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As confidentially submitted to the Securities and Exchange Commission on August 8, 2014

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TRIUMPH BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Texas		6712		20-0477066
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

 

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(214) 365-6900

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Aaron P. Graft

President and Chief Executive Officer

Triumph Bancorp, Inc.

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(214) 365-6900

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Edward D. Herlihy, Esq. Mark F. Veblen, Esq. Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Telephone: (212) 403-1000 Facsimile: (212) 403-2000		Charles E. Greef, Esq. Michael G. Keeley, Esq. Hunton & Williams LLP 1445 Ross Avenue, Suite 3700 Dallas, Texas 75202 Telephone: (214) 979-3000 Facsimile: (214) 880-0011

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x		Smaller reporting company		¨

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount of Registration Fee
Common stock, par value $0.01 per share

(1)	Includes shares of common stock that the underwriters have the option to purchase pursuant to their purchase option.

(2)	Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. This amount represents the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.

 

 

The Registrant hereby amends this Registration Statement on such date as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 8, 2014

             Shares

PRELIMINARY PROSPECTUS

 

Common Stock

This is the initial public offering of Triumph Bancorp, Inc., a financial holding company registered under the Bank Holding Company Act of 1956, as amended. We are offering              shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price per share of our common stock will be between $         and $         per share.

We intend to apply to list our common stock on the                      under the symbol “         .”

Investing in our common stock involves risk. See “Risk Factors” beginning on page 15.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.

 

		Per Share				Total
Initial public offering price		$				$
Underwriting discounts(1)		$				$
Proceeds to us, before expenses		$				$

 

(1)	See “Underwriting” for additional information regarding the underwriting discount and certain expenses payable to the underwriters by us.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The shares of our common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

Delivery of the shares of our common stock is expected to be made on or about                     , 2014. We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional              shares of our common stock.

 

 

 

SANDLER O’NEILL + PARTNERS, L.P.		EVERCORE

 

 

Prospectus dated                     , 2014

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TABLE OF CONTENTS

 

Prospectus Summary			1
This Offering			7
Selected Historical Consolidated Financial Information			9
Selected Summary Unaudited Pro Forma Condensed Combined Financial Statements			12
Risk Factors			15
Cautionary Note Regarding Forward-Looking Statements			42
Use of Proceeds			44
Dividend Policy			45
Capitalization			46
Dilution			48
Price Range of Our Common Stock			50
Business			51
Management’s Discussion and Analysis of Financial Condition and Results of Operations			63
Management			107
Executive Compensation			113
Security Ownership of Beneficial Owners and Management			118
Description of Capital Stock			121
Shares Eligible for Future Sale			127
Certain Relationships and Related Party Transactions			129
Supervision and Regulation			131
Certain Material U.S. Federal Income Tax Consequences for Non-U.S. Holders of Common Stock			141
Underwriting			144
Legal Matters			148
Experts			148
Where You Can Find More Information			148
Index to Financial Statements			F-1

 

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

MARKET AND INDUSTRY DATA

Although we are responsible for all of the disclosures contained in this prospectus, this prospectus contains industry, market and competitive position data and forecasts that are based on industry publications and studies conducted by third parties. The industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. The industry forward-looking statements included in this prospectus may be materially different than actual results.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (or the “JOBS Act”). We will continue to be an emerging growth company until the earliest to occur of:

 

•

the last day of the fiscal year following the fifth anniversary of this offering;

 

•

the last day of the fiscal year in which we have more than $1.0 billion in annual revenues;

 

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the date on which we have more than $700 million in market value of our common shares held by nonaffiliates; or

 

•

the date on which we issue more than $1.0 billion of nonconvertible debt over a three-year period.

Until we cease to be an emerging growth company, we may take advantage of specified reduced reporting and other regulatory requirements generally unavailable to other public companies. Those provisions allow us to:

 

•

present only two years of audited financial statements;

 

•

discuss only our results of operations for two years in related Management’s Discussions and Analyses;

 

•

provide less than five years of selected financial data in an initial public offering registration statement;

 

•

to not provide an auditor attestation of our internal control over financial reporting;

 

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to choose not to adopt new or revised financial accounting standards until they would apply to private companies;

 

•

to choose not to comply with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements;

 

•

to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosure regarding our executive compensation; and

 

•

to not seek a nonbinding advisory vote on executive compensation or golden parachute arrangements.

 

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We have elected to adopt the reduced disclosure requirements described above for purposes of the registration statement of which this prospectus is a part. In addition, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our stockholders.

We have elected to not take advantage of the extended transition period that allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, which means that the financial statements included in this prospectus, as well as financial statements we file in the future, will be subject to all new or revised accounting standards generally applicable to public companies. Our election not to take advantage of the extended transition period is irrevocable.

 

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RISK FACTORS

Investment in our common stock involves risks. In addition to other information contained in this prospectus, you should carefully consider the following factors before acquiring shares of our common stock offered by this prospectus. The occurrence of any of the following risks might cause you to lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to “Cautionary Note Regarding Forward-Looking Statements.”

Risks Relating to Our Business

Our limited operating history as an integrated company and our recent acquisitions, and in particular the impact of the acquisition method of accounting on our financial statements, may make it difficult for investors to evaluate our business, financial condition and results of operations and also impairs our ability to accurately forecast our future performance.

Our limited operating history as an integrated company may not provide an adequate basis for investors to evaluate our business, financial condition and results of operations. We have launched various new product lines over the past few years, and we acquired Triumph Community Bank, which represents a significant portion of our total operations, on October 15, 2013. Our future operating results depend upon a number of factors, including our ability to manage our growth, retain our customer base and successfully identify and respond to emerging trends in our primary product lines and markets. It may also be difficult for us to evaluate trends that may affect our business and to determine whether our expansion may be profitable. Thus, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business.

As part of our growth strategy, we have implemented and may continue to implement new lines of business, offer new products and services within our existing lines of business or shift the focus to our asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where such product lines are not fully mature. In developing and marketing new lines of business and/or new products and services and/or shifting the focus of asset mix, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have an adverse effect on our business, financial condition and results of operations.

We have incurred, and expect to continue incurring, substantial expenses related to our recent acquisitions.

We have incurred and expect to continue incurring, substantial expenses in connection with completing our recent acquisitions and integrating the operations of the acquired businesses with our operations. There are a number of factors beyond our control that could affect the total amount or the timing of our transaction and integration expenses and such expenses may exceed our initial projections. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with our recent acquisitions could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the acquired businesses following the completion of our recent acquisitions.

 

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Acquisitions may disrupt our business and dilute stockholder value. We may not be able to overcome the integration and other risks associated with acquisitions, which could adversely affect our growth and profitability.

Our business strategy focuses on both organic growth and targeted acquisitions. An example of this was our recent acquisition of Triumph Community Bank in October 2013. We may fail to realize some or all of the anticipated benefits of these acquisitions if the integration process takes longer or is more costly than expected or otherwise fails to meet our expectations. In addition, we anticipate that the overall integration of Triumph Community Bank and the other acquired businesses will be a time-consuming and expensive process that could significantly disrupt our existing services, even if it is effectively and efficiently planned and implemented, particularly given the size of Triumph Community Bank relative to our size and the fact that we have made multiple acquisitions in a short period of time.

In addition, our acquisition activities could be material to our business and involve a number of risks, including the following:

 

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incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

 

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using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

 

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exposure to potential asset quality issues of the target company;

 

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intense competition from other banking organizations and other acquirers for acquisitions;

 

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potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without limitation, liabilities for regulatory and compliance issues;

 

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inability to realize the expected revenue increases, cost savings, increases in geographic or product presence and other projected benefits of the acquisition;

 

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the time and expense required to integrate the operations and personnel of the combined businesses;

 

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experiencing higher operating expenses relative to operating income from the new operations;

 

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creating an adverse short-term effect on our results of operations;

 

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losing key employees and customers;

 

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significant problems relating to the conversion of the financial and customer data of the entity;

 

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integration of acquired customers into our financial and customer product systems;

 

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potential changes in banking or tax laws or regulations that may affect the target company; or

 

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risks of impairment to goodwill or other than temporary impairment of investment securities.

Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions and any acquisition we may consider will be subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our profitability, return on equity and return on assets, our ability to implement our business strategy and enhance stockholder value, which, in turn, could have an adverse effect on our business, financial condition and results of operations.

 

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As a business operating in the bank and non-bank financial services industries, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.

As a business operating in the bank and non-bank financial services industries, our business and operations are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and asset management services could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal and state governments (including possible ratings downgrades) and future tax rates (or other amendments to the Internal Revenue Code of 1986, as amended (the “Code”) or to state tax laws) is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over the stability of the Euro and Chinese Yuan currencies, could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak national economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized by interest rates at historically low levels, and our ability to retain or grow our deposit base could be hindered by higher market interest rates in the future. All of these factors may be detrimental to our business and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have an adverse effect on our business, financial condition and results of operations.

We may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Bank and non-bank financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to different industries and counterparties and through transactions with counterparties in the bank and non-bank financial services industries, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more bank or non-bank financial services companies, or the bank or non-bank financial services industries generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have an adverse effect on our business, financial condition and results of operations.

We rely heavily on our management team and could be adversely affected by the unexpected loss of key officers.

We are led by an experienced core management team with substantial experience in the markets that we serve and the financial products that we offer. Our operating strategy focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. We may not be successful in retaining our key employees and the unexpected loss of services of one or more of our key personnel could have a material adverse effect on our business because of their skills, knowledge of our market and financial products, years of industry experience, long-term customer relationships and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, which could have an adverse effect on our business, financial condition and results of operations.

 

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We are subject to interest rate risk, which could adversely affect our financial condition and profitability.

The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international disorder and instability in domestic and foreign financial markets.

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. If short-term interest rates continue to remain at their historically low levels for a prolonged period and assuming longer-term interest rates fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have an adverse effect on our net interest income and could have an adverse effect on our business, financial condition and results of operations.

Our factoring services are concentrated in the transportation industry and economic conditions or other factors negatively impacting the transportation industry could adversely affect our factoring business.

Factoring for small-to-mid-sized trucking businesses constituted approximately 95% of our total factoring portfolio as of March 31, 2014, calculated based on the gross receivables from the purchase of invoices from such trucking businesses compared to our total gross receivables in the purchase of factored receivables as of such date. Given the concentration of our factoring business in the transportation industry, economic conditions or other factors that negatively impact the transportation industry could impact our factoring revenues, as the revenues we earn from purchasing transportation invoices are directly correlated with the amount of transportation activity generated by our factoring clients (i.e., the volume of transportation invoices they are able to generate by providing their services). Reductions in economic activity will typically cause a decrease in the volume of goods in commerce available to be transported by our factoring clients. Increased costs associated with operating a trucking business, such as may be caused by increases in prices of oil and diesel fuel, may cause a diminished demand for trucking services as our clients pass those costs along to their customers. Additionally, the factoring industry may not continue its historical growth and we may face increased competition. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share. Any of such events could impact the returns we realize on our factoring activity or result in a decrease in the overall amount of our factoring activity and could have an adverse effect on our business, financial condition and results of operations.

 

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Additional regulations and rule making impacting the transportation industry may have a disproportionate impact on the small-to-mid-sized trucking businesses that comprise our primary transportation factoring clients and adversely affect our factoring business.

Our primary transportation factoring clients are small-to-mid-sized owner-operators and trucking fleets. Recently implemented federal regulations and regulations proposed to be implemented in the future, may significantly increase the costs and expenses associated with owning or operating a trucking fleet. These regulations include rule making proposed by the Federal Motor Carrier Safety Administration of the United States Department of Transportation (“FMCSA”) under the Compliance, Safety, Accountability (“CSA”) initiative, maximum hours of service limitations imposed the FMCSA, electronic log requirements, regulations proposed by the federal Food and Drug Administration (“FDA”) requiring increased labeling and monitoring by carriers of any commodity transported that is regulated by the FDA and proposed increases in the amount of combined single limit liability insurance coverage required of a carrier from $750,000 to $3.2 million. The costs and burdens of compliance with these requirements will have a disproportionate impact on the small-to-mid-sized trucking businesses that comprise our client base and may force some or all of these businesses out of the market. Such an occurrence could impact the returns we realize on our factoring activity or result in a decrease in the overall amount of our factoring activity and could have an adverse effect on our business, financial condition and results of operations.

Our asset-based lending and factoring products may expose us to an increased risk of fraud.

We rely on the structural features embedded in our asset-based lending and factoring products to mitigate the credit risk associated with such products. With respect to our asset-based loans, we limit our lending to a percentage of the customer’s borrowing base assets that we believe can be readily liquidated in the event of financial distress of the borrower. With respect to our factoring products, we purchase the underlying invoices of our customers and become the direct payee under such invoices, thus transferring the credit risk in such transactions from our customers to the underlying account debtors on such invoices. In the event one or more of our customers fraudulently represents the existence or valuation of borrowing base assets in the case of an asset-based loan, or the existence or validity of an invoice we purchase in the case of a factoring transaction, we may advance more funds to such customer than we otherwise would and lose the benefit of the structural protections of our products with respect to such advances. In such event we could be exposed to material additional losses with respect to such loans or factoring products. Although we believe we have controls in place to monitor and detect fraud with respect to our asset-based lending and factoring products, there is no guarantee such controls will be effective. We have experienced fraud with respect to these products in the past and we anticipate that we will experience such fraud in the future. Losses from such fraudulent activity could have a material impact on our business, financial condition and results of operations.

Our commercial finance clients, particularly with respect to our factoring and asset-based lending product lines, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional credit risk, especially if our additional controls for such products are ineffective in mitigating such additional risks.

A significant portion of our loan portfolio consists of commercial finance products. Some of these commercial finance products, particularly the asset-based loans originated under our Triumph Commercial Finance brand (which totaled $39.5 million, or 5% of our total loan portfolio as of March 31, 2014) and our factoring receivables (which totaled $129.5 million, or 16% of our total loan portfolio as of March 31, 2014) arise out relationships with clients who lack the operating history, cash flows or balance sheet necessary to qualify for other financing options. We attempt to control for the additional credit risk in these relationships through credit management processes employed in connection with these transactions. See “Business—Credit Risk Management.” However, if such controls are ineffective in controlling this additional risk or if we fail to follow the procedures we have established for managing this additional risk, we could be exposed to additional losses with respect to such product lines that could have an adverse effect on our business, financial condition and results of operations.

 

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Our healthcare asset-based lending product line may expose us to additional risks associated with the U.S. healthcare industry.

The U.S. healthcare industry is currently undergoing significant regulatory changes, both at the federal and state level, including changes associated with the adoption and implementation of the Patient Protection and Affordable Care Act of 2010. Such changes could negatively impact our existing healthcare asset-based loan portfolio or our ability to grow our healthcare asset-based loan portfolio in the future. For example, changes in reimbursement rates for healthcare receivables could impact the value and collectability of our healthcare loans, as such reimbursement obligations constitute the borrowing base collateral for such loans. While we believe our healthcare asset-based loans have features in place to protect against such risks (including the ability to reduce the available borrowing base or cease advances in the event of regulatory changes that jeopardize the collectability or valuation of the collateral), there is no guarantee that such protections will be effective. In addition, changes in the regulatory landscape for healthcare may cause certain service providers to leave the industry or cause consolidation in the industry that will decrease demand for our healthcare lending products. Any of such changes or occurrences could have an adverse effect on our business, financial condition and results of operations.

Lack of seasoning in portions of our loan portfolio could increase risk of credit defaults in the future.

As a result of our growth over the past three years, certain portions of our loan portfolio, such as the asset- based loans and equipment loans originated under our Triumph Commercial Finance brand, are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because such portions of our portfolio are relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have an adverse effect on our business, financial condition and results of operations.

We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, our business and financial condition, which could adversely affect profitability.

As a part of our products and services, we make commercial and commercial real estate loans. The principal economic risk associated with each class of loans is the creditworthiness of the borrower, which is affected by the strength of the relevant business market segment, local market conditions and general economic conditions. Additional factors related to the credit quality of commercial loans include the quality of the management of the business and the borrower’s ability both to properly evaluate changes in the supply and demand characteristics affecting our market for products and services and to effectively respond to those changes. Additional factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of management of the property. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have an adverse effect on our business, financial condition and results of operations.

The small-to-mid-sized businesses that comprise a material portion of our loan portfolio may have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to us, which could materially harm our operating results.

A significant element of our growth strategy involves offering our specialized commercial finance products to small-to-mid-sized businesses. These small-to-mid-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small-to-mid-sized business often depends on the management talents and efforts of one or two persons or a small group of persons and the death, disability or resignation of one or more of these persons could have a material adverse impact on

 

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the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas could cause us to incur substantial credit losses that could have an adverse effect our business, financial condition and results of operations.

Our concentration of large loans to certain borrowers may increase our credit risk.

Our growth over the last several years has been partially attributable to our ability to originate and retain large loans. Many of these loans have been made to a small number of borrowers, resulting in a concentration of large loans to certain borrowers. As of March 31, 2014, our ten largest borrowing relationships ranged from approximately $10.6 million to $29.7 million (including unfunded commitments) and averaged approximately $137 million in total commitments (representing, in the aggregate, 13.8% of our total outstanding commitments as of March 31, 2014). Each of the loans associated with these relationships has been underwritten in accordance with our underwriting policies and limits. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay their loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death, our nonperforming loans and our provision for loan losses could increase significantly, which could have an adverse effect on our business, financial condition and results of operations.

The amount of nonperforming and classified assets may increase significantly, resulting in additional losses and costs and expenses that will negatively affect our operations.

At March 31, 2014, we had a total of approximately $24.1 million of nonperforming assets or approximately 1.86% of total assets. Total assets classified as “substandard” or “doubtful” as of March 31, 2014 were approximately $31.0 million (or approximately 2.39% of total assets). An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

Should the amount of nonperforming assets increase in the future, we may incur losses and the costs and expenses to maintain such assets likewise can be expected to increase and potentially negatively affect earnings. Any additional increase in losses due to such assets could have an adverse effect on our business, financial condition and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory.

The amount of other real estate owned (“OREO”) may increase significantly, resulting in additional losses and costs and expenses that will negatively affect our operations.

At March 31, 2014, the amount of OREO we held totaled $13.6 million. In the event the amount of OREO should increase due to an increase in defaults on bank loans, our losses and the costs and expenses to maintain the real estate, likewise would increase. Any additional increase in losses and maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses and may reduce our ultimate realization from any OREO sales, which could have an adverse effect on our business, financial condition and results of operations.

 

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Nonperforming assets take significant time and resources to resolve and adversely affect our results of operations and financial condition.

Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on nonperforming loans or OREO, thereby adversely affecting our income and increasing loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair value of the collateral less estimated selling costs, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels regulators believe are appropriate in light of the ensuing risk profile. While we reduce problem assets through loan workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could have an adverse effect on our business, financial condition and results of operations. In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may materially and adversely impact their ability to perform their other responsibilities. There can be no assurance that we will not experience future increases in nonperforming assets.

Our ALLL and fair value adjustments for purchase of impaired loans acquired in acquisitions may prove to be insufficient to absorb potential losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.

ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. The provision for loan losses is charged against earnings in order to maintain our ALLL and reflects management’s best estimate of probable losses inherent in our loan portfolio at the balance sheet date.

As of March 31, 2014, our ALLL as a percentage of total loans was 0.58% and as a percentage of total nonperforming loans was 43.0%. Additional loan losses will likely occur in the future and may occur at a rate greater than we have previously experienced. We may be required to take additional provisions for loan losses in the future to further supplement our ALLL, either due to management’s decision to do so or requirements by our banking regulators. In addition, bank regulatory agencies will periodically review our ALLL and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Such regulatory agencies may require us to recognize future charge-offs. These adjustments could have an adverse effect on our business, financial condition and results of operations.

The application of the acquisition method of accounting in our acquisitions has impacted our allowance. Under the acquisition method of accounting, all loans acquired in acquisitions were recorded in our consolidated financial statements at their fair value at the time of acquisition and the related allowance was eliminated because credit quality, among other factors, was considered in the determination of fair value. To the extent that our estimates of fair value are too high, we could incur losses associated with the acquired loans. The allowance associated with our purchased credit impaired loans reflects deterioration in cash flows since acquisition resulting from our quarterly re-estimation of cash flows, which involves cash flow projections and significant judgment on timing of loan resolution.

A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, Federal Home Loan Bank advances, the sale of loans and other sources could have a

 

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substantial negative effect on our liquidity. Our most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank and our ability to raise brokered deposits. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services industries or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the bank or non-bank financial services industries.

As of March 31, 2014, approximately $351.7 million, or 33.5%, of our deposits consisted of interest-bearing demand deposits and money market accounts. Based on past experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

The fair value of our investment securities can fluctuate due to factors outside of our control.

As of March 31, 2014, the fair value of our investment securities portfolio was approximately $165.3 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect to the securities, defaults by the issuer or with respect to the underlying securities and changes in market interest rates and instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have an adverse effect on our business, financial condition and results of operations. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security.

Impairment of investment securities, goodwill, other intangible assets or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

In assessing whether the impairment of investment securities is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.

Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. A decline in our stock price or occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release. In the event that we conclude that

 

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all or a portion of our goodwill may be 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. At March 31, 2014, we had goodwill of $14.0 million, representing approximately 9% of equity.

In assessing the potential for realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence, both negative and positive, including the recent trend of quarterly earnings. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the tax law, including the use of tax planning strategies. When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carryforwards expiring unused) exists, more positive evidence than negative evidence will be necessary. We have concluded that, based on the level of positive evidence, it is more likely than not that at March 31, 2014 all but $1.6 million which is recorded as a valuation allowance of the deferred tax asset will be realized. At March 31, 2014, net deferred tax assets were approximately $20.4 million. The impact of each of these impairment matters could have a material adverse effect on our business, results of operations and financial condition.

Our asset management business, specifically our acting as the asset manager for one or more CLOs, may expose us to multiple additional risks.

As part of our growth strategy, we formed Triumph Capital Advisors to provide institutional asset management services, primarily as the asset manager for CLO vehicles. This product line is subject to numerous additional risks and uncertainties that have the potential to limit or eliminate the noninterest income we expect to generate from this activity, expose us to direct losses with respect to amounts we invest in any CLO vehicles that we manage and cause us reputational risk, including the following:

 

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a downturn in the global credit markets could cause defaults in the loans that comprise the collateral assets of the CLOs we manage, exposing the investors in such CLOs to loss and exposing us to reputational risk;

 

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we will be in a first-loss risk position with respect to any amounts we invest directly into the equity of any CLOs or CLO warehousing arrangements we manage and therefore could incur substantial losses on our investments in such vehicles, which could have a material adverse effect on our business, financial condition or results of operations;

 

•

the risk-retention requirements proposed under Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), if adopted as currently proposed, may require us to invest in any new CLOs we issue at levels that would be infeasible or impracticable for us, thus limiting this business as a growth strategy for us;

 

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as a banking entity, our ability to sponsor the CLOs we manage within the meaning of the so-called “Volcker Rule” provisions of the Dodd-Frank Act requires us to limit our activity with respect to our CLOs so that they qualify for the “loan-securitization exemption” set forth in the implementing regulations of such rule, which may make our CLOs less attractive than CLOs managed by investment managers that do not have to qualify for such exemption and limit our ability to issue new CLOs and execute on our growth strategy;

 

•

the asset management agreements we enter into with respect to our CLOs have provisions that allow for our removal as asset manager and/or the deferral of fee income payable to us upon the occurrence of certain events and/or the performance of the CLO portfolio, which could limit the income from our asset management business that is a part of our growth strategy;

 

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our asset management business’s failure to comply with investment guidelines set by its clients or the provisions of the management agreement and other agreements to which it is a party could result in damage awards against our asset management business and a loss of assets under management, either of which could cause our earnings to decline; and

 

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our asset management business may face risks relating to undiversified investments.

 

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We may be required to consolidate the CLOs we manage on our balance sheet, which would adversely affect our capital ratios.

Under GAAP, if we are deemed to be the “primary beneficiary” of a variable interest entity such as the CLOs we manage, we would be required to consolidate the assets of such entity on our balance sheet even though we are not entitled to the benefits from, nor do we bear the risk associated with, the assets held by such entities beyond any direct investment we have made and our rights to any management fees. Such an event would require us to include all of the assets of such CLO as assets of the Company for purposes of calculating our regulatory capital ratios. Furthermore, under the new bank capital requirements described below under “Risk Factors—Regulatory initiatives regarding bank capital requirements may require heightened capital” any minority interest we have in the preference shares or subordinated notes of a consolidated CLO would not be considered Common Equity Tier 1 capital, would be subject to the general limitations under such new requirements for the amount of minority interest permitted to be included in our Tier 1 capital and, depending on the structure of such interests, might not constitute Tier 1 capital at all.

Although we do not believe we are required to consolidate any of the CLOs we currently manage, it is possible that the accounting guidance regarding consolidation of such entities could change such that we would be required to consolidate such entities in the future. In addition, in the event proposed risk retention rules under the Dodd-Frank Act require us to make greater investments in the CLOs we manage, we may be required to consolidate such entities in order to meet such requirements. Such events could have an adverse effect on our capital ratios or limit the number of new CLOs we are able to issue as part of our growth strategy.

Our asset manager has entered into agreements with affiliated entities which may create conflicts of interest.

Triumph Capital Advisors shares office space with certain of its affiliated entities, including the Company and Triumph Savings Bank, and operates under a shared services agreement whereby Triumph Capital Advisors and such affiliated entities share a common infrastructure, including facilities, information technology, and human resources. In addition, certain supervised persons of Triumph Capital Advisors are also officers and/or directors of certain of its affiliated entities. Triumph Capital Advisors has entered into, and may enter into in the future, arrangements whereby Triumph Capital Advisors may offer its affiliated entities opportunities to invest in senior secured loans or other assets after a determination that such loans or other assets would not be appropriate for its CLO clients due to indenture restrictions, yield constraints or other factors. Under such arrangements, Triumph Capital Advisors may make offers of such opportunities to such affiliated entities, and provide to such affiliated entities its work product and other materials regarding such opportunity, but all decisions regarding the acquisition, disposition and management of the loan or other asset remain the responsibility of the applicable affiliated entity. Such arrangements may also contemplate that, to the extent that an affiliated entity acquires a loan or other asset as a result of an offer from Triumph Capital Advisors, Triumph Capital Advisors may provide monitoring services whereby Triumph Capital Advisors will monitor such loan or other asset in a manner similar to the manner in which it would monitor such loan or other asset for its CLO clients, and provide such monitoring materials to the applicable affiliated entity to assist such affiliated entity in their management of such loan or other asset.

Triumph Capital Advisors’ affiliations with its affiliated entities as described herein might create conflicts of interest for its clients, including:

 

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Triumph Capital Advisors’ affiliated entities acquiring senior secured loans or other assets (whether as a result of offers from Triumph Capital Advisors or otherwise) that comprise the primary investment strategy of Triumph Capital Advisors’ CLO clients;

 

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conflicts created in the event Triumph Capital Advisors’ affiliated entities and its CLO clients hold different interests (e.g., different tranches or series of a loan) in the same issuer; and

 

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the time and efforts expended by Triumph Capital Advisors personnel in their roles as officers and directors for, or otherwise providing services to, such affiliated entities distracting such personnel from the services they provide to its CLO clients.

 

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Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.

We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our risk management strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated. As our products and services change and grow and the markets in which we operate evolve, our risk management strategies may not always adapt to those changes. Some of our methods of managing risk are based upon our use of observed historical market behavior and management’s judgment. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate. In addition, our limited operating history reduces the historical information on which to predict future results or trends. Management of market, credit, liquidity, operational, legal, regulatory and compliance risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events and these policies and procedures may not be fully effective. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. Any of these circumstances could have an adverse effect on our business, financial condition and results of operations.

Risks for environmental liability apply to the properties under consideration as well as properties that are contiguous or upgradiant to the subject properties.

In the course of our business, we may purchase real estate in connection with our acquisition and expansion efforts, or we may foreclose on and take title to real estate that serves as collateral on loans we make. As a result, we could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.

The cost of removal or abatement may not substantially exceed the value of the affected properties or the loans secured by those properties, that we may not have adequate remedies against the prior owners or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability. Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced and, as a result, we may suffer a loss upon collection of the loan. Currently, we are not a party to any legal proceedings involving potential liability to us under applicable environmental laws. Any significant environmental liabilities could have an adverse effect on our business, financial condition and results of operations.

We face significant competition to attract and retain customers, which could adversely affect our growth and profitability.

We operate in the highly competitive bank and non-bank financial services industries and face significant competition for customers from bank and non-bank competitors, particularly regional and nationwide institutions, including U.S. banks, mortgage banking companies, consumer finance companies, credit unions, insurance companies and other institutional lenders and purchasers of loans in originating loans, attracting deposits and providing other financial services. Many of our competitors are significantly larger and have

 

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significantly more resources, greater name recognition and more extensive and established branch networks than we do. Because of their scale, many of these competitors can be more aggressive than we can on loan and deposit pricing. Also, many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. We expect competition to continue to intensify due to financial institution consolidation; legislative, regulatory and technological changes; and the emergence of alternative banking sources.

Our ability to compete successfully will depend on a number of factors, including, among other things:

 

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our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices;

 

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the scope, relevance and pricing of products and services that we offer;

 

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customer satisfaction with our products and services;

 

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industry and general economic trends; and

 

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our ability to keep pace with technological advances and to invest in new technology.

Increased competition could require us to increase the rates that we pay on deposits or lower the rates that we offer on loans, which could reduce our profitability. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have an adverse effect on our business, financial condition and results of operations.

The obligations associated with being a public company will require significant resources and management attention, which will increase our costs of operations and may divert focus from our business operations.

We have not been required in the past to comply with the requirements of the SEC, to file periodic reports with the SEC or to have our consolidated financial statements completed, reviewed or audited and filed within a specified time. As a public company following completion of this offering, we will be required to file periodic reports containing our consolidated financial statements with the SEC within a specified time following the completion of quarterly and annual periods. As a public company, we will also incur significant legal, accounting, insurance and other expenses. Compliance with these reporting requirements and other rules of the SEC and the rules of the              will increase our legal and financial compliance costs and make some activities more time consuming and costly. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from successfully implementing our strategic initiatives and improving our business, results of operations and financial condition. We have made and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses.

The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.

The preparation of financial statements and related disclosure in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in the section captioned “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in this prospectus, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures.

 

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Additionally, as a result of our recent acquisitions, our financial results are heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair value. If our assumptions are incorrect, any resulting change or modification could have an adverse effect on our business, financial condition and results of operations.

If we fail to correct any material weakness that we identify in our internal control over financial reporting or otherwise fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports and the price of our common stock may decline.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. As a public company, we will be required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act beginning with our second annual report on Form 10-K, which will require us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth companies, our independent registered public accounting firm will be required to report on the effectiveness of our internal control over financial reporting, beginning as of that second annual report.

If we identify material weaknesses in our internal control over financial reporting in the future, if we cannot comply with the requirements of the Sarbanes-Oxley Act in a timely manner or attest that our internal control over financial reporting is effective, or if our independent registered public accounting firm cannot express an opinion as to the effectiveness of our internal control over financial reporting when required, we may not be able to report our financial results accurately and timely. As a result, investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial reports; our liquidity, access to capital markets and perceptions of our creditworthiness could be adversely affected; and the market price of our common stock could decline. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the FDIC, the OCC or other regulatory authorities, which could require additional financial and management resources. These events could have an adverse effect on our business, financial condition and results of operations.

We face significant operational risks due to the high volume and the high dollar value nature of transactions we process.

We operate in many different businesses in diverse markets and rely on the ability of our employees and systems to process transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our Company, the execution of unauthorized transactions, errors relating to transaction processing and technology, breaches of our internal control systems, compliance failures, business continuation and disaster recovery issues and other external events. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action and suffer damage to our reputation.

 

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To the extent we engage in derivative transactions, we will be exposed to credit and market risk, which could adversely affect our profitability and financial condition.

While we do not currently engage in significant derivative or hedging activity, we may in the future manage interest rate risk by, among other things, utilizing derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. To the extent we engage in derivative transactions, we will be exposed to credit and market risk. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in the derivative. Market risk exists to the extent that interest rates change in ways that are significantly different from what we expect when we enter into the derivative transaction. The existence of credit and market risk associated with any derivative instruments we enter into could adversely affect our net interest income and, therefore, could have an adverse effect on our business, financial condition and results of operations.

System failure or cyber security breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.

The computer systems and network infrastructure we use could be vulnerable to hardware and cyber security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal sources. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical break-ins, cyber security breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our Internet banking services by current and potential customers. We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cyber security breaches, including firewalls and penetration testing. However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing cyber-crime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and cloud vendors could prove inadequate. A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have an adverse effect on our business, financial condition and results of operations.

We are subject to litigation, which could result in substantial judgment or settlement costs.

We are regularly involved in litigation matters in the ordinary course of business. We believe that these litigation matters should not have a material adverse effect on our business, financial condition, results of operations or future prospects. We cannot assure you, however, that we will be able to successfully defend or resolve any current or future litigation matters, in which case those litigation matters could have an adverse effect on our business, financial condition and results of operations.

Risks Relating to the Regulation of Our Industry

Our business, financial condition, results of operations and future prospects could be adversely affected by the highly regulated environment in which we operate.

As a financial holding company, we are subject to federal supervision and regulation. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules and standards, may limit our operations significantly and control the methods by which we conduct business, as they limit those of

 

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other banking organizations. Many of these regulations are intended to protect depositors, the public or the FDIC insurance funds, not stockholders. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. There are laws and regulations which restrict transactions between us and our subsidiaries. These requirements may constrain our operations and the adoption of new laws and changes to or repeal of existing laws may have a further impact on our business, financial condition, results of operations and future prospects. Also, the burden imposed by those federal and state regulations may place banks in general and us in particular, at a competitive disadvantage compared to less regulated competitors.

We are also subject to requirements with respect to the confidentiality of information obtained from clients concerning their identity, business, personal financial information, employment and other matters. We require our personnel to agree to keep all such information confidential and we monitor compliance. Failure to comply with confidentiality requirements could result in material liability and adversely affect our business, financial condition, results of operations and future prospects.

In conjunction with our 2010 acquisition of EJ Financial Corporation and Equity Bank (now known as Triumph Savings Bank), we made certain commitments to the Federal Reserve Bank of Dallas, including a commitment to maintain Triumph Savings Bank’s leverage capital ratio, as defined in 12 C.F.R. 325.2(m), at 12% or higher until January 1, 2015. In addition, in connection with our acquisition of Triumph Community Bank in October 2013, we agreed to maintain a minimum 8% Tier 1 leverage ratio and a minimum 10% total risk-based capital ratio at Triumph Community Bank. While we currently meet, and while it is expected that we will continue to meet, all regulatory capital requirements in the future, we cannot assure you in this regard and any failure to meet any of these requirements could have a material adverse effect on our stockholders.

Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years and may be subject to significant future changes. We cannot assure our stockholders that such future changes will not have an adverse effect on our business, financial condition and results of operations.

Federal and state regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulations to our Company. Compliance with current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance. Additionally, evolving regulations and guidance concerning executive compensation may impose limitations on us that affect our ability to compete successfully for executive and management talent.

The Consumer Financial Protection Bureau (“CFPB”), was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAAP authority”). The ongoing broad rulemaking powers of the CFPB and its UDAAP authority have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services. The CFPB has indicated that they are examining proposing new rules on overdrafts and other consumer financial products or services and if any such rule limits our ability to provide such financial products or services it may have an adverse effect on our business.

 

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In addition, given the current economic and financial environment, regulators may elect to alter the standards or the interpretation of the standards used to measure regulatory compliance or used to determine the adequacy of liquidity, certain risk management or other operational practices for bank or non-bank financial services companies. Such actions may impact our ability to implement our strategy and could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of the regulations and laws and their interpretation of the quality of our loan portfolio, securities portfolio and other assets. If any regulatory agency’s assessment of the quality of our assets differs from our assessment, we may be required to take additional charges that would have the effect of materially reducing our earnings, capital ratios and share price.

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.

We are subject to extensive regulation by multiple regulatory bodies. These regulations may affect the manner and terms of delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations. Changes in these regulations can significantly affect the services that we provide as well as our costs of compliance with such regulations. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the bank or non-bank financial services industries. The Dodd-Frank Act significantly changed the regulation of financial institutions and the bank and non-bank financial services industries. The Dodd-Frank Act and the regulations thereunder affect large and small financial institutions alike, including several provisions that will affect how community banks, thrifts and small bank and thrift holding companies will be regulated in the future.

The Dodd-Frank Act, among other things, imposes new capital requirements on bank holding companies; changes the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base and permanently raises the current standard deposit insurance limit to $250,000 and expands the FDIC’s authority to raise insurance premiums. The legislation also calls for the FDIC to raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion. The Dodd-Frank Act also limits interchange fees payable on debit card transactions. The Dodd-Frank Act establishes the Consumer Financial Protection Bureau as an independent entity within the Federal Reserve, which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. The Dodd-Frank Act also includes provisions that affect corporate governance and executive compensation at all publicly traded companies and allows financial institutions to pay interest on business checking accounts. Although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in assets, there can be no guarantee that such applicability will not be extended in the future or that regulators or other third parties will not seek to impose such requirements on institutions with less than $10 billion in assets.

New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which

 

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existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.

Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings.

The Federal Reserve, the FDIC, the Office of the Comptroller of the Currency (“OCC”) and the Texas Department of Savings and Mortgage Lending (the “TDSML”) periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

Our FDIC deposit insurance premiums and assessments may increase.

The deposits of our bank subsidiaries are insured by the FDIC up to legal limits and, accordingly, subject our bank subsidiaries to the payment of FDIC deposit insurance assessments. The banks’ regular assessments are based on our bank subsidiaries’ average consolidated total assets minus average tangible equity as well as by risk classification, which includes regulatory capital levels and the level of supervisory concern. High levels of bank failures since the beginning of the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund (“DIF”). In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC has, in the past, increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have an adverse effect on our business, financial condition and results of operations.

Our bank subsidiaries are subject to “cross-guarantee liability” in the event of a default by either bank and such liability may have an adverse effect on our financial condition, results of operations and future prospects.

Under the Federal Deposit Insurance Act, a depository institution, the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance.

 

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Our bank subsidiaries are affiliated FDIC-insured depository institution subsidiaries. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions. If cross-guarantee liability was imposed by the FDIC, such liability could have an adverse effect on our business, financial condition and results of operations.

The Federal Reserve may require us to commit capital resources to support our subsidiary banks.

As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the bank holding company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

Future acquisitions generally will require regulatory approvals and failure to obtain them would restrict our growth.

We intend to explore complementing and expanding our products and services by pursuing strategic acquisitions. Generally, any acquisition of target financial institutions, banking centers or other banking assets by us will require approval by and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on applications, federal banking regulators consider, among other factors:

 

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the effect of the acquisition on competition;

 

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the financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the bank(s) involved;

 

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the quantity and complexity of previously consummated acquisitions;

 

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the managerial resources of the applicant and the bank(s) involved;

 

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the convenience and needs of the community, including the record of performance under the Community Reinvestment Act of 1977 (the “CRA”);

 

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the effectiveness of the applicant in combating money-laundering activities;

 

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the applicant’s regulatory compliance record; and

 

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the extent to which the acquisition would result in greater or more concentrated risks to the stability of the United States banking or financial system.

Such regulators could deny our application based on the above criteria or other considerations, which would restrict our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For

 

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example, we could be required to sell banking centers as a condition to receiving regulatory approvals and such a condition may not be acceptable to us or may reduce the benefit of any acquisition.

Future legislation or actions could harm our competitive position.

In addition to the enactment of the Dodd-Frank Act, various legislative bodies have also recently been considering altering the existing framework governing creditors’ rights, including legislation that would result in or allow loan modifications of various sorts. Such legislation may change banking statutes and the operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business; limit or expand permissible activities; or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it or any regulations would have on our activities, financial condition or results of operations.

We are subject to commercial real estate lending guidance issued by the federal banking regulators that impacts our operations and capital requirements.

The federal banking regulators have issued final guidance regarding concentrations in commercial real estate lending directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios. This guidance suggests that institutions whose commercial real estate loans exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. Based on our commercial real estate concentration as of March 31, 2014, we believe that we are operating within the guidelines. However, increases in our commercial real estate lending could subject us to additional supervisory analysis. We cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management has implemented controls to monitor our commercial real estate lending concentrations, but we cannot predict the extent to which this guidance will continue to impact our operations or capital requirements.

Regulatory initiatives regarding bank capital requirements may require heightened capital.

New regulatory capital rules, released in July 2013, implement higher minimum capital requirements for bank holding companies and banks. The new rules include a new common equity Tier 1 capital requirement and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. These enhancements are expected to both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The revised capital rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a total Tier 1 capital ratio of 6%, a total capital ratio of 8% and a leverage ratio of 4%. Bank holding companies are also required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% to avoid limitations on capital distributions and executive compensation payments. The revised capital rules also require banks and bank holding companies to maintain a common equity Tier 1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements.

The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements to meet well-capitalized standards and future regulatory change could impose higher capital standards as a routine matter. The Company’s and its subsidiaries’ regulatory capital ratios currently are in excess of the levels established for “well-capitalized” institutions.

 

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These new standards may require the Company or our bank subsidiaries to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities to comply with formulaic liquidity requirements. Such regulation could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities which could have an adverse effect on our business, financial condition and results of operations.

We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies, including the CFPB, are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new product lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, financial condition and results of operations.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the USA PATRIOT Act of 2001 (the “Patriot Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have an adverse effect on our business, financial condition and results of operations.

There are substantial regulatory limitations on changes of control of a bank holding company.

With certain limited exceptions, federal regulations prohibit a person, a company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a

 

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bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our Company without prior notice or application to and the approval of the Federal Reserve. Companies investing in banks and bank holding companies receive additional review and may be required to become bank holding companies, subject to regulatory supervision. Accordingly, prospective investors must be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. These provisions effectively inhibit certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.

Risks Relating to an Investment in Our Common Stock

There is currently no public market for our common stock. An active, liquid market for our common stock may not develop or be sustained upon completion of this offering, which may impair your ability to sell your shares.

Before this offering, there has been no public market for our common stock. We intend to list our common stock on the             , but an active, liquid trading market for our common stock may not develop or be sustained following this offering. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, stockholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our common stock. The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of our common stock in the future.

The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired.

The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may impact the market price and trading volume of our common stock, including, without limitation:

 

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actual or anticipated fluctuations in our operating results, financial condition or asset quality;

 

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changes in economic or business conditions;

 

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the effects of and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve;

 

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publication of research reports about us, our competitors or the bank and non-bank financial services industries generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage;

 

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operating and stock price performance of companies that investors deem comparable to us;

 

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future issuances of our common stock or other securities;

 

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additions or departures of key personnel;

 

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proposed or adopted changes in laws, regulations or policies affecting us;

 

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perceptions in the marketplace regarding our competitors and/or us;

 

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our treatment as an “emerging growth company” under federal securities laws;

 

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changes in accounting principles, policies and guidelines;

 

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rapidly changing technology;

 

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significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us;

 

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other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and

 

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other news, announcements or disclosures (whether by us or others) related to us, our competitors, our core market or the bank and non-bank financial services industries.

The stock market and, in particular, the market for financial institution stocks, have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired.

Securities analysts may not initiate or continue coverage on our common stock, which could adversely affect the market for our common stock.

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts and they may not cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect our market price. If we are covered by securities analysts and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in nonconvertible debt in a three-year period or if the fair value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price is expected to be substantially higher than the net tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase shares in this offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of this offering to be $         per share, based on an assumed initial offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus) and our pro forma net tangible book value of $         per share as of March 31, 2014. Accordingly, if we were liquidated at our pro forma net tangible book value, you would not receive the full amount of your investment.

 

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We have pledged all of the stock of our subsidiary banks as collateral for a loan and if the lender forecloses, you could lose your investment.

We have pledged all of the stock of our subsidiary banks to secure our senior indebtedness, which had a balance of $12.3 million as of March 31, 2014. Although we anticipate repaying this indebtedness in full with a portion of the offering proceeds, we may elect not to repay this indebtedness. If we do not repay this indebtedness, or if in the future we incur indebtedness and secure it with our subsidiary banks’ stock and if we were to default on any such indebtedness, the lender could foreclose on our subsidiary banks’ stock and we would lose our principal asset. In that event, if the value of our subsidiary banks’ stock is less than the amount of the indebtedness, you would lose the entire amount of your investment.

Future equity issuances could result in dilution, which could cause our common stock price to decline and future sales of our common stock could depress the market price of our common stock.

As of August 8, 2014, we had 9,886,334 issued and outstanding shares of our common stock. Following the completion of this offering, we will have              issued and outstanding shares of our common stock (             shares if the underwriters elect to exercise in full their purchase options). Actual or anticipated issuances or sales of substantial amounts of our common stock following this offering could cause the market price of our common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also would and equity-related securities could, dilute the percentage ownership interest held by stockholders prior to such issuance. All of the shares of common stock sold in this offering will be freely tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”)) may be sold publicly only in compliance with the limitations described under “Shares Eligible For Future Sale.” The remaining 9,886,334 outstanding shares of our common stock, or     % of our outstanding shares, will be deemed to be “restricted securities” as that term is defined in Rule 144 and may be sold in the market over time in private transactions or future public offerings. We may issue all of these shares without any action or approval by our stockholders and these shares, once issued (including upon exercise of outstanding options), will be available for sale into the public market, subject to the restrictions described above, if applicable, for affiliate holders.

Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities.

We have broad discretion in the use of the net proceeds from this offering and our use of those proceeds may not yield a favorable return on your investment.

We intend to use approximately $25.9 million of the net proceeds to us generated by this offering to redeem, as promptly as practicable following the completion of this offering, our TARP preferred stock, and approximately $12.3 million of the net proceeds of this offering to retire, as promptly as practicable following the completion of this offering, our senior secured indebtedness, which had a balance outstanding of $12.3 million as of March 31, 2014. Any remainder of the net proceeds of this offering (which will be approximately $         million) will be used to support our organic growth and other general corporate purposes, including potential future acquisitions of bank and non-bank financial services companies that we believe are complementary to our business and consistent with our growth strategy.

Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our fair value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting stockholder returns, including earnings per share, return on assets and return on equity.

 

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The rights of our common stockholders are subordinate to the rights of the holders of our Series A Preferred Stock and Series B Preferred Stock and any debt securities that we may issue and may be subordinate to the holders of any other class of preferred stock that we may issue in the future.

We have issued 97,456 shares of our Series A Preferred Stock and Series B Preferred Stock. These shares have rights that are senior to our common stock. As a result, we must make payments on the preferred stock before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the Series A Preferred Stock and Series B Preferred Stock must be satisfied in full before any distributions can be made to the holders of our common stock. Our board of directors has the authority to issue in the aggregate up to 1,000,000 shares of preferred stock and to determine the terms of each issue of preferred stock without stockholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue in the future will also be senior to our common stock and could have a preference on liquidating distributions or a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital-raising efforts is uncertain. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.

We depend on the profitability of our bank subsidiaries.

Our principal source of funds to pay dividends on our common and preferred stock and service any of our obligations are dividends received directly from our subsidiaries. A substantial percentage of our current operations are currently conducted through our two bank subsidiaries. As is the case with all financial institutions, the profitability of our bank subsidiaries is subject to the fluctuating cost and availability of money, changes in interest rates and in economic conditions in general. In addition, various federal and state statutes limit the amount of dividends that our bank subsidiaries may pay to us, with or without regulatory approval.

We do not intend to pay dividends in the foreseeable future and our future ability to pay dividends is subject to restrictions.

We have not historically declared or paid any cash dividends on our common stock since inception. Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on common stock will depend upon our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by the board of directors. Furthermore, consistent with our business plans, growth initiatives, capital availability, projected liquidity needs and other factors, we have made and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our common stockholders. We are also restricted from paying dividends on our common stock if we do not pay dividends on our Series A Preferred Stock and Series B Preferred Stock for the same dividend period.

Our board of directors intends to retain all of our earnings to promote growth and build capital. Accordingly, we do not expect to pay dividends in the foreseeable future. In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. Further, the Federal Reserve issued Supervisory Letter SR 09-4 on February 24, 2009 and revised as of March 27, 2009, which provides guidance on the declaration and payment of dividends, capital redemptions and capital repurchases by bank holding companies. Supervisory Letter SR 09-4 provides that, as a general matter, a financial holding company should eliminate, defer or significantly reduce its dividends, if: (1) the financial holding company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the financial holding company’s prospective rate of earnings retention is not consistent with the financial holding company’s capital needs and overall current and prospective financial

 

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condition; or (3) the financial holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Failure to do so could result in a supervisory finding that the financial holding company is operating in an unsafe and unsound manner.

Our ability to pay dividends on common stock is also limited by contractual restrictions under our trust preferred securities and our TARP preferred stock. The trust preferred securities are in a superior ownership position compared to common stock. Interest must be paid on the trust preferred securities before dividends may be paid to the common stockholders. The Company is current in its interest and dividend payments on the trust preferred securities; however, it has the right to defer distributions on these instruments, during which time no dividends may be paid on its common stock. If the Company does not have sufficient earnings in the future and begins to defer distributions on the trust preferred securities, it will be unable to pay dividends on its common stock until it becomes current on those distributions.

Finally, our ability to pay dividends to our stockholders depends on our receipt of dividends from our two bank subsidiaries, which are also subject to restrictions on dividends as a result of banking laws, regulations and policies. Accordingly, if the receipt of dividends over the near term is important to you, you should not invest in our common stock. See “Dividend Policy.”

Our corporate governance documents and certain corporate and banking laws applicable to us, could make a takeover more difficult.

Certain provisions of our articles of incorporation and bylaws and corporate and federal banking laws and regulations could delay, defer or prevent a third party from acquiring control of our organization or conducting a proxy contest, even if those events were perceived by many of our stockholders as beneficial to their interests. These provisions, laws and regulations applicable to us:

 

•

enable our board of directors to issue additional shares of authorized but unissued capital stock;

 

•

enable our board of directors to issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors;

 

•

enable our board of directors to increase the size of our board of directors and fill the vacancies created by the increase;

 

•

enable our board of directors to serve for three-year terms;

 

•

provide for a plurality voting standard in the election of directors;

 

•

do not provide for cumulative voting in the election of directors;

 

•

enable our board of directors to amend our bylaws without stockholder approval;

 

•

do not allow for the removal of directors without cause;

 

•

limit the right of stockholders to call a special meeting;

 

•

do not allow stockholder action by less than unanimous written consent;

 

•

require the affirmative vote of two-thirds of the outstanding shares of common stock to approve all amendments to our charter and approve mergers and similar transactions;

 

•

require advance notice for director nominations and other stockholder proposals; and

 

•

require prior regulatory application and approval of any transaction involving control of our organization.

These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances in which our stockholders might otherwise receive a premium over the market price of our shares. See “Description of Capital Stock.”

 

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Our current board and management have significant control over our business.

As of August 8, 2014, our directors and executive officers beneficially owned, directly or indirectly, in the aggregate, 1,431,579 shares of our common stock, or approximately 14.28% of the outstanding shares of our common stock. As a result, in addition to their day-to-day management roles, our executive officers and directors will be able to exercise significant influence on our business as stockholders, including influence over election of members of the board of directors and the authorization of other corporate actions requiring stockholder approval.

An investment in our common stock is not an insured deposit and is subject to risk of loss.

Your investment in our common stock will not be a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk and you must be capable of affording the loss of your entire investment.

The return on your investment in our common stock is uncertain.

We cannot provide any assurance that an investor in our common stock will realize a substantial return on his or her investment, or any return at all. Further, as a result of the uncertainty and risks associated with our operations, many of which are described in this “Risk Factors” section, it is possible that an investor could lose his or her entire investment.

Certain of our officers and directors have the right to receive shares of our common stock from TCC, the original investment vehicle for our operations and a significant stockholder of the Company, based on the value of our shares as of and following the closing of this offering, which may incentivize them to manage our operations in a manner that incurs more risk to receive the full amount of shares that may be distributed to them.

TCC is a Texas limited liability company that served as the investment vehicle for our original acquisition of Equity Bank in 2010. As of August 8, 2014, TCC owned 4,500,000 shares of our common stock and a warrant to purchase an additional 259,067 shares of our common stock at a price of $11.58 per share. In connection with the formation and funding of TCC, TLCM Investments, LLC (“TLCM”) was granted a profits interest. The profits interest entitled TLCM to receive distributions from TCC after specified distribution targets, including a multiple of capital originally invested and an internal rate of return, were met with respect to the members of TCC other than TLCM. The percentage of such distributions to which TLCM would be entitled increases upon the achievement of additional distribution targets. In connection with this offering, TCC’s limited liability company agreement is expected to be amended such that, following the completion of this offering, the profits interest will entitle TLCM to periodic distributions of our common stock based on the market price of our common stock on a quarterly basis for a three year period following the closing of this offering. The ultimate beneficial owners of TLCM include certain of our directors and executive officers including our Chief Executive Officer, Aaron P. Graft, our executive chairman, Carlos Sepulveda, Jr., Charles A. Anderson, Justin M. Trail, C. Todd Sparks, Raymond W. Sperring III and Adam D. Nelson. Pursuant to the amendment, TLCM will be entitled to receive up to an aggregate of 1,250,000 shares of our common stock out of the 4,500,000 shares owned by TCC as of August 8, 2014. The number of shares of our common stock that TCC may distribute to TLCM will be based on a schedule agreed to by TCC and TLCM and depends upon the trading price of our common stock over the three year period following the closing of this offering. The higher the trading price of our common stock following this offering, the more shares TCC will distribute to TLCM. Accordingly, certain members of our board of directors and management may be incentivized to produce a higher price for our shares of common stock than they otherwise would be and may be prone to take risks that they otherwise would not in an effort to support a higher stock price. If the Company incurs additional risk or unduly focuses on the price of our common shares following this offering, it may have an adverse effect on our financial condition and results of operations. See “Security Ownership of Beneficial Owners and Management.”

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of section 27A of the Securities Act and 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). 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. 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.

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:

 

•

our limited operating history as an integrated company and our recent acquisitions;

 

•

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

 

•

our ability to mitigate our risk exposures;

 

•

our ability to maintain our historical earnings trends;

 

•

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

 

•

changes in management personnel;

 

•

interest rate risk;

 

•

concentration of our factoring 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;

 

•

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;

 

•

risks related to our acting as the asset manager for one or more CLOs;

 

•

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;

 

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•

the obligations associated with being a public company;

 

•

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;

 

•

increases in our capital requirements;

 

•

risk retention requirements under the Dodd-Frank Act; and

 

•

risks related to this offering.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. 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.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $         million, or approximately $         million if the underwriters elect to exercise in full their purchase option, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and offering expenses. Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us of this offering by $         million, or $         million if the underwriters elect to exercise in full their purchase option, after deducting estimated underwriting discounts and offering expenses.

We intend to use approximately $25.9 million of the net proceeds to us generated by this offering to redeem, as promptly as practicable following the completion of this offering, our TARP preferred stock; approximately $12.3 million of the net proceeds of this offering to retire, as promptly as practicable following the completion of this offering, our senior secured indebtedness, consisting of a senior secured note with a principal amount of $12.3 million as of March 31, 2014, which has an interest rate based at the prime rate with a minimum interest rate of 4.5%, and matures on October 15, 2018; and any remainder of the net proceeds of this offering (which will be approximately $         million) to support our organic growth and other general corporate purposes, including potential future acquisitions of bank and non-bank financial services companies that we believe are complementary to our business and consistent with our growth strategy. We do not currently have any plans to acquire specific depository institutions, either on an assisted or unassisted basis, or specific bank or non-bank financial services companies, assets or franchises.

 

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DIVIDEND POLICY

We have not historically declared or paid cash dividends on our common stock since inception and we do not intend to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including:

 

•

our historic and projected financial condition, liquidity and results of operations;

 

•

our capital levels and needs;

 

•

tax considerations;

 

•

any acquisitions or potential acquisitions that we may examine;

 

•

statutory and regulatory prohibitions and other limitations;

 

•

the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends;

 

•

general economic conditions; and

 

•

other factors deemed relevant by our board of directors.

We are not obligated to pay dividends on our common stock.

As a Texas corporation, we are subject to certain restrictions on dividends under the Texas Business Organizations Code (the “TBOC”). Generally, a Texas corporation may pay dividends to its stockholders out of its surplus (the excess of its assets over its liabilities and stated capital) or out of its net profits for the then-current and preceding fiscal year unless the corporation is insolvent or the dividend would render the corporation insolvent. In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. See “Supervision and Regulation—Bank Regulation; Standards for Safety and Soundness.”

Because we are a financial holding company and do not engage directly in business activities of a material nature, our ability to pay dividends to our stockholders depends, in large part, upon our receipt of dividends from our bank subsidiaries, which are also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. The present and future dividend policy of our bank subsidiaries are subject to the discretion of their respective board of directors. Our subsidiary banks are not obligated to pay dividends.

 

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CAPITALIZATION

The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis, as of March 31, 2014, on an actual basis and on an as adjusted basis after giving effect to the net proceeds from the sale by us of             shares at an initial offering price of $         per share, the midpoint of the offering price range on the cover page of this prospectus, after deducting estimated underwriting discounts and offering expenses. You should read the following table in conjunction with the sections titled “Selected Historical Consolidated Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

		As of March 31, 2014
		Actual				As adjusted for the offering(1)
		(dollars in thousands)
Senior secured note		$	12,259
Junior subordinated debentures			24,233
Stockholders’ Equity:
Common stock, par value $0.01 per share, 50,000,000 shares authorized, 9,846,096 shares issued and outstanding; and              shares issued and outstanding, as adjusted		$	98			$
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized
Series A, 50,000 shares authorized, 45,500 shares issued and outstanding; and 45,500 shares issued and outstanding, as adjusted			4,550
Series B, 115,000 shares authorized, 51,956 shares issued and outstanding; and 51,956 shares issued and outstanding, as adjusted			5,196
Additional paid-in capital			104,744
Retained earnings			22,111
Accumulated other comprehensive income, net			485
Total stockholders’ equity			137,184
Noncontrolling interest(2)			26,997
Total equity		$	164,181			$
Capital ratios:
Total equity to average assets			12.66	%				%
Tangible common equity to tangible assets(3)			7.85	%
Tier 1 capital to average assets			11.89	%
Tier 1 capital to risk-weighted assets			14.32	%
Total capital to risk-weighted assets			14.78	%

 

(1)

Unless otherwise indicated, the information contained in this prospectus is as of the date set forth on the cover page of this prospectus, assumes that the underwriters’ option to purchase additional shares is not exercised and assumes that the common stock to be sold in this offering is sold at $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and offering expenses.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (which is the midpoint of the price range on the cover page of this prospectus) would increase (decrease) each of cash, cash equivalents and marketable securities, additional paid-in capital, total stockholders’ equity and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, the pro forma as adjusted amount of each of cash, cash equivalents and marketable securities,

 

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additional paid-in capital, total equity and total capitalization would increase by approximately $         million, after deducting estimated underwriting discounts and commissions.

 

(2)

$25.9 million of our noncontrolling interests is related to our TARP preferred stock which we plan to redeem as promptly as practicable following the closing of this offering. See “Use of Proceeds.” The $1.1 million remainder of our noncontrolling interests is Class B Units of Triumph Commercial Finance, which were redeemed in June 2014.

 

(3)

Tangible common equity to tangible assets is a non-GAAP financial measure. Tangible common equity is computed as total stockholders’ equity, excluding preferred stock, less intangible assets and tangible assets are calculated as total assets less intangible assets. We believe that the most directly comparable GAAP financial measure is total stockholders’ equity to assets. For a reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent that the initial public offering price per share of our common stock exceeds the tangible book value per share of our common stock immediately following this offering. Tangible book value per common share is equal to our total stockholders’ equity, excluding preferred stock and noncontrolling interests, less intangible assets, divided by the number of common shares outstanding. As of March 31, 2014, the tangible book value of our common stock was $         million, or $         per share.

After giving effect to our sale of             shares of common stock in this offering (assuming the underwriters do not exercise their purchase option) at an assumed initial public offering price of $         per share (which is the midpoint of the price range on the cover page of this prospectus) and after deducting estimated underwriting discounts and offering expenses, the pro forma net tangible book value of our common stock at March 31, 2014 would have been approximately $         million, or $         per share. Therefore, this offering will result in an immediate increase of $         in the tangible book value per share of our common stock of existing stockholders and an immediate dilution of $         in the tangible book value per share of our common stock to investors purchasing shares in this offering, or approximately     % of the assumed public offering price of $         per share (which is the midpoint of the price range on the cover page of this prospectus).

The following table illustrates the calculation of the amount of dilution per share that a purchaser of our common stock in this offering will incur given the assumptions above:

 

Assumed initial public offering price per share						$
Net tangible book value per common share at March 31, 2014		$
Increase in net tangible book value per common share attributable to new investors		$
Pro forma tangible book value per common share upon completion of this offering						$
Dilution per common share to new investors from offering						$

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share of common stock would increase (decrease) our net tangible book value as of March 31, 2014 by approximately $         million, or approximately $         per share, and the pro forma dilution per share to new investors in this offering by approximately $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and offering expenses payable by us. The number of shares offered by us in this offering may be increased or decreased from the number of shares on the cover page of this prospectus. Each increase (decrease) of 1.0 million shares in the number of shares offered by us, together with a $1.00 increase in the assumed offering price of $         per share, would increase (decrease) our net tangible book value as of March 31, 2014 by approximately $         million, or approximately $         per share, and the pro forma dilution per share to new investors in this offering by approximately $         per share, assuming the assumed initial public offering price per share of $         per share, the midpoint of the offering price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and offering expenses. Similarly, a decrease of 1.0 million shares in the number of shares of common stock offered by us, together with a $1.00 decrease in the assumed public offering price of $         per share, would result in our net tangible book value, as of March 31, 2014, of approximately $         million, or approximately $         per share, and the pro forma dilution per share to investors in this offering would be approximately $         per share. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The following table summarizes, as of March 31, 2014, the total consideration paid to us and the average price paid per share by existing stockholders and investors purchasing common stock in this offering after giving effect to the sale of the common stock offered hereby; the receipt of the estimated net proceeds from this

 

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offering, after deducting the underwriting discounts and commissions and offering expenses; the use of the estimated net proceeds from this offering, as described under “Use of Proceeds”; our acquisition of Triumph Community Bank on October 15, 2013; and $42,402,000 in capital that we raised during 2013, the majority of the proceeds of which were used to fund our acquisition of Triumph Community Bank.

 

		Shares Purchased/Issued				Total Consideration				Average Price Per Share
		Number		Percent		Amount		Percent
Stockholders as of March 31, 2014
New investors in this offering
Total

The table above excludes 259,067 shares of common stock issuable upon exercise of the TCC Warrant at a weighted average exercise price of $11.58 per share. To the extent that the TCC Warrant is exercised, investors participating in this offering will experience further dilution.

 

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PRICE RANGE OF OUR COMMON STOCK

Prior to this offering, our common stock has not been traded on an established public trading market and quotations for our common stock were not reported on any market. As a result, there has been no regular market for our common stock. Although our shares may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in an active market. As of March 31, 2014, there were approximately 272 holders of record of our common stock.

We anticipate that this offering and the listing of our common stock on                     will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See “Underwriting” for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

 

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BUSINESS

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the BHC Act. Through our two wholly owned bank subsidiaries, Triumph Savings Bank and Triumph Community Bank, we offer traditional banking products as well as commercial finance products focused on businesses that require specialized and tailored financial solutions. Our banking operations include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance products include factoring, asset-based lending, equipment lending and healthcare lending products offered on a nationwide basis. These product offerings supplement the asset generation capacity in our community banking markets and enhance the overall yield of our loan portfolio, enabling us to earn attractive risk-adjusted net interest margins. We believe our integrated business model distinguishes us from other banks and non-bank financial services companies in the markets in which we operate. As of March 31, 2014, we had consolidated total assets of $1.3 billion, total loans held for investment of $801 million, total deposits of $1.1 billion and total stockholders’ equity of $137 million.

Our Corporate Structure

We operate our business through several corporate entities.

 

 

•

Triumph Community Bank, N.A. is a national bank headquartered in Moline, Illinois. As of August 8, 2014, Triumph Community Bank operates ten branches in the Quad Cities Metropolitan Area of Iowa and Illinois, seven other branches throughout central and northwestern Illinois and one branch and one loan production office in northeastern Illinois. Through this branch network, we offer our customers a variety of financial products and services that both augment our revenue (fee and interest income) and help us expand and retain our core deposit network, including checking and savings accounts, debit

 

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cards, electronic banking, trust services and treasury management. Triumph Community Bank also originates a full suite of commercial and retail loans including commercial real estate, general commercial, one-to-four family residential and construction and development loans, focused on customers in and around its primary market areas. In addition, Triumph Community Bank originates our healthcare asset-based loans from an additional loan production office in Portland, Oregon operating under our Triumph Healthcare Finance brand. A portion of Triumph Community Bank’s loan portfolio consists of participations of our asset-based loans and equipment loans originated at Triumph Savings Bank, and factoring relationships originated by Triumph Business Capital. As of March 31, 2014, Triumph Community Bank had total assets of $889 million, total deposits of $757 million and total loans held for investment of $512 million.

 

•

Triumph Savings Bank, SSB is a Texas state savings bank. Triumph Savings Bank originates asset-based loans, equipment loans and general factoring products under our Triumph Commercial Finance brand. It also originates commercial real estate, construction and development, mortgage warehouse and general commercial loans. Triumph Savings Bank operates two branches in Dallas, Texas, consisting of our corporate office and an additional branch that is dedicated to deposit gathering activities. As of March 31, 2014, Triumph Savings Bank had consolidated total assets of $384 million, total deposits of $293 million and total loans held for investment of $289 million (including the gross receivables held by its subsidiary, Triumph Business Capital).

 

•

Triumph Business Capital, LLC is a Delaware limited liability company and wholly owned subsidiary of Triumph Savings Bank that focuses on providing working capital financing through the purchase of accounts receivable, a product known as factoring. Substantially all of Triumph Business Capital’s factoring relationships are currently originated with small-to-mid-sized owner-operators, trucking fleets and freight brokers in the transportation industry, though it has recently expanded into non-transportation factoring markets as well. As of March 31, 2014, Triumph Business Capital’s purchased gross receivables outstanding totaled $119.7 million.

 

•

Triumph Insurance Group, Inc. is a Texas corporation and a wholly owned subsidiary of Triumph Savings Bank. Triumph Insurance Group was formed to provide insurance brokerage services, initially focused on the insurance needs of our factoring, asset-based lending and equipment lending clients. Triumph Insurance Group was formed in June 2014 and has yet to commence any material operations or activity.

 

•

Triumph Capital Advisors, LLC is a Texas limited liability company and registered investment advisor that provides investment management services for primarily institutional clients, principally focused on the origination and management of collateralized loan obligations. Triumph Capital Advisors closed its first CLO offering in May 2014 and closed its second CLO offering in August 2014, each with an approximate total size of $400 million. We anticipate that Triumph Capital Advisors will originate one to two additional CLOs per year, which we expect will provide us a recurring source of noninterest fee income. As of August 8, 2014, Triumph Capital Advisors had assets under management of approximately $800 million.

We may in the future implement transactions to streamline our operations and corporate structure, including a potential merger of our two banking subsidiaries. We believe such a transaction has the potential to provide us operational and economic efficiencies as we continue to grow and expand our operations.

Lending and Factoring Activities

We offer a broad range of lending and factoring products. Our business lending categories include commercial real estate, commercial, factoring and construction and development. Our retail lending consists primarily of residential first and second mortgage loans and a small portfolio of additional consumer loans.

Our strategy is to maintain a broadly diversified loan portfolio by type and location. Within this general strategy, we intend to focus on growth in the commercial finance lending areas where we believe we have

 

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expertise and market insights, including our factoring operations, and the asset-based loans and equipment loans we originate under our Triumph Commercial Finance brand. As of March 31, 2014, these product lines in aggregate totaled $225.2 million (or 28% of our loan portfolio). In addition, in June 2014 we acquired a healthcare asset-based lending business with a portfolio of loans with an outstanding balance of $46.7 million.

A majority of our current loans are in the areas surrounding our community banking operations in Illinois (34%) and Iowa (16%). We expect that we will continue to focus on the commercial and personal credit needs of businesses and individuals in these markets. We also have a significant concentration of loans in Texas (14%), the home of our corporate headquarters and a significant portion of our commercial finance operations. With respect to our commercial finance products, including our factoring, asset-based lending, equipment lending and healthcare lending product lines, we also seek out customers on a nationwide basis. In connection therewith, we maintain loan production offices or sales personnel for such product lines in Tennessee, North Carolina, Florida, Oregon, New York and Utah. As this portion of our portfolio grows, we expect that the geographic exposure of our loans will shift accordingly.

The following is a discussion of our major types of lending activity:

Commercial Real Estate Loans. We originate real estate loans to finance commercial property that is owner-occupied as well as commercial property owned by real estate investors. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as office buildings, warehouses, production facilities, hotels and mixed-use residential/commercial and multifamily properties. The total amount of our commercial real estate loans outstanding as of March 31, 2014, was $268.7 million (or 34% of our total loan portfolio), of which $145.1 million (or 18% of our total portfolio) was owner-occupied and $123.6 million (or 16% of our total portfolio) was non-owner occupied.

Commercial Loans. We offer commercial loans to small-to-mid-sized businesses across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment and business loans for working capital and operational purposes. In the aggregate, our commercial loans as of March 31, 2014 totaled $235.0 million (or 29% of our total loan portfolio)

A portion of our commercial loan portfolio consists of specialty commercial finance products including asset-based loans and equipment loans, originated under our Triumph Commercial Finance brand. As of March 31, 2014, these product lines in aggregate totaled $95.7 million (or 41% of our total commercial loan portfolio). In addition, in June 2014 we acquired a healthcare asset-based lending business with a portfolio of loans with an outstanding balance of $46.7 million. A more detailed description of these product lines is set forth below:

 

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Asset-Based Loans. Under our Triumph Commercial Finance brand, we originate asset-based loans to borrowers to support general working capital needs. Our 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 at any time. These loans typically bear interest at a floating rate comprised of LIBOR or the prime rate plus a premium and include certain other transaction fees, like origination and unused line fees. We target asset-based loan facilities between $1 million and $10 million for borrowers with annual net revenues between $4 million and $60 million. We originate asset-based loans across a variety of industries including manufacturing, distribution and energy services.

A significant portion of our asset-based lending portfolio consists of loans made to borrowers without the operating history, cash flows or balance sheet necessary to support other credit options, and therefore require careful analysis and oversight of the borrowing base collateral and the borrower’s activity to ensure sale and liquidation of the borrowing base collateral and application to the loan.

 

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These policies and procedures are described in more detail under “Credit Risk Management.” As of March 31, 2014, the asset-based loans originated under our Triumph Commercial Finance brand totaled $39.5 million (or 5% of our total portfolio).

 

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Equipment Loans. We originate equipment loans under our Triumph Commercial Finance brand. These equipment loans focus primarily on the construction, transportation and waste management industries. Equipment in these industries is essential use and has a broad resale market. Our equipment loans are typically fully amortizing, fixed rate loans secured by the underlying collateral with a term of three to five years. As of March 31, 2014, the equipment loans originated by Triumph Savings Bank under our Triumph Commercial Finance brand totaled $56.2 million (or 7% of our total loan portfolio).

 

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Healthcare Loans. In June 2014, we acquired an asset-based lending business dedicated exclusively to the healthcare industry. The focus of this product line, which now operates under the Triumph Healthcare Finance brand, is on secured credit facilities of $1 million to $15 million for healthcare service providers in the areas of skilled nursing, home healthcare, physical therapy and pharmacy delivery. We acquired a portfolio of loans with an outstanding balance of $46.7 million in the acquisition, as well as a team of lenders with significant experience in this specialized asset class.

Factored Receivables. We offer factoring services to our customers, primarily in the transportation sector, with an increasing focus on other industries. In contrast to a lending relationship, in a factoring transaction we directly purchase the receivables generated by our clients at a discount to their face value. These transactions are structured to provide our clients with immediate liquidity to meet operating expenses when there is mismatch between payments to our client for a good or service and the incurrence of operating costs required to provide such good or service. For example, in the transportation industry, invoices are typically paid 30 to 60 days after delivery whereas the truckers providing such transportation services require immediate funds to pay for fuel and other operating costs.

Our transportation factoring clients include small owner-operator trucking companies (one-to-four trucks) mid-sized fleets (5-to-50 trucks) and freight broker relationships whereby we manage all carrier payments on behalf of a broker client. The features and pricing of our transportation factoring relationships vary by client type. Typically our smaller owner-operator relationships are structured as “non-recourse” relationships (i.e., we retain the credit risk associated with the ability of the account debtor on an invoice we purchase to ultimately make payment) and our larger relationships are structured as “recourse” relationships (i.e., our client agrees to repurchase from us any invoices for which payment is not ultimately received by the account debtor). Transportation factoring comprised approximately 95% of our total factoring portfolio as of March 31, 2014, calculated based on outstanding gross receivables purchased as of such date.

Our non-transportation factoring business targets small businesses with annual sales between $1 million and $10 million in industries such as manufacturing, distribution, energy services and staffing.

We purchased $952.6 million of invoices pursuant to our factoring relationships during our fiscal year ended December 31, 2013. As of March 31, 2014, our gross outstanding factored receivables purchased totaled $129.5 million (or 16% of our total loan portfolio).

Commercial Construction, Land and Land Development Loans. We offer loans to small-to-mid-sized businesses to construct owner-user properties, as well as loans to developers of commercial real estate investment properties and residential developments. These loans are typically disbursed as construction progresses and carry interest rates that vary with the prime rate. As of March 31, 2014, the outstanding balance of our construction loans was $39.2 million (or 5% of our total loan portfolio).

Residential Real Estate Loans. We offer first and second mortgage loans to our individual customers primarily for the purchase of primary and secondary residences. As of March 31, 2014, the outstanding balance

 

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of one-to-four family real estate secured loans, including home equity loans and lines of credit, was $79.5 million (or 10% of our total loan portfolio). As of March 31, 2014, the substantial majority of our residential real estate loans were originated in our community banking markets in Iowa and Illinois.

Agriculture Loans. A portion of our loan portfolio consists of loans secured by farmland. These loans originate primarily in the areas surrounding our community banking markets in Iowa and Illinois. As of March 31, 2014, the outstanding balance of our loans secured by farmland was $20.1 million (or 2% of our loan portfolio).

Mortgage Warehouse Loans. We enter into mortgage warehouse arrangements whereby we directly fund the origination of one-to-four family residential mortgage loans on behalf of our mortgage banker clients. These arrangements provide our mortgage banker clients with the resources to fund their mortgage originations more quickly and efficiently than they could by using their own balance sheet. As of March 31, 2014, the outstanding balance of our mortgage warehouse loans was $14.9 million (or 2% of our loan portfolio).

Consumer Loans. In addition to our one-to-four family residential real estate loans as described above, we also originate personal loans for our retail banking customers. These loans originate exclusively out of our community banking operations in Iowa and Illinois. As of March 31, 2014, the outstanding balance of our consumer loans was $13.5 million (or 2% of our loan portfolio).

Other Products and Services

Asset Management Services. Triumph Capital Advisors is a registered investment adviser that provides fee-based asset management services primarily for institutional clients. We formed Triumph Capital Advisors in 2013 with the intent of it being a repeat issuer and manager of CLO vehicles, with a secondary focus on separately managed accounts. In establishing this business, we hired a team of executives with significant experience in the asset management industry generally, and with CLO vehicles specifically. We view this business as being a natural extension of our credit focus that will allow us to generate a recurring stream of noninterest fee income.

In general, a CLO is an investment fund whose assets are comprised primarily of senior secured corporate loans. A CLO issues its investors securities in a series of tranches, typically ranging from an AAA-rated debt tranche to an unrated subordinated or equity tranche. The payment rate on each security is linked to such security’s payment priority (e.g., the AAA-rated tranche of a CLO will receive all interest payments before any payments are made to the next most junior tranche of security issued by such CLO, but will pay a lower interest rate). The sole source of payment for the securities issued by the CLO consists of interest, fee and principal payments from its underlying senior secured loan assets.

Triumph Capital Advisors earns asset management fees for selecting and continuously managing the underlying assets of CLOs. In general, these management fees are calculated as percentage of eligible assets within each fund. A portion of these fees are payable as senior fees (i.e., payable before any payments to the subordinated debt investors in such fund) and a portion of these fees are payable as subordinated fees (i.e., payable only in the event interest payments are made to the debt investors in such CLO for such payment period). Such asset management fees typically range from 0.30% to 0.50% per annum of the total eligible assets of the fund, but may also be higher or lower depending on market conditions or the requirements of the investors in each specific CLO. In certain cases, we may offer a portion of our asset management fees to investors in a CLO as an inducement to get such investor to invest in the transaction. In addition, we may earn performance fees in the event the return of the subordinated or equity investors in a CLO exceeds a specified return threshold. We are currently focusing on CLOs with $300 million to $500 million in total assets.

Triumph Capital Advisors closed its first CLO offering in May 2014 and closed its second CLO offering in August 2014, each with an approximate total size of $400 million. We anticipate that Triumph Capital Advisors

 

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will originate one to two additional CLOs per year, which we anticipate will provide us a recurring source of noninterest fee income. As of August 8, 2014, Triumph Capital Advisors had assets under management of approximately $800 million.

Additional Products and Services. We offer a full range of commercial and retail banking services to our customers, including checking and savings accounts, debit cards, electronic banking, and trust services. These products both augment our revenue and help us expand our core deposit network. A number of our additional products and services focus on providing turnkey solutions to the commercial clients that comprise a key component of our lending growth strategy. For example, we provide comprehensive treasury management services for commercial clients to manage their cash and liquidity, including lock box, accounts receivable collection services, electronic payment solutions, fraud protection, information reporting, reconciliation and data integration and balance optimization solutions. In June 2014, we established Triumph Insurance Group, an insurance brokerage agency initially focused on meeting the insurance needs of our commercial clients, particularly our factoring clients in the transportation industry and our equipment lending clients. We believe these ancillary product offerings have the ability to diversify our revenue and increase customer retention for our primary product lines.

Our History and Growth

We commenced operations in November 2010, when an investor group, led by our Chief Executive Officer Aaron Graft, raised approximately $45 million to acquire and recapitalize Dallas-based Equity Bank (now known as Triumph Savings Bank). We believed that the economic downturn experienced in 2008 would provide opportunities within the banking industry to build a diversified financial enterprise through the acquisition of banking assets and management talent at a time when many banking competitors were working through credit and capital challenges. This platform provided us the foundation from which, through a combination of acquisitions and de novo growth, we have been able to grow and expand into both commercial finance products (factoring, asset-based lending, equipment lending and healthcare lending) and community banking. From our beginnings in 2010, we have:

 

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expanded our assets from $251 million as of December 31, 2010 to $1.3 billion as of March 31, 2014;

 

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increased our loans from $144 million as of December 31, 2010 to $801 million as of March 31, 2014;

 

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increased our deposits from $212 million as of December 31, 2010 to $1.1 billion as of March 31, 2014; and

 

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grown our employee base from 29 full-time employees following our first acquisition to 422 full-time equivalent employees as of March 31, 2014.

Our Competitive Strengths

We attribute our success to the following competitive strengths:

Scalable Product Platforms Positioned for Growth. We have invested substantially in people, processes and procedures in order to facilitate the recent growth in our key product lines and to position such product lines for additional growth in the future. We have made considerable investments to integrate Triumph Business Capital’s operations into a banking environment, enhance its technology platform and expand our staff during a period of significant growth in gross receivables purchased. In each of our asset-based lending, equipment lending and asset management businesses, we hired experienced executive teams to establish de novo product lines which have only recently become profitable on a run rate basis, and which we believe have significant remaining growth potential. Finally, our acquisition of Triumph Community Bank in October 2013 provided us with a management team experienced in the operation of a community banking franchise that can be leveraged for future acquisitions. We believe that the scalable platforms created by these investments position us for substantial growth in our key product lines and have laid the groundwork for our ability to operate as a larger financial institution.

 

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Diversified Business Model. We believe that the combination of our community banking operations and our commercial finance product lines allows us to grow in varied economic conditions and across business cycles. Our community banking operations provide us asset diversity and a favorable cost of funds, especially when competing against the wholesale banks and non-bank finance companies that offer many of our commercial finance products. Deposits represented 93% of our total funding and had an average cost of 50 basis points for the quarter ended March 31, 2014. Our commercial finance product lines enhance the overall yield of our loan portfolio and are offered on a nationwide basis, mitigating our exposure to stagnant loan demand or yield compression in our community banking markets. Additionally, the depth of our product offerings enhances our ability to serve our clients’ needs as they continue to grow and evolve over time. For example, we are able to offer our commercial finance clients a full suite of banking products and services (such as treasury management, deposit products, and insurance), and also offer them appropriate financing products for each stage in the life cycle of their business (such as factoring or asset-based lending options during the startup phase of their operations, graduating to cash flow working capital lines or other lending products as their businesses mature).

Focused Risk Mitigation Practices. We have developed underwriting and credit management processes tailored to each of the product lines we offer, allowing us to construct a diversified asset portfolio across a variety of industries, geographies and loan types, including in several specialized markets not typically served by community banks. We believe that our industry experience and product knowledge has allowed us to develop processes, procedures and structural features in connection with offering specialized products that enable us to appropriately identify and mitigate the risks associated therewith.

Experienced Management Team. Our leadership team consists of senior executives with an average of over 20 years of experience in the banking and non-banking financial services industries. Although Triumph is a relatively new organization, we have 20 senior executives, representing the majority of executives at the senior vice president level or above, who come from multi-billion dollar financial institutions, where they managed and grew similar operations. We believe this group represents a deep management bench for a financial institution of our size. We believe the experience and relationships of these senior executives, combined with our resources and entrepreneurial culture, have been key drivers of our growth.

Acquisition and Investment Expertise. We began operations in 2010 with the acquisition of a distressed bank in Dallas, Texas with no internal loan origination or transactional deposit generating capacity. Since then, we have developed both of these capabilities by identifying and executing on a series of acquisition and investment opportunities, and transformed our company in the process. These transactions have included acquisitions of a bank (Triumph Community Bank) and commercial finance companies (such as our factoring and healthcare lending businesses), as well as investments in proven management teams to develop and grow businesses on a de novo basis where we identify market opportunities (such as our asset-based lending, equipment lending and asset management businesses). We believe that our demonstrated experience in successfully identifying acquisition and investment opportunities in a broad range of industries, executing on their implementation and integrating them into our combined business will continue to serve us well as we grow and expand our operations.

Access to Texas Economy. Our corporate headquarters and the bulk of our commercial finance operations are located in the Dallas, Texas metropolitan area. We believe that our presence in Texas gives us an opportunity to continue to capitalize on the positive economic and demographic trends within the state as we execute on our growth strategy. Six of the largest 25 United States cities by population are located in Texas, and economic growth within the state has exceeded that of the national average since January 1, 2011. Texas’ economy has been one of the fastest growing and healthiest in the country, with estimated population growth of 5.5% since the 2010 census, real GDP growth of 3.7% in 2013, an unemployment rate of 5.1% as of June 2014 and the largest job growth rate of any state for each of the last four years. We believe these economic conditions are particularly conducive to growth in the small-to-mid-sized businesses that constitute our target client base. As of March 31, 2014, 14% of our loan portfolio is tied to Texas. We intend to continue to capitalize on our Texas presence as we grow and expand our operations.

 

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Our Strategy

We believe that our model of community banking with a focus on niche commercial finance products provides us with differentiated advantages when compared to our competitors, including a strong deposit franchise, a more complete set of product offerings and the ability to earn attractive risk-adjusted net interest margins. Our strategy is to generate stockholder value through the following initiatives:

Increase Market Share Across Core Products. We see opportunities to generate additional revenue growth across our product offerings, particularly in our commercial finance operations. The pool of potential commercial finance clients is a substantial and permanent part of the economy, yet the specialized lending markets that serve them remain highly fragmented. Many of our commercial finance product lines were established as de novo business lines and which we believe are poised to capture additional market share as they mature. We expect that we will continue to capture market share because we provide clients with turnkey solutions through the breadth of our banking products and because our balance sheet allows us to make investments in technology, personnel, marketing and systems not available to smaller non-bank commercial lenders.

Expand and Diversify Commercial Finance Products. We believe the acquisition of additional commercial finance businesses and the expansion into additional commercial finance product lines provides us opportunities to increase the total size and percentage of our loan portfolio represented by these assets. Our existing commercial finance products give us insight into numerous opportunities to acquire existing competitors and to expand into adjacent product lines. The growth of our commercial finance product lines to date demonstrates our willingness to acquire or build these capabilities depending on the particular opportunity.

Pursue Strategic Community Bank Acquisitions. We plan to be a strategic acquirer of additional community banks to increase the size, efficiency and ultimately the value of our franchise. We evaluate numerous criteria related to screening acquisition opportunities, but foremost among them are the existence of a strong deposit franchise and the opportunity to be a local market leader. We believe that additional community banking acquisitions will further improve our deposit mix and asset diversification. Our acquisition of Triumph Community Bank provided us with a management team experienced in the operation of a community banking franchise that can be leveraged and provide efficiencies in connection with additional community banking acquisitions.

Credit Risk Management

We control credit risk both through disciplined underwriting of each transaction we originate, as well as active credit management processes and procedures to manage risk and minimize loss throughout the life of a transaction. We seek to maintain a broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic area and industries in which our business customers are engaged. We have developed tailored underwriting criteria and credit management processes for each of the various loan product types we offer our customers.

Underwriting

In evaluating each potential loan relationship, we adhere to a disciplined underwriting evaluation process including the following:

 

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understanding of the customer’s financial condition and ability to repay the loan;

 

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verifying that the primary and secondary sources of repayment are adequate in relation to the amount and structure of the loan;

 

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observing appropriate loan to value guidelines for collateral secured loans;

 

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maintaining our targeted levels of diversification for the loan portfolio, both as to type of borrower and geographic location of collateral; and

 

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ensuring that each loan is properly documented with perfected liens on collateral.

 

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Our non-owner occupied commercial real estate loans are generally secured by well-managed income producing property with adequate margins, supported by a history of profitable operations and cash flows and proven operating stability in the case of commercial loans. Except in very limited circumstances, our commercial real estate loans and commercial loans are supported by personal guarantees from the principals of the borrower.

With respect to our asset-based loans, in addition to an overall evaluation of the borrower and transaction considering the applicable criteria set forth above, we also engage in a detailed evaluation of the assets comprising the borrowing base for such loans, to confirm that such assets are readily recoverable and recoverable at rates in excess of the advance rate for such loan. With respect to our healthcare asset-based loans, this process requires a detailed analysis of the payment rates applied to the reimbursement obligations payable to our customers by applicable payees.

Our factoring relationships in particular require a specialized underwriting process. For each factoring transaction, in addition to a credit evaluation of our client, we also evaluate the creditworthiness of all underlying account debtors, as such account debtors represent the substantive underlying credit risk to us. Transportation factoring also presents the additional challenge of underwriting high volumes of invoices (over 60,000 invoices per month as of March 31, 2014) of predominantly low value per invoice (generally under $2,000 per invoice as of March 31, 2014) and managing credit requests for a large industry pool (over 30,000 as of March 31, 2014) of account debtors. We facilitate this process through a proprietary web-based “Online Broker Credit” application, which processes invoice purchase approval requests for our clients through an online proprietary scoring model and delivers either preliminary responses for small dollar requests or immediate referral to our servicing personnel for larger dollar requests. We also set and monitor concentration limits for individual account debtors that are tracked across all of our clients (as multiple clients may have outstanding invoices from a particular account debtor).

Each of our banks implements its underwriting evaluation and approval process through a tiered system of loan authorities. Under these authorities, transactions at certain identified levels are eligible to be approved by a designated officer or a combination of designated officers. Transactions above such individual thresholds require approval of a management-level loan committee. Our management-level loan committee is a joint committee that reviews and approves credits for both banks. Transactions above the approval levels for our management-level loan committee must be approved by an executive loan committee comprised of directors of the applicable bank.

We employ limits we believe to be appropriate on our overall loan portfolio and requirements with respect to certain types of lending. As of March 31, 2014, our legal lending limit to any one customer was $14.1 million at Triumph Community Bank and $12.5 million at Triumph Savings Bank. As of March 31, 2014, our house limit to any one customer was $10.0 million at Triumph Community Bank and $7.5 million at Triumph Savings Bank, both subject to approval from the respective Executive Loan Committee of each bank.

Ongoing Credit Risk Management

In addition to the tailored underwriting process described above, we perform ongoing risk monitoring and review processes for all credit exposures. Although we grade and classify our loans internally, we have an independent third party contractor perform regular loan reviews to confirm loan classification. We strive to identify potential problem loans early in an effort to aggressively seek resolution of these situations before the loans create a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses incurred in the loan portfolio.

In general, whenever a particular loan or overall borrower relationship is downgraded to pass-watch or substandard based on one or more standard loan grading factors, our credit officers engage in active evaluation of the asset to determine the appropriate resolution strategy. Management of each bank regularly reviews the status of the watch list and classified assets portfolio as well as the larger credits in the portfolio.

 

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In addition to our general credit risk management processes, we employ specialized risk management processes and procedures for certain of our commercial finance products, in particular our asset-based lending and factoring products. With respect to our asset-based lending relationships, we require dominion over the borrower’s cash accounts in order to actively control and manage the cash flows from the conversion of borrowing base collateral into cash and its application to the loan. We also engage in active review and monitoring of the borrowing base collateral itself, including field audits typically conducted on a 90-180 day cycle.

With respect to our factoring operations, we employ a proprietary risk management program whereby each client is assigned a risk score based on measurable criteria. Our risk model is largely geared toward early detection and mitigation of fraud, which we believe represents the most material risk of loss in this asset class. Risk scores are presented on a daily basis through a proprietary software application. These risk scores are then used to assign such client into a particular classification level. The classification level is not a predictor of loss exposure but rather the determinant for monitoring levels and servicing protocols, such as the percentage requirements for collateral review and invoice verification prior to purchase. This scoring and risk allocation methodology allows us to effectively manage and control fraud and credit risk.

Marketing

We market our loans and other products and services through a variety of channels. Fundamentally, we focus on a high-touch direct sales model, building long-term relationships with our customers. In our community banking markets, our lending officers actively solicit new and existing businesses in the communities we serve. For our commercial finance product lines, we typically maintain sales personnel across the country with designated regional responsibilities for clients within their territories.

Triumph Business Capital, our factoring business, also actively markets its products and services through secondary channels, including e-marketing and search engine optimization, as well as key strategic sourcing relationships. Triumph Business Capital has an exclusive relationship with the largest transportation freight matching service in the United States, where we are identified as the sole preferred factoring provider on its freight matching boards, which links directly to our web services to provide credit scoring on over 250,000 loads per day. We also recently launched a sourcing and participation program with the nation’s largest equipment lender to provide factoring services to its clients.

Importantly, while we seek to ensure that the pricing on all of our loans and factoring products is competitive, we also attempt to distinguish ourselves with our clients on criteria other than price, including service, industry knowledge and a more complete value proposition than our competitors. We believe that our suite of complementary commercial finance product options and our other available banking services, including treasury management services and our newly launched insurance brokerage initiatives allows us to offer full-service banking relationships to clients and industries that have historically been served by smaller non-bank commercial finance companies. It is our strategy to deepen our customer relationships and increase retention by cross-marketing all of these products to our clients in an effort to be a “one-stop” financial services provider, particularly in our niche industries.

Investments

We manage our investments primarily for liquidity purposes, with a secondary focus on returns. Each of our banks maintains a separate investment portfolio in which substantially all of our investments are classified as available-for-sale and can be used for pledging as collateral for borrowings on public deposits, selling under repurchase agreements and meeting liquidity needs. Each investment portfolio consists of a variety of high-grade securities, including government agency securities, government and government agency guaranteed mortgage-backed securities, highly rated corporate bonds and municipal securities. We regularly evaluate the composition

 

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of our investment portfolios as changes occur with respect to the interest rate yield curve. Although we may sell investment securities from time to time to take advantage of changes in interest rate spreads or to adjust our exposure to changes in interest rates, it is our policy not to sell investment securities unless we can reinvest the proceeds at a similar or higher spread, so as not to take gains to the detriment of future income.

Deposits

Deposits are our primary source of funds to support our earning assets. We offer depository products, including checking, savings, money market and certificates of deposit with a variety of rates. Deposits at our bank subsidiaries are insured by the FDIC up to statutory limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business. In addition, required deposit balances associated with our commercial loan arrangements and treasury management relationships maintained by our commercial lending clients provide an additional source of deposits.

In our community banking markets, we have a network of 18 deposit-taking branch offices and have attracted significant transaction account business through our relationship-based approach. We rank in the top five in deposit market share in each of our primary community banking counties (Rock Island County and Carroll County, Illinois and Scott County, Iowa). Triumph Savings Bank also maintains a branch office in Dallas, Texas, dedicated to deposit generation activities. As a result of our significant deposit growth in transaction accounts (which we define as demand, Negotiable Order of Withdrawal (“NOW”) and money market deposits) in connection with the Triumph Community Bank acquisition we believe that we have achieved a substantially improved deposit mix between transaction accounts and certificates of deposit. We intend to continue to improve our deposit mix through organic growth and targeted acquisitions.

Competitors

The bank and non-bank financial services industries in our markets and the surrounding areas is highly competitive. We compete with a wide range of regional and national banks located in our market areas as well as non-bank commercial finance and factoring companies on a nationwide basis. We experience competition in both lending and attracting funds from commercial banks, savings associations, credit unions, consumer finance companies, pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and investment banking firms, non-bank lenders, government agencies and certain other non-financial institutions. Many of these competitors have more assets, capital and lending limits, and resources than we do and may be able to conduct more intensive and broader-based promotional efforts to reach both commercial and individual customers. Competition for deposit products can depend heavily on pricing because of the ease with which customers can transfer deposits from one institution to another.

Enterprise Risk Management

We place significant emphasis on risk mitigation as an integral component of our organizational culture. We believe that our emphasis on risk management is manifested in our solid asset quality statistics and our credit risk management procedures discussed above.

We also focus on risk management in numerous other areas throughout our organization, including with respect to asset/liability management, regulatory compliance and internal controls. We have implemented an extensive asset/liability management process aided by simulation models provided by reputable third parties. We engage in ongoing internal audit and review of all areas of our operations and regulatory compliance.

We are implementing management assessment and testing of internal controls consistent with the Sarbanes-Oxley Act and have engaged an experienced independent public accounting firm to assist us with respect to compliance.

 

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Employees

As of March 31, 2014, we had approximately 422 full-time equivalent employees. None of our employees are represented by any collective bargaining unit or is a party to a collective bargaining agreement.

Properties

Our corporate office is located at 12700 Park Central Drive, Suite 1700, Dallas, Texas 75251.

As of August 8, 2014, Triumph Community Bank operates ten branches in the Quad Cities Metropolitan Area of Iowa and Illinois, seven other branches throughout central and northwestern Illinois, one branch and one loan production office in northeastern Illinois and one loan production office in Portland, Oregon. We lease five of these offices and own the remaining 15. Our owned offices are freestanding permanent facilities; the leased offices are part of larger retail facilities. Most of Triumph Community Bank’s branches are equipped with automated teller machines (“ATM”) and drive-through facilities.

Triumph Savings Bank operates from our corporate office in Dallas, Texas and from one additional branch office also located in Dallas, Texas. The corporate office houses Triumph Savings Bank’s loan operations and the branch office is limited to deposit gathering activities. Triumph Savings Bank does not offer any ATM or drive-through facilities.

Triumph Business Capital operates from a leased facility within a larger business park located in Coppell, Texas.

Legal Proceedings

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.

 

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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 is intended to highlight and supplement data and information presented elsewhere in this prospectus, including the consolidated financial statements and related notes and should be read in conjunction with the accompanying tables and our annual audited financial statements and unaudited interim financial statements. 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. Factors that could cause these differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the BHC Act. Through our two wholly owned bank subsidiaries, Triumph Savings Bank and Triumph Community Bank, we offer traditional banking products as well as commercial finance product lines focused on businesses that require specialized and tailored financial solutions. Our banking operations include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines include factoring, asset-based lending, equipment lending and healthcare lending products offered on a nationwide basis. These product offerings supplement the asset generation capacity in our community banking markets and enhance the overall yield of our loan portfolio, enabling us to earn attractive risk-adjusted net interest margins. We believe our integrated business model distinguishes us from other banks and non-bank financial services companies in the markets in which we operate. As of March 31, 2014, we had consolidated total assets of $1.3 billion, total loans held for investment of $801 million, total deposits of $1.1 billion and total stockholders’ equity of $137 million.

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary 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. As a result, we have determined our reportable segments are Banking, Factoring and Corporate. Our segment reporting is discussed in further detail in the Notes to the Consolidated Financial Statements included elsewhere in this prospectus.

History & Background

Pre-2012 Highlights

We commenced operations in November 2010 when an investor group, led by our Chief Executive Officer Aaron Graft, raised approximately $45 million to acquire and recapitalize Dallas-based Equity Bank and its holding company, EJ Financial Corp. (which were subsequently renamed Triumph Savings Bank, SSB and Triumph Bancorp, Inc., respectively). We believed that the economic downturn experienced in 2008 would provide opportunities within the banking industry to build a diversified financial enterprise through the acquisition of banking assets and management talent at a time when many banking competitors were working through credit and capital challenges. Though at the time of the acquisition Equity Bank’s primary assets consisted of real estate loans acquired in the secondary market, its deposits consisted exclusively of time deposits and money market accounts, and it was operating under a regulatory enforcement order, this acquisition provided the banking charter and operating platform from which these opportunities could be pursued. We resolved the majority of Equity Bank’s troubled assets, and after one year we were released from all regulatory enforcement orders, allowing us to more aggressively pursue new opportunities.

 

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2012 Highlights

In 2012, we established the foundation of several of our commercial finance product lines we see as key elements of our growth strategy. In January 2012, we acquired Triumph Business Capital, one of the nation’s leading transportation factoring companies. Triumph Business Capital began operations in 2004 and had established an impressive track record, with a seasoned management team that had grown the company to $55.9 million in outstanding gross receivables purchased from small-to-mid-sized trucking companies and brokers in the trucking industry.

Also during the second half of 2012, we established our asset-based lending and equipment lending platforms. We made the decision to grow these product lines organically as start-up operations through the hiring of teams of experienced executives who had grown similar product lines at larger financial institutions.

The establishment of these product lines required us to make substantial upfront investments. In the case of Triumph Business Capital, we made significant investments in processes, people and infrastructure to integrate its operations into a banking environment and to support future growth. In the case of our asset-based lending and equipment lending product lines, we incurred upfront noninterest expense as staff was hired and processes were established several months in advance of the start of lending activity and several years before such products would be fully mature.

2013 Highlights

2013 was marked by continued investment but also significant growth both at Triumph Business Capital and in our newly established asset-based lending and equipment lending product lines. As of December 31, 2013, we had $117.4 million in outstanding purchased gross receivables, compared to $75.7 million as of December 31, 2012. Our asset-based loans and equipment loans originated under our Triumph Commercial Finance brand grew to $30.6 million and $46.7 million, respectively, as of December 31, 2013, compared to $2.0 million and $4.1 million as of December 31, 2012, respectively.

In March 2013, we announced the formation of our asset management subsidiary, Triumph Capital Advisors, a registered investment advisor focused on institutional credit management. As with the initial investments in our commercial finance product lines in previous years, this product line required considerable initial investments in people and processes in advance of earning revenues or ultimately reaching maturity.

Also in 2013, we announced and completed the acquisition of NBI, parent company of THE National Bank (now known as Triumph Community Bank), a community bank with $936.7 million in assets and branches in Iowa, Illinois and Wisconsin as of October 2013. The Triumph Community Bank acquisition fundamentally transformed our institution. As a result of the acquisition:

 

•

we increased our total assets from $393 million at September 30, 2013 to $1.3 billion at December 31, 2013;

 

•

we substantially changed our asset mix, combining Triumph Community Bank’s commercial and retail loan portfolio with the commercial finance product lines being originated at Triumph Savings Bank;

 

•

we added new fee-generating products and services through Triumph Community Bank’s retail branch network;

 

•

we significantly altered the manner in which we fund our operations, adding a core deposit franchise of transactional savings and checking accounts to our existing liability structure concentrated in money market accounts and time deposits, lowering our overall cost of funds; and

 

•

we added a management team experienced in the operation of a community banking franchise that can be leveraged to support future growth and bank acquisitions.

We believe that the pairing of Triumph Community Bank’s operations with the asset-generation capacity we have developed organically and through acquisitions in select specialized product lines creates a dynamic banking platform that positions us for future growth.

 

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Recent Developments

In May 2014, Triumph Capital Advisors completed the issuance of the first CLO for which it will act as investment advisor. The total size of the transaction was $400 million. Upon consummation of the transaction, Triumph Capital Advisors began earning management fees for its services as asset manager for this vehicle. Triumph Capital Advisors completed the issuance of a second CLO in August 2014, with an approximate total size of $400 million. We anticipate that Triumph Capital Advisors will originate one to two additional CLOs per year, which we anticipate will provide us a recurring source of noninterest fee income. As of August 8, 2014, Triumph Capital Advisors had assets under management of approximately $800 million.

In June 2014, we acquired an asset-based lending business focused exclusively on the healthcare industry, further expanding our reach in commercial finance. We acquired a portfolio of loans with an outstanding balance of $46.7 million in the acquisition. As part of the acquisition we also hired the executive team responsible for the portfolio, who as a group have focused primarily on this market for an average of over 15 years. This acquisition further augments our asset-generation capacity and fits into our strategy of continuing to grow our commercial finance platform through targeted acquisitions that are complementary to our existing product lines.

In July 2014, we sold our operating branch in Pewaukee, Wisconsin, which constituted our sole branch in the state, to a third party. Under the terms of the agreement, the acquirer assumed branch deposits ($36.0 million), purchased selected loans in the local market (approximately $78.0 million) and acquired the premises and equipment associated with the branch.

Triumph Community Bank Acquisition Affects Year-over-Year Comparability

The comparability of our consolidated results of operations and our consolidated financial condition presented herein is significantly affected by the Triumph Community Bank acquisition in October 2013. Our consolidated results of operations for the three months ended March 31, 2014 fully reflect the impact of the acquisition. However, our consolidated results of operations for the fiscal year ended December 31, 2013 show the effect of the acquisition only for the period between October 15, 2013, the closing date of the acquisition and December 31, 2013. As a result, the average balances, average income and average expenses for the fiscal year ended December 31, 2013 reflect a partial, but not full, effect of the changes to our assets, liabilities and operations resulting from the acquisition. Our consolidated results of operations for the three months ended March 31, 2013 and fiscal year ended December 31, 2012 are unaffected by the acquisition.

Financial statements and related notes of NBI, for the nine and one-half months ended October 14, 2013 (the date immediately prior to the closing date of the acquisition) and fiscal year ended December 31, 2012 are contained in the financial statements included in this prospectus. Included in this section under “—Summary Discussion of Results of Operations and Financial Condition of National Bancshares, Inc. for its Fiscal Year Ended December 31, 2012 and its Period Ended October 14, 2013” is a summary presentation and analysis of such financial statements for the periods indicated.

Results of Operations

Net Income

Three months ended March 31, 2014 compared with three months ended March 31, 2013. We earned net income of $3.7 million for the three months ended March 31, 2014 compared to $0.7 million for the three months ended March 31, 2013, an increase of $3.0 million. The increase was the result of a $12.8 million increase in net interest income and a $2.2 million increase in noninterest income, partially offset by a $0.5 million increase in the provision for loan losses, a $9.5 million increase in noninterest expense and a $1.8 million increase in income tax expense. Generally, these results reflect both the impact of the acquisition of Triumph Community Bank, whose operations contributed significant additional revenue and added significant additional expense to our operations on a period over period basis, as well as growth in our factoring operations and asset-based lending

 

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and equipment lending product lines. In the case of our asset-based lending and equipment lending product lines, such categories grew substantially from start-up operations on a period over period basis, beginning to offset the upfront costs we incurred in establishing such operations.

Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012. We earned net income of $13.4 million for our fiscal year ended December 31, 2013 compared to $11.1 million for our fiscal year ended December 31, 2012, an increase of $2.3 million. Our results for our fiscal year ended December 31, 2013 were impacted by a $9.0 million bargain purchase gain realized in connection with the Triumph Community Bank acquisition, offset by $1.5 million of merger and integration expenses incurred in connection with the Triumph Community Bank acquisition. Our results for our fiscal year ended December 31, 2012 were positively impacted by an income tax benefit of $7.4 million realized by removing all of the valuation allowance that had been previously established against our deferred tax asset. In addition, the comparability of our two fiscal periods was impacted by the Triumph Community Bank acquisition, which resulted in the reflection of a partial, but not full, effect of such acquisition for our results for the period ended December 31, 2013.

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.”

 

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Three months ended March 31, 2014 compared with three months ended March 31, 2013. 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 for the three-month periods ended March 31, 2014 and 2013:

 

		For the three months ended March 31,
		2014												2013
(Dollars in thousands)		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Earning assets:
Interest-earning balances		$	65,334			$	58				0.36	%		$	20,261			$	21				0.42	%
Investment securities:
Taxable			169,072				605				1.45	%			42,029				224				2.16	%
Tax-exempt			7,499				16				0.87	%			—				—				—
FHLB & Fed Reserve Stock			5,324				52				3.96	%			488				1				0.83	%
Total Loans(1)			868,505				19,648				9.17	%			217,766				6,575				12.24	%
Total earning assets			1,115,734				20,379				7.41	%			280,544				6,821				9.86	%
Non-earning assets:
Cash due from banks			27,651												5,432
Premises and equipment			23,153												2,988
Investment security fair value adjustment			752												740
Goodwill and intangible assets			28,267												14,047
Other real estate owned			13,664												4,733
Bank-owned life insurance			28,602												—
Other non-earning assets			37,306												9,278
Allowance for loan losses			(3,994	)											(1,992	)
Total assets		$	1,271,135											$	315,770
Interest-bearing liabilities:
Deposits:
Interest-bearing deposits		$	206,230			$	32				0.06	%		$	—			$	—				0.00	%
Individual retirement accounts			53,295				141				1.07	%			28,076				131				1.89	%
Money market			144,656				81				0.23	%			21,326				25				0.48	%
Savings deposits			71,944				9				0.05	%			—				—				—
Time deposits			356,135				789				0.90	%			163,572				609				1.51	%
Other brokered funds			58,436				56				0.39	%			—				—				—
Total Deposits			890,696				1,108				0.50	%			212,974				765				1.46	%
Short-term borrowings			26,954				5				0.08	%			3,053				2				0.27	%
Senior Secured Bank Stock Notes			12,308				140				4.61	%			—								—
Junior Subordinated Debentures			24,194				271				4.54	%			—				—				—
Total interest-bearing liabilities		$	954,152			$	1,524				0.65	%		$	216,027			$	767				1.44	%
Noninterest-bearing liabilities and equity:
Noninterest-bearing demand deposits			143,808												10,450
Other liabilities			9,967												5,042
Noncontrolling interest			26,997												3,387
Common stockholders’ equity			126,465												76,163
Preferred stockholders’ equity			9,746												4,700
Total equity			163,208												84,250
Total liabilities and equity		$	1,271,135											$	315,769
Net interest income						$	18,855											$	6,054
Interest spread(2)											6.76	%											8.42	%
Net interest margin on a fully tax-equivalent basis(3)											6.85	%											8.75	%

 

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1.	Balance totals include respective nonaccrual assets.

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

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

We earned net interest income of $18.9 million for the three months ended March 31, 2014 compared to $6.1 million for the three months ended March 31, 2013, an increase of $12.8 million, or 209.8%. This increase was driven by a significant increase in the average volume of our interest-earning assets, which was attributable both to the loan portfolio and other interest-earning assets acquired in the Triumph Community Bank acquisition and organic growth in our factored receivables, asset-based lending and equipment lending product lines. Average total interest-earning assets increased to $1.1 billion as of March 31, 2014 from $280.6 million as of March 31, 2013.

The growth in net interest income attributable to increases in our average interest-earning assets was offset in part by a decrease in our net interest margin, as the Triumph Community Bank acquisition significantly changed the composition of both our asset and liability portfolio. Net interest margin decreased to 6.85% for the period ended March 31, 2014 from 8.75% for the period ended March 31, 2013, a decrease of 190 basis points, or change of 21.7%.

The decline in our net interest margin resulted from a decrease in yield on our interest-earning assets, partially offset by a decrease in rates paid on our interest-bearing liabilities. In general, the assets acquired in the Triumph Community Bank acquisition had lower yields than our Triumph Savings Bank loan portfolio, which consisted of organic origination activity as well as the legacy loan portfolio we acquired in the Equity Bank transaction in 2010. The volumes of our organically generated loans at Triumph Savings Bank, particularly our factoring receivables and the asset-based loans and equipment loans originated under our Triumph Commercial Finance brand, have continued to increase on a period over period basis as a result of the continued execution of our growth strategy for such products, but following the Triumph Community Bank acquisition these higher yielding product lines represented a smaller portion of our larger, more diversified, asset base. See “Financial Condition—Assets” for a description of the changes in our asset mix in the periods following the Triumph Community Bank acquisition. This lowered our average yield on our earning assets to 7.41% for the three months ended March 31, 2014 from 9.86% for the three months ended March 31, 2013, a decrease of 245 basis points, or change of 24.8%.

A component of the yield on our loan portfolio consists of discount accretion on the Triumph Savings Bank legacy portfolio acquired in connection with our original acquisition of Equity Bank in 2010 and the portfolio acquired in the Triumph Community Bank acquisition. The aggregate increased yield on our portfolio attributable to this discount accretion was 169 basis points for the three-month period ended March 31, 2014 and 167 basis points for the three-month period ended March 31, 2013. We anticipate that the contribution of this discount accretion to our interest income will decline over time, but that any resulting decreases in aggregate yield on our loan portfolio will be offset in part by continued growth in our higher yielding specialized commercial finance product lines, increasing the percentage of our total loan portfolio represented by such assets.

The decreases in our net interest margin resulting from changes in the average yield in our loan portfolio discussed above were offset in part by a reduction in our average cost of funds as we realized the benefits of the lower rate structure of deposits present at Triumph Community Bank. Our average cost of interest-bearing liabilities fell to 0.65% in for the three months ended March 31, 2014 from 1.44% for the three months ended March 31, 2013, a decrease of 79 basis points, or 54.9%.

 

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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 for the three-month periods ended March 31, 2014 and 2013:

 

		For the three months ended March 31, 2014 vs. 2013
		Increase (Decrease) Due to:								Net Increase (Decrease)
(Dollars in thousands)		Rate				Volume
Interest-earning assets:
Interest-earning balances		$	(3	)		$	40			$	37
Investment securities:
Taxable			(74	)			455				381
Tax-exempt			—				16				16
FHLB & Fed Reserve Stock			4				47				51
Total Loans			(1,649	)			14,722				13,073
Total interest income			(1,722	)			15,280				13,558
Interest-bearing liabilities:
Interest-bearing deposits			—				32				32
Individual retirement accounts			(57	)			67				10
Money market			(13	)			69				56
Savings deposits			—				9				9
Time deposits			(247	)			427				180
Other brokered funds			—				56				56
Total Deposits			(317	)			660				343
Short-term borrowings			(1	)			4				3
Senior Secured Bank Stock Notes			—				140				140
Junior Subordinated Debentures			—				271				271
Total interest expense			(318	)			1,075				757
Change in net interest income		$	(1,404	)		$	14,205			$	12,801

 

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Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012. 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 for our fiscal years ended December 31, 2013 and 2012:

 

		For the years ended December 31,
		2013												2012
(Dollars in thousands)		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Earnings assets:
Interest-earning balances		$	44,996			$	166				0.37	%		$	12,923			$	52				0.40	%
Investment securities:
Taxable			71,386				1,178				1.65	%			47,455				1,008				2.12	%
Tax-exempt			1,745				39				2.23	%			—				—
FHLB & Fed Reserve Stock			1,678				47				2.80	%			571				5				0.88	%
Total Loans(1)			377,891				41,200				10.90	%			199,336				25,887				12.99	%
Total Earning Assets			497,696				42,630				8.57	%			260,285				26,952				10.35	%
Non-earning assets:
Cash due from banks			11,484												1,991
Premises and equipment			7,166												1,919
Investment security fair value adjustment			632												626
Goodwill and intangible assets			17,228												13,397
Other real estate owned			6,894												2,295
Bank-owned life insurance			6,084												—
Other non-earning assets			14,439												11,275
Allowance for loan losses			(2,677	)											(1,579	)
Total assets		$	558,946											$	290,209
Interest-bearing liabilities:
Deposits:
Interest-bearing Deposits		$	44,116			$	23				0.05	%		$	—			$	—				0.00	%
Individual retirement accounts			34,568				560				1.62	%			28,222				555				1.97	%
Money market			58,911				154				0.26	%			27,439				167				0.61	%
Savings deposits			14,925				7				0.05	%			—				—				0.00	%
Time deposits			221,538				2,760				1.25	%			157,192				2,619				1.67	%
Other brokered funds			12,586				56				0.44	%			—				—				0.00	%
Total Deposits			386,644				3,560				0.92	%			212,853				3,341				1.57	%
Short-term borrowings			12,297				17				0.14	%			11,605				374				3.22	%
Senior Secured Bank Stock Notes			2,687				123				4.58	%			—				—				0.00	%
Junior Subordinated Debentures			5,158				247				4.79	%			—				—				0.00	%
Total interest-bearing liabilities		$	406,786			$	3,947				0.97	%		$	224,458			$	3,715				1.66	%
Noninterest-bearing liabilities and equity:
Noninterest-bearing demand deposits			34,659												8,395
Other liabilities			6,795												2,822
Noncontrolling interest			7,226												6,960
Common stockholders’ equity			98,864												43,790
Preferred stockholders’ equity			4,616												3,784
Total equity			110,706												54,534
Total liabilities and equity		$	558,946											$	290,209
Net interest income						$	38,683											$	23,237
Interest spread(2)											7.60	%											8.69	%
Net interest margin on a fully tax-equivalent basis(3)											7.77	%											8.93	%

 

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1.	Balance totals include respective nonaccrual assets.

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

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

We earned net interest income of $38.7 million for our year ended December 31, 2013, compared with $23.2 million for our year ended December 31, 2012, an increase of $15.5 million, or 66.8%. The increase in net interest income was driven by increases in average interest-earning assets, which was attributable both to the presence of the loans and other interest-earning assets acquired in the Triumph Community Bank acquisition in our portfolio for the last two and one-half months of 2013, as well as increases in our factored receivables, asset-based lending and equipment lending portfolios as we continued to execute on our growth strategy for such products. The average balance of our interest-earning assets was $497.7 million for our year ended December 31, 2013 compared to $260.3 million for year ended December 31, 2012, an increase of $237.4 million, or 91.2%.

The growth in net interest income attributable to increases in our average interest-earning assets was offset in part by a decrease in our net interest margin, as the Triumph Community Bank acquisition significantly changed the composition of both our asset and liability portfolio during the last two and one-half months of 2013. Net interest margin decreased to 7.77% for our year ended December 31, 2013 from 8.93% for our fiscal year ended December 31, 2012, a decrease of 116 basis points, or 13.0%.

The decline in our net interest margin resulted from a decrease in yields on our interest-bearing assets, driven by the same general factors impacting our average yields for the three-month periods ended March 31, 2014 and March 31, 2013. Specifically, the impact of the lower yielding assets acquired in the Triumph Community Bank acquisition for the last two and one-half months of 2013 more than offset the growth in our higher yielding organically generated factoring, asset-based lending and equipment lending product lines. Our average yield on earning assets decreased to 8.57% for our year ended December 31, 2013 from 10.35% for our year ended December 31, 2012, a decrease of 178 basis points, or 17.2%.

A component of the yield of our loan portfolio consists of discount accretion on the Triumph Savings Bank legacy portfolio acquired in connection with our original acquisition of Equity Bank in 2010 and the portfolio acquired in the Triumph Community Bank acquisition. The aggregate increased yield on our portfolio attributable to this discount accretion was 229 basis points for the year ended December 31, 2013 and 159 basis points for the year ended December 31, 2012. We anticipate that the contribution of this discount accretion to our interest income will decline over time, but that any resulting decreases in aggregate yield on our loan portfolio will be offset in part by continued growth in our higher yielding specialized commercial finance product lines, increasing the percentage of our total loan portfolio represented by such assets.

The decreases in our net interest margin resulting from changes in the average yield in our loan portfolio discussed above were offset in part by a reduction in our average cost of funds as we realized the benefits of the lower rate structure of deposits present at Triumph Community Bank during the last two and one-half months of 2013. Our average cost of interest-bearing liabilities fell to 0.97% for our year ended December 31, 2013 from 1.66% for our year ended December 31, 2012, a decrease of 69 basis points, or 41.6%.

 

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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 for the years ended December 31, 2013 and 2012:

 

		For the twelve months ended December 31, 2013 vs. 2012
		Increase (Decrease) Due to:								Net Increase (Decrease)
(Dollars in thousands)		Rate				Volume
Interest-earning assets:
Interest-earning balances		$	(4	)		$	118			$	114
Investment securities:
Taxable			(225	)			395				170
Tax-exempt			—				39				39
FHLB & Fed Reserve Stock			11				31				42
Total Loans			(4,154	)			19,467				15,313
Total interest income			(4,372	)			20,050				15,678
Interest-bearing liabilities:
Interest-bearing Deposits			—				23				23
Individual Retirement Accounts			(98	)			103				5
Money market			(95	)			82				(13	)
Savings deposits			—				7				7
Time deposits			(661	)			802				141
Other brokered funds			—				56				56
Total Deposits			(854	)			1,073				219
Short-term borrowings			(358	)			1				(357	)
Senior Secured Bank Stock Notes			—				123				123
Junior Subordinated Debentures			—				247				247
Total interest expense			(1,212	)			1,444				232
Change in net interest income		$	(3,160	)		$	18,606			$	15,446

Provision for Loan Losses

The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan and lease losses at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity.

Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. The fair value of the loan portfolio acquired in the Triumph Community Bank acquisition was $568.4 million (compared to an acquired book balance of $592.6 million). A provision for loan losses will be recorded for the emergence of new probable and estimable losses on acquired loans after the acquisition date.

The provision for loan losses was $0.9 million for the three months ended March 31, 2014 compared to $0.4 million for the three months ended March 31, 2013. We experienced net recoveries of $61 thousand in the first three months of 2014 compared to net charge-offs of $91 thousand for the same period in 2013. Our ALLL was $4.6 million as of March 31, 2014 versus $3.6 million as of December 31, 2013.

The provision for loan losses was $3.4 million for the year ended December 31, 2013 compared to $1.7 million for the year ended December 31, 2012. Net charge-offs were $1.7 million in 2013 and $0.2 million in 2012. Our ALLL was $3.6 million as of December 31, 2013 versus $1.9 million as of December 31, 2012.

 

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Noninterest Income

The following table presents the major categories of noninterest income for the three-month periods ended March 31, 2014 and 2013 and our years ended December 31, 2013 and 2012:

 

		Three Months Ended March 31,												Years Ended December 31,
(Dollars in thousands)		2014				2013				% Change				2013				2012				% Change
Service charges on deposits		$	769			$	—				—			$	733			$	—				—
Card income			490				—				—				405				—				—
Net realized gains and valuation adjustments on OREO			(77	)			77				(200.0	)%			154				1,379				(88.8	)%
Net gains on sale of loans			255				—				—				846				132				540.9	%
Fee income			398				231				72.3	%			1,189				860				38.3	%
Gain on bargain purchase			—				—				—				9,014				—				—
Other			774				137				465.0	%			672				290				131.7	%
Total noninterest income		$	2,609			$	445				486.3	%		$	13,013			$	2,661				389.0	%

Three months ended March 31, 2014 compared with three months ended March 31, 2013. We earned noninterest income of $2.6 million for the three months ended March 31, 2014, compared to $0.4 million for the three months ended March 31, 2013, an increase of $2.2 million, or 486.3%.

This increase was due primarily to noninterest income earned with respect to new products and services added as part of the Triumph Community Bank acquisition, including service charges on deposit accounts, card income, net gains on sale of residential mortgages originated for sale and other miscellaneous fees and income earned by Triumph Community Bank associated with its trust activities, bank-owned life insurance, check cashing and wire transfer fees. Service charges on deposit accounts, including overdraft and non-sufficient fund fees, increased from zero for the period ended March 31, 2013 to $0.8 million for the three months ended March 31, 2014. Income from credit and debit card accounts increased from zero for the period ended March 31, 2013 to $0.5 million for the period ended March 31, 2014. Gains realized from the sale of residential mortgages were $0.3 million for the period ending March 31, 2014. Other income increased from $0.1 million for the three-month period ended March 31, 2013 to $0.8 million for the three-month period ended March 31, 2014, primarily due to new income for check cashing and wire transfer fees at Triumph Community Bank retail branches being reflected in this category, as well as income associated with Triumph Community Bank’s trust activities and bank-owned life insurance acquired as part of the Triumph Community Bank acquisition.

Fee income, comprised primarily of fees and services charges earned from services provided to our factoring clients, increased 72% due to the growth experienced in our factored accounts receivable portfolio.

Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012. We earned noninterest income of $13.0 million for our fiscal year ended December 31, 2013 compared to $2.7 million for our fiscal year ended December 31, 2012, an increase of $10.3 million. The increase was primarily due to $9.0 million of bargain purchase gain we recorded in connection with the Triumph Community Bank acquisition (see Note 2—“Business Combinations,” of the Notes to Consolidated Financial Statements included elsewhere in this prospectus).

Removing the bargain purchase gain, we earned noninterest income of $4.0 million for our fiscal year ended December 31, 2013 compared to $2.7 million for our fiscal year ended December 31, 2012, an increase of $1.3 million or 48.1%. This increase was largely due to noninterest income earned with respect to new products and services added as part of the Triumph Community Bank acquisition during the last two and one-half months of 2013, including transactional deposit account fees and charges, debit and credit card fee revenue and wire transfer and check cashing fee income.

 

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Service charges on deposit accounts, including overdraft and non-sufficient fund fees, increased from zero for our fiscal year ended December 31, 2012 to $0.7 million for our fiscal year ended December 31, 2013. Income from credit and debit card accounts increased from zero for our fiscal year ended December 31, 2012 to $0.4 million for our fiscal year ended December 31, 2013. Other income increased from $0.3 million for our fiscal year ended December 31, 2012 to $0.7 million for our fiscal year ended December 31, 2013, primarily due to new income for check cashing and wire transfer fees at Triumph Community Bank retail branches being reflected in this category, as well as income associated with Triumph Community Bank’s trust activities and bank-owned life insurance acquired as part of the Triumph Community Bank acquisition.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three-month periods ended March 31, 2014 and 2013 and our fiscal years ended December 31, 2013 and 2012:

 

		Three Months Ended March 31,												Years Ended December 31,
(Dollars in thousands)		2014				2013				% Change				2013				2012				% Change
Salaries and employee benefits		$	8,876			$	3,754				136.4	%		$	20,737			$	11,739				76.7	%
Occupancy, furniture and equipment			1,332				427				211.9	%			2,465				1,308				88.5	%
Acquisition-related expenses			—				75				—				1,521				52				2825.0	%
Communications and technology			888				212				318.9	%			1,412				546				158.6	%
Professional fees			592				42				1309.5	%			1,003				1,120				(10.4	)%
Advertising and promotion			443				183				142.1	%			682				621				9.8	%
Amortization of intangible assets			726				—				—				620				948				(34.9	)%
FDIC insurance			261				72				2632.5	%			499				241				107.1	%
Carrying costs for OREO			132				57				131.6	%			233				240				(2.9	)%
Other			1,646				525				213.5	%			3,552				1,664				113.5	%
Total noninterest expense		$	14,896			$	5,347				178.6	%			32,724				18,479				77.1	%

N/M indicates result is not meaningful.

Three months ended March 31, 2014 compared with three months ended March 31, 2013. Noninterest expense totaled $14.9 million for the three months ended March 31, 2014 compared to $5.3 million for the three months ended March 31, 2013, an increase of $9.6 million, or 179%. This increase is attributable both to the costs of the significant personnel, facilities and infrastructure acquired in the Triumph Community Bank acquisition, as well as continuing investments made in personnel and infrastructure to support growth in organically generated product lines and other strategic initiatives.

 

•

Salaries and Employee Benefits. Salaries and employee benefits expenses have historically been our largest category of noninterest expense. Salaries and employee benefits expenses were $8.9 million for the three months ended March 31, 2014 compared to $3.8 million for the three months ended March 31, 2013, an increase of $5.1 million, or 136%. This increase is primarily attributable to a significant increase in the total size of our workforce between these periods. Our full-time equivalent employees totaled 422.0 and 120.5 at March 31, 2014 and 2013, respectively. Sources of this increased headcount include employees hired as part of the Triumph Community Bank acquisition (approximately 290 additional full-time equivalent employees), as well as additional employees hired to support growth in our commercial finance product lines and other strategic initiatives, including the establishment of our asset management business. Other factors contributing to this increase include 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 were $1.3 million for the three months ended March 31, 2014 compared to $0.4 million for the three months

 

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ended March 31, 2013, an increase of $0.9 million, or 212%. This increase is primarily attributable to the cost of the retail branches acquired in the Triumph Community Bank acquisition including utilities, rent, depreciation and other occupancy expenses.

 

•

Communications and Technology. Communications and technology expenses were $0.9 million for the three months ended March 31, 2014 compared to $0.2 million for the three months ended March 31, 2013, an increase of $0.7 million, or 319%. This increase is attributed both to the communications and technology expense associated with our larger workforce generally and additional hardware and software expenses acquired as part of the Triumph Community Bank acquisition.

 

•

Additional Items of Noninterest Expense. Increases experienced in other noninterest expense items in the first quarter of 2014 versus the first quarter of 2013 are largely attributable to the impact of incurring the routine expenses of Triumph Community Bank which was acquired in October 2013, and the amortization expense incurred for the core deposit intangible acquired in that acquisition. Professional fees were $0.6 million for the three months ended March 31, 2014 compared to $0.1 million for the three months ended March 31, 2013, an increase of $0.5 million. Advertising and promotion expenses increased $0.3 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Amortization of core deposit intangible assets was $0.7 million for the three months ended March 31, 2014 compared to zero for the three months ended March 31, 2013. Increases in other expenses, loan-related expenses, utilities, postage and subscription expenses totaling $1.1 million for the three months ended March 31, 2014, are largely attributable to the impact of the Triumph Community Bank acquisition, and continued growth in our commercial finance products.

Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012. Noninterest expense totaled $32.7 million for our fiscal year ended December 31, 2013 compared to $18.5 million for our fiscal year ended December 31, 2012, an increase of $14.2 million, or 77%. This increase is attributable both to the costs of the significant personnel, facilities and infrastructure acquired in the Triumph Community Bank acquisition for the last two and one-half months of 2013, as well as continued investments we made in personnel and infrastructure to support growth in our commercial finance product lines and other strategic initiatives over the course of the fiscal year. Noninterest expense for our fiscal year ended December 31, 2013 and 2012 also included $1.5 million and $0.1 million of direct merger and integration costs related to the Triumph Community Bank acquisition, respectively. Excluding these direct merger and integration costs, noninterest expense increased $12.8 million or 69% in 2013 compared to 2012.

 

•

Salaries and Employee Benefits. Salaries and employee benefits expenses have historically been our largest category of noninterest expense. Salaries and employee benefits expenses were $20.7 million for our fiscal year ended December 31, 2013 compared to $11.7 million for our fiscal year ended December 31, 2012, an increase of $9.0 million, or 77%. This increase is primarily attributable to a significant increase in the total size of our workforce between the periods. Our full-time equivalent employees totaled 427.0 and 108.5 at December 31, 2013 and 2012, respectively. Sources of this increased headcount include employees hired as part of the Triumph Community Bank acquisition (approximately 290 additional full-time equivalent employees), as well as additional employees hired to support growth in our commercial finance product lines and other strategic initiatives, including the establishment of our asset management business. Other factors contributing to this increase include merit increases for existing employees, higher health insurance benefit costs, incentive compensation and 401(k) expense.

 

•

Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expense was $2.5 million for our fiscal year ended December 31, 2013 compared to $1.3 million for our fiscal year ended December 31, 2012, an increase of $1.2 million, or 88.5%. This increase was primarily attributable to a an additional $0.6 million of occupancy expenses related to the operation of Triumph Community Bank’s offices and retail branch network for the last two and one-half months of 2013 and a $0.3 million increase attributable to a full year of lease expense cost for Triumph’s corporate headquarters, which moved to a larger facility in June 2012.

 

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•

Communications and Technology. Communications and technology expenses were $1.4 million for our year ended December 31, 2013, compared to $0.5 million for our year ended December 31, 2012, an increase of $0.9 million, or 159%. This increase is attributed both to the communication and technology expense associated with our larger workforce generally and additional hardware and software expenses for the last two and one-half months of 2013 acquired as part of the Triumph Community Bank acquisition.

 

•

Amortization of Intangible Assets. Amortization of intangible assets decreased $0.3 million for our year ended December 31, 2013 compared to our year ended December 31, 2012. In 2013, we amortized $0.6 million of the core deposit intangibles acquired in the Triumph Community Bank acquisition. During the year ended December 31, 2012, we fully amortized the $0.9 million of the intangible asset representing customer relationships acquired in the Triumph Business Capital acquisition in January 2012.

 

•

Other. Other expenses, including loan-related expenses, utilities, postage and subscription expenses, were $3.6 million for our fiscal year ended December 31, 2013 compared to $1.7 million for our fiscal year ended December 31, 2012, an increase of $1.9 million, or 117%. Our other expenses increased as a result of the impact of the Triumph Community Bank acquisition for the last two and one-half months of 2013.

Income Taxes

The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the effect of changes in valuation allowances maintained against deferred tax benefits. Income tax expense for the three months ended March 31, 2014 was $1.9 million compared to $0.1 million for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2014 was 34% and was 15% for the three months ended March 31, 2013. The effective tax rate for the period ended March 31, 2013 was lowered by permanent differences attributable to the tax treatment of the initial distributions made to our Triumph Commercial Finance Class B security holders included in noncontrolling interest. Income tax expense for our fiscal year ended December 31, 2013 was $2.1 million compared to $5.4 million benefit for the year ended December 31, 2012. During the period ended December 31, 2013, the effective tax rate was 13.7% which reflects the increase in nontaxable income attributed to the $9.0 million bargain purchase gain associated with the Triumph Community Bank acquisition. The Triumph Community Bank acquisition included $28.4 million of bank-owned life insurance. The periodic increases in cash surrender value of those policies are tax-exempt and therefore contribute to a larger permanent difference between book income and taxable income. Triumph Community Bank is subject to income tax in the States of Illinois, Iowa, Wisconsin and Florida. During the year ended December 31, 2012, we removed the $7.4 million valuation allowance that had previously reduced the carrying amount of the deferred tax asset to zero, as it was more likely than not that we would realize this asset in future years. This adjustment resulted in an income tax benefit of $5.4 million in 2012, and accounts for the variance from the statutory rate.

See Note 13 of the Consolidated Financial Statements included elsewhere in this prospectus for further information regarding income taxes.

Operating Segment Results

Our reportable segments are Banking, Factoring and Corporate. As discussed in Note 23 of the Consolidated Financial Statements included elsewhere in this prospectus, our reportable segments 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 factoring segment includes the operations of Triumph Business Capital since its acquisition on January 13, 2012 with revenue derived from factoring services. The banking segment includes the operations of Triumph Savings Bank, and since October 15, 2013 includes the operations of Triumph Community 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

 

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also includes certain factored receivables which are originated through the commercial finance division of Triumph Savings Bank instead of Triumph Business Capital.  Corporate includes holding company financing and investment activities, management and administrative expenses to support the overall operations of the Company, and the operations of Triumph Capital Advisors.

Our segment financial information was compiled utilizing the accounting policies described in Note 1, “Summary of Significant Accounting Policies,” and Note 23, “Segment Reporting,” of the Notes to Consolidated Financial Statements included elsewhere in this prospectus. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Transactions between segments consist primarily of borrowed funds.  Intersegment interest expense is allocated to the factoring segment based on the Company’s prime rate. The provision for loan loss is allocated based on the segment’s ALLL determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and are not allocated for segment purposes.  Certain factored receivables not originated through Triumph Business Capital are included in the Banking segment.

Three months ended March 31, 2014 compared with three months ended March 31, 2013. The following tables present our primary operating results for our operating segments for the three-month periods ended March 31, 2014 and 2013, respectively.

 

Three Months Ended March 31, 2014		Factoring				Banking				Corporate				Consolidated TBI
(Dollars in thousands)
Total interest income		$	5,105			$	15,260			$	14			$	20,379
Intersegment interest allocations			(571	)			571				—				—
Total interest expense			—				1,114				410				1,524
Net interest income (expense)			4,534				14,717				(396	)			18,855
Provision for loan losses			390				535				—				925
Net interest income after provision			4,144				14,182				(396	)			17,930
Noninterest income			383				1,966				260				2,609
Noninterest expense			2,936				10,865				1,095				14,896
Operating income (loss)		$	1,591			$	5,283			$	(1,231	)		$	5,643
Total assets		$	137,774			$	1,133,436			$	25,900			$	1,297,110
Gross loans		$	119,733			$	680,934			$	—			$	800,667
Three Months Ended March 31, 2013		Factoring				Banking				Corporate				Consolidated TBI
(Dollars in thousands)
Total interest income		$	3,458			$	3,363			$	—			$	6,821
Intersegment interest allocations			(408	)			408				—				—
Total interest expense			1				766				—				767
Net interest income			3,049				3,005				—				6,054
Provision for loan losses			124				255				—				379
Net interest income after provision			2,925				2,750				—				5,675
Noninterest income			229				205				11				445
Intercompany expense allocations			47				(47	)			—				—
Noninterest expense			2,188				2,816				343				5,347
Operating income (loss)		$	919			$	186			$	(332	)		$	773
Total assets		$	89,962			$	239,199			$	816			$	329,977
Gross loans		$	77,796			$	155,712			$	—			$	233,508

 

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Banking. Our banking segment’s operating income totaled $5.3 million for the three months ended March 31, 2014 compared to $0.2 million for the three months ended March 31, 2013. This increase was due primarily to increases in interest income and noninterest income attributable the Triumph Community Bank acquisition, as well as growth in our asset-based lending and equipment lending portfolios, which had just commenced de novo operations during the second half of 2012. These increases more than offset the increased operating expenses in personnel, facilities and infrastructure incurred in connection with the Triumph Community Bank acquisition and to support the growth in our asset-based lending and equipment lending. Net interest income was $14.7 million for the three months ended March 31, 2014, compared to $3.0 million for the three months ended March 31, 2013, an increase of $11.7 million, or 390%, reflecting both the interest income from the loan portfolio acquired in the Triumph Community Bank acquisition and growth in our asset-based lending and equipment lending portfolios as discussed above, offset in part by increases in our interest expense associated with the larger total pool of interest-bearing liabilities acquired as part of the Triumph Community Bank acquisition. Growth in these interest-bearing liabilities was mitigated in part by changes in our liability mix as a result for the Triumph Community Bank acquisition, which lowered our overall cost of funds. Noninterest income was $2.0 million for the three months ended March 31, 2014 compared to $0.2 million for the three months ended March 31, 2013. This increase was due primarily to income from the fee-generating transaction products and services acquired as part of the Triumph Community Bank acquisition, most notably service charges, credit fees and debit card fees. Noninterest expense was $10.9 million for the three months ended March 31, 2014, compared with $2.8 million for the three months ended March 31, 2013, an increase of $8.1 million, driven primarily by increased expenses in personnel, facilities and infrastructure incurred in connection with the Triumph Community Bank acquisition, as well as increased costs incurred in connection with the growth of our asset-based lending and equipment lending. Our provision for loan losses was $0.5 million for the period ended March 31, 2014 compared with $0.3 million for the period ended March 31, 2013.

Factoring. Our factoring segment’s operating income for the three months ended March 31, 2014 was $1.6 million, compared with $0.9 million for the three months ended March 31, 2013, an increase of $0.7 million, or 78%. This increase was due to growth in interest and noninterest income as gross loans or factored receivables in our factoring segment grew from $77.8 million as of March 31, 2013 to $119.7 million as of March 31, 2014. Growth experienced in our factoring portfolio resulted from increased marketing efforts and growth initiatives during 2013 as well as favorable economic conditions driving increased activity generally in the transportation sector. This increase in income from the growth in our portfolio more than offset the increased variable expenses associated with this growth, mostly personnel costs required to service our larger portfolio. Net interest income was $4.5 million for the three months ended March 31, 2014 compared to $3.0 million for the three months ended March 31, 2013, an increase of 50%, driven by growth in our portfolio which more than offset the increased intersegment interest allocation attributable to this growth. Noninterest expense was $2.9 million for the three months ended March 31, 2014 compared with $2.2 million for the three months ended March 31, 2013, driven primarily by increased personnel costs incurred in connection with growth in our factoring portfolio. Our provision for loan losses was $0.4 million for the three months ended March 31, 2014 compared with $0.1 million for the three months ended March 31, 2013.

Corporate. The Corporate segment’s operating loss totaled $1.2 million for the three months ended March 31, 2014, compared with $0.3 million for the three months ended March 31, 2013. Included in this result is an increase in interest expense of $0.4 million for the three months ended March 31, 2014 related to the junior subordinated debentures issued by NBI, which we acquired as part of the Triumph Community Bank acquisition, and the senior secured bank loan entered into in connection with the Triumph Community Bank acquisition, also included an increase of $0.8 million in operating expenses for the three months ended March 31, 2014, related primarily to increases in management and administrative expenses at the holding company level not attributable to an operating segment, as well as increases in personnel and operating expenses related to the company’s asset management operations. These items were offset in part by other income of $0.3 million, related primarily to income recognized on a short-term investment by the Company in the CLO warehouse vehicle established by Triumph Capital Advisors, the Company’s wholly owned subsidiary, in connection with the anticipated offering of its first CLO vehicle.

 

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Fiscal year ended December 31, 2013 compared with fiscal year end December 31, 2012. The following tables present our primary operating results for our operating segments for our fiscal years ended December 31, 2013 and 2012, respectively.

 

Year Ended December 31, 2013		Factoring				Banking				Corporate				Consolidated TBI
(Dollars in thousands)
Total interest income		$	17,388			$	25,184			$	58			$	42,630
Intersegment interest allocations			(2,155	)			2,155				—				—
Total interest expense (expense)			1				3,577				369				3,947
Net interest income			15,232				23,762				(311	)			38,683
Provision for loan losses			881				2,531				—				3,412
Net interest income after provision			14,351				21,231				(311	)			35,271
Noninterest income			1,042				2,674				283				3,999
Gain on bargain purchase			—				—				9,014				9,014
Intercompany expense allocations			104				(104	)			—				—
Noninterest expense			9,938				18,191				4,595				32,724
Operating income		$	5,351			$	5,818			$	4,391			$	15,560
Total assets		$	122,279			$	1,129,962			$	35,998			$	1,288,239
Gross loans		$	106,575			$	774,524			$	—			$	881,099
Year Ended December 31, 2012		Factoring				Banking				Corporate				Consolidated TBI
(Dollars in thousands)
Total interest income		$	14,434			$	12,518			$	—			$	26,952
Intersegment interest allocations			(1,596	)			1,596				—				—
Total interest expense			360				3,355				—				3,715
Net interest income			12,478				10,759				—				23,237
Provision for loan losses			1,334				405				—				1,739
Net interest income after provision			11,144				10,354				—				21,498
Noninterest income			967				1,687				7				2,661
Intercompany expense allocations			201				(201	)			—				—
Noninterest expenses			8,511				9,548				420				18,479
Operating income (loss)		$	3,399			$	2,694			$	(413	)		$	5,680
Total assets		$	85,974			$	215,225			$	263			$	301,462
Gross loans		$	71,223			$	140,026			$	—			$	211,249

Banking. Our banking segment’s operating income totaled $5.8 million for our fiscal year ended December 31, 2013 compared to $2.7 million for our fiscal year ended December 31, 2012. This increase was due both to increases in interest income and noninterest income attributable to the Triumph Community Bank acquisition for the last two and one-half months of 2013, as well as growth in our asset-based lending and equipment lending portfolios experienced during 2013 as we continued to execute on our growth strategy for such products. These increases more than offset the increased operating expenses in personnel, facilities and infrastructure incurred in connection with the Triumph Community Bank acquisition for the last two and one-half months of 2013, as well as increased costs and expenses incurred to support the growth in our asset-based lending and equipment lending. Net interest income was $23.8 million for our fiscal year ended December 31, 2013, compared to $10.8 million for our fiscal year ended December 31, 2012, an increase of $13.0 million, or 120%, reflecting both the interest income from the loan portfolio acquired in the Triumph Community Bank acquisition for the last two and one-half months of 2013 as well as growth in our asset-based lending and equipment lending portfolios as discussed above. Interest income was offset in part by increases in our interest expense associated with the larger total pool of interest-bearing liabilities acquired as part of the Triumph

 

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Community Bank acquisition for the last two and one-half months of 2013; however, this increase was largely offset by changes in our liability mix as a result of the Triumph Community Bank acquisition, which lowered our overall cost of funds. Noninterest income was $2.7 million for our fiscal year ended December 31, 2013 compared to $1.7 million for our fiscal year ended December 31, 2012, attributable primarily to the addition of fee-generating products and services acquired as part of the Triumph Community Bank acquisition, most notably, service charges, credit fees and debit card fees, for the last two and one-half months of 2013. Noninterest expense was $18.2 million for our fiscal year ended December 31, 2013, compared with $9.5 million for our fiscal year ended December 31, 2012, an increase of $8.7 million, driven both by increased expenses in personnel, facilities and infrastructure incurred in connection with the Triumph Community Bank acquisition for the last two and one-half months of 2013 as well as increased costs incurred in connection with the growth of our asset-based lending and equipment lending. Our provision for loan losses was $2.5 million for our fiscal year ended December 31, 2013, compared with $0.4 million for our fiscal year ended December 31, 2012, driven primarily by growth in our equipment lending product lines.

Factoring. Our factoring segment’s operating income for our fiscal year ended December 31, 2013 was $5.4 million, compared with $3.4 million for our fiscal year ended December 31, 2012, an increase of $2.0 million, or 59%. This increase was due to growth in interest and noninterest income as gross loans in our factoring segment grew from $71.2 million as of December 31, 2012 to $106.6 million as of December 31, 2014. Growth experienced in our factoring portfolio resulted from execution on our growth strategy for such product, increased marketing efforts and initiatives during 2013 as well as favorable economic conditions driving increased activity generally in the transportation sector. This increase in income from the growth in our portfolio more than offset the increased variable expenses associated with this growth, mostly personnel costs required to service our larger portfolio. Net interest income was $15.2 million for our fiscal year ended December 31, 2013, compared to $12.5 million for our fiscal year ended December 31, 2012, an increase of 22%, driven by growth in our portfolio which more than offset the increased intersegment interest allocation attributable to this growth. Noninterest expense was $9.9 million for our fiscal year ended December 31, 2013, compared with $8.5 million for our fiscal year ended December 31, 2012, an increase of $1.4 million, or 16%, driven primarily by increased personnel costs incurred in connection with growth in our factoring portfolio. Our provision for loan losses was $0.9 million for our fiscal year ended December 31, 2013, compared with $1.3 million for our fiscal year ended December 31, 2012. The larger provision expense in 2012 is largely attributable to application of business combination accounting to the acquisition of Triumph Business Capital in early 2012. The purchased accounts receivable were recorded at fair value at the date of acquisition without carryover of the seller’s ALLL. We subsequently established an appropriate ALLL on new receivables purchased by recording a provision for loan losses. Due to the rapid turnover of this receivables portfolio, the result was a large provision expense being recorded. Provision expense recognized since that time has been at more normalized levels driven primarily by portfolio growth.

Corporate. The Corporate segment’s operating income totaled $4.4 million for our fiscal year ended December 31, 2013, compared with $(0.4) million for our fiscal year ended December 31, 2012. This result includes $9.0 million of bargain purchase gain recorded in connection with the Triumph Community Bank acquisition. Excluding this bargain purchase gain, operating loss totaled $4.6 million for our fiscal year ended December 31, 2013. Included in this result is an increase in interest expense of $0.4 million in our fiscal year ended December 31, 2013 related to the junior subordinated debentures assumed and the senior secured bank loan entered into in connection with the Triumph Community Bank acquisition for the last two and one-half months of 2013, and an increase of $4.2 million in operating expenses for our fiscal year ended December 31, 2013, related primarily to increases in management and administrative expenses at the holding company level not attributable to the banking and factoring operating segments, as well as increases in personnel and operating expenses related to the company’s asset management operations. These items were offset in part by other income of $0.3 million, related primarily to income recognized on a short-term investment by the Company in the CLO warehouse vehicle established by Triumph Capital Advisors, the Company’s wholly owned subsidiary, in connection with the anticipated offering of its first CLO vehicle.

 

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Financial Condition

Assets

Total assets were $1.3 billion at March 31, 2014 and December 31, 2013, an increase of $1.0 billion over $301.5 million at December 31, 2012, principally due to the Triumph Community Bank acquisition, which added approximately $936.7 million in assets at the date of acquisition, as well as growth in our commercial finance product lines during 2013.

Loan Portfolio

Loans held for investment were $800.5 million at March 31, 2014, compared with $880.9 million at December 31, 2013. This decrease was primarily due to the classification of $86.4 million of loans included in branch assets held for sale due to our agreement to sell our Pewaukee, Wisconsin branch (see “Recent Developments”), offset in part by continued growth in our commercial loans and factored receivables.

Our loans held for investment outstanding of $880.9 million at December 31, 2013 represented an increase of $669.7 million from our loans held for investment outstanding at December 31, 2012 of $211.2 million. This increase was due both to the $568.4 million in fair value of loans acquired in connection with the Triumph Community Bank acquisition, as well as organic growth, primarily with respect to factored receivables as well as the asset-based loans and equipment loans that make up a portion of our commercial loan portfolio.

We offer a broad range of lending and credit products. Our primary lending categories include commercial real estate, construction and development, commercial and factoring. Our retail lending consists primarily of residential first and second mortgage loans and a small portfolio of additional consumer loans. Within our commercial lending category, we offer a number of specialized commercial finance loans, including asset-based lending and equipment lending. See “Business—Lending and Factoring Activities” for further information about the types of loans we offer.

The following table shows our loan portfolio by portfolio segments as of March 31, 2014 and December 31 for each of the past two years:

 

		March 31,								December 31,
(Dollars in thousands)		2014				% of Total				2013				% of Total				2012				% of Total
Real estate:
Commercial		$	268,688				34	%		$	331,271				38	%		$	104,271				49	%
Construction, land development, land			39,230				5	%			37,626				4	%			3,964				2	%
Residential real estate			79,542				10	%			91,301				10	%			4,084				2	%
Farmland			20,114				2	%			20,294				2	%			786				0	%
Total real estate			407,574				51	%			480,492				54	%			113,105				53	%
Commercial			234,986				29	%			255,655				29	%			22,425				11	%
Factored receivables			129,531				16	%			117,370				13	%			75,719				36	%
Consumer			13,515				2	%			13,878				2	%			—				0	%
Mortgage warehouse			14,886				2	%			13,513				2	%			—				0	%
Total Loans		$	800,492				100	%		$	880,908				100	%		$	211,249				100	%

Commercial Real Estate Loans. Our commercial real estate loans were $268.7 million at March 31, 2014, a decrease of $62.6 million from $331.3 million at December 31, 2013, due primarily to the classification of $41.0 million of these loans as branch assets held for sale in connection with our agreement to sell the Pewaukee, Wisconsin branch. The remainder of the decrease was driven by several large paydowns that offset new loan

 

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activity for the period. Our commercial real estate loans of $331.3 million at December 31, 2013 increased $227.0 million from $104.3 million at December 31, 2012, primarily as a result of the loans acquired as part of the Triumph Community Bank acquisition.

Construction and Development Loans. Our construction and development loans were $39.2 million at March 31, 2014, an increase of $1.6 million from $37.6 million at December 31, 2013, due primarily to growth from continued strength of this category in our markets, offset by the classification of $8.4 million of these loans as branch assets available for sale in connection with our agreement to sell our Pewaukee, Wisconsin branch. Our construction and development loans of $37.6 million at December 31, 2013 increased $33.6 million from $4.0 million at December 31, 2012, primarily as a result of the loans acquired as part of the Triumph Community Bank acquisition.

Residential Real Estate Loans. Our one-to-four family residential loans were $79.5 million at March 31, 2014, a decrease of $11.8 million from $91.3 million at December 31, 2013, due primarily to the classification of $12.7 million of these loans as branch assets available for sale in connection with our agreement to sell our Pewaukee, Wisconsin branch. Our residential real estate loans of $91.3 million at December 31, 2013 increased $87.2 million from $4.1 million at December 31, 2012, primarily as a result of the loans acquired as part of the Triumph Community Bank acquisition.

Commercial Loans. Our commercial loans held for investment were $235.0 million at March 31, 2014, a decrease of $20.7 million from $255.7 million at December 31, 2013. These results were significantly impacted by the classification of $24.4 million of commercial loans as available for sale in connection with our agreement to sell our Pewaukee, Wisconsin branch. Outside of this classification change, our commercial loans increased in the aggregate, driven by increases in our asset-based lending and equipment lending portfolios originated under our Triumph Commercial Finance brand as we continue to execute on our growth strategy for such products. These loans were $95.7 million in aggregate as of March 31, 2014 compared to $77.3 million in aggregate as of December 31, 2013. The increases in these product lines were offset in part by decreases in other components of our commercial loan portfolio, as we continue to experience pricing pressure and flat loan demand for general commercial lending in our community banking markets.

Our commercial loans of $255.7 million at December 31, 2013 increased $233.3 million from $22.4 million at December 31, 2012, primarily as a result of the loans acquired in the Triumph Community Bank acquisition. We acquired commercial loans totaling $164.7 million in the Triumph Community Bank acquisition on October 15, 2013. These loans included general commercial and industrial loans, equipment loans, asset-based loans, and assignments of syndicated national credits. These loans augmented our existing commercial loans at the time of acquisition, which consisted of the asset-based loans and equipment loans originated under our Triumph Commercial Finance brand, additional commercial loans originated by us at Triumph Savings Bank, and legacy commercial loans acquired by us in the Equity Bank transaction in 2010.

In addition to the growth in our commercial loan portfolio attributable to the loans acquired in the Triumph Community Bank acquisition, we also experienced significant organic growth in our commercial loan portfolio, particularly with respect to the asset-based loans and equipment loans originated under our Triumph Commercial Finance brand, as we grew these businesses from de novo startup operations. These loans were $77.3 million in aggregate as of December 31, 2013 compared to $6.1 million in aggregate as of December 31, 2012.

Factored Receivables. Our factored receivables were $129.5 million at March 31, 2014, an increase of $12.1 million from $117.4 million at December 31, 2013. Our factored receivables of $117.4 million at December 31, 2013 increased $41.7 million, or 55%, from $75.7 million at December 31, 2012. The growth across all periods was primarily due to execution of growth strategy and continued strength in our target markets, particularly in the transportation sector.

Other Loans. Our portfolio also includes real estate loans secured by farmland, consumer loans and mortgage warehouse loans. All of these categories of loans were less than 3% of our total loan portfolio as of March 31, 2014, December 31, 2013 and December 31, 2012.

 

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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 as of March 31, 2014 and December 31, 2013.

 

		March 31, 2014
(Dollars in thousands)		One Year or Less				After One but within Five Years				After Five Years				Total
Commercial real estate		$	50,526			$	179,927			$	38,235			$	268,688
Construction, land development, land			23,934				12,209				3,087				39,230
Residential real estate			16,864				29,784				32,894				79,542
Farmland			2,456				12,128				5,530				20,114
Commercial			87,104				132,431				15,451				234,986
Factored receivables			129,531				—				—				129,531
Consumer			3,832				7,766				1,917				13,515
Mortgage warehouse			14,886				—				—				14,886
		$	329,133			$	374,245			$	97,114			$	800,492
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates						$	271,458				27,238
Floating interest rates							102,787				69,876
Total						$	374,245			$	97,114

 

		December 31, 2013
(Dollars in thousands)		One Year or Less				After One but within Five Years				After Five Years				Total
Commercial real estate		$	61,607			$	219,100			$	50,564			$	331,271
Construction, land development, land			17,862				15,729				4,035				37,626
Residential real estate			19,779				32,358				39,164				91,301
Farmland			1,640				12,881				5,773				20,294
Commercial			108,131				129,517				18,007				255,655
Factored receivables			117,370				—				—				117,370
Consumer			3,928				7,848				2,102				13,878
Mortgage warehouse			13,513				—				—				13,513
		$	343,830			$	417,433			$	119,645			$	880,908
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates							302,355				37,691
Floating interest rates							115,078				81,954
Total						$	417,433			$	119,645

As of March 31, 2014, most of the Company’s business activity is with customers located within certain states. The states of Illinois (34%), Iowa (16%) and Texas (14%) make up 64% of the Company’s gross loans. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economies in these states.

Further, a significant majority (95%) of our factored receivables, representing approximately 16% of our total loan portfolio as of March 31, 2014, are receivables purchased from trucking fleets and owner-operators in the transportation industry. 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,

 

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and small-to-mid-sized operators in such industry specifically, we feel the credit risk with respect to our outstanding portfolio is appropriately mitigated as we limit the amount of receivables acquired from individual debtors thereby achieving diversification across a number of companies and industries.

In addition, large credit relationships greater than $10 million represent 17% of the Company’s gross loans while credit relationships between $5 million and $10 million represent 16% of the Company’s gross loans. There are no significant concentrations of these loans to any one industry.

As of March 31, 2014, loans to our ten largest individual borrowers ranged from $10.6 million to $29.7 million (including unfunded commitments) and comprised 13.8% of our total loans (including unfunded commitments).

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 significant senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we rigorously 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 subsidiaries, independent loan review, approval of large credit relationships by our bank subsidiaries’ Management Loan Committees 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.

The accrual of interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or at an earlier date if full collection of interest or principal becomes doubtful. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual is excluded from interest income. Interest received on these loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. We had $10.5 million, $12.4 million and $10.1 million in loans on nonaccrual status as of March 31, 2014, December 31, 2013, and December 31, 2012, respectively. As of March 31, 2014, we have $21.4 million of loans internally classified as either substandard or special mention that are not on nonaccrual status.

Our loans on nonaccrual status increased from December 31, 2012 to December 31, 2013 by $2.3 million on a net basis. This net increase is a result of the nonaccrual loans acquired in the Triumph Community Bank acquisition offset by the reduction in nonaccrual loans at Triumph Savings Bank during this time period. Nonaccrual loans acquired from Triumph Community Bank as of December 31, 2013 were $3.2 million. Nonaccrual loans at Triumph Savings Bank declined from $10.1 million as of December 31, 2012 to $9.2 million at the end of 2013, as a result of collections of loans by means of foreclosures and reductions in nonperforming loans by other means, including payoffs. Nonaccrual loans declined $1.9 million from December 31, 2013 to March 31, 2014, comprised of a decline of $1.9 million at Triumph Savings Bank.

OREO acquired as a result of foreclosure or as part of an acquisition are held for sale and are initially recorded at fair value less estimated cost to sell at the date of acquisition, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. At the time of acquisition of properties not acquired as part of an acquisition, losses are charged against the ALLL, and gains are realized to the extent fair value exceeds the carrying amount of the foreclosed loan. Improvements to the value of the properties are capitalized, but not in excess of the net realizable value of the property.

 

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We obtain appraisals or other valuations of real property and other collateral which secure loans, and may update these valuations of collateral securing loans categorized as nonperforming loans and potential problem loans. In instances where updated valuations reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the ALLL.

Our OREO as of March 31, 2014 totaled $13.6 million, a decrease of $0.2 million from the $13.8 million as of December 31, 2013. The OREO as of December 31, 2013 was an increase of $9.1 million over $4.7 million as of December 31, 2012, primarily attributable to assets acquired in the Triumph Community Bank acquisition.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. We classify nonperforming loans as nonaccrual loans, loans modified under restructurings as a result of the borrower experiencing financial difficulties, and OREO. The balances of nonperforming loans reflect the recorded investment in these assets, including deductions for purchase discounts.

Nonperforming Assets

 

		At March 31,				At December 31,
(Dollars in thousands)		2014				2013				2012
Nonaccrual loans:
Commercial real estate		$	3,896			$	5,417			$	4,086
Construction, land development, land			—				—				—
Residential real estate			1,320				1,392				722
Farmland			—				—				—
Commercial			5,269				5,494				5,267
Factored receivables			58				89				—
Consumer			—				—				—
Mortgage Warehouse			—				—				—
Total nonaccrual loans			10,543				12,392				10,075
OREO acquired through foreclosure, net			13,575				13,783				4,749
Total nonperforming assets		$	24,118			$	26,175			$	14,824
Nonperforming assets to total assets			1.86	%			2.03	%			4.92	%
Nonaccrual loans to total loans			1.32	%			1.41	%			4.77	%
Total past due loans to total loans			2.99	%			2.78	%			6.81	%
Accruing loans 90 days or more past due			237				79				64

Allowance for Loan and Lease Losses

ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired.

 

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Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All loans are subject to being individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the ALLL.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company since acquisition. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

Analysis of the Allowance for Loan and Lease Losses

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

 

		March 31, 2014												December 31, 2013												December 31, 2012
(Dollars in thousands)		Allocated Allowance				% of Loan Portfolio				ALLL to Loans				Allocated Allowance				% of Loan Portfolio				ALLL to Loans				Allocated Allowance				% of Loan Portfolio				ALLL to Loans
Balance at end of each period applicable to:
Commercial real estate		$	402				33.6	%			0.15	%		$	348				37.6	%			0.11	%		$	261				49.4	%			0.25	%
Construction, land development, land			194				4.9	%			0.49	%			110				4.3	%			0.29	%			40				1.9	%			1.01	%
Residential real estate			203				9.9	%			0.26	%			100				10.4	%			0.11	%			227				1.9	%			5.56	%
Farmland			7				2.5	%			0.03	%			7				2.3	%			0.03	%			5				0.4	%			0.64	%
Commercial			1,519				29.4	%			0.65	%			1,145				29.0	%			0.45	%			172				10.6	%			0.77	%
Factored receivables			2,173				16.2	%			1.68	%			1,842				13.3	%			1.57	%			1,221				35.8	%			1.61	%
Consumer			75				1.7	%			0.55	%			49				1.6	%			0.35	%			—				0.00	%			0.00	%
Mortgage Warehouse			58				1.9	%			0.39	%			44				1.5	%			0.33	%			—				0.00	%			0.00	%
Total Loans		$	4,631				100.00	%			0.58	%		$	3,645				100.00	%			0.41	%		$	1,926				100.00	%			0.91	%

Purchased loans are recorded at fair value at the date of acquisition without carryover of the seller’s ALLL. Therefore we maintain an ALLL on purchased loans based on credit deterioration subsequent to the acquisition date. Our ALLL as of December 31, 2012 was $1.9 million or 0.91% of total loans. Total loans as of that date

 

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were $211.2 million, which generally consists of $93.9 million of legacy loans purchased from Equity Bank in November 2010, $72.4 million of factored accounts receivable outstanding in our factoring subsidiary, and $44.9 million of new loans originated by Triumph Savings Bank since the acquisition of Equity Bank. As of December 31, 2012 we had established an ALLL of (i) $289,000, or 0.31%, of the legacy Equity Bank portfolio to account for estimated credit deterioration since acquisition, (ii) $1.2 million, or 1.62% on factored accounts receivable, and (iii) $461,000, or 1.03%, on new loans originated by Triumph Savings Bank since November 2010. Due to the fact that much of the new lending since November 2010 involved new products without significant historical loss experience available to the company, management made estimates of the amount of needed allowance on these loans based on the experience of the lending teams hired to build these lending programs and peer analysis.

From December 31, 2012 to December 31, 2013, we increased our ALLL from $1.9 million to $3.6 million, while for the same year over year period the ALLL as a percentage of total loans decreased from 0.91% to 0.41%. The increase in the dollar amount of the ALLL was largely driven by continued growth in the outstanding balance of both the gross receivables in the factored accounts receivable portfolio owned by our factoring subsidiary which increased to $88.9 million, and new loans originated by Triumph Savings Bank. The new loans originated by Triumph Savings Bank totaled $112.0 million, with an ALLL of $1.1 million or 0.99% at the end of 2013. The decrease in the ALLL as a percentage of total loans is materially due to the addition of the purchased loan portfolio of Triumph Community Bank in October 2013, which totaled $594.6 million at the end of 2013 with none of the seller’s related ALLL carried over in purchase accounting.

From December 31, 2013 to March 31, 2014, the ALLL increased from $3.6 million or 0.41% of total loans to $4.6 million and 0.58% of total loans. The increase was principally driven by an increase in the Company’s allowance for collectively evaluated loans. The allowance associated with collectively evaluated loans increased to $4.1 million at March 31, 2014 from $3.2 million at December 31, 2013. The increase was driven by growth in factored receivables as well as changes in the mix of collectively evaluated loans. Additionally, non-purchased credit impaired loans acquired in the Triumph Community Bank acquisition that matured and were renewed during the quarter, which previously maintained discounts associated with fair value adjustments recorded at acquisition, required allowance allocations.

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