assets

We have established procedures to assist us in maintaining the overall quality of our loan portfolio. In addition, we have adopted underwriting guidelines to be followed by our lending officers and require senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we monitor them for any negative or adverse trends. Our loan review procedures include approval of lending policies and underwriting guidelines by the Board of Directors of our bank subsidiary, independent loan review, approval of large credit relationships by our bank subsidiary’s Management Loan Committee and loan quality documentation procedures. We, like other financial institutions, are subject to the risk that our loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

 

64

 

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. We classify nonperforming assets as nonperforming loans, OREO, other repossessed assets and nonaccrual loans included in assets held for sale. Nonperforming loans consist of nonaccrual loans (including nonaccrual PCD loans), troubled debt restructurings (“TDRs”) and factored receivables greater than 90 days past due. The balances of nonperforming loans reflect the recorded investment in these assets, including adjustments for deferred fees and costs as well as purchase discounts.

 

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Nonperforming loans:

 

 

 

 

 

 

 

 

Commercial real estate

 

$

14,645

 

 

$

7,501

 

Construction, land development, land

 

 

3,819

 

 

 

3,922

 

1-4 family residential

 

 

2,041

 

 

 

1,804

 

Farmland

 

 

5,935

 

 

 

6,715

 

Commercial

 

 

20,625

 

 

 

16,118

 

Factored receivables

 

 

6,849

 

 

 

4,226

 

Consumer

 

 

391

 

 

 

327

 

Mortgage warehouse

 

 

—

 

 

 

—

 

Total nonperforming loans

 

 

54,305

 

 

 

40,613

 

Other real estate owned, net

 

 

2,540

 

 

 

3,009

 

Other repossessed assets

 

 

1,329

 

 

 

476

 

Total nonperforming assets

 

$

58,174

 

 

$

44,098

 

 

 

 

 

 

 

 

 

 

Nonperforming assets to total assets

 

 

1.09

%

 

 

0.87

%

Nonperforming loans to total loans held for investment

 

 

1.26

%

 

 

0.97

%

Past due loans to total loans held for investment(1)

 

 

1.99

%

 

 

1.74

%

Nonperforming loans increased $13.7 million, or 33.7%, primarily due to the addition of a $5.8 million commercial real estate loan secured by a hotel property, a $4.5 million asset-based lending loan primarily secured by accounts receivable, and a $2.3 million general commercial loan secured by real estate and equipment. The remaining activity in nonperforming loans was also impacted by additions and removals of smaller credits to and from nonperforming loans.

OREO decreased $0.5 million, or 15.6%, due to insignificant OREO property removals and disposals as well as valuation adjustments made throughout the period.

Other repossessed assets increased $0.9 million, or 179.2%, due to the addition of individually insignificant assets during the period.

As a result of the above activity, the ratio of nonperforming loans to total loans increased to 1.26% at March 31, 2020 compared to 0.97% at December 31, 2019, and our ratio of nonperforming assets to total assets increased to 1.09% at March 31, 2020 from 0.87% at December 31, 2019.  

Past due loans to total loans increased to 1.99% at March 31, 2020 compared to 1.74% at December 31, 2019, due to an increase in factored receivables past due as well as other payment performance activity.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which the Company has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. The Company monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate.  At March 31, 2020, we had $38.1 million in loans of this type which are not included in any of the nonperforming loan categories.  

Allowance for Credit Losses on Loans

The ACL is a valuation allowance estimated at each balance sheet date in accordance with US GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See Note 1 – Summary of Significant Accounting Policies in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in the Company’s judgment, should be charged-off.

 

65

 

Loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of collateral dependent loans and factored invoices greater than 90 days past due with negative cash reserves.

The following table sets forth the ACL by category of loan:

 

March 31, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

Allocated

Allowance

 

 

% of Loan

Portfolio

 

 

ACL to

Loans

 

 

Allocated

Allowance

 

 

% of Loan

Portfolio

 

 

ACL to

Loans

 

Commercial real estate

 

$

11,753

 

 

 

23

%

 

 

1.19

%

 

$

5,353

 

 

 

25

%

 

 

0.51

%

Construction, land development, land

 

 

3,179

 

 

 

5

%

 

 

1.61

%

 

 

1,382

 

 

 

4

%

 

 

0.86

%

1-4 family residential

 

 

1,087

 

 

 

4

%

 

 

0.64

%

 

 

308

 

 

 

4

%

 

 

0.17

%

Farmland

 

 

1,021

 

 

 

3

%

 

 

0.76

%

 

 

670

 

 

 

4

%

 

 

0.43

%

Commercial

 

 

20,145

 

 

 

33

%

 

 

1.43

%

 

 

12,566

 

 

 

31

%

 

 

0.94

%

Factored receivables

 

 

6,134

 

 

 

15

%

 

 

0.93

%

 

 

7,657

 

 

 

15

%

 

 

1.24

%

Consumer

 

 

674

 

 

 

0

%

 

 

3.32

%

 

 

488

 

 

 

1

%

 

 

2.23

%

Mortgage warehouse

 

 

739

 

 

 

17

%

 

 

0.10

%

 

 

668

 

 

 

16

%

 

 

0.10

%

Total Loans

 

$

44,732

 

 

 

100

%

 

 

1.04

%

 

$

29,092

 

 

 

100

%

 

 

0.69

%

 

The ACL increased $15.6 million, or 53.8%. Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on January 1, 2020, the Company recorded an increase of $0.3 million to the ACL. Additionally, the ACL on loans held for investment was reduced by $0.5 million upon transferring the premium finance portfolio to held for sale.

 

The primary reason for the increase in required ACL is significant projected deterioration of the loss drivers that the Company forecasts to calculate expected losses and, to a much lesser extent, increases in qualitative loss factors. This deterioration was brought on by the projected economic impact of COVID-19 on the Company’s loss drivers over the reasonable and supportable forecast period and created the need for $10.5 million of additional ACL.

 

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 premium finance), 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.

 

For all DCF models at March 31, 2020, 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 March 31, 2020 the Company forecasted a significant increase in national unemployment, significant decrease in one-year percentage change in national retail sales, significant decrease in one-year percentage change in the national home price index, and a significant decrease in on-year percentage change in national gross domestic product for the first forecasted quarter. With the exception of percentage change in the national home price index, the Company projected gradual improvement in the loss drivers over the next three quarters with these loss drivers remaining significantly worse compared to recent historical trends over the past several years. Percentage change in home price index is expected to decrease each of the next four projected quarters.

The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, premium finance, 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.

 

66

 

The increase in required ACL was also driven by net charge-offs of $1.5 million (which carried reserves of $0.7 million at the time of charge-off), net new specific allowances recorded on individual loans of $3.0 million, and growth and changes in mix in the underlying portfolio.

The following table presents the unpaid principal and recorded investment for loans at March 31, 2020. The difference between the unpaid principal balance and recorded investment is primarily (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans totaling $13.4 million at March 31, 2020 and (2) net deferred origination and factoring costs and fees totaling $0.4 million at March 31, 2020. The net difference can provide protection from credit loss in addition to the ACL as future potential charge-offs for an individual loan is limited to the recorded investment plus unpaid accrued interest.

 

(Dollars in thousands)

 

Recorded

 

 

Unpaid

 

 

 

 

 

March 31, 2020

 

Investment

 

 

Principal

 

 

Difference

 

Commercial real estate

 

$

985,757

 

 

$

990,063

 

 

$

(4,306

)

Construction, land development, land

 

 

198,050

 

 

 

199,638

 

 

 

(1,588

)

1-4 family residential properties

 

 

169,703

 

 

 

170,506

 

 

 

(803

)

Farmland

 

 

133,579

 

 

 

134,507

 

 

 

(928

)

Commercial

 

 

1,412,822

 

 

 

1,416,913

 

 

 

(4,091

)

Factored receivables

 

 

661,100

 

 

 

663,105

 

 

 

(2,005

)

Consumer

 

 

20,326

 

 

 

20,383

 

 

 

(57

)

Mortgage warehouse

 

 

739,211

 

 

 

739,211

 

 

 

—

 

 

 

$

4,320,548

 

 

$

4,334,326

 

 

$

(13,778

)

 

At March 31, 2020 and December 31, 2019, we had on deposit $55.5 million and $66.8 million, respectively, of customer reserves associated with factored receivables. These deposits 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 on our consolidated balance sheets.

 

67

 

The following table provides an analysis of the provisions for loan losses, net charge-offs and recoveries and the effects of those items on our ACL:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Balance at beginning of period

 

$

29,092

 

 

$

27,571

 

Loans charged-off:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

—

 

 

 

—

 

Construction, land development, land

 

 

—

 

 

 

(78

)

1-4 family residential

 

 

(21

)

 

 

(36

)

Farmland

 

 

—

 

 

 

—

 

Commercial

 

 

(306

)

 

 

(780

)

Factored receivables

 

 

(1,394

)

 

 

(9

)

Consumer

 

 

(204

)

 

 

(278

)

Mortgage warehouse

 

 

—

 

 

 

—

 

Total loans charged-off

 

$

(1,925

)

 

$

(1,181

)

Recoveries of loans charged-off:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

1

 

 

 

1

 

Construction, land development, land

 

 

1

 

 

 

85

 

1-4 family residential

 

 

28

 

 

 

47

 

Farmland

 

 

—

 

 

 

—

 

Commercial

 

 

285

 

 

 

7

 

Factored receivables

 

 

38

 

 

 

16

 

Consumer

 

 

31

 

 

 

45

 

Mortgage warehouse

 

 

—

 

 

 

—

 

Total loans recoveries

 

$

384

 

 

$

201

 

Net loans charged-off

 

$

(1,541

)

 

$

(980

)

Credit loss expense:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

5,027

 

 

 

692

 

Construction, land development, land

 

 

1,983

 

 

 

(235

)

1-4 family residential

 

 

259

 

 

 

39

 

Farmland

 

 

(86

)

 

 

43

 

Commercial

 

 

8,233

 

 

 

120

 

Factored receivables

 

 

1,463

 

 

 

189

 

Consumer

 

 

411

 

 

 

173

 

Mortgage warehouse

 

 

71

 

 

 

(7

)

Credit loss expense

 

$

17,361

 

 

$

1,014

 

Impact of adopting ASU 2016-13

 

 

269

 

 

 

—

 

Reclassification to held for sale

 

 

(449

)

 

 

—

 

Balance at end of period

 

$

44,732

 

 

$

27,605

 

 

 

 

 

 

 

 

 

 

Average total loans held for investment

 

$

4,036,431

 

 

$

3,534,010

 

Net charge-offs to average total loans held for investment

 

 

0.04

%

 

 

0.03

%

Allowance to total loans held for investment

 

 

1.04

%

 

 

0.76

%

 

Net loans charged-off increased $0.6 million, or 57.2% primarily driven by at $1.4 million increase in net charge-offs on factored receivables. There were no other significant fluctuations or significant individual activity period over period.  

 

 

68

 

Securities

As of March 31, 2020, we held equity securities with a fair value of $5.7 million, an increase of $0.3 million from $5.4 million at December 31, 2019. These securities represent investments in a publicly traded Community Reinvestment Act mutual fund and are subject to market pricing volatility with changes in fair value reflected in earnings.

As of March 31, 2020, we held debt securities classified as available for sale with a fair value of $302.1 million, an increase of $53.3 million from $248.8 million at December 31, 2019. The increase is attributable to increases of $51.1 million and $20.8 million of CLO and State and Municipal securities, respectively, offset by a decrease of $10.7 million in U.S. Government Agency Obligations. Our available for sale CLO portfolio consists of investment grade positions in high ranking tranches within their respective securitization structures. As of March 31, 2020, the Company determined that all impaired available for sale securities experienced a decline in fair value below their amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at March 31, 2020. Our available for sale securities can be used for pledging to secure FHLB borrowings and public deposits, or can be sold to meet liquidity needs.

As of March 31, 2020, we held investments classified as held to maturity with an amortized cost, net of ACL, of $8.2 million, a decrease of $0.2 million from $8.4 million at December 31, 2019. These held to maturity securities represent a minority investment in the unrated subordinated notes of issued CLOs managed by Trinitas Capital Management and carried an ACL of $0.1 million at March 31, 2020.

The following tables set forth the amortized cost and average yield of our debt securities, by type and contractual maturity:

 

 

 

Maturity as of March 31, 2020

 

 

 

One Year or Less

 

 

After One but within Five Years

 

 

After Five but within Ten Years

 

 

After Ten Years

 

 

Total

 

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

(Dollars in thousands)

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

U.S. Government agency obligations

 

$

18,826

 

 

 

1.60

%

 

$

9,889

 

 

 

2.08

%

 

$

—

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

28,715

 

 

 

1.77

%

Mortgage-backed securities

 

 

1

 

 

 

4.59

%

 

 

2,700

 

 

 

2.01

%

 

 

8,730

 

 

 

2.06

%

 

 

23,372

 

 

 

2.82

%

 

 

34,803

 

 

 

2.56

%

Asset backed securities

 

 

—

 

 

 

—

 

 

 

353

 

 

 

2.09

%

 

 

5,205

 

 

 

1.99

%

 

 

2,130

 

 

 

1.94

%

 

 

7,688

 

 

 

1.98

%

State and municipal

 

 

10,929

 

 

 

2.74

%

 

 

13,038

 

 

 

2.72

%

 

 

7,100

 

 

 

2.06

%

 

 

20,791

 

 

 

2.50

%

 

 

51,858

 

 

 

2.55

%

CLO securities

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21,917

 

 

 

6.42

%

 

 

114,090

 

 

 

4.66

%

 

 

136,007

 

 

 

5.02

%

Corporate bonds

 

 

36,711

 

 

 

3.62

%

 

 

9,403

 

 

 

3.40

%

 

 

—

 

 

 

—

 

 

 

272

 

 

 

5.04

%

 

 

46,386

 

 

 

3.58

%

SBA pooled securities

 

 

—

 

 

 

—

 

 

 

50

 

 

 

4.35

%

 

 

3

 

 

 

4.38

%

 

 

3,797

 

 

 

4.01

%

 

 

3,850

 

 

 

4.01

%

Total available for sale securities

 

$

66,467

 

 

 

2.90

%

 

$

35,433

 

 

 

2.66

%

 

$

42,955

 

 

 

4.40

%

 

$

164,452

 

 

 

4.00

%

 

$

309,307

 

 

 

3.64

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities:

 

$

—

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

8,343

 

 

 

11.34

%

 

$

—

 

 

 

—

 

 

$

8,343

 

 

 

11.34

%

Liabilities

Total liabilities were $4.764 billion as of March 31, 2020, compared to $4.424 billion at December 31, 2019, an increase of $340.7 million, the components of which are discussed below.

Deposits

The following table summarizes our deposits:

(Dollars in thousands)

 

March 31, 2020

 

 

December 31, 2019

 

 

$ Change

 

 

% Change

 

Noninterest bearing demand

 

$

846,412

 

 

$

809,696

 

 

$

36,716

 

 

 

4.53

%

Interest bearing demand

 

 

583,445

 

 

 

580,323

 

 

 

3,122

 

 

 

0.54

%

Individual retirement accounts

 

 

101,743

 

 

 

104,472

 

 

 

(2,729

)

 

 

(2.61

%)

Money market

 

 

412,376

 

 

 

497,105

 

 

 

(84,729

)

 

 

(17.04

%)

Savings

 

 

367,163

 

 

 

363,270

 

 

 

3,893

 

 

 

1.07

%

Certificates of deposit

 

 

1,056,012

 

 

 

1,084,425

 

 

 

(28,413

)

 

 

(2.62

%)

Brokered deposits

 

 

314,864

 

 

 

350,615

 

 

 

(35,751

)

 

 

(10.20

%)

Total deposits

 

$

3,682,015

 

 

$

3,789,906

 

 

$

(107,891

)

 

 

(2.85

%)

 

69

 

Our total deposits decreased $107.9 million, or 2.9%, primarily due to decreases in all deposit products with the exception of increases in noninterest bearing demand, interest bearing demand, and savings deposits. As of March 31, 2020, interest bearing demand deposits, noninterest bearing deposits, money market deposits and savings deposits accounted for 60% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered deposits made up 40% of total deposits.

The following table provides information on the maturity distribution of time deposits with individual balances of $100,000 to $250,000 and of time deposits with individual balances of $250,000 or more as of March 31, 2020:

 

  

 

$100,000 to

 

 

$250,000 and

 

 

 

 

 

(Dollars in thousands)

 

$250,000

 

 

Over

 

 

Total

 

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

3 months or less

 

$

175,713

 

 

$

84,701

 

 

$

260,414

 

Over 3 through 6 months

 

 

112,227

 

 

 

42,101

 

 

 

154,328

 

Over 6 through 12 months

 

 

187,268

 

 

 

65,230

 

 

 

252,498

 

Over 12 months

 

 

99,797

 

 

 

50,068

 

 

 

149,865

 

 

 

$

575,005

 

 

$

242,100

 

 

$

817,105

 

The following table summarizes our average deposit balances and weighted average rates:

 

 

Three Months Ended March 31, 2020

 

 

Three Months Ended March 31, 2019

 

 

 

Average

 

 

Weighted

 

 

% of

 

 

Average

 

 

Weighted

 

 

% of

 

(Dollars in thousands)

 

Balance

 

 

Avg Yields

 

 

Total

 

 

Balance

 

 

Avg Yields

 

 

Total

 

Interest bearing demand

 

$

586,671

 

 

 

0.24

%

 

 

16

%

 

$

606,096

 

 

 

0.25

%

 

 

18

%

Individual retirement accounts

 

 

103,351

 

 

 

1.56

%

 

 

3

%

 

 

113,636

 

 

 

1.45

%

 

 

3

%

Money market

 

 

441,815

 

 

 

0.94

%

 

 

12

%

 

 

408,953

 

 

 

1.32

%

 

 

12

%

Savings

 

 

363,888

 

 

 

0.14

%

 

 

10

%

 

 

370,067

 

 

 

0.13

%

 

 

11

%

Certificates of deposit

 

 

1,068,023

 

 

 

2.26

%

 

 

28

%

 

 

834,515

 

 

 

1.93

%

 

 

25

%

Brokered deposits

 

 

344,847

 

 

 

2.06

%

 

 

9

%

 

 

353,829

 

 

 

2.32

%

 

 

11

%

Total interest bearing deposits

 

 

2,908,595

 

 

 

1.34

%

 

 

78

%

 

 

2,687,096

 

 

 

1.24

%

 

 

80

%

Noninterest bearing demand

 

 

810,654

 

 

 

—

 

 

 

22

%

 

 

679,538

 

 

 

—

 

 

 

20

%

Total deposits

 

$

3,719,249

 

 

 

1.05

%

 

 

100

%

 

$

3,366,634

 

 

 

0.99

%

 

 

100

%

Other Borrowings

Customer Repurchase Agreements

The following provides a summary of our customer repurchase agreements as of and for the three months ended March 31, 2020 and the year ended December 31, 2019:

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Amount outstanding at end of period

 

$

3,693

 

 

$

2,033

 

Weighted average interest rate at end of period

 

 

0.03

%

 

 

0.03

%

Average daily balance during the period

 

$

8,256

 

 

$

7,823

 

Weighted average interest rate during the period

 

 

0.01

%

 

 

0.02

%

Maximum month-end balance during the period

 

$

3,693

 

 

$

14,463

 

 

70

 

Our customer repurchase agreements generally mature overnight. Variances in these balances are attributable to normal customer behavior and seasonal factors affecting their liquidity positions.

FHLB Advances

The following provides a summary of our FHLB advances as of and for the three months ended March 31, 2020 and the year ended December 31, 2019:

  

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Amount outstanding at end of period

 

$

850,000

 

 

$

430,000

 

Weighted average interest rate at end of period

 

 

0.44

%

 

 

1.58

%

Average amount outstanding during the period

 

$

359,286

 

 

$

369,548

 

Weighted average interest rate during the period

 

 

1.39

%

 

 

2.32

%

Highest month-end balance during the period

 

$

850,000

 

 

$

530,000

 

Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. At March 31, 2020 and December 31, 2019, we had $432.0 million and $871.0 million, respectively, in unused and available advances from the FHLB.

Subordinated Notes

On September 30, 2016, we issued $50.0 million of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2016 Notes”). The 2016 Notes initially bear interest at 6.50% per annum, are payable semi-annually in arrears, to, but excluding, September 30, 2021, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus 5.345%. We may, at our option, beginning on September 30, 2021 and on any scheduled interest payment date thereafter, redeem the 2016 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2016 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.

On November 27, 2019, we issued $39.5 million of Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2019 Notes”). The 2019 Notes initially bear interest at 4.875% per annum, payable semi-annually in arrears, to, but excluding, November 27, 2024, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to a benchmark rate, initially three-month LIBOR, as determined for the applicable quarterly period, plus 3.330%. We may, at our option, beginning on November 27, 2024 and on any scheduled interest payment date thereafter, redeem the 2019 Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the 2019 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.

The Notes are included on our consolidated balance sheet as liabilities; however, for regulatory purposes, the carrying value of these obligations is eligible for inclusion in Tier 2 regulatory capital.

Issuance costs related to the 2016 Notes and the 2019 Notes totaled $1.3 million and $1.2 million, respectively, and have been netted against the subordinated notes liability on the consolidated balance sheets. The debt issuance costs are being amortized using the effective interest method over the life of the 2016 Notes and the 2019 Notes as a component of interest expense. The carrying value of the 2016 Notes and the 2019 Notes totaled $87.3 million at March 31, 2020.

Junior Subordinated Debentures

The following provides a summary of our junior subordinated debentures as of March 31, 2020:

(Dollars in thousands)

 

Face Value

 

 

Carrying Value

 

 

Maturity Date

 

Interest Rate

National Bancshares Capital Trust II

 

$

15,464

 

 

$

13,125

 

 

September 2033

 

LIBOR + 3.00%

National Bancshares Capital Trust III

 

 

17,526

 

 

 

12,821

 

 

July 2036

 

LIBOR + 1.64%

ColoEast Capital Trust I

 

 

5,155

 

 

 

3,559

 

 

September 2035

 

LIBOR + 1.60%

ColoEast Capital Trust II

 

 

6,700

 

 

 

4,645

 

 

March 2037

 

LIBOR + 1.79%

Valley Bancorp Statutory Trust I

 

 

3,093

 

 

 

2,870

 

 

September 2032

 

LIBOR + 3.40%

Valley Bancorp Statutory Trust II

 

 

3,093

 

 

 

2,669

 

 

July 2034

 

LIBOR + 2.75%

 

 

$

51,031

 

 

$

39,689

 

 

 

 

 

 

71

 

These debentures are unsecured obligations and were issued to trusts that are unconsolidated subsidiaries. The trusts in turn issued trust preferred securities with identical payment terms to unrelated investors. The debentures may be called by the Company at par plus any accrued but unpaid interest; however, we have no current plans to redeem them prior to maturity. Interest on the debentures is calculated quarterly, based on a contractual rate equal to three month LIBOR plus a weighted average spread of 2.24%. As part of the purchase accounting adjustments made with the National Bancshares, Inc. acquisition on October 15, 2013, the ColoEast acquisition on August 1, 2016, and the Valley acquisition on December 9, 2017, we adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition dates. The discounts on the debentures will continue to be amortized through maturity and recognized as a component of interest expense.

The debentures are included on our consolidated balance sheet as liabilities; however, for regulatory purposes, these obligations are eligible for inclusion in regulatory capital, subject to certain limitations. All of the carrying value of $39.7 million was allowed in the calculation of Tier I capital as of March 31, 2020.

Capital Resources and Liquidity Management

Capital Resources

Our stockholders’ equity totaled $589.3 million at March 31, 2020, compared to $636.6 at December 31, 2019, a decrease of $47.3 million. Stockholders’ equity decreased during this period primarily due to $35.6 million of common stock repurchased into treasury stock during the period under our stock repurchase program, a $6.6 million decrease in accumulated other comprehensive income related to changes in the fair value of our available for sale securities during the period, and our net loss for the period of $4.5 million.

Liquidity Management

We define liquidity as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, or other cash demands and disbursement needs, and otherwise to operate on an ongoing basis.

We manage liquidity at the holding company level as well as that of our bank subsidiary. The management of liquidity at both levels is critical, because the holding company and our bank subsidiary have different funding needs and sources, and each are subject to regulatory guidelines and requirements which require minimum levels of liquidity. We believe that our liquidity ratios meet or exceed those guidelines and our present position is adequate to meet our current and future liquidity needs.

Our liquidity requirements are met primarily through cash flow from operations, receipt of pre-paid and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. Our liquidity position is supported by management of liquid assets and liabilities and access to other sources of funds. Liquid assets include cash, interest earning deposits in banks, federal funds sold, securities available for sale and maturing or prepaying balances in our investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of funds include the sale of loans, brokered deposits, the issuance of additional collateralized borrowings such as FHLB advances or borrowings from the Federal Reserve, the issuance of debt securities and the issuance of common securities. For additional information regarding our operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in our consolidated financial statements.

In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed.

As of March 31, 2020, TBK Bank had $432.0 million in unused and available advances from the FHLB, collateralized by assets, including a blanket pledge of certain loans, and a total of $137.5 million of available unsecured federal funds lines of credit with seven unaffiliated banks.

Regulatory Capital Requirements

Our capital management consists of providing equity to support our current and future operations. We 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. For further information regarding our regulatory capital requirements, see Note 10 – Regulatory Matters in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.

 

72

 

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of March 31, 2020.  The amount of the obligations presented in the table reflects principal amounts only and excludes the amount of interest we are obligated to pay. Also excluded from the table are a number of obligations to be settled in cash. These excluded items are reflected in our consolidated balance sheet and include deposits with no stated maturity, trade payables, and accrued interest payable.

 

 

Payments Due by Period - March 31, 2020

 

(Dollars in thousands)

 

Total

 

 

One Year or

Less

 

 

After One

but within

Three Years

 

 

After Three

but within

Five Years

 

 

After Five

Years

 

Customer repurchase agreements

 

$

3,693

 

 

$

3,693

 

 

$

—

 

 

$

—

 

 

$

—

 

ICC Contingent consideration

 

 

22,000

 

 

 

22,000

 

 

 

—

 

 

 

—

 

 

 

—

 

Federal Home Loan Bank advances

 

 

850,000

 

 

 

820,000

 

 

 

—

 

 

 

—

 

 

 

30,000

 

Subordinated notes

 

 

50,000

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

50,000

 

Junior subordinated debentures

 

 

51,031

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51,031

 

Operating lease agreements

 

 

22,395

 

 

 

4,000

 

 

 

7,397

 

 

 

5,964

 

 

 

5,034

 

Time deposits with stated maturity dates

 

 

1,472,619

 

 

 

1,244,985

 

 

 

216,409

 

 

 

11,121

 

 

 

104

 

Total contractual obligations

 

$

2,471,738

 

 

$

2,094,678

 

 

$

223,806

 

 

$

17,085

 

 

$

136,169

 

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit, standby and commercial letters of credit, mortgage warehouse commitments, and commitments to purchase loans, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. For further information, see Note 8 – Off-Balance Sheet Loan Commitments in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Policies and Estimates

Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related changes, and changes in the financial condition of borrowers.

Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified a significant accounting policy which involves a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. At December 31, 2019, the significant accounting policy which we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for loan and lease losses. This is further described under “Critical Accounting Policies and Estimates” and in Note 1 to the Consolidated Financial Statements in our 2019 Form 10-K.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through March 31, 2020, the significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans.

 

73

 

Allowance for Credit Losses on Loans. Management considers the policies related to the allowance for credit losses on loans as the most critical to the financial statement presentation. The total allowance for credit losses on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses. The allowance for credit losses is established through credit loss expense charged to current earnings. The amount maintained in the allowance reflects management’s estimate of the net amount not expected to be collected on the loans held for investment portfolio at the balance sheet date. The allowance for credit losses is comprised of specific reserves assigned to certain loans that don’t share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of establishing the general reserve, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculate the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to “Allowance for Credit Losses” above and Note 1 – Summary of Significant Accounting Policies in the accompanying condensed notes to the consolidated financial statements elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

Recently Issued Accounting Pronouncements

See Note 1 – Summary of Significant Accounting Policies in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.

Forward-Looking Statements

This document contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable of a future or forward-looking nature. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

 

74

 

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but are not limited to, the following:

 

•

business and economic conditions generally and in the bank and non-bank financial services industries, nationally and within our local market areas;

 

•

the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

 

•

our ability to mitigate our risk exposures;

 

•

our ability to maintain our historical earnings trends;

 

•

changes in management personnel;

 

•

interest rate risk;

 

•

concentration of our products and services in the transportation industry;

 

•

credit risk associated with our loan portfolio;

 

•

lack of seasoning in our loan portfolio;

 

•

deteriorating asset quality and higher loan charge-offs;

 

•

time and effort necessary to resolve nonperforming assets;

 

•

inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;

 

•

risks related to the integration of acquired businesses and any future acquisitions;

 

•

our ability to successfully identify and address the risks associated with our possible future acquisitions, and the risks that our prior and possible future acquisitions make it more difficult for investors to evaluate our business, financial condition and results of operations, and impairs our ability to accurately forecast our future performance;

 

•

lack of liquidity;

 

•

fluctuations in the fair value and liquidity of the securities we hold for sale;

 

•

impairment of investment securities, goodwill, other intangible assets or deferred tax assets;

 

•

our risk management strategies;

 

•

environmental liability associated with our lending activities;

 

•

increased competition in the bank and non-bank financial services industries, nationally, regionally or locally, which may adversely affect pricing and terms;

 

•

the accuracy of our financial statements and related disclosures;

 

•

material weaknesses in our internal control over financial reporting;

 

•

system failures or failures to prevent breaches of our network security;

 

•

the institution and outcome of litigation and other legal proceedings against us or to which we become subject;

 

•

changes in carry-forwards of net operating losses;

 

•

changes in federal tax law or policy;

 

•

the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, such as the Dodd-Frank Act and their application by our regulators;

 

•

governmental monetary and fiscal policies;

 

•

changes in the scope and cost of FDIC, insurance and other coverages;

 

•

failure to receive regulatory approval for future acquisitions; and

 

•

increases in our capital requirements.

 

75

 

The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Asset/Liability Management and Interest Rate Risk

The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors of our subsidiary bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.

As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values.

We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so in the future. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets.

We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

The following table summarizes simulated change in net interest income assuming a static balance sheet versus unchanged rates as of March 31, 2020 and December 31, 2019:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Following 12 Months

 

 

Months

13-24

 

 

Following 12 Months

 

 

Months

13-24

 

+400 basis points

 

 

8.0

%

 

 

5.7

%

 

 

12.5

%

 

 

9.3

%

+300 basis points

 

 

5.1

%

 

 

3.7

%

 

 

9.4

%

 

 

7.1

%

+200 basis points

 

 

2.2

%

 

 

1.7

%

 

 

6.3

%

 

 

4.9

%

+100 basis points

 

 

(0.3

%)

 

 

(0.1

%)

 

 

3.1

%

 

 

2.6

%

Flat rates

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

-100 basis points

 

 

(3.7

%)

 

 

(3.6

%)

 

 

(3.3

%)

 

 

(2.9

%)

 

 

76

 

The following table presents the change in our economic value of equity as of March 31, 2020 and December 31, 2019, assuming immediate parallel shifts in interest rates:

 

  

 

Economic Value of Equity at Risk (%)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

+400 basis points

 

 

37.6

%

 

 

22.4

%

+300 basis points

 

 

31.3

%

 

 

18.1

%

+200 basis points

 

 

23.0

%

 

 

13.4

%

+100 basis points

 

 

12.8

%

 

 

7.5

%

Flat rates

 

 

0.0

%

 

 

0.0

%

-100 basis points

 

 

(17.6

%)

 

 

(9.9

%)

 

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.

As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest bearing non-maturity deposit accounts, whose cost is less sensitive to changes in interest rates.

 

 

ITEM 4

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2019, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The Company implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASU 2016-13. Many controls under this new standard mirror controls under prior GAAP. New controls were established over the review of economic forecasting projections obtained from an independent third party. Except as related to the adoption of ASU 2016‑13, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

 

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

 

 

77

 

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

 

•

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;

 

•

increased bankruptcies being experienced by the carrier, freight broker and shipper clients serviced by our factoring and TriumphPay operations;

 

•

declines in collateral values;

 

•

third party disruptions, including outages at network providers and other suppliers;

 

•

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

 

•

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

 

 

78

 

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

On October 16, 2019, the Company announced that its board of directors had authorized the repurchase of up to $50.0 million of its outstanding common stock in open market transactions or through privately negotiated transactions for a period of one year. The following repurchases were made under this program during the three months ended March 31, 2020, effectively completing the repurchase program:

Period

 

(a)

Total number of shares (or units) purchased

 

 

(b)

Average price paid per share (or unit)

 

 

(c)

Total number of shares (or units) purchased as part of publicly announced plans or programs

 

 

(d)

Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs

 

January 1, 2020 - January 31, 2020

 

 

284,252

 

 

$

39.51

 

 

 

284,252

 

 

$

24,348,000

 

February 1, 2020 - February 29, 2020

 

 

587,067

 

 

 

41.44

 

 

 

587,067

 

 

$

1,000

 

Total

 

 

871,319

 

 

$

40.81

 

 

 

871,319

 

 

 

 

 

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

 

79

 

Item 6. Exhibits

Exhibits (Exhibits marked with a “†” denote management contracts or compensatory plans or arrangements) 

3.1

 

Second Amended and Restated Certificate of Formation of the Registrant, effective November 7, 2014, incorporated by reference to Exhibit 3.1 to Form 8-K filed with the SEC on November 13, 2014.

3.2

 

Certificate of Amendment to Second Amended and Restated Certificate of Formation of Triumph Bancorp, Inc., incorporated by reference to Exhibit 3.1 to Form 8-K filed with the SEC on May 10, 2018.

3.3

 

Second Amended and Restated Bylaws of the Registrant, effective November 7, 2014, incorporated by reference to Exhibit 3.2 to Form 8-K filed with the SEC on November 13, 2014.

3.4

 

Amendment No. 1 to Second Amended and Restated Bylaws of Triumph Bancorp, Inc., incorporated by reference to Exhibit 3.2 to Form 8-K filed with the SEC on May 10, 2018.

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

 

 

80

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

TRIUMPH BANCORP, INC.

 

 

 

(Registrant)

 

 

 

 

Date:

April 21, 2020

 

 /s/ Aaron P. Graft

 

 

 

Aaron P. Graft

 

 

 

President and Chief Executive Officer

 

 

 

 

Date:

April 21, 2020

 

 /s/ R. Bryce Fowler

 

 

 

R. Bryce Fowler

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81
tbk-ex311_6.htm

Exhibit 31.1

 

CERTIFICATION

 

I, Aaron P. Graft, certify that:

 

 

1.

I have reviewed this quarterly report on Form 10-Q of Triumph Bancorp, Inc.;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

 

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounted principles;

 

 

c.

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

 

d.

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

April 21, 2020

 

By:

 

/s/ Aaron P. Graft

 

 

Name:

 

Aaron P. Graft

 

 

Title:

 

President and Chief Executive Officer

 

tbk-ex312_7.htm

Exhibit 31.2

 

CERTIFICATION

 

I, R. Bryce Fowler, certify that:

 

 

1.

I have reviewed this quarterly report on Form 10-Q of Triumph Bancorp, Inc.;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

 

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounted principles;

 

 

c.

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

 

d.

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

April 21, 2020

 

By:

 

/s/ R. Bryce Fowler

 

 

Name:

 

R. Bryce Fowler

 

 

Title:

 

Executive Vice President and Chief Financial Officer

 

tbk-ex321_8.htm

Exhibit 32.1

 

CERTIFICATIONS

SARBANES-OXLEY ACT SECTION 906

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned President and Chief Executive Officer and Executive Vice President and Chief Financial Officer of Triumph Bancorp, Inc. (the Company) certify, on the basis of such officers’ knowledge and belief that:

 

 

(1)

The Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on April 21, 2020, (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:

 

/s/ Aaron P. Graft

 

 

Name:

 

Aaron P. Graft

 

 

Title:

 

President and Chief Executive Officer

 

 

Date:

 

April 21, 2020

 

By:

 

/s/ R. Bryce Fowler

 

 

Name:

 

R. Bryce Fowler

 

 

Title:

 

Executive Vice President and Chief Financial Officer

 

 

Date:

 

April 21, 2020

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request. This certification accompanies the Report and shall not be treated as having been filed as part of this Report.