tbk-10q_20180930.htm

  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from              to            

Commission File Number 001-36722

 

TRIUMPH BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

 

20-0477066

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(Address of principal executive offices)

(214) 365-6900

(Registrant’s telephone number, including area code)

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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

 

Smaller reporting company

Emerging growth company

 

 

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

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

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

Common Stock — $0.01 par value, 26,279,761 shares, as of October 17, 2018.

 

 

 

 

 


 

TRIUMPH BANCORP, INC.

FORM 10-Q

September 30, 2018

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

    Item 1.

 

Financial Statements

 

 

 

   Consolidated Balance Sheets

2

 

 

   Consolidated Statements of Income

3

 

 

   Consolidated Statements of Comprehensive Income

4

 

 

   Consolidated Statements of Changes in Stockholders’ Equity

5

 

 

   Consolidated Statements of Cash Flows

6

 

 

   Condensed Notes to Consolidated Financial Statements

8

 

    Item 2.

 

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

44

 

    Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

83

 

    Item 4.

 

Controls and Procedures

84

 

 

PART II — OTHER INFORMATION

 

 

    Item 1.

 

Legal Proceedings

84

 

    Item 1A.

 

Risk Factors

84

 

    Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

84

 

    Item 3.

 

Defaults Upon Senior Securities

85

 

    Item 4.

 

Mine Safety Disclosures

85

 

    Item 5.

 

Other Information

85

 

    Item 6.

 

Exhibits

85

 

 

 

 

i


 

PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

 

 

 

 

1


 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2018 and December 31, 2017

(Dollar amounts in thousands, except per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

74,737

 

 

$

59,114

 

Interest bearing deposits with other banks

 

 

207,672

 

 

 

75,015

 

Total cash and cash equivalents

 

 

282,409

 

 

 

134,129

 

Securities - available for sale

 

 

355,981

 

 

 

250,603

 

Securities - equity investments

 

 

4,981

 

 

 

5,006

 

Securities - held to maturity, fair value of $8,094 and $7,527, respectively

 

 

8,403

 

 

 

8,557

 

Loans held for sale

 

 

683

 

 

 

 

Loans, net of allowance for loan and lease losses of $27,256 and $18,748, respectively

 

 

3,484,887

 

 

 

2,792,108

 

Assets held for sale

 

 

 

 

 

71,362

 

Federal Home Loan Bank stock, at cost

 

 

23,109

 

 

 

16,006

 

Premises and equipment, net

 

 

82,935

 

 

 

62,861

 

Other real estate owned, net

 

 

2,442

 

 

 

9,191

 

Goodwill

 

 

158,728

 

 

 

44,126

 

Intangible assets, net

 

 

43,114

 

 

 

19,652

 

Bank-owned life insurance

 

 

40,339

 

 

 

44,364

 

Deferred tax assets, net

 

 

8,137

 

 

 

8,959

 

Other assets

 

 

40,954

 

 

 

32,109

 

Total assets

 

$

4,537,102

 

 

$

3,499,033

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

697,903

 

 

$

564,225

 

Interest bearing

 

 

2,741,146

 

 

 

2,057,123

 

Total deposits

 

 

3,439,049

 

 

 

2,621,348

 

Customer repurchase agreements

 

 

13,248

 

 

 

11,488

 

Federal Home Loan Bank advances

 

 

330,000

 

 

 

365,000

 

Subordinated notes

 

 

48,903

 

 

 

48,828

 

Junior subordinated debentures

 

 

38,966

 

 

 

38,623

 

Other liabilities

 

 

50,295

 

 

 

22,048

 

Total liabilities

 

 

3,920,461

 

 

 

3,107,335

 

Commitments and contingencies - See Note 8 and Note 9

 

 

 

 

 

 

 

 

Stockholders' equity - See Note 12

 

 

 

 

 

 

 

 

Preferred Stock

 

 

9,658

 

 

 

9,658

 

Common stock

 

 

264

 

 

 

209

 

Additional paid-in-capital

 

 

458,920

 

 

 

264,855

 

Treasury stock, at cost

 

 

(2,285

)

 

 

(1,784

)

Retained earnings

 

 

152,401

 

 

 

119,356

 

Accumulated other comprehensive income (loss)

 

 

(2,317

)

 

 

(596

)

Total stockholders’ equity

 

 

616,641

 

 

 

391,698

 

Total liabilities and stockholders' equity

 

$

4,537,102

 

 

$

3,499,033

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

2


 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2018 and 2017

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

41,257

 

 

$

30,863

 

 

$

116,288

 

 

$

86,711

 

Factored receivables, including fees

 

 

27,939

 

 

 

12,198

 

 

 

64,033

 

 

 

32,177

 

Securities

 

 

1,551

 

 

 

1,655

 

 

 

4,040

 

 

 

5,004

 

FHLB stock

 

 

147

 

 

 

51

 

 

 

353

 

 

 

129

 

Cash deposits

 

 

865

 

 

 

370

 

 

 

2,412

 

 

 

986

 

Total interest income

 

 

71,759

 

 

 

45,137

 

 

 

187,126

 

 

 

125,007

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

6,219

 

 

 

3,272

 

 

 

15,127

 

 

 

9,198

 

Subordinated notes

 

 

837

 

 

 

837

 

 

 

2,512

 

 

 

2,508

 

Junior subordinated debentures

 

 

714

 

 

 

495

 

 

 

2,024

 

 

 

1,435

 

Other borrowings

 

 

2,207

 

 

 

1,021

 

 

 

5,294

 

 

 

1,978

 

Total interest expense

 

 

9,977

 

 

 

5,625

 

 

 

24,957

 

 

 

15,119

 

Net interest income

 

 

61,782

 

 

 

39,512

 

 

 

162,169

 

 

 

109,888

 

Provision for loan losses

 

 

6,803

 

 

 

572

 

 

 

14,257

 

 

 

9,697

 

Net interest income after provision for loan losses

 

 

54,979

 

 

 

38,940

 

 

 

147,912

 

 

 

100,191

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

1,412

 

 

 

1,046

 

 

 

3,767

 

 

 

3,003

 

Card income

 

 

1,877

 

 

 

956

 

 

 

4,515

 

 

 

2,700

 

Net OREO gains (losses) and valuation adjustments

 

 

65

 

 

 

15

 

 

 

(551

)

 

 

(86

)

Net gains (losses) on sale of securities

 

 

 

 

 

35

 

 

 

(272

)

 

 

35

 

Fee income

 

 

1,593

 

 

 

625

 

 

 

3,514

 

 

 

1,845

 

Insurance commissions

 

 

1,113

 

 

 

826

 

 

 

2,646

 

 

 

2,125

 

Asset management fees

 

 

 

 

 

 

 

 

 

 

 

1,717

 

Gain on sale of subsidiary or division

 

 

 

 

 

 

 

 

1,071

 

 

 

20,860

 

Other

 

 

(1

)

 

 

668

 

 

 

1,486

 

 

 

4,459

 

Total noninterest income

 

 

6,059

 

 

 

4,171

 

 

 

16,176

 

 

 

36,658

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

24,695

 

 

 

16,717

 

 

 

64,626

 

 

 

54,687

 

Occupancy, furniture and equipment

 

 

3,553

 

 

 

2,398

 

 

 

9,621

 

 

 

7,105

 

FDIC insurance and other regulatory assessments

 

 

363

 

 

 

294

 

 

 

945

 

 

 

790

 

Professional fees

 

 

3,384

 

 

 

1,465

 

 

 

7,102

 

 

 

4,671

 

Amortization of intangible assets

 

 

2,064

 

 

 

870

 

 

 

4,542

 

 

 

2,892

 

Advertising and promotion

 

 

1,609

 

 

 

804

 

 

 

3,938

 

 

 

2,653

 

Communications and technology

 

 

7,252

 

 

 

2,145

 

 

 

13,882

 

 

 

6,552

 

Other

 

 

6,026

 

 

 

3,532

 

 

 

15,735

 

 

 

11,033

 

Total noninterest expense

 

 

48,946

 

 

 

28,225

 

 

 

120,391

 

 

 

90,383

 

Net income before income tax

 

 

12,092

 

 

 

14,886

 

 

 

43,697

 

 

 

46,466

 

Income tax expense

 

 

2,922

 

 

 

5,104

 

 

 

10,074

 

 

 

16,551

 

Net income

 

 

9,170

 

 

 

9,782

 

 

 

33,623

 

 

 

29,915

 

Dividends on preferred stock

 

 

(195

)

 

 

(195

)

 

 

(578

)

 

 

(580

)

Net income available to common stockholders

 

$

8,975

 

 

$

9,587

 

 

$

33,045

 

 

$

29,335

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.48

 

 

$

1.37

 

 

$

1.58

 

Diluted

 

$

0.34

 

 

$

0.47

 

 

$

1.35

 

 

$

1.53

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

3


 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2018 and 2017

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

9,170

 

 

$

9,782

 

 

$

33,623

 

 

$

29,915

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(605

)

 

 

124

 

 

 

(2,494

)

 

 

815

 

Reclassification of amount realized through sale of securities

 

 

 

 

 

(35

)

 

 

272

 

 

 

(35

)

Tax effect

 

 

137

 

 

 

(33

)

 

 

501

 

 

 

(290

)

Total other comprehensive income (loss)

 

 

(468

)

 

 

56

 

 

 

(1,721

)

 

 

490

 

Comprehensive income

 

$

8,702

 

 

$

9,838

 

 

$

31,902

 

 

$

30,405

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

4


 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2018 and 2017

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Treasury Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Liquidation

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Preference

 

 

Shares

 

 

Par

 

 

Paid-in-

 

 

Shares

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Total

 

 

 

Amount

 

 

Outstanding

 

 

Amount

 

 

Capital

 

 

Outstanding

 

 

Cost

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance, January 1, 2017

 

$

9,746

 

 

 

18,078,247

 

 

$

182

 

 

$

197,157

 

 

 

76,118

 

 

$

(1,374

)

 

$

83,910

 

 

$

(276

)

 

$

289,345

 

Issuance of common stock, net of expenses

 

 

 

 

 

2,530,000

 

 

 

25

 

 

 

65,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,528

 

Issuance of restricted stock awards

 

 

 

 

 

45,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

1,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,484

 

Forfeiture of restricted stock awards

 

 

 

 

 

(853

)

 

 

 

 

 

20

 

 

 

853

 

 

 

(20

)

 

 

 

 

 

 

 

 

 

Stock option exercises, net

 

 

 

 

 

22,731

 

 

 

 

 

 

281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

281

 

Warrant exercises, net

 

 

 

 

 

153,134

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

 

 

 

(14,197

)

 

 

 

 

 

 

 

 

14,197

 

 

 

(366

)

 

 

 

 

 

 

 

 

(366

)

Preferred stock converted to common stock

 

 

(88

)

 

 

6,106

 

 

 

 

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(273

)

 

 

 

 

 

(273

)

Series B preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(307

)

 

 

 

 

 

(307

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,915

 

 

 

 

 

 

29,915

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

490

 

 

 

490

 

Balance, September 30, 2017

 

$

9,658

 

 

 

20,820,900

 

 

$

209

 

 

$

264,531

 

 

 

91,168

 

 

$

(1,760

)

 

$

113,245

 

 

$

214

 

 

$

386,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

$

9,658

 

 

 

20,820,445

 

 

$

209

 

 

$

264,855

 

 

 

91,951

 

 

$

(1,784

)

 

$

119,356

 

 

$

(596

)

 

$

391,698

 

Issuance of common stock, net of expenses

 

 

 

 

 

5,405,000

 

 

 

54

 

 

 

191,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

192,053

 

Issuance of restricted stock awards

 

 

 

 

 

65,001

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

1,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,966

 

Forfeiture of restricted stock awards

 

 

 

 

 

(2,422

)

 

 

 

 

 

105

 

 

 

2,422

 

 

 

(105

)

 

 

 

 

 

 

 

 

 

Stock option exercises, net

 

 

 

 

 

1,366

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

Purchase of treasury stock

 

 

 

 

 

(9,629

)

 

 

 

 

 

 

 

 

9,629

 

 

 

(396

)

 

 

 

 

 

 

 

 

(396

)

Series A preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(273

)

 

 

 

 

 

(273

)

Series B preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(305

)

 

 

 

 

 

(305

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,623

 

 

 

 

 

 

33,623

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,721

)

 

 

(1,721

)

Balance, September 30, 2018

 

$

9,658

 

 

 

26,279,761

 

 

$

264

 

 

$

458,920

 

 

 

104,002

 

 

$

(2,285

)

 

$

152,401

 

 

$

(2,317

)

 

$

616,641

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

5


 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2018 and 2017

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

  

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

33,623

 

 

$

29,915

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

3,880

 

 

 

2,892

 

Net accretion on loans

 

 

(6,884

)

 

 

(5,374

)

Amortization of subordinated notes issuance costs

 

 

75

 

 

 

70

 

Amortization of junior subordinated debentures

 

 

343

 

 

 

307

 

Net amortization on securities

 

 

639

 

 

 

823

 

Amortization of intangible assets

 

 

4,542

 

 

 

2,892

 

Deferred taxes

 

 

1,329

 

 

 

4,405

 

Provision for loan losses

 

 

14,257

 

 

 

9,697

 

Stock based compensation

 

 

1,966

 

 

 

1,484

 

Net (gains) losses on sale of securities

 

 

272

 

 

 

(35

)

Net (gain) loss on loans transferred to loans held for sale

 

 

 

 

 

46

 

Net OREO (gains) losses and valuation adjustments

 

 

551

 

 

 

86

 

Gain on sale of subsidiary or division

 

 

(1,071

)

 

 

(20,860

)

Income from CLO warehouse investments

 

 

 

 

 

(1,954

)

Origination of loans held for sale

 

 

(185

)

 

 

 

Proceeds from sale of loans originated for sale

 

 

740

 

 

 

 

(Increase) decrease in other assets

 

 

(7,084

)

 

 

1,857

 

Increase (decrease) in other liabilities

 

 

6,107

 

 

 

6,741

 

Net cash provided by (used in) operating activities

 

 

53,100

 

 

 

32,992

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of securities available for sale

 

 

 

 

 

(5,042

)

Proceeds from sales of securities available for sale

 

 

123,016

 

 

 

2,936

 

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

 

 

38,389

 

 

 

66,253

 

Purchases of securities held to maturity

 

 

 

 

 

(5,092

)

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

 

 

898

 

 

 

17,993

 

Proceeds from sale of loans

 

 

 

 

 

1,919

 

Net change in loans

 

 

(281,518

)

 

 

(394,859

)

Purchases of premises and equipment, net

 

 

(16,479

)

 

 

(1,390

)

Net proceeds from sale of OREO

 

 

7,771

 

 

 

1,708

 

Proceeds from surrender of BOLI

 

 

4,562

 

 

 

 

Net proceeds from CLO warehouse investments

 

 

 

 

 

20,000

 

(Purchases) redemptions of FHLB stock, net

 

 

(6,188

)

 

 

(7,646

)

Cash paid for acquisitions, net of cash acquired

 

 

(141,872

)

 

 

 

Proceeds from sale of subsidiary, net

 

 

73,849

 

 

 

10,269

 

Net cash provided by (used in) investing activities

 

 

(197,572

)

 

 

(292,951

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

135,654

 

 

 

(3,240

)

Increase (decrease) in customer repurchase agreements

 

 

1,760

 

 

 

9,379

 

Increase (decrease) in Federal Home Loan Bank advances

 

 

(35,737

)

 

 

155,000

 

Issuance of common stock, net of expenses

 

 

192,053

 

 

 

65,528

 

Stock option exercises

 

 

(4

)

 

 

281

 

Purchase of treasury stock

 

 

(396

)

 

 

(366

)

Dividends on preferred stock

 

 

(578

)

 

 

(580

)

Net cash provided by (used in) financing activities

 

 

292,752

 

 

 

226,002

 

Net increase (decrease) in cash and cash equivalents

 

 

148,280

 

 

 

(33,957

)

Cash and cash equivalents at beginning of period

 

 

134,129

 

 

 

114,514

 

Cash and cash equivalents at end of period

 

$

282,409

 

 

$

80,557

 

See accompanying condensed notes to consolidated financial statements.

 

6


 

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2018 and 2017

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

21,790

 

 

$

13,609

 

Income taxes paid, net

 

$

8,567

 

 

$

7,676

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Loans transferred to OREO

 

$

221

 

 

$

6,194

 

Premises transferred to OREO

 

$

1,139

 

 

$

276

 

Loans transferred to loans held for sale

 

$

 

 

$

1,965

 

Consideration received from sale of subsidiary or division

 

$

 

 

$

12,123

 

 

 

 

 

 

7


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

On March 16, 2018, the Company sold the assets of Triumph Healthcare Finance (“THF”) and exited its healthcare asset based lending line of business. THF operated within the Company’s TBK Bank subsidiary.

On March 31, 2017 the Company sold its membership interests in its wholly owned subsidiary Triumph Capital Advisors, LLC (“TCA”).

See Note 2 – Business Combinations and Divestitures for details of the THF and TCA sales and their impact on our consolidated financial statements.

Basis of Presentation

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

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

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, the Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from contracts with customers.

 

 

8


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Income Taxes

On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing law. Authoritative guidance and interpretation by regulatory bodies is ongoing, and as such, the accounting for the effects of the Tax Act is not final and the full impact of the new regulation is still being evaluated.

Adoption of New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.  

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Company on January 1, 2018 and resulted in separate classification of equity securities previously included in available for sale securities on the consolidated balance sheets with changes in the fair value of the equity securities captured in the consolidated statements of income. See Note 3 – Securities for disclosures related to equity securities. Adoption of the standard also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 10 – Fair Value Disclosures for further information regarding the valuation of these loans.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“ASU 2017-01”) to improve such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 was effective for the Company on January 1, 2018 and is to be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations or asset purchases.

Newly Issued, But Not Yet Effective Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. Adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated financial statements. The Company leases certain properties and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the Company’s balance sheet under the ASU, however, the majority of the Company’s properties and equipment are owned, not leased. At September 30, 2018, the Company had contractual operating lease commitments of approximately $21,863,000, before considering renewal options that are generally present.

 

9


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018, however, the Company does not currently plan to early adopt the ASU. The Company has assessed its data and system needs and is evaluating the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

 

NOTE 2 – Business combinations AND DIVESTITURES

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

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

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

(Dollars in thousands)

 

FBD

 

 

SCC

 

 

Total

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

151,973

 

 

$

14,299

 

 

$

166,272

 

Securities

 

 

237,183

 

 

 

33,477

 

 

 

270,660

 

Loans held for sale

 

 

1,238

 

 

 

 

 

 

1,238

 

Loans

 

 

256,384

 

 

 

31,454

 

 

 

287,838

 

FHLB stock

 

 

786

 

 

 

129

 

 

 

915

 

Premises and equipment

 

 

7,495

 

 

 

840

 

 

 

8,335

 

Other real estate owned

 

 

213

 

 

 

 

 

 

213

 

Intangible assets

 

 

11,915

 

 

 

2,154

 

 

 

14,069

 

Other assets

 

 

2,730

 

 

 

403

 

 

 

3,133

 

 

 

 

669,917

 

 

 

82,756

 

 

 

752,673

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

601,194

 

 

 

73,464

 

 

 

674,658

 

Federal Home Loan Bank advances

 

 

737

 

 

 

 

 

 

737

 

Other liabilities

 

 

1,313

 

 

 

64

 

 

 

1,377

 

 

 

 

603,244

 

 

 

73,528

 

 

 

676,772

 

Fair value of net assets acquired

 

 

66,673

 

 

 

9,228

 

 

 

75,901

 

Cash consideration transferred

 

 

134,667

 

 

 

13,294

 

 

 

147,961

 

Goodwill

 

$

67,994

 

 

$

4,066

 

 

$

72,060

 

The Company has recognized goodwill of $72,060,000, which was calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in these acquisitions resulted from expected synergies and expansion in the Colorado market and into the New Mexico market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transactions will be amortized utilizing an accelerated method over their ten year estimated useful lives. The initial accounting for the acquisitions has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

 

10


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

Loans Excluding PCI Loans

 

 

PCI Loans

 

 

Total Loans

 

(Dollars in thousands)

 

FBD

 

 

SCC

 

 

Total

 

 

FBD

 

 

SCC

 

 

Total

 

 

Acquired

 

Commercial real estate

 

$

140,955

 

 

$

11,894

 

 

$

152,849

 

 

$

832

 

 

$

200

 

 

$

1,032

 

 

$

153,881

 

Construction, land development, land

 

 

13,949

 

 

 

5,229

 

 

 

19,178

 

 

 

3,081

 

 

 

 

 

 

3,081

 

 

 

22,259

 

1-4 family residential properties

 

 

59,228

 

 

 

10,180

 

 

 

69,408

 

 

 

75

 

 

 

 

 

 

75

 

 

 

69,483

 

Farmland

 

 

5,709

 

 

 

1,207

 

 

 

6,916

 

 

 

 

 

 

 

 

 

 

 

 

6,916

 

Commercial

 

 

26,125

 

 

 

2,121

 

 

 

28,246

 

 

 

1,020

 

 

 

 

 

 

1,020

 

 

 

29,266

 

Factored receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

5,410

 

 

 

623

 

 

 

6,033

 

 

 

 

 

 

 

 

 

 

 

 

6,033

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

251,376

 

 

$

31,254

 

 

$

282,630

 

 

$

5,008

 

 

$

200

 

 

$

5,208

 

 

$

287,838

 

The following presents information at the acquisition date for non-PCI loans acquired in the transactions:

(Dollars in thousands)

 

FBD

 

 

SCC

 

 

Total

 

Contractually required principal and interest payments

 

$

318,674

 

 

$

38,590

 

 

$

357,264

 

Contractual cash flows not expected to be collected

 

$

4,255

 

 

$

550

 

 

$

4,805

 

Fair value at acquisition

 

$

251,376

 

 

$

31,254

 

 

$

282,630

 

The following presents information at the acquisition date for PCI loans acquired in the transactions:

(Dollars in thousands)

 

FBD

 

 

SCC

 

 

Total

 

Contractually required principal and interest payments

 

$

10,511

 

 

$

269

 

 

$

10,780

 

Contractual cash flows not expected to be collected (nonaccretable difference)

 

 

2,570

 

 

 

5

 

 

 

2,575

 

Expected cash flows at acquisition

 

 

7,941

 

 

 

264

 

 

 

8,205

 

Interest component of expected cash flows (accretable yield)

 

 

2,933

 

 

 

64

 

 

 

2,997

 

Fair value of loans acquired with deterioration of credit quality

 

$

5,008

 

 

$

200

 

 

$

5,208

 

 

11


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents supplemental pro forma information for the three and nine months ended September 30, 2018 and 2017 as if the FBD and SCC acquisitions had occurred at the beginning of 2017. The supplemental pro forma information includes adjustments for interest income on loans acquired, depreciation expense on property acquired, amortization of intangibles arising from the transactions, and the related income tax effects. Additionally, because FBD and SCC were Subchapter S corporations before the acquisitions and did not incur any federal income tax liabilities, adjustments have been included to estimate the impact of federal income taxes on FBD and SCC’s net income for the periods presented. The supplemental pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been completed on the assumed date.

 

Three months ended September 30, 2018

 

 

Three months ended September 30, 2017

 

(Dollars in thousands)

 

FBD

 

 

SCC

 

 

Total

 

 

FBD

 

 

SCC

 

 

Total

 

Net interest income

 

$

65,694

 

 

$

62,269

 

 

$

66,181

 

 

$

44,683

 

 

$

40,147

 

 

$

45,318

 

Noninterest income

 

$

7,167

 

 

$

6,159

 

 

$

7,267

 

 

$

5,404

 

 

$

4,260

 

 

$

5,493

 

Net income

 

$

8,371

 

 

$

8,578

 

 

$

7,778

 

 

$

10,595

 

 

$

9,804

 

 

$

10,617

 

Basic earnings per common share

 

$

0.31

 

 

$

0.32

 

 

$

0.29

 

 

$

0.44

 

 

$

0.48

 

 

$

0.43

 

Diluted earnings per common share

 

$

0.31

 

 

$

0.32

 

 

$

0.29

 

 

$

0.43

 

 

$

0.47

 

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

Nine months ended September 30, 2017

 

(Dollars in thousands)

 

FBD

 

 

SCC

 

 

Total

 

 

FBD

 

 

SCC

 

 

Total

 

Net interest income

 

$

176,441

 

 

$

163,916

 

 

$

178,188

 

 

$

125,098

 

 

$

111,756

 

 

$

126,966

 

Noninterest income

 

$

19,679

 

 

$

16,618

 

 

$

20,121

 

 

$

40,072

 

 

$

37,028

 

 

$

40,442

 

Net income

 

$

34,179

 

 

$

33,458

 

 

$

34,013

 

 

$

32,291

 

 

$

30,065

 

 

$

32,441

 

Basic earnings per common share

 

$

1.31

 

 

$

1.35

 

 

$

1.30

 

 

$

1.42

 

 

$

1.55

 

 

$

1.40

 

Diluted earnings per common share

 

$

1.30

 

 

$

1.33

 

 

$

1.28

 

 

$

1.39

 

 

$

1.51

 

 

$

1.37

 

The operations of FBD and SCC are included in the Company’s operating results beginning September 8, 2018.

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

 

12


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Interstate Capital Corporation

On June 2, 2018, the Company acquired substantially all of the operating assets of, and assumed certain liabilities associated with, Interstate Capital Corporation’s (“ICC”) accounts receivable factoring business and other related financial services. ICC operates out of offices located in El Paso, Texas and Santa Teresa, New Mexico and provides invoice factoring to small and medium-sized businesses.

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

(Dollars in thousands)

 

 

 

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

75

 

Factored receivables

 

 

131,017

 

Premises and equipment

 

 

279

 

Intangible assets

 

 

13,920

 

Other assets

 

 

144

 

 

 

 

145,435

 

Liabilities assumed:

 

 

 

 

Deposits

 

 

7,389

 

Other liabilities

 

 

763

 

 

 

 

8,152

 

Fair value of net assets acquired

 

 

137,283

 

Consideration:

 

 

 

 

Cash paid

 

 

160,258

 

Contingent consideration

 

 

20,000

 

Total consideration

 

 

180,258

 

Goodwill

 

$

42,975

 

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

Consideration paid included contingent consideration with an acquisition date fair value of $20,000,000. The contingent consideration is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition and is correlated to historical monthly movements in average invoice prices historically experienced by ICC. At the end of a 30 month earnout period, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price. Final contingent consideration payout will range from $0 to $22,000,000 and the fair value of the associated liability will be remeasured each reporting period with changes in fair value reflected in operating results. The fair value of the contingent consideration was $20,487,000 at September 30, 2018.

The operations of ICC are reflected in the Company’s Factoring segment and included in the Company’s operating results beginning June 2, 2018. The initial accounting for the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

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

 

 

13


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Triumph Healthcare Finance

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

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

(Dollars in thousands)

 

 

 

 

Carrying amount of assets in the disposal group:

 

 

 

 

Loans

 

$

70,147

 

Premises and equipment, net

 

 

19

 

Goodwill

 

 

1,457

 

Intangible assets, net

 

 

958

 

Other assets

 

 

197

 

Total carrying amount

 

 

72,778

 

Total consideration received

 

 

74,017

 

Gain on sale of division

 

 

1,239

 

Transaction costs

 

 

168

 

Gain on sale of division, net of transaction costs

 

$

1,071

 

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

Valley Bancorp, Inc.

Effective December 9, 2017, the Company acquired Valley Bancorp, Inc. (“Valley”) and its community banking subsidiary, Valley Bank & Trust, in an all-cash transaction. Valley Bank & Trust serves individuals and business customers from seven locations across the northern front range including Brighton, Dacono, Denver, Hudson, Westminster and Strasburg, Colorado. Valley Bank & Trust was merged into TBK Bank upon closing. The acquisition expanded the Company’s market in Colorado and further diversified the Company’s loan, customer, and deposit base.

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

(Dollars in thousands)

 

 

 

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

38,473

 

Securities

 

 

97,687

 

Loans

 

 

171,199

 

FHLB stock

 

 

315

 

Premises and equipment

 

 

6,238

 

Other real estate owned

 

 

2,282

 

Intangible assets

 

 

6,072

 

Bank-owned life insurance

 

 

7,153

 

Other assets

 

 

1,882

 

 

 

 

331,301

 

Liabilities assumed:

 

 

 

 

Deposits

 

 

293,398

 

Junior subordinated debentures

 

 

5,470

 

Other liabilities

 

 

2,881

 

 

 

 

301,749

 

Fair value of net assets acquired

 

 

29,552

 

Consideration transferred

 

 

40,075

 

Goodwill

 

$

10,523

 

 

14


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has recognized goodwill of $10,523,000, which was calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in this acquisition resulted from expected synergies and expansion in the Colorado market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transaction will be amortized utilizing an accelerated method over their ten year estimated useful lives. The initial accounting for the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

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

 

 

Loans,

 

 

 

 

 

 

 

 

 

 

 

Excluding

 

 

PCI

 

 

Total

 

(Dollars in thousands)

 

PCI Loans

 

 

Loans

 

 

Loans

 

Commercial real estate

 

$

73,273

 

 

$

254

 

 

$

73,527

 

Construction, land development, land

 

 

19,770

 

 

 

1,199

 

 

 

20,969

 

1-4 family residential properties

 

 

26,264

 

 

 

 

 

 

26,264

 

Farmland

 

 

16,934

 

 

 

 

 

 

16,934

 

Commercial

 

 

31,893

 

 

 

 

 

 

31,893

 

Factored receivables

 

 

 

 

 

 

 

 

 

Consumer

 

 

1,612

 

 

 

 

 

 

1,612

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

$

169,746

 

 

$

1,453

 

 

$

171,199

 

The operations of Valley are included in the Company’s operating results beginning December 9, 2017.

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $1,251,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended December 31, 2017.

 

15


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Independent Bank Colorado Branches

On October 6, 2017, the Company completed its acquisition of nine branch locations in Colorado from Independent Bank Group, Inc.’s banking subsidiary Independent Bank for an aggregate deposit premium of $6,771,000 or 4.2%. The branches were merged into TBK Bank upon closing. The primary purpose of the acquisition was to improve the Company’s core deposit base and continue to build upon the diversification of the Company’s loan portfolio.

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

(Dollars in thousands)

 

 

 

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

1,611

 

Loans

 

 

95,794

 

Premises and equipment

 

 

7,524

 

Intangible assets

 

 

3,255

 

Other assets

 

 

1,644

 

 

 

 

109,828

 

Liabilities assumed:

 

 

 

 

Deposits

 

 

160,702

 

Other liabilities

 

 

249

 

 

 

 

160,951

 

Fair value of net assets acquired

 

 

(51,123

)

Cash received from seller, net of $6,771 deposit premium

 

 

45,306

 

Goodwill

 

$

5,817

 

The Company has recognized goodwill of $5,817,000, which was calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in this acquisition resulted from expected synergies and expansion in the Colorado market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transaction will be amortized utilizing an accelerated method over their ten year estimated useful lives. The accounting for the acquisition has been finalized.

The following table presents details of the estimated fair value of  acquired loans at the acquisition date:

(Dollars in thousands)

 

 

 

 

Commercial real estate

 

$

13,382

 

Construction, land development, land

 

 

537

 

1-4 family residential properties

 

 

6,986

 

Farmland

 

 

31,490

 

Commercial

 

 

43,104

 

Factored receivables

 

 

 

Consumer

 

 

295

 

Mortgage warehouse

 

 

 

 

 

$

95,794

 

The operations of the branches acquired are included in the Company’s operating results beginning October 6, 2017.

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $437,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended December 31, 2017.

 

16


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Triumph Capital Advisors, LLC

On March 31, 2017, the Company sold its wholly owned asset management subsidiary, Triumph Capital Advisors, LLC, to an unrelated third party. The transaction was completed to enhance shareholder value and provide a platform for TCA to operate without the impact of regulations intended for depository institutions and their holding companies.  

A summary of the consideration received and the gain on sale is as follows:

(Dollars in thousands)

 

 

 

 

Consideration received (fair value):

 

 

 

 

Cash

 

$

10,554

 

Loan receivable

 

 

10,500

 

Revenue share

 

 

1,623

 

Total consideration received

 

 

22,677

 

Carrying value of TCA membership interest

 

 

1,417

 

Gain on sale of subsidiary or division

 

 

21,260

 

Transaction costs

 

 

400

 

Gain on sale of subsidiary or division, net of transaction costs

 

$

20,860

 

The Company financed a portion of the consideration received with a $10,500,000 term credit facility.  Terms of the floating rate credit facility provide for quarterly principal and interest payments with an interest rate floor of 5.50%, maturing on March 31, 2023.

In addition, the Company is entitled to receive an annual earn-out payment representing 3% of TCA’s future annual gross revenue, with a total maximum earn-out amount of $2,500,000.  The revenue share earn-out was considered contingent consideration which the Company recorded as an asset at its estimated fair value of $1,623,000 on the date of sale. The fair value of the revenue share asset was $1,725,000 at September 30, 2018. The Company received the first cash proceeds of $174,000 from the revenue share during the nine months ended September 30, 2018.

The Company incurred pre-tax expenses related to the transaction, including professional fees and other direct transaction costs, totaling $400,000 which were netted against the gain on sale of subsidiary in the consolidated statements of income during the three months ended March 31, 2017.

 

 

17


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 - SECURITIES

Equity Securities

The Company held equity securities with fair values of $4,981,000 and $5,006,000 at September 30, 2018 and December 31, 2017, respectively. During the three and nine months ended September 30, 2018, the Company recognized unrealized losses of $44,000 and $25,000, respectively, on the equity securities held at September 30, 2018, which were recorded in noninterest income in the consolidated statements of income. There were no sales of equity securities during the three and nine months ended September 30, 2018.

Debt Securities

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

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

September 30, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

96,102

 

 

$

 

 

$

(1,328

)

 

$

94,774

 

U.S. Treasury notes

 

 

1,952

 

 

 

 

 

 

(47

)

 

 

1,905

 

Mortgage-backed securities, residential

 

 

31,067

 

 

 

155

 

 

 

(641

)

 

 

30,581

 

Asset backed securities

 

 

10,803

 

 

 

36

 

 

 

(34

)

 

 

10,805

 

State and municipal

 

 

145,017

 

 

 

70

 

 

 

(1,025

)

 

 

144,062

 

Corporate bonds

 

 

69,088

 

 

 

43

 

 

 

(145

)

 

 

68,986

 

SBA pooled securities

 

 

4,952

 

 

 

5

 

 

 

(89

)

 

 

4,868

 

Total available for sale securities

 

$

358,981

 

 

$

309

 

 

$

(3,309

)

 

$

355,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrecognized

 

 

Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO securities

 

$

8,403

 

 

$

230

 

 

$

(539

)

 

$

8,094

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2017

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

110,531

 

 

$

76

 

 

$

(717

)

 

$

109,890

 

U.S. Treasury notes

 

 

1,940

 

 

 

 

 

 

(6

)

 

 

1,934

 

Mortgage-backed securities, residential

 

 

33,537

 

 

 

306

 

 

 

(180

)

 

 

33,663

 

Asset backed securities

 

 

11,883

 

 

 

47

 

 

 

(85

)

 

 

11,845

 

State and municipal

 

 

74,684

 

 

 

150

 

 

 

(443

)

 

 

74,391

 

Corporate bonds

 

 

15,271

 

 

 

52

 

 

 

(3

)

 

 

15,320

 

SBA pooled securities

 

 

3,535

 

 

 

27

 

 

 

(2

)

 

 

3,560

 

Total available for sale securities

 

$

251,381

 

 

$

658

 

 

$

(1,436

)

 

$

250,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrecognized

 

 

Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO securities

 

$

8,557

 

 

$

 

 

$

(1,030

)

 

$

7,527

 

  

 

18


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The amortized cost and estimated fair value of securities at September 30, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

 

Available for Sale Securities

 

 

Held to Maturity Securities

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Due in one year or less

 

$

87,890

 

 

$

87,668

 

 

$

 

 

$

 

Due from one year to five years

 

 

175,252

 

 

 

173,829

 

 

 

 

 

 

 

Due from five years to ten years

 

 

38,428

 

 

 

37,827

 

 

 

3,052

 

 

 

3,282

 

Due after ten years

 

 

10,589

 

 

 

10,403

 

 

 

5,351

 

 

 

4,812

 

 

 

 

312,159

 

 

 

309,727

 

 

 

8,403

 

 

 

8,094

 

Mortgage-backed securities, residential

 

 

31,067

 

 

 

30,581

 

 

 

 

 

 

 

Asset backed securities

 

 

10,803

 

 

 

10,805

 

 

 

 

 

 

 

SBA pooled securities

 

 

4,952

 

 

 

4,868

 

 

 

 

 

 

 

 

 

$

358,981

 

 

$

355,981

 

 

$

8,403

 

 

$

8,094

 

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

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Proceeds

 

$

88,820

 

 

$

2,936

 

 

$

123,016

 

 

$

2,936

 

Gross gains

 

 

 

 

 

35

 

 

 

5

 

 

 

35

 

Gross losses

 

 

 

 

 

 

 

 

(277

)

 

 

 

Debt securities with a carrying amount of approximately $107,249,000 and $85,985,000 at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

 

19


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

   

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(Dollars in thousands)

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

September 30, 2018

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

62,335

 

 

$

(685

)

 

$

32,439

 

 

$

(643

)

 

$

94,774

 

 

$

(1,328

)

U.S. Treasury notes

 

 

1,905

 

 

 

(47

)

 

 

 

 

 

 

 

 

1,905

 

 

 

(47

)

Mortgage-backed securities, residential

 

 

12,554

 

 

 

(349

)

 

 

5,782

 

 

 

(292

)

 

 

18,336

 

 

 

(641

)

Asset backed securities

 

 

110

 

 

 

(2

)

 

 

4,967

 

 

 

(32

)

 

 

5,077

 

 

 

(34

)

State and municipal

 

 

100,141

 

 

 

(804

)

 

 

9,917

 

 

 

(221

)

 

 

110,058

 

 

 

(1,025

)

Corporate bonds

 

 

45,583

 

 

 

(144

)

 

 

149

 

 

 

(1

)

 

 

45,732

 

 

 

(145

)

SBA pooled securities

 

 

3,920

 

 

 

(89

)

 

 

 

 

 

 

 

 

3,920

 

 

 

(89

)

 

 

$

226,548

 

 

$

(2,120

)

 

$

53,254

 

 

$

(1,189

)

 

$

279,802

 

 

$

(3,309

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(Dollars in thousands)

 

Fair

 

 

Unrecognized

 

 

Fair

 

 

Unrecognized

 

 

Fair

 

 

Unrecognized

 

September 30, 2018

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO securities

 

$

 

 

$

 

 

$

4,812

 

 

$

(539

)

 

$

4,812

 

 

$

(539

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(Dollars in thousands)

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

December 31, 2017

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Government agency obligations

 

$

47,605

 

 

$

(166

)

 

$

40,053

 

 

$

(551

)

 

$

87,658

 

 

$

(717

)

U.S. Treasury notes

 

 

1,934

 

 

 

(6

)

 

 

 

 

 

 

 

 

1,934

 

 

 

(6

)

Mortgage-backed securities, residential

 

 

10,349

 

 

 

(21

)

 

 

6,200

 

 

 

(159

)

 

 

16,549

 

 

 

(180

)

Asset backed securities

 

 

4,898

 

 

 

(85

)

 

 

 

 

 

 

 

 

4,898

 

 

 

(85

)

State and municipal

 

 

32,257

 

 

 

(216

)

 

 

12,138

 

 

 

(227

)

 

 

44,395

 

 

 

(443

)

Corporate bonds

 

 

4,073

 

 

 

(2

)

 

 

149

 

 

 

(1

)

 

 

4,222

 

 

 

(3

)

SBA pooled securities

 

 

1,654

 

 

 

(2

)

 

 

 

 

 

 

 

 

1,654

 

 

 

(2

)

 

 

$

102,770

 

 

$

(498

)

 

$

58,540

 

 

$

(938

)

 

$

161,310

 

 

$

(1,436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(Dollars in thousands)

 

Fair

 

 

Unrecognized

 

 

Fair

 

 

Unrecognized

 

 

Fair

 

 

Unrecognized

 

December 31, 2017

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO securities

 

$

1,835

 

 

$

(28

)

 

$

5,692

 

 

$

(1,002

)

 

$

7,527

 

 

$

(1,030

)

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

At September 30, 2018, the Company had 516 debt securities in an unrealized loss position. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2018, management believes that the unrealized losses detailed in the previous table are temporary and no other than temporary impairment loss has been recognized in the Company’s consolidated statements of income.

 

 

20


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

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

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Recorded

 

 

Unpaid

 

 

 

 

 

 

Recorded

 

 

Unpaid

 

 

 

 

 

(Dollars in thousands)

 

Investment

 

 

Principal

 

 

Difference

 

 

Investment

 

 

Principal

 

 

Difference

 

Commercial real estate

 

$

906,494

 

 

$

914,503

 

 

$

(8,009

)

 

$

745,893

 

 

$

753,803

 

 

$

(7,910

)

Construction, land development, land

 

 

190,920

 

 

 

195,075

 

 

 

(4,155

)

 

 

134,812

 

 

 

138,045

 

 

 

(3,233

)

1-4 family residential properties

 

 

194,752

 

 

 

196,361

 

 

 

(1,609

)

 

 

125,827

 

 

 

127,499

 

 

 

(1,672

)

Farmland

 

 

177,313

 

 

 

180,599

 

 

 

(3,286

)

 

 

180,141

 

 

 

184,006

 

 

 

(3,865

)

Commercial

 

 

1,123,598

 

 

 

1,127,844

 

 

 

(4,246

)

 

 

920,812

 

 

 

924,133

 

 

 

(3,321

)

Factored receivables

 

 

611,285

 

 

 

613,832

 

 

 

(2,547

)

 

 

374,410

 

 

 

376,046

 

 

 

(1,636

)

Consumer

 

 

31,423

 

 

 

31,576

 

 

 

(153

)

 

 

31,131

 

 

 

31,144

 

 

 

(13

)

Mortgage warehouse

 

 

276,358

 

 

 

276,358

 

 

 

 

 

 

297,830

 

 

 

297,830

 

 

 

 

Total

 

 

3,512,143

 

 

$

3,536,148

 

 

$

(24,005

)

 

 

2,810,856

 

 

$

2,832,506

 

 

$

(21,650

)

Allowance for loan and lease losses

 

 

(27,256

)

 

 

 

 

 

 

 

 

 

 

(18,748

)

 

 

 

 

 

 

 

 

 

 

$

3,484,887

 

 

 

 

 

 

 

 

 

 

$

2,792,108

 

 

 

 

 

 

 

 

 

  

The difference between the recorded investment and the unpaid principal balance is primarily (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $20,869,000 and $18,706,000 at September 30, 2018 and December 31, 2017, respectively, and (2) net deferred origination and factoring fees totaling $3,136,000 and $2,944,000 at September 30, 2018 and December 31, 2017, respectively.

 

At September 30, 2018 and December 31, 2017, the Company had $54,917,000 and $32,459,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.

 

Loans with carrying amounts of $680,070,000 and $596,230,000 at September 30, 2018 and December 31, 2017, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

 

During the nine months ended September 30, 2017, loans with a carrying amount of $1,965,000 were transferred to loans held for sale as the Company made the decision to sell the loans. These loans were subsequently sold resulting in proceeds of $1,919,000 and losses on sale of loans of $46,000, which were recorded as a reduction in other noninterest income in the consolidated statements of income. No loans were transferred to loans held for sale during the three months ended September 30, 2018 and 2017. There were no loans sold during the nine months ended September 30, 2018, other than those included in the sale of THF. See Note 2 – Business Combinations and Divestitures for details of the THF sale and its impact on our consolidated financial statements.

 

 

21


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Allowance for Loan and Lease Losses    

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

 

(Dollars in thousands)

 

Beginning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending

 

Three months ended September 30, 2018

 

Balance

 

 

Provision

 

 

Charge-offs

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

3,803

 

 

$

136

 

 

$

 

 

$

103

 

 

$

4,042

 

Construction, land development, land

 

 

1,025

 

 

 

244

 

 

 

 

 

 

2

 

 

 

1,271

 

1-4 family residential properties

 

 

240

 

 

 

15

 

 

 

(3

)

 

 

7

 

 

 

259

 

Farmland

 

 

509

 

 

 

(6

)

 

 

 

 

 

 

 

 

503

 

Commercial

 

 

10,230

 

 

 

6,324

 

 

 

(4,074

)

 

 

273

 

 

 

12,753

 

Factored receivables

 

 

7,727

 

 

 

64

 

 

 

(228

)

 

 

8

 

 

 

7,571

 

Consumer

 

 

670

 

 

 

93

 

 

 

(286

)

 

 

104

 

 

 

581

 

Mortgage warehouse

 

 

343

 

 

 

(67

)

 

 

 

 

 

 

 

 

276

 

 

 

$

24,547

 

 

$

6,803

 

 

$

(4,591

)

 

$

497

 

 

$

27,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Beginning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending

 

Three months ended September 30, 2017

 

Balance

 

 

Provision

 

 

Charge-offs

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

2,506

 

 

$

58

 

 

$

 

 

$

 

 

$

2,564

 

Construction, land development, land

 

 

915

 

 

 

210

 

 

 

 

 

 

 

 

 

1,125

 

1-4 family residential properties

 

 

149

 

 

 

111

 

 

 

(1

)

 

 

23

 

 

 

282

 

Farmland

 

 

261

 

 

 

(22

)

 

 

 

 

 

 

 

 

239

 

Commercial

 

 

10,603

 

 

 

(629

)

 

 

(755

)

 

 

929

 

 

 

10,148

 

Factored receivables

 

 

4,507

 

 

 

645

 

 

 

(136

)

 

 

30

 

 

 

5,046

 

Consumer

 

 

627

 

 

 

208

 

 

 

(270

)

 

 

178

 

 

 

743

 

Mortgage warehouse

 

 

229

 

 

 

(9

)

 

 

 

 

 

 

 

 

220

 

 

 

$

19,797

 

 

$

572

 

 

$

(1,162

)

 

$

1,160

 

 

$

20,367

 

 

  

(Dollars in thousands)

 

Beginning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending

 

Nine months ended September 30, 2018

 

Balance

 

 

Provision

 

 

Charge-offs

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

3,435

 

 

$

506

 

 

$

(2

)

 

$

103

 

 

$

4,042

 

Construction, land development, land

 

 

883

 

 

 

376

 

 

 

 

 

 

12

 

 

 

1,271

 

1-4 family residential properties

 

 

293

 

 

 

(29

)

 

 

(17

)

 

 

12

 

 

 

259

 

Farmland

 

 

310

 

 

 

393

 

 

 

(200

)

 

 

 

 

 

503

 

Commercial

 

 

8,150

 

 

 

8,895

 

 

 

(4,701

)

 

 

409

 

 

 

12,753

 

Factored receivables

 

 

4,597

 

 

 

3,850

 

 

 

(928

)

 

 

52

 

 

 

7,571

 

Consumer

 

 

783

 

 

 

287

 

 

 

(776

)

 

 

287

 

 

 

581

 

Mortgage warehouse

 

 

297

 

 

 

(21

)

 

 

 

 

 

 

 

 

276

 

 

 

$

18,748

 

 

$

14,257

 

 

$

(6,624

)

 

$

875

 

 

$

27,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Beginning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending

 

Nine months ended September 30, 2017

 

Balance

 

 

Provision

 

 

Charge-offs

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

1,813

 

 

$

888

 

 

$

(137

)

 

$

 

 

$

2,564

 

Construction, land development, land

 

 

465

 

 

 

1,235

 

 

 

(582

)

 

 

7

 

 

 

1,125

 

1-4 family residential properties

 

 

253

 

 

 

16

 

 

 

(29

)

 

 

42

 

 

 

282

 

Farmland

 

 

170

 

 

 

69

 

 

 

 

 

 

 

 

 

239

 

Commercial

 

 

8,014

 

 

 

4,660

 

 

 

(3,833

)

 

 

1,307

 

 

 

10,148

 

Factored receivables

 

 

4,088

 

 

 

1,978

 

 

 

(1,102

)

 

 

82

 

 

 

5,046

 

Consumer

 

 

420

 

 

 

813

 

 

 

(877

)

 

 

387

 

 

 

743

 

Mortgage warehouse

 

 

182

 

 

 

38

 

 

 

 

 

 

 

 

 

220

 

 

 

$

15,405

 

 

$

9,697

 

 

$

(6,560

)

 

$

1,825

 

 

$

20,367

 

 

22


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

(Dollars in thousands)

 

Loan Evaluation

 

 

ALLL Allocations

 

September 30, 2018

 

Individually

 

 

Collectively

 

 

PCI

 

 

Total loans

 

 

Individually

 

 

Collectively

 

 

PCI

 

 

Total ALLL

 

Commercial real estate

 

$

7,847

 

 

$

887,834

 

 

$

10,813

 

 

$

906,494

 

 

$

581

 

 

$

3,461

 

 

$

 

 

$

4,042

 

Construction, land development, land

 

 

221

 

 

 

183,862

 

 

 

6,837

 

 

 

190,920

 

 

 

74

 

 

 

1,197

 

 

 

 

 

 

1,271

 

1-4 family residential properties

 

 

2,240

 

 

 

191,868

 

 

 

644

 

 

 

194,752

 

 

 

125

 

 

 

134

 

 

 

 

 

 

259

 

Farmland

 

 

4,156

 

 

 

172,782

 

 

 

375

 

 

 

177,313

 

 

 

72

 

 

 

431

 

 

 

 

 

 

503

 

Commercial

 

 

19,680

 

 

 

1,102,309

 

 

 

1,609

 

 

 

1,123,598

 

 

 

1,496

 

 

 

11,253

 

 

 

4

 

 

 

12,753

 

Factored receivables

 

 

6,841

 

 

 

604,444

 

 

 

 

 

 

611,285

 

 

 

1,916

 

 

 

5,655

 

 

 

 

 

 

7,571

 

Consumer

 

 

256

 

 

 

31,167

 

 

 

 

 

 

31,423

 

 

 

29

 

 

 

552

 

 

 

 

 

 

581

 

Mortgage warehouse

 

 

 

 

 

276,358

 

 

 

 

 

 

276,358

 

 

 

 

 

 

276

 

 

 

 

 

 

276

 

 

 

$

41,241

 

 

$

3,450,624

 

 

$

20,278

 

 

$

3,512,143

 

 

$

4,293

 

 

$

22,959

 

 

$

4

 

 

$

27,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Loan Evaluation

 

 

ALLL Allocations

 

December 31, 2017

 

Individually

 

 

Collectively

 

 

PCI

 

 

Total loans

 

 

Individually

 

 

Collectively

 

 

PCI

 

 

Total ALLL

 

Commercial real estate

 

$

1,013

 

 

$

735,118

 

 

$

9,762

 

 

$

745,893

 

 

$

123

 

 

$

3,312

 

 

$

 

 

$

3,435

 

Construction, land development, land

 

 

136

 

 

 

130,732

 

 

 

3,944

 

 

 

134,812

 

 

 

 

 

 

883

 

 

 

 

 

 

883

 

1-4 family residential properties

 

 

2,638

 

 

 

122,093

 

 

 

1,096

 

 

 

125,827

 

 

 

152

 

 

 

141

 

 

 

 

 

 

293

 

Farmland

 

 

3,800

 

 

 

176,232

 

 

 

109

 

 

 

180,141

 

 

 

 

 

 

310

 

 

 

 

 

 

310

 

Commercial

 

 

26,616

 

 

 

893,509

 

 

 

687

 

 

 

920,812

 

 

 

1,409

 

 

 

6,741

 

 

 

 

 

 

8,150

 

Factored receivables

 

 

4,726

 

 

 

369,684

 

 

 

 

 

 

374,410

 

 

 

949

 

 

 

3,648

 

 

 

 

 

 

4,597

 

Consumer

 

 

384

 

 

 

30,747

 

 

 

 

 

 

31,131

 

 

 

80

 

 

 

703

 

 

 

 

 

 

783

 

Mortgage warehouse

 

 

 

 

 

297,830

 

 

 

 

 

 

297,830

 

 

 

 

 

 

297

 

 

 

 

 

 

297

 

 

 

$

39,313

 

 

$

2,755,945

 

 

$

15,598

 

 

$

2,810,856

 

 

$

2,713

 

 

$

16,035

 

 

$

 

 

$

18,748

 

  

 

23


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

  

 

Impaired Loans and Purchased Credit

 

 

Impaired Loans

 

 

 

Impaired Loans With a Valuation Allowance

 

 

Without a Valuation Allowance

 

(Dollars in thousands)

 

Recorded

 

 

Unpaid

 

 

Related

 

 

Recorded

 

 

Unpaid

 

September 30, 2018

 

Investment

 

 

Principal

 

 

Allowance

 

 

Investment

 

 

Principal

 

Commercial real estate

 

$

6,031

 

 

$

6,079

 

 

$

581

 

 

$

1,816

 

 

$

1,869

 

Construction, land development, land

 

 

167

 

 

 

168

 

 

 

74

 

 

 

54

 

 

 

54

 

1-4 family residential properties

 

 

223

 

 

 

216

 

 

 

125

 

 

 

2,017

 

 

 

2,124

 

Farmland

 

 

914

 

 

 

900

 

 

 

72

 

 

 

3,242

 

 

 

3,524

 

Commercial

 

 

3,620

 

 

 

3,616

 

 

 

1,496

 

 

 

16,060

 

 

 

16,261

 

Factored receivables

 

 

6,841

 

 

 

6,841

 

 

 

1,916

 

 

 

 

 

 

 

Consumer

 

 

92

 

 

 

86

 

 

 

29

 

 

 

164

 

 

 

169

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PCI

 

 

71

 

 

 

55

 

 

 

4

 

 

 

 

 

 

 

 

 

$

17,959

 

 

$

17,961

 

 

$

4,297

 

 

$

23,353

 

 

$

24,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans and Purchased Credit

 

 

Impaired Loans

 

 

 

Impaired Loans With a Valuation Allowance

 

 

Without a Valuation Allowance

 

(Dollars in thousands)

 

Recorded

 

 

Unpaid

 

 

Related

 

 

Recorded

 

 

Unpaid

 

December 31, 2017

 

Investment

 

 

Principal

 

 

Allowance

 

 

Investment

 

 

Principal

 

Commercial real estate

 

$

165

 

 

$

165

 

 

$

123

 

 

$

848

 

 

$

881

 

Construction, land development, land

 

 

 

 

 

 

 

 

 

 

 

136

 

 

 

136

 

1-4 family residential properties

 

 

237

 

 

 

235

 

 

 

152

 

 

 

2,401

 

 

 

2,519

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

3,800

 

 

 

4,071

 

Commercial

 

 

9,194

 

 

 

9,191

 

 

 

1,409

 

 

 

17,422

 

 

 

17,605

 

Factored receivables

 

 

4,726

 

 

 

4,726

 

 

 

949

 

 

 

 

 

 

 

Consumer

 

 

271

 

 

 

267

 

 

 

80

 

 

 

113

 

 

 

115

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,593

 

 

$

14,584

 

 

$

2,713

 

 

$

24,720

 

 

$

25,327

 

  

 

24


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

  

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

(Dollars in thousands)

 

Impaired Loans

 

 

Recognized

 

 

Impaired Loans

 

 

Recognized

 

Commercial real estate

 

$

6,861

 

 

$

70

 

 

$

853

 

 

$

 

Construction, land development, land

 

 

181

 

 

 

1

 

 

 

135

 

 

 

 

1-4 family residential properties

 

 

2,205

 

 

 

21

 

 

 

1,817

 

 

 

16

 

Farmland

 

 

3,835

 

 

 

10

 

 

 

3,361

 

 

 

14

 

Commercial

 

 

24,579

 

 

 

46

 

 

 

22,003

 

 

 

167

 

Factored receivables

 

 

5,724

 

 

 

 

 

 

3,907

 

 

 

 

Consumer

 

 

260

 

 

 

3

 

 

 

136

 

 

 

4

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

PCI

 

 

75

 

 

 

 

 

 

143

 

 

 

 

 

 

$

43,720

 

 

$

151

 

 

$

32,355

 

 

$

201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

(Dollars in thousands)

 

Impaired Loans

 

 

Recognized

 

 

Impaired Loans

 

 

Recognized

 

Commercial real estate

 

$

4,429

 

 

$

76

 

 

$

1,150

 

 

$

1

 

Construction, land development, land

 

 

178

 

 

 

1

 

 

 

249

 

 

 

 

1-4 family residential properties

 

 

2,439

 

 

 

25

 

 

 

1,509

 

 

 

23

 

Farmland

 

 

3,978

 

 

 

27

 

 

 

2,287

 

 

 

32

 

Commercial

 

 

23,149

 

 

 

665

 

 

 

27,077

 

 

 

398

 

Factored receivables

 

 

5,783

 

 

 

 

 

 

3,847

 

 

 

 

Consumer

 

 

320

 

 

 

4

 

 

 

117

 

 

 

4

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

PCI

 

 

35

 

 

 

 

 

 

262

 

 

 

 

 

 

$

40,311

 

 

$

798

 

 

$

36,498

 

 

$

458

 

  

 

25


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Past Due and Nonaccrual Loans

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

 

 

Past Due

 

 

Past Due 90

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

30-89 Days

 

 

Days or More

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Still Accruing

 

 

Still Accruing

 

 

Nonaccrual

 

 

Total

 

Commercial real estate

 

$

2,493

 

 

$

 

 

$

7,873

 

 

$

10,366

 

Construction, land development, land

 

 

769

 

 

 

 

 

 

221

 

 

 

990

 

1-4 family residential properties

 

 

1,253

 

 

 

79

 

 

 

2,156

 

 

 

3,488

 

Farmland

 

 

 

 

 

 

 

 

3,387

 

 

 

3,387

 

Commercial

 

 

3,976

 

 

 

246

 

 

 

16,865

 

 

 

21,087

 

Factored receivables

 

 

32,645

 

 

 

2,252

 

 

 

 

 

 

34,897

 

Consumer

 

 

820

 

 

 

 

 

 

276

 

 

 

1,096

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

PCI

 

 

206

 

 

 

 

 

 

2,969

 

 

 

3,175

 

 

 

$

42,162

 

 

$

2,577

 

 

$

33,747

 

 

$

78,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due

 

 

Past Due 90

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

30-89 Days

 

 

Days or More

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Still Accruing

 

 

Still Accruing

 

 

Nonaccrual

 

 

Total

 

Commercial real estate

 

$

1,374

 

 

$

 

 

$

1,012

 

 

$

2,386

 

Construction, land development, land

 

 

 

 

 

 

 

 

136

 

 

 

136

 

1-4 family residential properties

 

 

1,378

 

 

 

62

 

 

 

2,625

 

 

 

4,065

 

Farmland

 

 

250

 

 

 

109

 

 

 

3,412

 

 

 

3,771

 

Commercial

 

 

6,630

 

 

 

39

 

 

 

22,247

 

 

 

28,916

 

Factored receivables

 

 

20,858

 

 

 

1,454

 

 

 

 

 

 

22,312

 

Consumer

 

 

947

 

 

 

 

 

 

384

 

 

 

1,331

 

Mortgage warehouse

 

 

165

 

 

 

 

 

 

 

 

 

165

 

PCI

 

 

72

 

 

 

 

 

 

2,333

 

 

 

2,405

 

 

 

$

31,674

 

 

$

1,664

 

 

$

32,149

 

 

$

65,487

 

The following table presents information regarding nonperforming loans at the dates indicated:

  

(Dollars in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Nonaccrual loans(1)

 

$

33,747

 

 

$

32,149

 

Factored receivables greater than 90 days past due

 

 

2,252

 

 

 

1,454

 

Troubled debt restructurings accruing interest

 

 

3,603

 

 

 

5,128

 

 

 

$

39,602

 

 

$

38,731

 

 

(1)

Includes troubled debt restructurings of $3,927,000 and $14,009,000 at September 30, 2018 and December 31, 2017, respectively.

 

Credit Quality Information

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

Pass:

Loans classified as pass are loans with low to average risk and not otherwise classified as substandard or doubtful.

 

26


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Substandard:

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful:

Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

PCI:

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

As of September 30, 2018 and December 31, 2017, based on the most recent analysis performed, the risk category of loans is as follows:

   

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Pass

 

 

Substandard

 

 

Doubtful

 

 

PCI

 

 

Total

 

Commercial real estate

 

$

889,505

 

 

$

6,176

 

 

$

 

 

$

10,813

 

 

$

906,494

 

Construction, land development, land

 

 

183,706

 

 

 

377

 

 

 

 

 

 

6,837

 

 

 

190,920

 

1-4 family residential

 

 

191,844

 

 

 

2,264

 

 

 

 

 

 

644

 

 

 

194,752

 

Farmland

 

 

171,631

 

 

 

5,307

 

 

 

 

 

 

375

 

 

 

177,313

 

Commercial

 

 

1,099,057

 

 

 

22,932

 

 

 

 

 

 

1,609

 

 

 

1,123,598

 

Factored receivables

 

 

605,002

 

 

 

5,340

 

 

 

943

 

 

 

 

 

 

611,285

 

Consumer

 

 

31,160

 

 

 

263

 

 

 

 

 

 

 

 

 

31,423

 

Mortgage warehouse

 

 

276,358

 

 

 

 

 

 

 

 

 

 

 

 

276,358

 

 

 

$

3,448,263

 

 

$

42,659

 

 

$

943

 

 

$

20,278

 

 

$

3,512,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Pass

 

 

Substandard

 

 

Doubtful

 

 

PCI

 

 

Total

 

Commercial real estate

 

$

732,175

 

 

$

3,956

 

 

$

 

 

$

9,762

 

 

$

745,893

 

Construction, land development, land

 

 

130,732

 

 

 

136

 

 

 

 

 

 

3,944

 

 

 

134,812

 

1-4 family residential

 

 

122,044

 

 

 

2,687

 

 

 

 

 

 

1,096

 

 

 

125,827

 

Farmland

 

 

171,017

 

 

 

9,015

 

 

 

 

 

 

109

 

 

 

180,141

 

Commercial

 

 

878,957

 

 

 

41,168

 

 

 

 

 

 

687

 

 

 

920,812

 

Factored receivables

 

 

370,839

 

 

 

2,325

 

 

 

1,246

 

 

 

 

 

 

374,410

 

Consumer

 

 

30,739

 

 

 

392

 

 

 

 

 

 

 

 

 

31,131

 

Mortgage warehouse

 

 

297,830

 

 

 

 

 

 

 

 

 

 

 

 

297,830

 

 

 

$

2,734,333

 

 

$

59,679

 

 

$

1,246

 

 

$

15,598

 

 

$

2,810,856

 

 

Troubled Debt Restructurings

The Company had a recorded investment in troubled debt restructurings of $7,530,000 and $19,137,000 as of September 30, 2018 and December 31, 2017, respectively. The Company had allocated specific allowances for these loans of $640,000 and $535,000 at September 30, 2018 and December 31, 2017, respectively, and had not committed to lend additional amounts. The Company’s troubled debt restructurings are the result of granting a borrower that is experiencing financial difficulty a concession such as extending amortization periods, reducing contractual interest rates, or a combination thereof. The Company did not grant principal reductions on any restructured loans.

 

27


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents loans modified as troubled debt restructurings that occurred during the nine months ended September 30, 2018 and 2017:

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

(Dollars in thousands)

 

Number of

 

 

Recorded

 

 

Recorded

 

September 30, 2018

 

Loans

 

 

Investment

 

 

Investment

 

1-4 family residential properties

 

 

3

 

 

$

111

 

 

$

111

 

Farmland

 

 

1

 

 

 

263

 

 

 

263

 

Commercial

 

 

10

 

 

 

875

 

 

 

875

 

Total

 

 

14

 

 

$

1,249

 

 

$

1,249

 

 

  

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

(Dollars in thousands)

 

Number of

 

 

Recorded

 

 

Recorded

 

September 30, 2017

 

Loans

 

 

Investment

 

 

Investment

 

Commercial

 

 

5

 

 

$

2,184

 

 

$

2,184

 

During the nine months ended September 30, 2018, the Company had one loan modified as troubled debt restructurings with a recorded investment of $156,000 for which there was a payment default within twelve months following the modification. During the nine months ended September 30, 2017, the Company had four loans modified as troubled debt restructurings with a recorded investment of $2,999,000 for which there were payment defaults within twelve months following the modification. The full recorded investment in one of these loans of $2,702,000 was charged off during the period. Default is determined at 90 or more days past due.  

Residential Real Estate Loans In Process of Foreclosure

At September 30, 2018, the Company had $21,000 in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.

Purchased Credit Impaired Loans

The Company has loans that were acquired, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding contractually required principal and interest and the carrying amount of these loans included in the balance sheet amounts of loans at September 30, 2018 and December 31, 2017, are as follows:

  

  

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Contractually required principal and interest:

 

 

 

 

 

 

 

 

Real estate loans

 

$

22,877

 

 

$

16,360

 

Commercial loans

 

 

4,141

 

 

 

3,501

 

Outstanding contractually required principal and interest

 

$

27,018

 

 

$

19,861

 

Gross carrying amount included in loans receivable

 

$

20,278

 

 

$

15,598

 

 

 

28


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The changes in accretable yield during the three and nine months ended September 30, 2018 and 2017 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

 

  

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Accretable yield, beginning balance

 

$

2,105

 

 

$

3,126

 

 

$

2,793

 

 

$

4,261

 

Additions

 

 

2,997

 

 

 

 

 

 

2,997

 

 

 

 

Accretion

 

 

(439

)

 

 

(411

)

 

 

(1,177

)

 

 

(3,117

)

Reclassification from nonaccretable to accretable yield

 

 

124

 

 

 

56

 

 

 

174

 

 

 

2,067

 

Disposals

 

 

 

 

 

(2

)

 

 

 

 

 

(442

)

Accretable yield, ending balance

 

$

4,787

 

 

$

2,769

 

 

$

4,787

 

 

$

2,769

 

  

 

NOTE 5 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

(Dollars in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Goodwill

 

$

158,728

 

 

$

44,126

 

 

  

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

(Dollars in thousands)

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Core deposit intangibles

 

$

43,578

 

 

$

(14,666

)

 

$

28,912

 

 

$

29,511

 

 

$

(11,335

)

 

$

18,176

 

Other intangible assets

 

 

15,700

 

 

 

(1,498

)

 

 

14,202

 

 

 

1,764

 

 

 

(288

)

 

 

1,476

 

 

 

$

59,278

 

 

$

(16,164

)

 

$

43,114

 

 

$

31,275

 

 

$

(11,623

)

 

$

19,652

 

 

The changes in goodwill and intangible assets during the three and nine months ended September 30, 2018 and 2017 are as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Beginning balance

 

$

117,777

 

 

$

43,322

 

 

$

63,778

 

 

$

46,531

 

Acquired goodwill

 

 

72,060

 

 

 

 

 

 

115,035

 

 

 

152

 

Acquired intangibles

 

 

14,069

 

 

 

 

 

 

28,004

 

 

 

 

Divestiture

 

 

 

 

 

 

 

 

(433

)

 

 

(1,339

)

Amortization of intangibles

 

 

(2,064

)

 

 

(870

)

 

 

(4,542

)

 

 

(2,892

)

Ending balance

 

$

201,842

 

 

$

42,452

 

 

$

201,842

 

 

$

42,452

 

 

NOTE 6 – Variable Interest Entities

Collateralized Loan Obligation Funds – Closed

The Company, through its subsidiary Triumph Capital Advisors, acted as the asset manager or provided certain middle and back office staffing and services to the asset manager of various CLO funds. TCA earned asset management fees in accordance with the terms of its asset management or staffing and services agreements associated with the CLO funds. TCA earned asset management fees totaling $1,717,000 for the three months ended March 31, 2017. On March 31, 2017 the Company sold its membership interests in TCA as discussed in Note 2 – Business Combinations and Divestitures.  As a result of the TCA sale, as of March 31, 2017 the Company no longer acted as asset manager or staffing and services provider for any CLO funds.

 

29


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

Offering

 

Offering

 

(Dollars in thousands)

Date

 

Amount

 

Trinitas CLO IV, LTD (Trinitas IV)

June 2, 2016

 

$

406,650

 

Trinitas CLO V, LTD (Trinitas V)

September 22, 2016

 

$

409,000

 

Trinitas CLO VI, LTD (Trinitas VI)

June 20, 2017

 

$

717,100

 

The carrying amounts of the Company’s investments in the subordinated notes of the CLO funds, which represent the Company’s maximum exposure to loss as a result of its involvement with the CLO funds, totaled $8,403,000 and $8,557,000 at September 30, 2018 and December 31, 2017, respectively, and are classified as held to maturity securities within the Company’s consolidated balance sheets.  

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

Collateralized Loan Obligation Fund – Warehouse Phase

From time to time, the Company may invest in the subordinated debt of entities formed to be the issuers of CLO offerings during their warehouse phases. The Company’s investments in these CLO funds are repaid when the CLO funds’ warehouse phases are closed and the CLO offerings are issued. The Company’s maximum exposure to loss as a result of its involvement with these CLO funds is limited to the carrying amount of its investments in the subordinated debt of the CLO funds. The Company did not hold any investments in the subordinated debt of CLO funds during their warehouse phase at December 31, 2017 or during the nine months ended September 30, 2018. Income from the Company’s investments in CLO warehouse entities totaled $0 and $1,954,000 during the three and nine months ended September 30, 2017, respectively, which is included in other noninterest income within the Company’s consolidated statements of income.

The Company performed a consolidation analysis of CLO funds during their warehouse phases and concluded that the CLO funds were variable interest entities and that the Company held a variable interest in the entities that could potentially be significant to the entities in the form of its investments in the subordinated notes of the entities. However, the Company also concluded that the Company does not have the power to direct the activities that most significantly impact the entities’ economic performance.  As a result, the Company is not the primary beneficiary and therefore is not required to consolidate the assets, liabilities, equity, or operations of the entities in the Company’s financial statements.

 

 

NOTE 7 - Deposits

Deposits at September 30, 2018 and December 31, 2017 are summarized as follows:

 

(Dollars in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Noninterest bearing demand

 

$

697,903

 

 

$

564,225

 

Interest bearing demand

 

 

608,775

 

 

 

403,244

 

Individual retirement accounts

 

 

118,459

 

 

 

108,505

 

Money market

 

 

413,402

 

 

 

283,969

 

Savings

 

 

373,062

 

 

 

235,296

 

Certificates of deposit

 

 

854,048

 

 

 

837,384

 

Brokered deposits

 

 

373,400

 

 

 

188,725

 

Total Deposits

 

$

3,439,049

 

 

$

2,621,348

 

 

 

30


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

At September 30, 2018, scheduled maturities of certificates of deposits, individual retirement accounts and brokered deposits are as follows:

 

(Dollars in thousands)

 

September 30, 2018

 

Within one year

 

$

1,052,802

 

After one but within two years

 

 

192,942

 

After two but within three years

 

 

46,448

 

After three but within four years

 

 

38,478

 

After four but within five years

 

 

8,524

 

After five years

 

 

6,713

 

Total

 

$

1,345,907

 

 

Time deposits, including individual retirement accounts, certificates of deposit, and brokered deposits, with individual balances of $250,000 and greater totaled $185,443,000 and $158,197,000 at September 30, 2018 and December 31, 2017, respectively.

NOTE 8 - Legal Contingencies

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

 

 

NOTE 9 - OFF-BALANCE SHEET LOAN COMMITMENTS

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

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

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

  

 

September 30, 2018

 

 

December 31, 2017

 

(Dollars in thousands)

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

Unused lines of credit

 

$

78,708

 

 

$

418,319

 

 

$

497,027

 

 

$

133,634

 

 

$

242,236

 

 

$

375,870

 

Standby letters of credit

 

$

2,148

 

 

$

5,641

 

 

$

7,789

 

 

$

1,998

 

 

$

8,169

 

 

$

10,167

 

Mortgage warehouse commitments

 

$

 

 

$

305,053

 

 

$

305,053

 

 

$

 

 

$

239,632

 

 

$

239,632

 

 

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

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

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

 

31


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company records a reserve for loan and lease losses on off-balance sheet lending-related commitments through a charge to other noninterest expense on the Company’s consolidated statements of income. At September 30, 2018 and December 31, 2017, the reserve for loan and lease losses on off-balance sheet lending-related commitments totaled $511,000 and $501,000, respectively, and was included in other liabilities on the Company’s consolidated balance sheets.

In addition to the commitments above, the Company had overdraft protection available in the amounts of $3,145,000 and $2,397,000 at September 30, 2018 and December 31, 2017, respectively.

NOTE 10 - Fair Value Disclosures

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

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

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

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

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 15 of the Company’s 2017 Form 10-K, except for the valuation of loans held for investment which was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification.

 

32


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets measured at fair value on a recurring basis are summarized in the table below. There were no liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

September 30, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

 

 

$

94,774

 

 

$

 

 

$

94,774

 

U.S. Treasury notes

 

 

 

 

 

1,905

 

 

 

 

 

 

1,905

 

Mortgage-backed securities, residential

 

 

 

 

 

30,581

 

 

 

 

 

 

30,581

 

Asset backed securities

 

 

 

 

 

10,805

 

 

 

 

 

 

10,805

 

State and municipal

 

 

 

 

 

144,062

 

 

 

 

 

 

144,062

 

Corporate bonds

 

 

 

 

 

68,986

 

 

 

 

 

 

68,986

 

SBA pooled securities

 

 

 

 

 

4,868

 

 

 

 

 

 

4,868

 

 

 

$

 

 

$

355,981

 

 

$

 

 

$

355,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund

 

$

4,981

 

 

$

 

 

$

 

 

$

4,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

 

$

683

 

 

$

 

 

$

683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

December 31, 2017

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

 

$

 

 

$

109,890

 

 

$

 

 

$

109,890

 

U.S. Treasury notes

 

 

 

 

 

1,934

 

 

 

 

 

 

1,934

 

Mortgage-backed securities, residential

 

 

 

 

 

33,663

 

 

 

 

 

 

33,663

 

Asset backed securities

 

 

 

 

 

11,845

 

 

 

 

 

 

11,845

 

State and municipal

 

 

 

 

 

74,391

 

 

 

 

 

 

74,391

 

Corporate bonds

 

 

 

 

 

15,320

 

 

 

 

 

 

15,320

 

SBA pooled securities

 

 

 

 

 

3,560

 

 

 

 

 

 

3,560

 

 

 

$

 

 

$

250,603

 

 

$

 

 

$

250,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund

 

$

5,006

 

 

$

 

 

$

 

 

$

5,006

 

 

 

There were no transfers between levels during 2018 or 2017.  

 

33


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2018 and December 31, 2017.

  

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

September 30, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

 

 

$

5,450

 

 

$

5,450

 

Construction, land development, land

 

 

 

 

 

 

 

 

93

 

 

 

93

 

1-4 family residential properties

 

 

 

 

 

 

 

 

98

 

 

 

98

 

Farmland

 

 

 

 

 

 

 

 

842

 

 

 

842

 

Commercial

 

 

 

 

 

 

 

 

2,124

 

 

 

2,124

 

Factored receivables

 

 

 

 

 

 

 

 

4,925

 

 

 

4,925

 

Consumer

 

 

 

 

 

 

 

 

63

 

 

 

63

 

PCI

 

 

 

 

 

 

 

 

67

 

 

 

67

 

Other real estate owned (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

819

 

 

 

819

 

 

 

$

 

 

$

 

 

$

14,481

 

 

$

14,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Fair Value Measurements Using

 

 

Total

 

December 31, 2017

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

 

 

$

42

 

 

$

42

 

1-4 family residential properties

 

 

 

 

 

 

 

 

85

 

 

 

85

 

Commercial

 

 

 

 

 

 

 

 

7,785

 

 

 

7,785

 

Factored receivables

 

 

 

 

 

 

 

 

3,777

 

 

 

3,777

 

Consumer

 

 

 

 

 

 

 

 

191

 

 

 

191

 

Other real estate owned (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

138

 

 

 

138

 

Construction, land development, land

 

 

 

 

 

 

 

 

202

 

 

 

202

 

 

 

$

 

 

$

 

 

$

12,220

 

 

$

12,220

 

 

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

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

 

34


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at September 30, 2018 and December 31, 2017 were as follows:

  

(Dollars in thousands)

 

Carrying

 

 

Fair Value Measurements Using

 

 

Total

 

September 30, 2018

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

282,409

 

 

$

282,409

 

 

$

 

 

$

 

 

$

282,409

 

Securities - held to maturity

 

 

8,403

 

 

 

 

 

 

 

 

 

8,094

 

 

 

8,094

 

Loans not previously presented, gross

 

 

3,494,184

 

 

 

 

 

 

 

 

 

3,432,384

 

 

 

3,432,384

 

FHLB stock

 

 

23,109

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Accrued interest receivable

 

 

20,141

 

 

 

20,141

 

 

 

 

 

 

 

 

 

20,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,439,049

 

 

 

 

 

 

3,428,722

 

 

 

 

 

 

3,428,722

 

Customer repurchase agreements

 

 

13,248

 

 

 

 

 

 

13,248

 

 

 

 

 

 

13,248

 

Federal Home Loan Bank advances

 

 

330,000

 

 

 

 

 

 

330,000

 

 

 

 

 

 

330,000

 

Subordinated notes

 

 

48,903

 

 

 

 

 

 

51,125

 

 

 

 

 

 

51,125

 

Junior subordinated debentures

 

 

38,966

 

 

 

 

 

 

41,057

 

 

 

 

 

 

41,057

 

Accrued interest payable

 

 

6,072

 

 

 

6,072

 

 

 

 

 

 

 

 

 

6,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Carrying

 

 

Fair Value Measurements Using

 

 

Total

 

December 31, 2017

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,129

 

 

$

134,129

 

 

$

 

 

$

 

 

$

134,129

 

Securities - held to maturity

 

 

8,557

 

 

 

 

 

 

 

 

 

7,527

 

 

 

7,527

 

Loans not previously presented, net

 

 

2,780,228

 

 

 

 

 

 

 

 

 

2,800,362

 

 

 

2,800,362

 

Loans included in assets held for sale, net

 

 

68,668

 

 

 

 

 

 

 

 

 

69,268

 

 

 

69,268

 

FHLB stock

 

 

16,006

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Accrued interest receivable

 

 

15,517

 

 

 

15,517

 

 

 

 

 

 

 

 

 

15,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,621,348

 

 

 

 

 

 

2,616,034

 

 

 

 

 

 

2,616,034

 

Customer repurchase agreements

 

 

11,488

 

 

 

 

 

 

11,488

 

 

 

 

 

 

11,488

 

Federal Home Loan Bank advances

 

 

365,000

 

 

 

 

 

 

365,000

 

 

 

 

 

 

365,000

 

Subordinated notes

 

 

48,828

 

 

 

 

 

 

52,310

 

 

 

 

 

 

52,310

 

Junior subordinated debentures

 

 

38,623

 

 

 

 

 

 

41,563

 

 

 

 

 

 

41,563

 

Accrued interest payable

 

 

3,323

 

 

 

3,323

 

 

 

 

 

 

 

 

 

3,323

 

 

 

35


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11 - Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and TBK Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity Tier 1, and Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Management believes, as of September 30, 2018 and December 31, 2017, the Company and TBK Bank meet all capital adequacy requirements to which they are subject.

As of September 30, 2018 and December 31, 2017, TBK Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” TBK Bank must maintain minimum total risk based, common equity Tier 1 risk based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since September 30, 2018 that management believes have changed TBK Bank’s category.

 

36


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The actual capital amounts and ratios for the Company and TBK Bank as of September 30, 2018 and December 31, 2017 are presented in the following table.

  

  

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

Minimum for Capital

 

 

Prompt Corrective

 

(Dollars in thousands)

 

Actual

 

 

Adequacy Purposes

 

 

Action Provisions

 

As of September 30, 2018

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Total capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

529,965

 

 

13.0%

 

 

$

324,920

 

 

 

8.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

471,802

 

 

12.0%

 

 

$

314,844

 

 

 

8.0%

 

 

$

393,555

 

 

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

453,295

 

 

11.2%

 

 

$

243,690

 

 

 

6.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

444,126

 

 

11.3%

 

 

$

236,133

 

 

 

6.0%

 

 

$

314,843

 

 

 

8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

404,671

 

 

10.0%

 

 

$

182,767

 

 

 

4.5%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

444,126

 

 

11.3%

 

 

$

177,099

 

 

 

4.5%

 

 

$

255,810

 

 

 

6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

453,295

 

 

11.7%

 

 

$

154,333

 

 

 

4.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

444,126

 

 

11.7%

 

 

$

152,037

 

 

 

4.0%

 

 

$

190,046

 

 

 

5.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

436,036

 

 

13.2%

 

 

$

264,026

 

 

 

8.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

361,068

 

 

11.4%

 

 

$

254,139

 

 

 

8.0%

 

 

$

317,674

 

 

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

367,958

 

 

11.1%

 

 

$

198,019

 

 

 

6.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

341,910

 

 

10.8%

 

 

$

190,603

 

 

 

6.0%

 

 

$

254,137

 

 

 

8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1 capital (to risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

320,265

 

 

9.7%

 

 

$

148,514

 

 

 

4.5%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

341,910

 

 

10.8%

 

 

$

142,952

 

 

 

4.5%

 

 

$

206,486

 

 

 

6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triumph Bancorp, Inc.

 

$

367,958

 

 

11.8%

 

 

$

124,754

 

 

 

4.0%

 

 

N/A

 

 

N/A

 

TBK Bank, SSB

 

$

341,910

 

 

11.1%

 

 

$

123,088

 

 

 

4.0%

 

 

$

153,860

 

 

 

5.0%

 

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

Beginning in January 2016, the implementation of the capital conservation buffer set forth by the Basel III regulatory capital framework was effective for the Company starting at 0.625% of risk weighted assets above the minimum risk based capital ratio requirements and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer was 1.875% and 1.25% at September 30, 2018 and December 31, 2017, respectively. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. At September 30, 2018 and December 31, 2017, the Company’s and TBK Bank’s risk based capital exceeded the required capital conservation buffer.

 

37


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 12 – STOCKHOLDERS’ EQUITY

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

Common Stock

 

September 30, 2018

 

 

December 31, 2017

 

Shares authorized

 

 

50,000,000

 

 

 

50,000,000

 

Shares issued

 

 

26,383,763

 

 

 

20,912,396

 

Treasury shares

 

 

(104,002

)

 

 

(91,951

)

Shares outstanding

 

 

26,279,761

 

 

 

20,820,445

 

Par value per share

 

$

0.01

 

 

$

0.01

 

Preferred Stock

 

 

Series A

 

 

Series B

 

(Dollars in thousands, except per share amounts)

 

September 30, 2018

 

 

December 31, 2017

 

 

September 30, 2018

 

 

December 31, 2017

 

Shares authorized

 

 

50,000

 

 

 

50,000

 

 

 

115,000

 

 

 

115,000

 

Shares issued

 

 

45,500

 

 

 

45,500

 

 

 

51,076

 

 

 

51,076

 

Shares outstanding

 

 

45,500

 

 

 

45,500

 

 

 

51,076

 

 

 

51,076

 

Par value per share

 

$

0.01

 

 

$

0.01

 

 

$

0.01

 

 

$

0.01

 

Liquidation preference per share

 

$

100

 

 

$

100

 

 

$

100

 

 

$

100

 

Liquidation preference amount

 

$

4,550

 

 

$

4,550

 

 

$

5,108

 

 

$

5,108

 

Dividend rate

 

Prime + 2%

 

 

Prime + 2%

 

 

 

8.00

%

 

 

8.00

%

Dividend rate - floor

 

 

8.00

%

 

 

8.00

%

 

N/A

 

 

N/A

 

Subsequent dividend payment dates

 

Quarterly

 

 

Quarterly

 

 

Quarterly

 

 

Quarterly

 

Convertible to common stock

 

Yes

 

 

Yes

 

 

Yes

 

 

Yes

 

Conversion period

 

Anytime

 

 

Anytime

 

 

Anytime

 

 

Anytime

 

Conversion ratio - preferred to common

 

6.94008

 

 

6.94008

 

 

6.94008

 

 

6.94008

 

 

Common Stock Offering

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

NOTE 13 – STOCK BASED COMPENSATION

Stock based compensation expense that has been charged against income was $913,000 and $1,966,000 for the three and nine months ended September 30, 2018, respectively, and $459,000 and $1,484,000 for the three and nine months ended September 30, 2017, respectively.

2014 Omnibus Incentive Plan

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

 

38


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Restricted Stock Awards

A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2018 were as follows:

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant-Date

 

Nonvested RSAs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2018

 

 

102,776

 

 

$

18.68

 

Granted

 

 

65,001

 

 

 

40.64

 

Vested

 

 

(63,995

)

 

 

20.38

 

Forfeited

 

 

(2,422

)

 

 

27.56

 

Nonvested at September 30, 2018

 

 

101,360

 

 

$

31.48

 

 

RSAs granted to employees under the Omnibus Incentive Plan typically vest over three to four years. Compensation expense for the RSAs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of September 30, 2018, there was $2,166,000 of unrecognized compensation cost related to the nonvested RSAs. The cost is expected to be recognized over a remaining period of 3.17 years.

Restricted Stock Units

A summary of changes in the Company’s nonvested Restricted Stock Units (“RSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2018 were as follows:

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant-Date

 

Nonvested RSUs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2018

 

 

 

 

$

 

Granted

 

 

59,658

 

 

 

38.75

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Nonvested at September 30, 2018

 

 

59,658

 

 

$

38.75

 

 

RSUs granted to employees under the Omnibus Incentive Plan vest after five years. Compensation expense for the RSUs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of September 30, 2018, there was $2,118,000 of unrecognized compensation cost related to the nonvested RSUs. The cost is expected to be recognized over a remaining period of 4.59 years.

Performance Stock Units

A summary of changes in the Company’s nonvested Performance Stock Units (“PSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 2018 were as follows:

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant-Date

 

Nonvested PSUs

 

Shares

 

 

Fair Value

 

Nonvested at January 1, 2018

 

 

 

 

$

 

Granted

 

 

59,658

 

 

 

38.57

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Nonvested at September 30, 2018

 

 

59,658

 

 

$

38.57

 

 

PSUs granted to employees under the Omnibus Incentive Plan vest after five years. The number of shares issued upon vesting will range from 0% to 175% of the PSUs granted based on the Company’s relative total shareholder return (“TSR”) as compared to the

 

39


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

TSR of a specified group of peer banks. Compensation expense for the PSUs will be recognized over the vesting period of the awards based on the fair value of the award at the grant date. The fair value of PSUs granted is estimated using a Monte Carlo simulation. Expected volatilities were determined based on the historical volatilities of the Company and the specified peer group. The risk-free interest rate for the performance period was derived from the Treasury constant maturities yield curve on the valuation date.

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

Grant date

 

May 1, 2018

 

Performance period

 

5.00 Years

 

Stock price

 

$

38.85

 

Triumph stock price volatility

 

 

29.13

%

Risk-free rate

 

 

2.76

%

 

As of September 30, 2018, there was $2,108,000 of unrecognized compensation cost related to the nonvested PSUs. The cost is expected to be recognized over a remaining period of 4.59 years.

Stock Options

A summary of the changes in the Company’s stock options under the Omnibus Incentive Plan for the nine months ended September 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

 

Weighted-Average

 

 

Contractual Term

 

 

Intrinsic Value

 

Stock Options

 

Shares

 

 

Exercise Price

 

 

(In Years)

 

 

(In Thousands)

 

Outstanding at January 1, 2018

 

 

185,328

 

 

$

18.97

 

 

 

 

 

 

 

 

 

Granted

 

 

51,952

 

 

 

38.75

 

 

 

 

 

 

 

 

 

Exercised

 

 

(2,556

)

 

 

17.16

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(3,186

)

 

 

18.98

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

231,538

 

 

$

23.43

 

 

 

8.22

 

 

$

3,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully vested shares and shares expected to vest at September 30, 2018

 

 

231,538

 

 

$

23.43

 

 

 

8.22

 

 

$

3,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares exercisable at September 30, 2018

 

 

75,550

 

 

$

17.73

 

 

 

7.69

 

 

$

1,547

 

 

Information related to the stock options for the nine months ended September 30, 2018 and 2017 was as follows:

 

Nine Months Ended September 30,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

Aggregate intrinsic value of options exercised

 

$

59

 

 

$

243

 

Cash received from option exercises

 

 

 

 

 

281

 

Tax benefit realized from options exercises

 

 

12

 

 

 

85

 

Weighted average fair value of options granted

 

$

13.22

 

 

$

8.71

 

 

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

 

 

40


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Risk-free interest rate

 

 

2.85

%

 

 

2.11

%

Expected term

 

6.25 years

 

 

6.25 Years

 

Expected stock price volatility

 

 

28.07

%

 

 

29.70

%

Dividend yield

 

 

 

 

 

 

 

As of September 30, 2018, there was $804,000 of unrecognized compensation cost related to nonvested stock options granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 3.11 years.

NOTE 14 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income to common stockholders

 

$

8,975

 

 

$

9,587

 

 

$

33,045

 

 

$

29,335

 

Weighted average common shares outstanding

 

 

26,178,194

 

 

 

19,811,577

 

 

 

24,159,543

 

 

 

18,600,009

 

Basic earnings per common share

 

$

0.34

 

 

$

0.48

 

 

$

1.37

 

 

$

1.58

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income to common stockholders

 

$

8,975

 

 

$

9,587

 

 

$

33,045

 

 

$

29,335

 

Dilutive effect of preferred stock

 

 

195

 

 

 

195

 

 

 

578

 

 

 

580

 

Net income to common stockholders - diluted

 

$

9,170

 

 

$

9,782

 

 

$

33,623

 

 

$

29,915

 

Weighted average common shares outstanding

 

 

26,178,194

 

 

 

19,811,577

 

 

 

24,159,543

 

 

 

18,600,009

 

Dilutive effects of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed conversion of Preferred A

 

 

315,773

 

 

 

315,773

 

 

 

315,773

 

 

 

315,773

 

Assumed conversion of Preferred B

 

 

354,471

 

 

 

354,471

 

 

 

354,471

 

 

 

354,471

 

Assumed exercises of stock warrants

 

 

 

 

 

54,476

 

 

 

 

 

 

110,089

 

Assumed exercises of stock options

 

 

90,320

 

 

 

45,788

 

 

 

86,728

 

 

 

42,084

 

Restricted stock awards

 

 

45,796

 

 

 

63,384

 

 

 

55,087

 

 

 

65,999

 

Restricted stock units

 

 

7,276

 

 

 

 

 

 

2,706

 

 

 

 

Performance stock units

 

 

 

 

 

 

 

 

 

 

 

 

Average shares and dilutive potential common shares

 

 

26,991,830

 

 

 

20,645,469

 

 

 

24,974,308

 

 

 

19,488,425

 

Diluted earnings per common share

 

$

0.34

 

 

$

0.47

 

 

$

1.35

 

 

$

1.53

 

 

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Shares assumed to be converted from Preferred Stock Series A

 

 

 

 

 

 

 

 

 

 

 

 

Shares assumed to be converted from Preferred Stock Series B

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

51,952

 

 

 

58,442

 

 

 

51,952

 

 

 

58,442

 

Restricted stock awards

 

 

14,513

 

 

 

 

 

 

14,513

 

 

 

 

Restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

 

59,658

 

 

 

 

 

 

59,658

 

 

 

 

 

 

 

 

41


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 15 – BUSINESS SEGMENT INFORMATION

The following table presents the Company’s operating segments. The accounting policies of the segments are substantially similar to those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2017 Form 10-K. 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 allowance for loan loss determination. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis but not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC. General factoring services not originated through TBC are included in the Banking segment. On March 31, 2017, the Company sold its 100% membership interest in Triumph Capital Advisors, LLC (“TCA”) and discontinued fee based asset management services. TCA operations were not material during the year ended December 31, 2017 and are reflected in the Corporate segment, along with the gain on sale of the Company’s membership interest in TCA.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

43,769

 

 

$

27,420

 

 

$

570

 

 

$

71,759

 

Intersegment interest allocations

 

 

6,289

 

 

 

(6,289

)

 

 

 

 

 

 

Total interest expense

 

 

8,426

 

 

 

 

 

 

1,551

 

 

 

9,977

 

Net interest income (expense)

 

 

41,632

 

 

 

21,131

 

 

 

(981

)

 

 

61,782

 

Provision for loan losses

 

 

6,774

 

 

 

41

 

 

 

(12

)

 

 

6,803

 

Net interest income after provision

 

 

34,858

 

 

 

21,090

 

 

 

(969

)

 

 

54,979

 

Noninterest income

 

 

4,991

 

 

 

942

 

 

 

126

 

 

 

6,059

 

Noninterest expense

 

 

33,507

 

 

 

12,902

 

 

 

2,537

 

 

 

48,946

 

Operating income (loss)

 

$

6,342

 

 

$

9,130

 

 

$

(3,380

)

 

$

12,092

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

32,973

 

 

$

11,736

 

 

$

428

 

 

$

45,137

 

Intersegment interest allocations

 

 

2,193

 

 

 

(2,193

)

 

 

 

 

 

 

Total interest expense

 

 

4,294

 

 

 

 

 

 

1,331

 

 

 

5,625

 

Net interest income (expense)

 

 

30,872

 

 

 

9,543

 

 

 

(903

)

 

 

39,512

 

Provision for loan losses

 

 

(69

)

 

 

649

 

 

 

(8

)

 

 

572

 

Net interest income after provision

 

 

30,941

 

 

 

8,894

 

 

 

(895

)

 

 

38,940

 

Noninterest income

 

 

3,498

 

 

 

774

 

 

 

(101

)

 

 

4,171

 

Noninterest expense

 

 

21,984

 

 

 

5,600

 

 

 

641

 

 

 

28,225

 

Operating income (loss)

 

$

12,455

 

 

$

4,068

 

 

$

(1,637

)

 

$

14,886

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

123,050

 

 

$

62,514

 

 

$

1,562

 

 

$

187,126

 

Intersegment interest allocations

 

 

13,377

 

 

 

(13,377

)

 

 

 

 

 

 

Total interest expense

 

 

20,421

 

 

 

 

 

 

4,536

 

 

 

24,957

 

Net interest income (expense)

 

 

116,006

 

 

 

49,137

 

 

 

(2,974

)

 

 

162,169

 

Provision for loan losses

 

 

10,510

 

 

 

3,747

 

 

 

 

 

 

14,257

 

Net interest income after provision

 

 

105,496

 

 

 

45,390

 

 

 

(2,974

)

 

 

147,912

 

Gain on sale of subsidiary or division

 

 

1,071

 

 

 

 

 

 

 

 

 

1,071

 

Other noninterest income

 

 

12,612

 

 

 

2,452

 

 

 

41

 

 

 

15,105

 

Noninterest expense

 

 

86,446

 

 

 

30,067

 

 

 

3,878

 

 

 

120,391

 

Operating income (loss)

 

$

32,733

 

 

$

17,775

 

 

$

(6,811

)

 

$

43,697

 

 

 

42


TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

93,204

 

 

$

30,828

 

 

$

975

 

 

$

125,007

 

Intersegment interest allocations

 

 

5,211

 

 

 

(5,211

)

 

 

 

 

 

 

Total interest expense

 

 

11,177

 

 

 

 

 

 

3,942

 

 

 

15,119

 

Net interest income (expense)

 

 

87,238

 

 

 

25,617

 

 

 

(2,967

)

 

 

109,888

 

Provision for loan losses

 

 

7,571

 

 

 

2,042

 

 

 

84

 

 

 

9,697

 

Net interest income after provision

 

 

79,667

 

 

 

23,575

 

 

 

(3,051

)

 

 

100,191

 

Gain on sale of subsidiary or division

 

 

 

 

 

 

 

 

20,860

 

 

 

20,860

 

Other noninterest income

 

 

10,604

 

 

 

2,203

 

 

 

2,991

 

 

 

15,798

 

Noninterest expense

 

 

65,171

 

 

 

16,677

 

 

 

8,535

 

 

 

90,383

 

Operating income (loss)

 

$

25,100

 

 

$

9,101

 

 

$

12,265

 

 

$

46,466

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

4,433,862

 

 

$

659,782

 

 

$

712,971

 

 

$

(1,269,513

)

 

$

4,537,102

 

Gross loans

 

$

3,411,456

 

 

$

579,985

 

 

$

10,952

 

 

$

(490,250

)

 

$

3,512,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

3,444,322

 

 

$

360,922

 

 

$

504,656

 

 

$

(810,867

)

 

$

3,499,033

 

Gross loans

 

$

2,784,147

 

 

$

346,293

 

 

$

11,936

 

 

$

(331,520

)

 

$

2,810,856

 

 

 

 

 

 

 

43


 

item 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this discussion for further information on forward-looking statements.

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act. Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services as well as commercial finance product lines focused on businesses that require specialized financial solutions. Our banking operations include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines include factoring, asset based lending, equipment lending, and premium finance 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 September 30, 2018, we had consolidated total assets of $4.537 billion, total loans held for investment of $3.512 billion, total deposits of $3.439 billion and total stockholders’ equity of $616.6 million.

A key element of our strategy is to supplement the asset generation capacity in our community banking markets with commercial finance product lines which are offered on a nationwide basis and which serve to enhance the overall yield of our portfolio.  These products include our factoring services, provided principally in the transportation sector, and our asset based lending, equipment finance, and premium finance products. Our aggregate outstanding balances for these products increased $386.0 million, or 43.0%, to $1.284 billion as of September 30, 2018, primarily due to organic growth as well as increased factored receivables resulting from the acquisition of Interstate Capital Corporation as discussed below.

The following table sets forth our commercial finance product lines:

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Commercial finance

 

 

 

 

 

 

 

 

Equipment

 

$

323,832

 

 

$

254,119

 

Asset based lending

 

 

273,096

 

 

 

213,471

 

Premium finance

 

 

75,293

 

 

 

55,520

 

Factored receivables

 

 

611,285

 

 

 

374,410

 

Total commercial finance loans

 

$

1,283,506

 

 

$

897,520

 

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary, Triumph Business Capital, operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products. This business also has a legacy and structure as a standalone company. We have determined our reportable segments are Banking, Factoring, and Corporate. For the nine months ended September 30, 2018, our Banking segment generated 67% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 32% of our total revenue, and our Corporate segment generated 1% of our total revenue. On March 31, 2017, we sold our 100% membership interest in Triumph Capital Advisors, LLC (“TCA”) and discontinued fee based asset management services. TCA operations were not material during the year ended December 31, 2017 and are reflected in our Corporate segment, along with the gain on sale of our membership interest in TCA.

 

44


 

Third Quarter 2018 Overview

Net income available to common stockholders for the three months ended September 30, 2018 was $9.0 million, or $0.34 per diluted share, compared to net income available to common stockholders for the three months ended September 30, 2017 of $9.6 million, or $0.47 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, adjusted net income to common stockholders was $13.5 million, or $0.51 per diluted share, for the three months ended September 30, 2018.  For the three months ended September 30, 2018, our return on average common equity was 5.85% and our return on average assets was 0.90%.

Net income available to common stockholders for the nine months ended September 30, 2018 was $33.0 million, or $1.35 per diluted share, compared to net income available to common stockholders for the nine months ended September 30, 2017 of $29.3 million, or $1.53 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $37.5 million, or $1.53 per diluted share, for the nine months ended September 30, 2018, compared to adjusted net income to common stockholders for the nine months ended September 30, 2017 of $19.4 million, or $1.02 per diluted share.  For the nine months ended September 30, 2018, our return on average common equity was 8.41% and our return on average assets was 1.21%.

At September 30, 2018, we had total assets of $4.537 billion, including gross loans of $3.512 billion, compared to $3.499 billion of total assets and $2.811 billion of gross loans at December 31, 2017. Organic loan growth totaled $282.4 million during the nine months ended September 30, 2018. Our commercial finance product lines increased from $897.5 million in aggregate as of December 31, 2017 to $1.284 billion as of September 30, 2018, an increase of 43.0%, and constitute 37% of our total loan portfolio at September 30, 2018.

At September 30, 2018, we had total liabilities of $3.920 billion, including total deposits of $3.439 billion, compared to $3.107 billion of total liabilities and $2.621 billion of total deposits at December 31, 2017. Deposits increased $817.7 million during the nine months ended September 30, 2018.

At September 30, 2018, we had total stockholders' equity of $616.6 million. During the nine months ended September 30, 2018, total stockholders’ equity increased $224.9 million, primarily due to $192.1 million of net proceeds from the April 12, 2018 common stock offering discussed below and our net income for the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 11.16% and 13.05%, respectively, at September 30, 2018.

2018 Items of Note

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

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

Interstate Capital Corporation

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

Common Stock Offering

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

 

45


 

Triumph Healthcare Finance

On January 19, 2018, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Healthcare Finance (“THF”) and exit the healthcare asset-based lending line of business. The decision to sell THF was made prior to the end of the fourth quarter of 2017, and at December 31, 2017, the fair value of the Disposal Group exceeded its carrying amount. As a result of this decision, the $71.4 million carrying amount of the Disposal Group was transferred to assets held for sale as of December 31, 2017. The sale was finalized on March 16, 2018 and resulted in a net pre-tax contribution to earnings for the nine months ended September 30, 2018 of $1.1 million, or approximately $0.8 million net of tax.

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

2017 Items of Note

Valley Bancorp, Inc.

Effective December 9, 2017, we acquired Valley Bancorp, Inc. (“Valley”) and its community banking subsidiary, Valley Bank & Trust, which was merged into TBK Bank upon closing, in an all-cash transaction for $40.1 million. As part of the Valley acquisition, we acquired $171.2 million of loans, assumed $293.4 million of deposits and recorded $6.1 million of core deposit intangible assets and $10.5 million of goodwill.

Independent Bank – Colorado Branches

On October 6, 2017, we, through our subsidiary TBK Bank, completed our acquisition of nine branch locations in Colorado from Independent Bank Group, Inc.’s banking subsidiary Independent Bank (the “Acquired Branches”) for an aggregate deposit premium of approximately $6.8 million, or 4.2%. As part of the acquisition, we acquired $95.8 million of loans, assumed $160.7 million of deposits associated with the branches and recorded $3.3 million of core deposit intangible assets and $5.8 million of goodwill.

Common Stock Offering

On August 1, 2017, we completed an underwritten common stock offering issuing 2.53 million shares of our common stock, including 0.33 million shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares, at $27.50 per share for total gross proceeds of $69.6 million. Net proceeds after underwriting discounts and offering expenses were $65.5 million. We used a significant portion of the net proceeds of the offering to fund the acquisition of Valley Bancorp, Inc. and for general corporate purposes.

Triumph Capital Advisors

On March 31, 2017, we sold our 100% membership interest in Triumph Capital Advisors, LLC (“TCA”). The TCA sale resulted in a net pre-tax contribution to earnings for the three months ended March 31, 2017 of $15.7 million, or approximately $10.0 million net of tax. Consideration received included a seller financed loan receivable in the amount of $10.5 million.

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

 

46


 

Financial Highlights

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

71,759

 

 

$

45,137

 

 

$

187,126

 

 

$

125,007

 

Interest expense

 

 

9,977

 

 

 

5,625

 

 

 

24,957

 

 

 

15,119

 

Net interest income

 

 

61,782

 

 

 

39,512

 

 

 

162,169

 

 

 

109,888

 

Provision for loan losses

 

 

6,803

 

 

 

572

 

 

 

14,257

 

 

 

9,697

 

Net interest income after provision

 

 

54,979

 

 

 

38,940

 

 

 

147,912

 

 

 

100,191

 

Gain on sale of subsidiary or division

 

 

 

 

 

 

 

 

1,071

 

 

 

20,860

 

Other noninterest income

 

 

6,059

 

 

 

4,171

 

 

 

15,105

 

 

 

15,798

 

Noninterest income

 

 

6,059

 

 

 

4,171

 

 

 

16,176

 

 

 

36,658

 

Noninterest expense

 

 

48,946

 

 

 

28,225

 

 

 

120,391

 

 

 

90,383

 

Net income before income taxes

 

 

12,092

 

 

 

14,886

 

 

 

43,697

 

 

 

46,466

 

Income tax expense

 

 

2,922

 

 

 

5,104

 

 

 

10,074

 

 

 

16,551

 

Net income

 

 

9,170

 

 

 

9,782

 

 

 

33,623

 

 

 

29,915

 

Dividends on preferred stock

 

 

(195

)

 

 

(195

)

 

 

(578

)

 

 

(580

)

Net income available to common stockholders

 

$

8,975

 

 

$

9,587

 

 

$

33,045

 

 

$

29,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.34

 

 

$

0.48

 

 

$

1.37

 

 

$

1.58

 

Diluted earnings per common share

 

$

0.34

 

 

$

0.47

 

 

$

1.35

 

 

$

1.53

 

Weighted average shares outstanding - basic

 

 

26,178,194

 

 

 

19,811,577

 

 

 

24,159,543

 

 

 

18,600,009

 

Weighted average shares outstanding - diluted

 

 

26,991,830

 

 

 

20,645,469

 

 

 

24,974,308

 

 

 

19,488,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Per Share Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted diluted earnings per common share

 

$

0.51

 

 

$

0.47

 

 

$

1.53

 

 

$

1.02

 

Adjusted weighted average shares outstanding - diluted

 

 

26,991,830

 

 

 

20,645,469

 

 

 

24,974,308

 

 

 

19,488,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance ratios - Annualized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.90

%

 

 

1.36

%

 

 

1.21

%

 

 

1.46

%

Return on average total equity

 

 

5.88

%

 

 

10.71

%

 

 

8.40

%

 

 

12.44

%

Return on average common equity

 

 

5.85

%

 

 

10.79

%

 

 

8.41

%

 

 

12.58

%

Return on average tangible common equity (1)

 

 

7.57

%

 

 

12.28

%

 

 

10.27

%

 

 

14.65

%

Yield on loans

 

 

8.33

%

 

 

7.44

%

 

 

8.05

%

 

 

7.47

%

Adjusted yield on loans (1)

 

 

8.18

%

 

 

7.20

%

 

 

7.74

%

 

 

7.14

%

Cost of interest bearing deposits

 

 

1.08

%

 

 

0.80

%

 

 

0.96

%

 

 

0.75

%

Cost of total deposits

 

 

0.85

%

 

 

0.64

%

 

 

0.76

%

 

 

0.61

%

Cost of total funds

 

 

1.16

%

 

 

0.90

%

 

 

1.06

%

 

 

0.84

%

Net interest margin

 

 

6.59

%

 

 

5.90

%

 

 

6.35

%

 

 

5.82

%

Adjusted net interest margin (1)

 

 

6.45

%

 

 

5.69

%

 

 

6.08

%

 

 

5.54

%

Efficiency ratio

 

 

72.15

%

 

 

64.61

%

 

 

67.50

%

 

 

61.68

%

Adjusted efficiency ratio (1)

 

 

63.49

%

 

 

64.61

%

 

 

63.98

%

 

 

67.82

%

Net noninterest expense to average assets

 

 

4.19

%

 

 

3.35

%

 

 

3.76

%

 

 

2.63

%

Adjusted net noninterest expense to average assets (1)

 

 

3.62

%

 

 

3.35

%

 

 

3.55

%

 

 

3.40

%

  

 

47


 

 

September 30,

 

 

December 31,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

Total assets

 

$

4,537,102

 

 

$

3,499,033

 

Cash and cash equivalents

 

 

282,409

 

 

 

134,129

 

Investment securities

 

 

369,365

 

 

 

264,166

 

Loans held for investment, net

 

 

3,484,887

 

 

 

2,792,108

 

Total liabilities

 

 

3,920,461

 

 

 

3,107,335

 

Noninterest bearing deposits

 

 

697,903

 

 

 

564,225

 

Interest bearing deposits

 

 

2,741,146

 

 

 

2,057,123

 

FHLB advances

 

 

330,000

 

 

 

365,000

 

Subordinated notes

 

 

48,903

 

 

 

48,828

 

Junior subordinated debentures

 

 

38,966

 

 

 

38,623

 

Total stockholders’ equity

 

 

616,641

 

 

 

391,698

 

Preferred stockholders' equity

 

 

9,658

 

 

 

9,658

 

Common stockholders' equity

 

 

606,983

 

 

 

382,040

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

Book value per share

 

$

23.10

 

 

$

18.35

 

Tangible book value per share (1)

 

$

15.42

 

 

$

15.29

 

Shares outstanding end of period

 

 

26,279,761

 

 

 

20,820,445

 

 

 

 

 

 

 

 

 

 

Asset Quality ratios(2):

 

 

 

 

 

 

 

 

Past due to total loans

 

 

2.23

%

 

 

2.33

%

Nonperforming loans  to total loans

 

 

1.13

%

 

 

1.38

%

Nonperforming assets to total assets

 

 

0.93

%

 

 

1.39

%

ALLL to nonperforming loans

 

 

68.82

%

 

 

48.41

%

ALLL to total loans

 

 

0.78

%

 

 

0.67

%

Net charge-offs to average loans(3)

 

 

0.19

%

 

 

0.28

%

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

Tier 1 capital to average assets

 

 

11.75

%

 

 

11.80

%

Tier 1 capital to risk-weighted assets

 

 

11.16

%

 

 

11.15

%

Common equity Tier 1 capital to risk-weighted assets

 

 

9.96

%

 

 

9.70

%

Total capital to risk-weighted assets

 

 

13.05

%

 

 

13.21

%

Total stockholders' equity to total assets

 

 

13.59

%

 

 

11.19

%

Tangible common stockholders' equity ratio (1)

 

 

9.35

%

 

 

9.26

%

  

 

(1)

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

 

 

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

 

 

Tangible common stockholders’ equity” is common stockholders’ equity less goodwill and other intangible assets.

 

 

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

 

 

48


 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

Adjusted yield on loans” is our yield on loans after excluding loan accretion from our acquired loan portfolio.  Our management uses this metric to better assess the impact of purchase accounting on our yield on loans, as the effect of loan discount accretion is expected to decrease as the acquired loans roll off of our balance sheet, absent the impact, if any, of future acquisitions.

 

 

Adjusted net interest margin” is net interest margin after excluding loan accretion from the acquired loan portfolio.  Our management uses this metric to better assess the impact of purchase accounting on net interest margin, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off of our balance sheet, absent the impact, if any, of future acquisitions.

 

 

(2)

Asset quality ratios exclude loans held for sale.

 

 

(3)

Net charge-offs to average loans ratios are for the nine months ended September 30, 2018 and the year ended December 31, 2017.

 

 

49


 

GAAP Reconciliation of Non-GAAP Financial Measures

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

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income available to common stockholders

 

$

8,975

 

 

$

9,587

 

 

$

33,045

 

 

$

29,335

 

Transaction costs

 

 

5,871

 

 

 

 

 

 

6,965

 

 

 

325

 

Gain on sale of subsidiary

 

 

 

 

 

 

 

 

(1,071

)

 

 

(20,860

)

Incremental bonus related to transaction

 

 

 

 

 

 

 

 

 

 

 

4,814

 

Tax effect of adjustments

 

 

(1,392

)

 

 

 

 

 

(1,401

)

 

 

5,754

 

Adjusted net income available to common stockholders

 

$

13,454

 

 

$

9,587

 

 

$

37,538

 

 

$

19,368

 

Dilutive effect of convertible preferred stock

 

 

195

 

 

 

195

 

 

 

578

 

 

 

580

 

Adjusted net income available to common stockholders - diluted

 

$

13,649

 

 

$

9,782

 

 

$

38,116

 

 

$

19,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

 

26,991,830

 

 

 

20,645,469

 

 

 

24,974,308

 

 

 

19,488,425

 

Adjusted effects of assumed preferred stock conversion

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average shares outstanding - diluted

 

 

26,991,830

 

 

 

20,645,469

 

 

 

24,974,308

 

 

 

19,488,425

 

Adjusted diluted earnings per common share

 

$

0.51

 

 

$

0.47

 

 

$

1.53

 

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

8,975

 

 

$

9,587

 

 

$

33,045

 

 

$

29,335

 

Average tangible common equity

 

 

470,553

 

 

 

309,624

 

 

 

430,080

 

 

 

267,633

 

Return on average tangible common equity

 

 

7.57

%

 

 

12.28

%

 

 

10.27

%

 

 

14.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted efficiency ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

61,782

 

 

$

39,512

 

 

$

162,169

 

 

$

109,888

 

Noninterest income

 

 

6,059

 

 

 

4,171

 

 

 

16,176

 

 

 

36,658

 

Operating revenue

 

 

67,841

 

 

 

43,683

 

 

 

178,345

 

 

 

146,546

 

Gain on sale of subsidiary

 

 

 

 

 

 

 

 

(1,071

)

 

 

(20,860

)

Adjusted operating revenue

 

$

67,841

 

 

$

43,683

 

 

$

177,274

 

 

$

125,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

$

48,946

 

 

$

28,225

 

 

$

120,391

 

 

$

90,383

 

Transaction costs

 

 

(5,871

)

 

 

 

 

 

(6,965

)

 

 

(325

)

Incremental bonus related to transaction

 

 

 

 

 

 

 

 

 

 

 

(4,814

)

Adjusted noninterest expense

 

$

43,075

 

 

$

28,225

 

 

$

113,426

 

 

$

85,244

 

Adjusted efficiency ratio

 

 

63.49

%

 

 

64.61

%

 

 

63.98

%

 

 

67.82

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net noninterest expense to average assets ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

$

48,946

 

 

$

28,225

 

 

$

120,391

 

 

$

90,383

 

Transaction costs

 

 

(5,871

)

 

 

 

 

 

(6,965

)

 

 

(325

)

Incremental bonus related to transaction

 

 

 

 

 

 

 

 

 

 

 

(4,814

)

Adjusted noninterest expense

 

$

43,075

 

 

$

28,225

 

 

$

113,426

 

 

$

85,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest income

 

$

6,059

 

 

$

4,171

 

 

$

16,176

 

 

$

36,658

 

Gain on sale of subsidiary

 

 

 

 

 

 

 

 

(1,071

)

 

 

(20,860

)

Adjusted noninterest income

 

 

6,059

 

 

 

4,171

 

 

 

15,105

 

 

 

15,798

 

Adjusted net noninterest expenses

 

$

37,016

 

 

$

24,054

 

 

$

98,321

 

 

$

69,446

 

Average total assets

 

 

4,060,560

 

 

 

2,849,170

 

 

 

3,702,513

 

 

 

2,731,426

 

Adjusted net noninterest expense to average assets ratio

 

 

3.62

%

 

 

3.35

%

 

 

3.55

%

 

 

3.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported yield on loans

 

 

8.33

%

 

 

7.44

%

 

 

8.05

%

 

 

7.47

%

Effect of accretion income on acquired loans

 

 

(0.15

%)

 

 

(0.24

%)

 

 

(0.31

%)

 

 

(0.33

%)

Adjusted yield on loans

 

 

8.18

%

 

 

7.20

%

 

 

7.74

%

 

 

7.14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported net interest margin

 

 

6.59

%

 

 

5.90

%

 

 

6.35

%

 

 

5.82

%

Effect of accretion income on acquired loans

 

 

(0.14

%)

 

 

(0.21

%)

 

 

(0.27

%)

 

 

(0.28

%)

Adjusted net interest margin

 

 

6.45

%

 

 

5.69

%

 

 

6.08

%

 

 

5.54

%

  

 

50


 

  

 

September 30,

 

 

December 31,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

Total stockholders' equity

 

$

616,641

 

 

$

391,698

 

Preferred stock liquidation preference

 

 

(9,658

)

 

 

(9,658

)

Total common stockholders' equity

 

 

606,983

 

 

 

382,040

 

Goodwill and other intangibles

 

 

(201,842

)

 

 

(63,778

)

Tangible common stockholders' equity

 

$

405,141

 

 

$

318,262

 

Common shares outstanding

 

 

26,279,761

 

 

 

20,820,445

 

Tangible book value per share

 

$

15.42

 

 

$

15.29

 

 

 

 

 

 

 

 

 

 

Total assets at end of period

 

$

4,537,102

 

 

$

3,499,033

 

Goodwill and other intangibles

 

 

(201,842

)

 

 

(63,778

)

Tangible assets at period end

 

$

4,335,260

 

 

$

3,435,255

 

Tangible common stockholders' equity ratio

 

 

9.35

%

 

 

9.26

%

Results of Operations

Three months ended September 30, 2018 compared with three months ended September 30, 2017.

Net Income

We earned net income of $9.2 million for the three months ended September 30, 2018 compared to $9.8 million for the three months ended September 30, 2017, a decrease of $0.6 million.

The results for the three months ended September 30, 2018 include the results of operations of the assets acquired from FBD and SCC since the September 8, 2018 acquisition date and were impacted by $5.9 million of transaction costs associated with the acquisition. Excluding the transaction costs, net of taxes, we earned adjusted net income of $13.6 million for the three months ended September 30, 2018 compared to $9.8 million for the three months ended September 30, 2017, an increase of $3.8 million. The adjusted increase was primarily the result of a $22.3 million increase in net interest income, a $1.9 million increase in noninterest income, and a $0.7 million decrease in adjusted income tax expense, offset in part by a $6.2 million increase in the provision for loan losses and a $14.9 million increase in adjusted noninterest expense.

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

Net Interest Income

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

 

 

51


 

The following table presents the distribution of average assets, liabilities and equity, as well as interest income and fees earned on average interest earning assets and interest expense paid on average interest bearing liabilities:

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Rate(4)

 

 

Balance

 

 

Interest

 

 

Rate(4)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

156,876

 

 

$

865

 

 

 

2.19

%

 

$

111,364

 

 

$

370

 

 

 

1.32

%

Taxable securities

 

 

183,238

 

 

 

1,207

 

 

 

2.61

%

 

 

211,354

 

 

 

1,570

 

 

 

2.95

%

Tax-exempt securities

 

 

66,208

 

 

 

344

 

 

 

2.06

%

 

 

25,174

 

 

 

85

 

 

 

1.34

%

FHLB stock

 

 

20,984

 

 

 

147

 

 

 

2.78

%

 

 

14,885

 

 

 

51

 

 

 

1.36

%

Loans (1)

 

 

3,293,719

 

 

 

69,196

 

 

 

8.33

%

 

 

2,295,356

 

 

 

43,061

 

 

 

7.44

%

Total interest earning assets

 

 

3,721,025

 

 

 

71,759

 

 

 

7.65

%

 

 

2,658,133

 

 

 

45,137

 

 

 

6.74

%

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

69,875

 

 

 

 

 

 

 

 

 

 

 

36,128

 

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

 

269,660

 

 

 

 

 

 

 

 

 

 

 

154,909

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,060,560

 

 

 

 

 

 

 

 

 

 

$

2,849,170

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

$

418,226

 

 

$

200

 

 

 

0.19

%

 

$

312,009

 

 

$

137

 

 

 

0.17

%

Individual retirement accounts

 

 

105,774

 

 

 

339

 

 

 

1.27

%

 

 

98,713

 

 

 

309

 

 

 

1.24

%

Money market

 

 

303,843

 

 

 

594

 

 

 

0.78

%

 

 

201,462

 

 

 

118

 

 

 

0.23

%

Savings

 

 

272,230

 

 

 

60

 

 

 

0.09

%

 

 

167,908

 

 

 

20

 

 

 

0.05

%

Certificates of deposit

 

 

793,685

 

 

 

3,068

 

 

 

1.53

%

 

 

773,075

 

 

 

2,381

 

 

 

1.22

%

Brokered deposits

 

 

384,337

 

 

 

1,958

 

 

 

2.02

%

 

 

72,094

 

 

 

307

 

 

 

1.69

%

Total deposits

 

 

2,278,095

 

 

 

6,219

 

 

 

1.08

%

 

 

1,625,261

 

 

 

3,272

 

 

 

0.80

%

Subordinated notes

 

 

48,890

 

 

 

837

 

 

 

6.79

%

 

 

48,791

 

 

 

837

 

 

 

6.81

%

Junior subordinated debentures

 

 

38,905

 

 

 

714

 

 

 

7.28

%

 

 

32,983

 

 

 

495

 

 

 

5.95

%

Other borrowings

 

 

425,781

 

 

 

2,207

 

 

 

2.06

%

 

 

365,464

 

 

 

1,021

 

 

 

1.11

%

Total interest bearing liabilities

 

 

2,791,671

 

 

 

9,977

 

 

 

1.42

%

 

 

2,072,499

 

 

 

5,625

 

 

 

1.08

%

Noninterest bearing liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

 

608,245

 

 

 

 

 

 

 

 

 

 

 

398,774

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

41,961

 

 

 

 

 

 

 

 

 

 

 

15,698

 

 

 

 

 

 

 

 

 

Total equity

 

 

618,683

 

 

 

 

 

 

 

 

 

 

 

362,199

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,060,560

 

 

 

 

 

 

 

 

 

 

$

2,849,170

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

61,782

 

 

 

 

 

 

 

 

 

 

$

39,512

 

 

 

 

 

Interest spread (2)

 

 

 

 

 

 

 

 

 

 

6.23

%

 

 

 

 

 

 

 

 

 

 

5.66

%

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

6.59

%

 

 

 

 

 

 

 

 

 

 

5.90

%

 

(1) 

Balance totals include respective nonaccrual assets.

(2) 

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

(3) 

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

(4) 

Ratios have been annualized.

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

 

 

Three Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Average community banking

 

$

2,039,624

 

 

$

1,463,401

 

Average commercial finance

 

 

1,254,095

 

 

 

831,955

 

Average total loans

 

$

3,293,719

 

 

$

2,295,356

 

Community banking yield

 

 

5.68

%

 

 

5.60

%

Commercial finance yield

 

 

12.66

%

 

 

10.62

%

Total loan yield

 

 

8.33

%

 

 

7.44

%

 

52


 

We earned net interest income of $61.8 million for the three months ended September 30, 2018 compared to $39.5 million for the three months ended September 30, 2017, an increase of $22.3 million, or 56.5%, primarily driven by the following factors.

Interest income increased $26.6 million, or 58.9%, as a result of an increase in average interest earning assets of $1,063 million, or 40.0%, which was attributable to the impact of the FBD and SCC acquisitions which contributed $287.8 million of loans and $270.7 million of securities. The increase is also attributable to growth in our factored receivable operations as a result of the ICC acquisition and organic factored receivables growth. Additionally, interest income increased as a result of the Valley and Acquired Branch acquisitions which contributed $267.0 million of loans and $97.7 million of securities during the fourth quarter of 2017 and organic loan growth. The average balance of our higher yielding commercial finance loans increased $422.1 million, or 50.7%, from $832.0 million for the three months ended September 30, 2017 to $1.254 billion for the three months ended  September 30, 2018 as a result of the ICC acquisition and the continued execution of our growth strategy for such products. Our average mortgage warehouse lending balance was $289.7 million for the three months ended September 30, 2018 compared to $177.8 million for the three months ended September 30, 2017. We also experienced increased average balances in our other community banking lending products, including commercial real estate and general commercial and industrial loans, due to organic growth period over period.

Interest expense increased $4.4 million, or 77.4%, as a result of growth in customer deposits and other borrowings as well as higher average rates. Average total interest bearing deposits increased $652.8 million 40.2%, primarily due to $674.7 million of customer deposits assumed in the FBD and SCC acquisitions and $454.1 million of customer deposits assumed in the Valley and Acquired Branches acquisitions.  Excluding the acquired customer deposits, we also experienced growth in our certificates of deposit and brokered deposits as these higher cost deposit products were used to fund our growth period over period.  In addition, our use of other interest bearing borrowings, consisting primarily of FHLB advances, was also increased to fund our growth however, our outstanding balance of FHLB advances at period end decreased period over period.

Net interest margin increased to 6.59% for the three months ended September 30, 2018 from 5.90% for the three months ended September 30, 2017, an increase of 69 basis points or 11.7%.

The increase in our net interest margin primarily resulted from an increase in yields on our interest earning assets.  Our average yield on interest earning assets increased 91 basis points to 7.65% for the three months ended September 30, 2018 from 6.74% for the three months ended September 30, 2017, primarily due to an overall change in the mix within our loan portfolio period over period.  Our higher yielding average commercial finance products as a percentage of the total loan portfolio increased from 36.2% for the three months ended September 30, 2017 to 38.1% for the three months ended September 30, 2018 and, average factored receivables as a percentage of the total commercial finance portfolio increased from 36.4% at September 30, 2017 to 47.7% at September 30, 2018 contributing to the overall increase in yield on our interest earning assets.  In addition, our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, increased as a percentage of the overall factoring portfolio to 78% at September 30, 2018 compared to 77% at September 30, 2017.

A component of the yield on our loan portfolio consists of discount accretion on the portfolios acquired in connection with our acquisitions.  The aggregate increased yield on our loan portfolio attributable to the accretion of purchase discounts associated with our acquisitions was 15 basis points for the three months ended September 30, 2018 and 24 basis points for the three months ended September 30, 2017. Excluding the impact of this discount accretion, the adjusted yield on our loan portfolio was 8.18% and 7.20% for the three months ended September 30, 2018 and 2017, respectively.  Subject to future acquisitions, we anticipate that the contribution of this discount accretion to our interest income will continue to decline over time, but we expect 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.

Also impacting our net interest margin was  an increase in our average cost of interest bearing liabilities of 34 basis points. This increase was caused by an increased use of higher rate certificates of deposit and brokered deposits to fund our growth period over period, and higher rates on short term and floating rate FHLB advances as a result of higher interest rates in the macro economy. This increase was partially offset by a change in the mix of our interest bearing deposits resulting from lower cost customer deposits assumed in the FBD, SCC, Valley and Acquired Branches acquisitions.

Our adjusted net interest margin, which excludes the impact of the acquired loan discount accretion described above, was 6.45% and 5.69% for the three months ended September 30, 2018 and 2017, respectively.

 

 

 

53


 

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

 

 

Three Months Ended

 

 

 

September 30, 2018 vs. 2017

 

 

 

Increase (Decrease) Due to:

 

 

 

 

 

(Dollars in thousands)

 

Rate

 

 

Volume

 

 

Net Increase

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

244

 

 

$

251

 

 

$

495

 

Taxable securities

 

 

(178

)

 

 

(185

)

 

 

(363

)

Tax-exempt securities

 

 

46

 

 

 

213

 

 

 

259

 

FHLB stock

 

 

53

 

 

 

43

 

 

 

96

 

Loans

 

 

5,161

 

 

 

20,974

 

 

 

26,135

 

Total interest income

 

 

5,326

 

 

 

21,296

 

 

 

26,622

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

 

12

 

 

 

51

 

 

 

63

 

Individual retirement accounts

 

 

7

 

 

 

23

 

 

 

30

 

Money market

 

 

276

 

 

 

200

 

 

 

476

 

Savings

 

 

17

 

 

 

23

 

 

 

40

 

Certificates of deposit

 

 

607

 

 

 

80

 

 

 

687

 

Brokered deposits

 

 

60

 

 

 

1,591

 

 

 

1,651

 

Total deposits

 

 

979

 

 

 

1,968

 

 

 

2,947

 

Subordinated notes

 

 

(2

)

 

 

2

 

 

 

 

Junior subordinated debentures

 

 

110

 

 

 

109

 

 

 

219

 

Other borrowings

 

 

873

 

 

 

313

 

 

 

1,186

 

Total interest expense

 

 

1,960

 

 

 

2,392

 

 

 

4,352

 

Change in net interest income

 

$

3,366

 

 

$

18,904

 

 

$

22,270

 

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 (“ALLL”) at an appropriate level to absorb estimated incurred losses in the loan portfolio at the balance sheet date. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity.

Our ALLL was $27.3 million as of September 30, 2018 versus $18.7 million as of December 31, 2017, representing an ALLL to total loans ratio of 0.78% and 0.67% respectively.

Our provision for loan losses was $6.8 million for the three months ended September 30, 2018 compared to $0.6 million for the three months ended September 30, 2017, an increase of $6.2 million, or 1033.3%.  

The increase in provision for loan loss was the result of increased net charge-offs, an increased loss factor on our asset based lending portfolio, which is included in our commercial loan portfolio, and increased net new specific reserves. Net charge-offs increased by $4.1 million from $2 thousand for the three months ended September 30, 2017 to $4.1 million for the three months ended September 30, 2018. Approximately $0.7 million and $0.3 million of the charge-offs for the three months ended September 30, 2018 and 2017, respectively, had specific reserves previously recorded. We recorded net new specific reserves of $0.5 million during the three months ended September 30, 2018 compared to net specific reserve releases of $0.1 million recorded during the three months ended September 30, 2017.

We charged-off approximately $4.0 million on a single asset based lending relationship during the three months ended September 30, 2018.  The loss resulted from fraudulent conduct believed to be perpetrated by one or more employees of the borrower.  The primary cause of the loss was the borrower’s submission of false borrowing base certificates and supporting documentation that resulted in advances in excess of available collateral.  A notice of default has been issued to the borrower and the facility is in the process of liquidation. Approximately $0.7 million of the charge off had specific reserves previously recorded at the beginning of the three months period ended September 30, 2018. In addition, the charge-off resulted in an increase in the estimate of the allowance for loan loss reserves recorded against the remaining asset based lending portfolio in an amount of $2.5 million as a result of higher loss factors being incorporated into the Company’s allowance for loan loss reserve methodology for the period ended September 30, 2018.

 

54


 

Excluding the aforementioned impact of the FBD and SCC acquisitions, during the three months ended September 30, 2018 outstanding loans increased $27.8 million from June 30, 2018.  During the three months ended September 30, 2017, outstanding loans increased $130.4 million from June 30, 2017.  The smaller increase in loan balances within the three months ended September 30, 2018 partially offset the increase in our provision for loan losses in the current period however, this benefit was offset by a change in the composition of our loan portfolio.

Noninterest Income

The following table presents our major categories of noninterest income:

 

Three Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Service charges on deposits

 

$

1,412

 

 

$

1,046

 

 

$

366

 

 

 

35.0

%

Card income

 

 

1,877

 

 

 

956

 

 

 

921

 

 

 

96.3

%

Net OREO gains (losses) and valuation adjustments

 

 

65

 

 

 

15

 

 

 

50

 

 

 

333.3

%

Net gains (losses) on sale of securities

 

 

 

 

 

35

 

 

 

(35

)

 

 

(100.0

%)

Fee income

 

 

1,593

 

 

 

625

 

 

 

968

 

 

 

154.9

%

Insurance commissions

 

 

1,113

 

 

 

826

 

 

 

287

 

 

 

34.7

%

Other

 

 

(1

)

 

 

668

 

 

 

(669

)

 

 

(100.1

%)

Total noninterest income

 

$

6,059

 

 

$

4,171

 

 

$

1,888

 

 

 

45.3

%

Noninterest income increased $1.9 million, or 45.3%, primarily due to increases in service charges on deposits, card income and fee income.  Changes in selected components of noninterest income in the above table are discussed below.

 

Service charges on deposits. Service charges on deposit accounts, including overdraft and non-sufficient funds fees, increased $0.4 million, or 35.0%, primarily due to additional service charges associated with the increase in customer deposits due to the Valley and Acquired Branches acquisitions and to a lesser extent, the FBD and SCC acquisitions.

 

Card Income.  Debit and credit card income increased $0.9 million, or 96.3%, primarily due to additional customer debit and credit card activity associated with the increase in issued cards resulting from the Valley and Acquired Branches acquisitions and to a lesser extent, the FBD and SCC acquisitions. In addition to increased activity, we received a $0.4 million incentive payment from our debit card provider for the achievement of certain growth goals. The incentive payment was received during the third quarter of 2018 is not expected to continue in future periods.

 

Fee income. Fee income increased $1.0 million, or 154.9%, primarily due to increased check and wire fees resulting from the Valley and Acquired Branches acquisitions and to a lesser extent, the FBD and SCC acquisitions.

 

Other.  Other noninterest income, including income for check cashing and wire transfer fees, income associated with trust activities, and bank-owned life insurance, decreased $0.7 million, or 100.1%.  The decrease was driven by a $0.5 million increase on our liability for contingent consideration due to the sellers of ICC upon remeasurement of the liability at September 30, 2018. The contingent payment is due during the fourth quarter of 2020. The decrease was also driven by a write-down on signage and other assets of $0.3 million related to rebranding of Triumph Community Bank to our standardized TBK Bank brand during the three months ended September 30, 2018. There were no other significant increases or decreases in the components of other noninterest income period over period.

Noninterest Expense

The following table presents our major categories of noninterest expense:

 

Three Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

24,695

 

 

$

16,717

 

 

$

7,978

 

 

 

47.7

%

Occupancy, furniture and equipment

 

 

3,553

 

 

 

2,398

 

 

 

1,155

 

 

 

48.2

%

FDIC insurance and other regulatory assessments

 

 

363

 

 

 

294

 

 

 

69

 

 

 

23.5

%

Professional fees

 

 

3,384

 

 

 

1,465

 

 

 

1,919

 

 

 

131.0

%

Amortization of intangible assets

 

 

2,064

 

 

 

870

 

 

 

1,194

 

 

 

137.2

%

Advertising and promotion

 

 

1,609

 

 

 

804

 

 

 

805

 

 

 

100.1

%

Communications and technology

 

 

7,252

 

 

 

2,145

 

 

 

5,107

 

 

 

238.1

%

Travel and entertainment

 

 

1,168

 

 

 

543

 

 

 

625

 

 

 

115.1

%

Other

 

 

4,858

 

 

 

2,989

 

 

 

1,869

 

 

 

62.5

%

Total noninterest expense

 

$

48,946

 

 

$

28,225

 

 

$

20,721

 

 

 

73.4

%

 

55


 

Noninterest expense increased $20.7 million, or 73.4%.  Noninterest expense for the three months ended September 30, 2018 was impacted by $5.9 million of transaction costs associated with the FBD and SCC acquisitions. There were no comparable transaction costs during the three months ended September 30, 2017. Excluding the FBD and SCC transaction costs, we incurred adjusted noninterest expense of $43.0 million for the three months ended September 30, 2018, resulting in an adjusted net increase in noninterest expense of $14.8 million period over period.  Details of the more significant changes in the various components of noninterest expense are further discussed below.

 

Salaries and Employee Benefits. Salaries and employee benefits expenses increased $8.0 million, or 47.7%, which is primarily due to a significant increase in the total size of our workforce between these periods as our average full-time equivalent employees were 1,023.3 and 713.0 for the three months ended September 30, 2018 and 2017, respectively. Sources of this increased headcount were primarily employees added through the ICC, Valley and Acquired Branches acquisitions and to a lesser extent, employees added through the FBD and SCC acquisitions.  In addition, employees were hired to support growth in our commercial finance product lines and other strategic initiatives. Other factors contributing to the increase in salaries and employee benefits 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 increased $1.2 million, or 48.2%, primarily due to expenses associated with the infrastructure and facilities added through the ICC, Valley and Acquired Branches acquisitions and to a lesser extent, infrastructure and facilities added through the FBD and SCC acquisitions.

 

Professional Fees. Professional fees, which are primarily comprised of external audit, tax, consulting, and legal fees, increased $1.9 million, or 131.0%, primarily due to $1.4 million of professional fees incurred in connection with the FBD and SCC acquisitions during the quarter.

 

Amortization of intangible assets. Amortization of intangible assets increased $1.2 million, or 137.2%, primarily due to the addition of intangible assets resulting from the FBD, SCC, ICC, Valley and Acquired Branch acquisitions.

 

Advertising and promotion. Advertising and promotion expenses increased $0.8 million, or 100.1%, primarily due to advertising and brand-awareness activities in connection with the FBD and SCC acquisitions.

 

Communications and Technology. Communications and technology expenses increased $5.1 million, or 238.1%, primarily as a result of $3.1 million in information technology deconversion and termination fees resulting from our acquisition of FBD and SCC. The remaining increase is a result of increased usage and transaction volumes resulting from the ICC, Valley and Acquired Branch acquisitions and to a lesser extent, increased usage and transaction volumes resulting from the FBD and SCC acquisitions. The increase is also a result of growth in our organic operations.

 

Travel and entertainment. Travel and entertainment expenses increased $0.6 million, or 115.1%, primarily due to additional travel required to efficiently integrate the recent acquisitions as well as additional travel in the normal course of business.

 

Other. Other noninterest expense includes loan-related expenses, training and recruiting, postage, insurance, and subscription services.  Other noninterest expense increased $1.9 million or 62.5% primarily due to an increase in software amortization cost resulting from our investments in systems and infrastructure to support the growth in our operations. There were no other significant increases or decreases in the components of other noninterest expense period over period.

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 decreased $2.2 million, or 43.1%, from $5.1 million for the three months ended September 30, 2017 to $2.9 million for the three months ended September 30, 2018. The effective tax rate decreased from 34% for the three months ended September 30, 2017 to 24% for the three months ended September 30, 2018, primarily due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017 which lowered our federal statutory tax rate, effective on January 1, 2018, and resulted in significant modifications to existing law.  

In regard to the Tax Act, authoritative guidance and interpretation by regulatory bodies is ongoing and as such, the accounting for the effects of the Tax Act is not final and the full impact of the new regulation is still being evaluated.

 

56


 

Operating Segment Results

Our reportable segments are Banking, Factoring, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. Our Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Banking segment also includes certain factored receivables which are purchased by TBK Bank. The Factoring segment includes the operations of Triumph Business Capital with revenue derived from factoring services. Corporate includes holding company financing and investment activities, asset management fees associated with TCA prior to its sale on March 31, 2017, and management and administrative expenses to support the overall operations of the Company.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are substantially similar to those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2017 Form 10-K. 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. Noninterest income and expense directly attributable to a segment are assigned accordingly. Taxes are paid on a consolidated basis and are not allocated for segment purposes.

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

   

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

43,769

 

 

$

27,420

 

 

$

570

 

 

$

71,759

 

Intersegment interest allocations

 

 

6,289

 

 

 

(6,289

)

 

 

 

 

 

 

Total interest expense

 

 

8,426

 

 

 

 

 

 

1,551

 

 

 

9,977

 

Net interest income (expense)

 

 

41,632

 

 

 

21,131

 

 

 

(981

)

 

 

61,782

 

Provision for loan losses

 

 

6,774

 

 

 

41

 

 

 

(12

)

 

 

6,803

 

Net interest income after provision

 

 

34,858

 

 

 

21,090

 

 

 

(969

)

 

 

54,979

 

Noninterest income

 

 

4,991

 

 

 

942

 

 

 

126

 

 

 

6,059

 

Noninterest expense

 

 

33,507

 

 

 

12,902

 

 

 

2,537

 

 

 

48,946

 

Operating income (loss)

 

$

6,342

 

 

$

9,130

 

 

$

(3,380

)

 

$

12,092

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

32,973

 

 

$

11,736

 

 

$

428

 

 

$

45,137

 

Intersegment interest allocations

 

 

2,193

 

 

 

(2,193

)

 

 

 

 

 

 

Total interest expense

 

 

4,294

 

 

 

 

 

 

1,331

 

 

 

5,625

 

Net interest income (expense)

 

 

30,872

 

 

 

9,543

 

 

 

(903

)

 

 

39,512

 

Provision for loan losses

 

 

(69

)

 

 

649

 

 

 

(8

)

 

 

572

 

Net interest income after provision

 

 

30,941

 

 

 

8,894

 

 

 

(895

)

 

 

38,940

 

Noninterest income

 

 

3,498

 

 

 

774

 

 

 

(101

)

 

 

4,171

 

Noninterest expense

 

 

21,984

 

 

 

5,600

 

 

 

641

 

 

 

28,225

 

Operating income (loss)

 

$

12,455

 

 

$

4,068

 

 

$

(1,637

)

 

$

14,886

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

4,433,862

 

 

$

659,782

 

 

$

712,971

 

 

$

(1,269,513

)

 

$

4,537,102

 

Gross loans

 

$

3,411,456

 

 

$

579,985

 

 

$

10,952

 

 

$

(490,250

)

 

$

3,512,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

3,444,322

 

 

$

360,922

 

 

$

504,656

 

 

$

(810,867

)

 

$

3,499,033

 

Gross loans

 

$

2,784,147

 

 

$

346,293

 

 

$

11,936

 

 

$

(331,520

)

 

$

2,810,856

 

 

57


 

Banking

(Dollars in thousands)

 

Three Months Ended September 30,

 

 

 

 

 

Banking

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

43,769

 

 

$

32,973

 

 

$

10,796

 

 

 

32.7

%

Intersegment interest allocations

 

 

6,289

 

 

 

2,193

 

 

 

4,096

 

 

 

186.8

%

Total interest expense

 

 

8,426

 

 

 

4,294

 

 

 

4,132

 

 

 

96.2

%

Net interest income (expense)

 

 

41,632

 

 

 

30,872

 

 

 

10,760

 

 

 

34.9

%

Provision for loan losses

 

 

6,774

 

 

 

(69

)

 

 

6,843

 

 

 

9917.4

%

Net interest income (expense) after provision

 

 

34,858

 

 

 

30,941

 

 

 

3,917

 

 

 

12.7

%

Noninterest income

 

 

4,991

 

 

 

3,498

 

 

 

1,493

 

 

 

42.7

%

Noninterest expense

 

 

33,507

 

 

 

21,984

 

 

 

11,523

 

 

 

52.4

%

Operating income (loss)

 

$

6,342

 

 

$

12,455

 

 

$

(6,113

)

 

 

(49.1

%)

Our Banking segment’s operating income decreased $6.1 million, or 49.1%.

Interest income increased primarily as a result of increases in the average balances of our interest earning assets, primarily loans, which was attributable to the impact of the FBD and SCC acquisitions which contributed $287.8 million of loans and $270.7 million of securities. Additionally, interest income increased as a result of the Valley and Acquired Branch acquisitions which contributed $267.0 million of loans and $97.7 million of securities and organic loan growth.  Average loans in our Banking segment increased 45.2% from $2.208 billion for the three months ended September 30, 2017 to $3.206 billion for the three months ended September 30, 2018.

Interest expense increased primarily as a result of growth in average customer deposits and other borrowings due to $674.7 million of customer deposits assumed in the FBD and SCC acquisitions as well as $454.1 million of customer deposits assumed in the Valley and Acquired Branches acquisitions.  Excluding the acquired customer deposits, we also experienced growth in our certificates of deposit and brokered deposits as these higher cost deposit products were used to fund our growth period over period.  In addition, our use of other interest bearing borrowings, consisting primarily of FHLB advances, was also increased to fund our growth however, our outstanding balance of FHLB advances at period end decreased period over period.  We also experienced increased rates across several of our interest bearing borrowings.

The increase in provision for loan loss was the result of an increase in net charge-offs at our Banking segment. Net charge-offs increased by $4.0 million from a net recovery of $0.1 million for the three months ended September 30, 2017 to $3.9 million for the three months ended September 30, 2018 at our Banking segment. Approximately $0.7 million and $0.3 million of the charge-offs for the three months ended September 30, 2018 and 2017, respectively, had specific reserves previously recorded. Also impacting the Banking segment provision for loan loss was a $4.0 million charge-off of an asset based lending relationship which resulted in an increase in the estimate of the allowance for loan loss reserves recorded against the remaining asset based lending portfolio in an amount of $2.5 million as a result of higher loss factors being incorporated into the Company’s allowance for loan loss reserve methodology for the period ended September 30, 2018. Refer to the previous Provision for Loan Loss discussion for further details regarding the charge-off. We recorded net new specific reserves at our Banking segment of $0.1 million during the three months ended September 30, 2018 compared to net specific reserve releases of $0.1 million recorded during the three months ended September 30, 2017. Additionally, loans in our Banking segment grew at a slower pace for the nine months ended September 30, 2018 compared to the same period in 2017 which, when combined with changes in the mix of our portfolio and non-asset based lending-related loss factors used to calculate the ALLL, contributed to a slight offset of the increased provision for loan loss.

Noninterest income increased primarily due to additional service charges and card income associated with the increase in customer deposit and credit/debit card accounts acquired in the FBD, SCC, Valley and Acquired Branches acquisitions. Noninterest income for our Banking Segment includes $0.4 million incentive payment from our debit card provider for the achievement of certain growth goals during the three months ended September 30, 2018. The bonus payment is not expected to continue in future periods. It also includes a write-down on signage and other assets of $0.3 million related to rebranding of Triumph Community Bank to our standardized TBK Bank brand during the three months ended September 30, 2018. In addition, other sources of noninterest income, such as check cashing fees and wire transfer fees increased slightly due to incremental transaction volumes associated with the acquisitions.

 

58


 

For the three months ended September 30, 2018 noninterest expense at our Banking segment includes $4.6 million of transaction costs as well as increased intangible amortization as a result of the FBD and SCC acquisitions with no comparable expenses for the three months ended September 30, 2017. Additionally, noninterest expense increased due to incremental costs associated with the growth in our Banking segment personnel and infrastructure in conjunction with our acquisitions of Valley and the Acquired Branches and to a lesser extent, our acquisitions of FBD and SCC, as well as personnel, facilities and infrastructure to support the continued organic growth in our lending operations. In addition, increases due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense contributed to the increase.

Factoring

(Dollars in thousands)

 

Three Months Ended September 30,

 

 

 

 

 

Factoring

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

27,420

 

 

$

11,736

 

 

$

15,684

 

 

 

133.6

%

Intersegment interest allocations

 

 

(6,289

)

 

 

(2,193

)

 

 

(4,096

)

 

 

186.8

%

Total interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

 

21,131

 

 

 

9,543

 

 

 

11,588

 

 

 

121.4

%

Provision for loan losses

 

 

41

 

 

 

649

 

 

 

(608

)

 

 

(93.7

%)

Net interest income (expense) after provision

 

 

21,090

 

 

 

8,894

 

 

 

12,196

 

 

 

137.1

%

Noninterest income

 

 

942

 

 

 

774

 

 

 

168

 

 

 

21.7

%

Noninterest expense

 

 

12,902

 

 

 

5,600

 

 

 

7,302

 

 

 

130.4

%

Operating income (loss)

 

$

9,130

 

 

$

4,068

 

 

$

5,062

 

 

 

124.4

%

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

Factored receivable period end balance

 

$

579,985,000

 

 

$

315,742,000

 

Yield on average receivable balance

 

 

18.96

%

 

 

16.64

%

Rolling twelve quarter annual charge-off rate

 

 

0.38

%

 

 

0.44

%

Factored receivables - transportation concentration

 

 

83

%

 

 

84

%

 

 

 

 

 

 

 

 

 

Interest income, including fees

 

$

27,420,000

 

 

$

11,736,000

 

Non-interest income

 

 

942,000

 

 

 

774,000

 

Factored receivable total revenue

 

 

28,362,000

 

 

 

12,510,000

 

Average net funds employed

 

 

525,499,000

 

 

 

260,384,000

 

Yield on average net funds employed

 

 

21.41

%

 

 

19.06

%

 

 

 

 

 

 

 

 

 

Accounts receivable purchased

 

$

1,503,049,000

 

 

$

732,406,000

 

Number of invoices purchased

 

 

836,771

 

 

 

476,370

 

Average invoice size

 

$

1,796

 

 

$

1,537

 

Average invoice size - transportation

 

$

1,666

 

 

$

1,486

 

Average invoice size - non-transportation

 

$

3,267

 

 

$

1,965

 

 

 

 

 

 

 

 

 

 

Net new clients

 

 

422

 

 

 

235

 

Period end clients

 

 

5,932

 

 

 

2,925

 

Our Factoring segment’s operating income increased $5.1 million, or 124.4%.

Our average invoice size increased 16.9% from $1,537 for the three months ended September 30, 2017 to $1,796 for the three months ended September 30, 2018, and the number of invoices purchased increased 75.7% period over period. At September 30, 2018, Triumph Business Capital had 86 clients utilizing the TriumphPay platform. For the quarter ended September 30, 2018, TriumphPay processed 65,535 invoices paying 16,125 distinct carriers a total of $95.8 million.

 

59


 

Net interest income increased due to a 101.8% increase in overall average net funds employed in the third quarter of 2018 compared to the third quarter of 2017. Net funds employed represent factored receivable balances net of customer reserves which we hold to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in our consolidated balance sheets. The increase in NFE was the result of a full quarter impact of the ICC acquisition as well as organic growth in the factored receivables portfolio. In addition to increased average net funds employed, yield on average net funds employed increased period over period as a result of an increased average invoice size. Our transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances, as a percentage of the overall Factoring segment portfolio decreased from 84% on September 30, 2017 to 83% on September 30, 2018.  

The decrease in provision for loan losses was primarily the result of lower growth in the ending balance of the factored receivables portfolio during the three months ended September 30, 2018 compared to the same period in 2017. The ending balance of the factored receivables portfolio at our Factoring segment grew $2.4 million during the three months ended September 30, 2018 compared to ending balance growth of $47.0 million over the same time period in 2017. We experienced higher total net charge-offs of $0.2 million in the three months ended September 30, 2018 compared to $0.1 million for the same period in 2017. We recorded net new allowances on specific at-risk balances at our Factoring segment of $0.4 million during the three months ended September 30, 2018 with no significant net new allowances on specific at-risk balances during the three months ended September 30, 2017.

The increase in noninterest income and noninterest expense was driven primarily by increased personnel, operating, and technology costs incurred in connection with the ICC acquisition and growth in our factoring portfolio, particularly the increase in the number of clients and number of invoices processed period over period.

Corporate

(Dollars in thousands)

 

Three Months Ended September 30,

 

 

 

 

 

Corporate

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

570

 

 

$

428

 

 

$

142

 

 

 

33.2

%

Intersegment interest allocations

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

1,551

 

 

 

1,331

 

 

 

220

 

 

 

16.5

%

Net interest income (expense)

 

 

(981

)

 

 

(903

)

 

 

(78

)

 

 

8.6

%

Provision for loan losses

 

 

(12

)

 

 

(8

)

 

 

(4

)

 

 

(50.0

%)

Net interest income (expense) after provision

 

 

(969

)

 

 

(895

)

 

 

(74

)

 

 

8.3

%

Noninterest income

 

 

126

 

 

 

(101

)

 

 

227

 

 

 

224.8

%

Noninterest expense

 

 

2,537

 

 

 

641

 

 

 

1,896

 

 

 

295.8

%

Operating income (loss)

 

$

(3,380

)

 

$

(1,637

)

 

$

(1,743

)

 

 

106.5

%

 

The Corporate segment’s operating loss increased primarily due to $1.3 million of FBD and SCC-related transaction costs recorded during the three months ended September 30, 2018. There were no other significant fluctuations in accounts in our Corporate segment period over period.

Results of Operations

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

Net Income

We earned net income of $33.6 million for the nine months ended September 30, 2018 compared to $29.9 million for the nine months ended September 30, 2017, an increase of $3.7 million.

The results for the nine months ended September 30, 2018 include the results of operations of the acquisitions of FBD, SCC, and ICC since their respective acquisition dates and are inclusive of a combined $7.0 million of transaction costs associated with the acquisitions included in noninterest expense. The results for the nine months ended September 30, 2018 were also impacted by the sale of THF, which resulted in a pre-tax gain on sale in the amount of $1.1 million included in noninterest income. The results for the nine months ended September 30, 2017 were impacted by our sale of TCA, which resulted in a pre-tax gain on sale in the amount of $20.9 million included in noninterest income, offset by an additional $4.8 million bonus accrual and $0.3 million of other indirect transaction related costs recorded in connection with the TCA sale; both reported as noninterest expense.  

 

60


 

Excluding the tax-effected impact of the FBD, SCC and ICC transaction costs and the THF and TCA sale transactions, we earned adjusted net income of $38.1 million for the nine months ended September 30, 2018 compared to $19.9 million for the nine months ended September 30, 2017, an increase of $18.2 million.  The adjusted increase was primarily the result of a $52.3 million increase in net interest income offset in part by a $4.6 million increase in the provision for loan losses, a $0.7 million decrease in adjusted noninterest income, a $28.2 million increase in adjusted noninterest expense and a $0.6 million increase in adjusted income tax expense.

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

Net Interest Income

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

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:

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Rate(4)

 

 

Balance

 

 

Interest

 

 

Rate(4)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

168,827

 

 

$

2,412

 

 

 

1.91

%

 

$

121,479

 

 

$

986

 

 

 

1.09

%

Taxable securities

 

 

176,953

 

 

 

3,289

 

 

 

2.49

%

 

 

239,353

 

 

 

4,750

 

 

 

2.65

%

Tax-exempt securities

 

 

53,444

 

 

 

751

 

 

 

1.88

%

 

 

25,581

 

 

 

254

 

 

 

1.33

%

FHLB stock

 

 

18,548

 

 

 

353

 

 

 

2.54

%

 

 

11,295

 

 

 

129

 

 

 

1.53

%

Loans (1)

 

 

2,996,138

 

 

 

180,321

 

 

 

8.05

%

 

 

2,126,532

 

 

 

118,888

 

 

 

7.47

%

Total interest earning assets

 

 

3,413,910

 

 

 

187,126

 

 

 

7.33

%

 

 

2,524,240

 

 

 

125,007

 

 

 

6.62

%

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

61,309

 

 

 

 

 

 

 

 

 

 

 

36,897

 

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

 

227,294

 

 

 

 

 

 

 

 

 

 

 

170,289

 

 

 

 

 

 

 

 

 

Total assets

 

$

3,702,513

 

 

 

 

 

 

 

 

 

 

$

2,731,426

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

$

396,550

 

 

$

603

 

 

 

0.20

%

 

$

326,798

 

 

$

385

 

 

 

0.16

%

Individual retirement accounts

 

 

105,337

 

 

 

963

 

 

 

1.22

%

 

 

100,224

 

 

 

903

 

 

 

1.20

%

Money market

 

 

281,205

 

 

 

1,306

 

 

 

0.62

%

 

 

205,585

 

 

 

356

 

 

 

0.23

%

Savings

 

 

251,108

 

 

 

120

 

 

 

0.06

%

 

 

170,431

 

 

 

81

 

 

 

0.06

%

Certificates of deposit

 

 

791,400

 

 

 

8,246

 

 

 

1.39

%

 

 

767,680

 

 

 

6,682

 

 

 

1.16

%

Brokered deposits

 

 

272,997

 

 

 

3,889

 

 

 

1.90

%

 

 

69,359

 

 

 

791

 

 

 

1.52

%

Total deposits

 

 

2,098,597

 

 

 

15,127

 

 

 

0.96

%

 

 

1,640,077

 

 

 

9,198

 

 

 

0.75

%

Subordinated notes

 

 

48,864

 

 

 

2,512

 

 

 

6.87

%

 

 

48,767

 

 

 

2,508

 

 

 

6.88

%

Junior subordinated debentures

 

 

38,789

 

 

 

2,024

 

 

 

6.98

%

 

 

32,881

 

 

 

1,435

 

 

 

5.83

%

Other borrowings

 

 

384,922

 

 

 

5,294

 

 

 

1.84

%

 

 

286,910

 

 

 

1,978

 

 

 

0.92

%

Total interest bearing liabilities

 

 

2,571,172

 

 

 

24,957

 

 

 

1.30

%

 

 

2,008,635

 

 

 

15,119

 

 

 

1.01

%

Noninterest bearing liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

 

569,123

 

 

 

 

 

 

 

 

 

 

 

388,217

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

27,260

 

 

 

 

 

 

 

 

 

 

 

12,984

 

 

 

 

 

 

 

 

 

Total equity

 

 

534,958

 

 

 

 

 

 

 

 

 

 

 

321,590

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

3,702,513

 

 

 

 

 

 

 

 

 

 

$

2,731,426

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

162,169

 

 

 

 

 

 

 

 

 

 

$

109,888

 

 

 

 

 

Interest spread (2)

 

 

 

 

 

 

 

 

 

 

6.03

%

 

 

 

 

 

 

 

 

 

 

5.61

%

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

6.35

%

 

 

 

 

 

 

 

 

 

 

5.82

%

 

61


 

(1) 

Balance totals include respective nonaccrual assets.

(2) 

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

(3) 

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

(4) 

Ratios have been annualized.

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

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Average community banking

 

$

1,918,890

 

 

$

1,370,339

 

Average commercial finance

 

 

1,077,248

 

 

 

756,193

 

Average total loans

 

$

2,996,138

 

 

$

2,126,532

 

Community banking yield

 

 

5.78

%

 

 

5.65

%

Commercial finance yield

 

 

12.08

%

 

 

10.79

%

Total loan yield

 

 

8.05

%

 

 

7.47

%

We earned net interest income of $162.2 for the nine months ended September 30, 2018 compared to $109.9 for the nine months ended September 30, 2017, an increase of $52.3, or 47.6%, primarily driven by the following factors.

Interest income increased $62.1, or 49.7%, as a result of an increase in total average interest earning assets of $889.7 million, or 35.2%, which was attributable to the impact of the FBD and SCC acquisitions which contributed $287.8 million of loans and $270.7 million of securities. The increase is also attributable to growth in our factored receivable operations as a result of the ICC acquisition and organic factored receivables growth. Additionally, interest income increased as a result of the Valley and Acquired Branch acquisitions which contributed $267.0 million of loans and $97.7 million of securities during the fourth quarter of 2017 and organic loan growth. The average balance of our higher yielding commercial finance loans increased $321.0 million, or 42.4%, from $756.2 million for the nine months ended September 30, 2017 to $1,077.2 million for the nine months ended September 30, 2018 as a result of the ICC acquisition and the continued execution of our growth strategy for such products. Additionally, our average mortgage warehouse lending balance was $238.8 million for the nine months ended September 30, 2018 compared to $144.3 million for the nine months ended September 30, 2017. We also experienced increased average balances in our other community banking lending products, including commercial real estate and general commercial and industrial loans, due to organic growth period over period.

Interest expense increased $9.8, or 65.1%, as a result of growth in customer deposits and other borrowings as well as higher average rates. Average total interest bearing deposits increased $458.5 million, or 28.0%, primarily due to $674.7 million of customer deposits assumed in the FBD and SCC acquisitions and $454.1 million of customer deposits assumed in the Valley and Acquired Branches acquisitions.  Excluding the acquired customer deposits, we also experienced growth in our certificates of deposit and brokered deposits as these higher cost deposit products were used to fund our growth period over period.  In addition, our use of other interest bearing borrowings, consisting primarily of FHLB advances, was also increased to fund our growth however, our outstanding balance of FHLB advances at period end decreased period over period.

Net interest margin increased to 6.35% for the nine months ended September 30, 2018 from 5.82% for the nine months ended September 30, 2017, an increase of 53 basis points, or 9.1%.

The increase in our net interest margin primarily resulted from an increase in yields on our interest earning assets.  Our average yield on interest earning assets increased 71 basis points to 7.33% for the nine months ended September 30, 2018 from 6.62% for the nine months ended September 30, 2017, primarily due to a change in the mix within our loan portfolio period over period.  Our higher yielding average commercial finance products as a percentage of the total portfolio increased from 35.6% for the nine months ended September 30, 2017 to 36.0% for the nine months ended September 30, 2018, and average factored receivables as a percentage of the total commercial finance portfolio increased from 35.0% for the nine months ended September 30, 2017 to 44.2% for the nine months ended September 30, 2018, contributing to the overall increase in yield on our interest earning assets.  In addition, our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, increased as a percentage of the overall factoring portfolio to 78% at September 30, 2018 compared to 77% at September 30, 2017.

A component of the yield on our loan portfolio consists of discount accretion on the portfolios acquired in connection with our acquisitions.  The aggregate increased yield on our loan portfolio attributable to the accretion of purchase discounts associated with our acquisitions was 31 basis points for the nine months ended September 30, 2018 and 33 basis points for the nine months ended September 30, 2017.  Excluding the impact of this discount accretion, the adjusted yield on our loan portfolio was 7.74% and 7.14% for the nine months ended September 30, 2018 and 2017, respectively.  Subject to future acquisitions, we anticipate that the contribution of this discount accretion to our interest income will continue to decline over time, but we expect that any resulting

 

62


 

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.  

Also impacting our net interest margin was an increase in our average cost of interest bearing liabilities of 29 basis points. This increase was caused by an increased use of higher rate certificates of deposit and brokered deposits to fund our growth period over period, and higher rates on short term and floating rate FHLB advances as a result of higher interest rates in the macro economy. This increase was partially offset by a change in the mix of our interest bearing deposits resulting from lower cost customer deposits assumed in the FBD, SCC, Valley and Acquired Branches acquisitions.

Our adjusted net interest margin, which excludes the impact of the acquired loan discount accretion described above, was 6.08% and 5.54% for the nine months ended September 30, 2018 and 2017, respectively.

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:  

 

 

Nine Months Ended

 

 

 

September 30, 2018 vs. 2017

 

 

 

Increase (Decrease) Due to:

 

 

 

 

 

(Dollars in thousands)

 

Rate

 

 

Volume

 

 

Net Increase

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

750

 

 

$

676

 

 

$

1,426

 

Taxable securities

 

 

(301

)

 

 

(1,160

)

 

 

(1,461

)

Tax-exempt securities

 

 

105

 

 

 

392

 

 

 

497

 

FHLB stock

 

 

86

 

 

 

138

 

 

 

224

 

Loans

 

 

9,096

 

 

 

52,337

 

 

 

61,433

 

Total interest income

 

 

9,736

 

 

 

52,383

 

 

 

62,119

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

 

112

 

 

 

106

 

 

 

218

 

Individual retirement accounts

 

 

13

 

 

 

47

 

 

 

60

 

Money market

 

 

599

 

 

 

351

 

 

 

950

 

Savings

 

 

 

 

 

39

 

 

 

39

 

Certificates of deposit

 

 

1,317

 

 

 

247

 

 

 

1,564

 

Brokered deposits

 

 

197

 

 

 

2,901

 

 

 

3,098

 

Total deposits

 

 

2,238

 

 

 

3,691

 

 

 

5,929

 

Subordinated notes

 

 

(1

)

 

 

5

 

 

 

4

 

Junior subordinated debentures

 

 

281

 

 

 

308

 

 

 

589

 

Other borrowings

 

 

1,968

 

 

 

1,348

 

 

 

3,316

 

Total interest expense

 

 

4,486

 

 

 

5,352

 

 

 

9,838

 

Change in net interest income

 

$

5,250

 

 

$

47,031

 

 

$

52,281

 

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 (“ALLL”) at an appropriate level to absorb estimated incurred losses in the loan portfolio at the balance sheet date. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity.

Our ALLL was $27.3 million as of September 30, 2018 versus $18.7 million as of December 31, 2017, representing an ALLL to total loans ratio of 0.78% and 0.67% respectively.

Our provision for loan losses was $14.3 million for the nine months ended September 30, 2018 compared to $9.7 million for the nine months ended September 30, 2017, an increase of $4.6 million, or 47.4%.

The increased provision for loan losses was the result of increased net charge-offs, increased net new specific reserves and loan growth. Net charge-offs increased by $1.1 million to $5.8 million for the nine months ended September 30, 2018 from $4.7 million for the nine months ended September 30, 2017. Approximately $1.6 million and $1.7 million of the charge-offs for the nine months ended September 30, 2018 and 2017, respectively, had specific reserves previously recorded. We recorded net new specific reserves of $3.2 million during the nine months ended September 30, 2018 compared to net new specific reserves of $1.6 million recorded during the nine months ended September 30, 2017.

 

63


 

Excluding the aforementioned impact of the FBD and SCC acquisitions, during the nine months ended September 30, 2018 outstanding loans increased $413.5 million from December 31, 2017.  During the nine months ended September 30, 2017, outstanding loans increased $397.8 million from December 31, 2016.  The larger increase in loan balances within the nine months ended September 30, 2018 contributed to the increase in our provision for loan loss which was further impacted by the change in the mix of our loan portfolio with a greater percentage being made up of commercial finance loan products which tend to carry higher ALLL compared to our traditional community banking loan products. Given the short term nature of factored receivables, the loan growth figures for the nine months ended September 30, 2018 were not adjusted for the acquisition of ICC.

Noninterest Income

The following table presents our major categories of noninterest income:

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Service charges on deposits

 

$

3,767

 

 

$

3,003

 

 

$

764

 

 

 

25.4

%

Card income

 

 

4,515

 

 

 

2,700

 

 

 

1,815

 

 

 

67.2

%

Net OREO gains (losses) and valuation adjustments

 

 

(551

)

 

 

(86

)

 

 

(465

)

 

 

(540.7

%)

Net gains (losses) on sale of securities

 

 

(272

)

 

 

35

 

 

 

(307

)

 

 

(877.1

%)

Fee income

 

 

3,514

 

 

 

1,845

 

 

 

1,669

 

 

 

90.5

%

Insurance commissions

 

 

2,646

 

 

 

2,125

 

 

 

521

 

 

 

24.5

%

Asset management fees

 

 

 

 

 

1,717

 

 

 

(1,717

)

 

 

(100.0

%)

Gain on sale of subsidiary or division

 

 

1,071

 

 

 

20,860

 

 

 

(19,789

)

 

 

(94.9

%)

CLO warehouse investment income

 

 

 

 

 

1,954

 

 

 

(1,954

)

 

 

(100.0

%)

Other

 

 

1,486

 

 

 

2,505

 

 

 

(1,019

)

 

 

(40.7

%)

Total noninterest income

 

$

16,176

 

 

$

36,658

 

 

$

(20,482

)

 

 

(55.9

%)

Noninterest income decreased $20.5 million, or 55.9%.  Noninterest income for the nine months ended September 30, 2018 was impacted by the realization of the $1.1 million gain associated with the sale of THF in the first quarter of 2018 and noninterest income for the nine months ended September 30, 2017 was impacted by the realization of the $20.9 million gain associated with the sale of TCA in the first quarter of 2017. Excluding the gain on sale of THF and the gain on sale of TCA, we earned adjusted noninterest income of $15.1 million and $15.8 million for the nine months ended September 30, 2018 and 2017, respectively, resulting in an adjusted decrease in noninterest income of $0.7 million, or 4.4%, period over period.  The adjusted decrease was primarily due to a decrease in asset management fees and CLO warehouse investment income resulting from the sale of TCA at the end of the first quarter of 2017.  Changes in selected components of noninterest income in the above table are discussed below.

 

Service Charges on Deposits.  Service charges on deposit accounts, including overdraft and non-sufficient funds fees, increased $0.8 million, or 25.4%, primarily due to additional service charges associated with the increase in customer deposits due to the Valley and Acquired Branches acquisitions and to a lesser extent, the FBD and SCC acquisitions..

 

Card Income.  Debit and credit card income increased $1.8 million, or 67.2%, primarily due to additional customer debit and credit card activity associated with the increase in issued cards resulting from the Valley and Acquired Branches acquisitions and to a lesser extent, the FBD and SCC acquisitions. In addition to increased activity, we received a $0.4 million incentive payment from our debit card provider for the achievement of certain growth goals. The incentive payment was received during the third quarter of 2018 is not expected to continue in future periods.

 

Fee income. Fee income increased $1.7 million, or 90.5%, primarily due to increased check and wire fees resulting from the Valley and Acquired Branches acquisitions and to a lesser extent, the FBD and SCC acquisitions.

 

Asset Management Fees.  As a result of the sale of TCA on March 31, 2017, there was no asset management fee income recorded for the nine months ended September 30, 2018, compared to $1.7 million for the nine months ended September 30, 2017.  

 

CLO Warehouse Investment Income.  We did not hold any CLO warehouse equity investments during the nine months ended September 30, 2018. As a result, there was no CLO warehouse investment income recorded for the nine months ended September 30, 2018, compared to $2.0 million for the nine months ended September 30, 2017.

 

64


 

 

Other.  Other noninterest income, including income for check cashing and wire transfer fees, income associated with trust activities, and bank-owned life insurance, decreased $1.0 million, or 40.7%.  The decrease was driven by a $0.5 million increase on our liability for contingent consideration due to the sellers of ICC upon remeasurement of the liability at September 30, 2018. The contingent payment is due during the fourth quarter of 2020. The decrease was also driven by a write-down on signage and other assets of $0.3 million related to rebranding of Triumph Community Bank to our standardized TBK Bank brand during the nine months ended September 30, 2018. There were no other significant increases or decreases in the components of other noninterest income period over period.

Noninterest Expense

The following table presents our major categories of noninterest expense:

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

64,626

 

 

$

54,687

 

 

$

9,939

 

 

 

18.2

%

Occupancy, furniture and equipment

 

 

9,621

 

 

 

7,105

 

 

 

2,516

 

 

 

35.4

%

FDIC insurance and other regulatory assessments

 

 

945

 

 

 

790

 

 

 

155

 

 

 

19.6

%

Professional fees

 

 

7,102

 

 

 

4,671

 

 

 

2,431

 

 

 

52.0

%

Amortization of intangible assets

 

 

4,542

 

 

 

2,892

 

 

 

1,650

 

 

 

57.1

%

Advertising and promotion

 

 

3,938

 

 

 

2,653

 

 

 

1,285

 

 

 

48.4

%

Communications and technology

 

 

13,882

 

 

 

6,552

 

 

 

7,330

 

 

 

111.9

%

Travel and entertainment

 

 

3,014

 

 

 

1,835

 

 

 

1,179

 

 

 

64.3

%

Other

 

 

12,721

 

 

 

9,198

 

 

 

3,523

 

 

 

38.3

%

Total noninterest expense

 

$

120,391

 

 

$

90,383

 

 

$

30,008

 

 

 

33.2

%

Noninterest expense increased $30.0 million, or 33.2%.  Noninterest expense for the nine months ended September 30, 2018 was impacted by $1.1 million of transaction costs associated with the ICC acquisition and $5.9 million of transaction costs associated with the FBD and SCC transactions. Noninterest expense for the nine months ended September 30, 2017 was impacted by the recognition of an incremental $5.1 million of transaction related costs associated with the TCA sale, including $4.8 million of bonus expense for the amount paid to team members to recognize their contribution to the value realized from the TCA sale and approximately $0.3 million of other transaction related costs. Excluding the ICC, FBD and SCC transaction costs and the TCA sale bonus and transaction related costs, we incurred adjusted noninterest expense of $113.4 million for the nine months ended September 30, 2018 and $85.3 million for the nine months ended September 30, 2017, resulting in an adjusted net increase in noninterest expense of $28.1 million, or 32.9% period over period.  Details of the more significant changes in the various components of noninterest expense are further discussed below.

 

Salaries and Employee Benefits. Salaries and employee benefits expenses increased $9.9 million, or 18.2%. Salaries and employee benefits expenses for the nine months ended September 30, 2017 included $4.8 million of bonus expense associated with the TCA sale.  Absent the TCA-related bonus expense, salaries and employee benefits expenses increased $14.7 million. We experienced a significant increase in the total size of our workforce between these periods as our average full-time equivalent employees were 904.5 and 708.5 for the nine months ended September 30, 2018 and 2017, respectively. Sources of this increased headcount were primarily employees added through the ICC, Valley and Acquired Branches acquisitions and to a lesser extent, employees added through the FBD and SCC acquisitions.  In addition, employees were hired to support growth in our commercial finance product lines and other strategic initiatives. Other factors contributing to the increase in salaries and employee benefits 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 increased $2.5 million, or 35.4%, primarily due to expenses associated with the infrastructure and facilities added through the ICC, Valley and Acquired Branches acquisitions and to a lesser extent, infrastructure and facilities added through the FBD and SCC acquisitions.

 

Professional Fees. Professional fees, which are primarily comprised of external audit, tax, consulting, and legal fees, increased $2.4 million, or 52.0% primarily due to $1.1 million of professional fees incurred in connection with the ICC acquisition and $1.4 million of professional fees incurred in connection with the FBD and SCC acquisitions during the quarter.  

 

65


 

 

Amortization of intangible assets. Amortization of intangible assets increased $1.7 million, or 57.1%, primarily due to the addition of intangible assets resulting from the ICC, Valley and Acquired Branch acquisitions and to a lesser extent, intangible assets added through the FBD and SCC acquisitions.

 

Advertising and promotion. Advertising and promotion expenses increased $1.3 million, or 48.4%, primarily due to advertising and brand-awareness activities in connection with the FBD and SCC acquisitions.

 

Communications and Technology. Communications and technology expenses increased $7.3 million, or 111.9%, primarily as a result of $3.1 million in information technology deconversion and termination fees resulting from our acquisition of FBD and SCC. The remaining increase is a result of increased usage and transaction volumes resulting from the ICC, Valley and Acquired Branch acquisitions and to a lesser extent, increased usage and transaction volumes resulting from the FBD and SCC acquisitions. The increase is also a result of growth in our organic operations.

 

Other. Other noninterest expense includes loan-related expenses, training and recruiting, postage, insurance, and subscription services.  Other noninterest expense increased $3.5 million or 38.3% primarily due to an increase in software amortization cost resulting from our investments in systems and infrastructure to support the growth in our operations. There were no other significant increases or decreases in the components of other noninterest expense period over period.

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 decreased $6.5 million, or 39.2%, from $16.6 million for the nine months ended September 30, 2017 to $10.1 million for the nine months ended September 30, 2018. The effective tax rate decreased from 36% for the nine months ended September 30, 2017 to 23% for the nine months ended September 30, 2018, primarily due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017 which lowered our federal statutory tax rate, effective on January 1, 2018, and resulted in significant modifications to existing law.

In regard to the Tax Act, authoritative guidance and interpretation by regulatory bodies is ongoing and as such, the accounting for the effects of the Tax Act is not final and the full impact of the new regulation is still being evaluated.

Operating Segment Results

Our reportable segments are Banking, Factoring, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. Our Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Banking segment also includes certain factored receivables which are purchased by TBK Bank. The Factoring segment includes the operations of Triumph Business Capital with revenue derived from factoring services. Corporate includes holding company financing and investment activities, asset management fees associated with TCA prior to its sale on March 31, 2017, and management and administrative expenses to support the overall operations of the Company.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are substantially similar to those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2017 Form 10-K. 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. Noninterest income and expense directly attributable to a segment are assigned accordingly. Taxes are paid on a consolidated basis and are not allocated for segment purposes.

 

66


 

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

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

123,050

 

 

$

62,514

 

 

$

1,562

 

 

$

187,126

 

Intersegment interest allocations

 

 

13,377

 

 

 

(13,377

)

 

 

 

 

 

 

Total interest expense

 

 

20,421

 

 

 

 

 

 

4,536

 

 

 

24,957

 

Net interest income (expense)

 

 

116,006

 

 

 

49,137

 

 

 

(2,974

)

 

 

162,169

 

Provision for loan losses

 

 

10,510

 

 

 

3,747

 

 

 

 

 

 

14,257

 

Net interest income after provision

 

 

105,496

 

 

 

45,390

 

 

 

(2,974

)

 

 

147,912

 

Gain on sale of subsidiary or division

 

 

1,071

 

 

 

 

 

 

 

 

 

1,071

 

Other noninterest income

 

 

12,612

 

 

 

2,452

 

 

 

41

 

 

 

15,105

 

Noninterest expense

 

 

86,446

 

 

 

30,067

 

 

 

3,878

 

 

 

120,391

 

Operating income (loss)

 

$

32,733

 

 

$

17,775

 

 

$

(6,811

)

 

$

43,697

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Consolidated

 

Total interest income

 

$

93,204

 

 

$

30,828

 

 

$

975

 

 

$

125,007

 

Intersegment interest allocations

 

 

5,211

 

 

 

(5,211

)

 

 

 

 

 

 

Total interest expense

 

 

11,177

 

 

 

 

 

 

3,942

 

 

 

15,119

 

Net interest income (expense)

 

 

87,238

 

 

 

25,617

 

 

 

(2,967

)

 

 

109,888

 

Provision for loan losses

 

 

7,571

 

 

 

2,042

 

 

 

84

 

 

 

9,697

 

Net interest income after provision

 

 

79,667

 

 

 

23,575

 

 

 

(3,051

)

 

 

100,191

 

Gain on sale of subsidiary or division

 

 

 

 

 

 

 

 

20,860

 

 

 

20,860

 

Other noninterest income

 

 

10,604

 

 

 

2,203

 

 

 

2,991

 

 

 

15,798

 

Noninterest expense

 

 

65,171

 

 

 

16,677

 

 

 

8,535

 

 

 

90,383

 

Operating income (loss)

 

$

25,100

 

 

$

9,101

 

 

$

12,265

 

 

$

46,466

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

4,433,862

 

 

$

659,782

 

 

$

712,971

 

 

$

(1,269,513

)

 

$

4,537,102

 

Gross loans

 

$

3,411,456

 

 

$

579,985

 

 

$

10,952

 

 

$

(490,250

)

 

$

3,512,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Banking

 

 

Factoring

 

 

Corporate

 

 

Eliminations

 

 

Consolidated

 

Total assets

 

$

3,444,322

 

 

$

360,922

 

 

$

504,656

 

 

$

(810,867

)

 

$

3,499,033

 

Gross loans

 

$

2,784,147

 

 

$

346,293

 

 

$

11,936

 

 

$

(331,520

)

 

$

2,810,856

 

Banking

(Dollars in thousands)

 

Nine Months Ended September 30,

 

 

 

 

 

Banking

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

123,050

 

 

$

93,204

 

 

$

29,846

 

 

 

32.0

%

Intersegment interest allocations

 

 

13,377

 

 

 

5,211

 

 

 

8,166

 

 

 

156.7

%

Total interest expense

 

 

20,421

 

 

 

11,177

 

 

 

9,244

 

 

 

82.7

%

Net interest income (expense)

 

 

116,006

 

 

 

87,238

 

 

 

28,768

 

 

 

33.0

%

Provision for loan losses

 

 

10,510

 

 

 

7,571

 

 

 

2,939

 

 

 

38.8

%

Net interest income (expense) after provision

 

 

105,496

 

 

 

79,667

 

 

 

25,829

 

 

 

32.4

%

Gain on sale of subsidiary or division

 

 

1,071

 

 

 

 

 

 

1,071

 

 

 

100.0

%

Other noninterest income

 

 

12,612

 

 

 

10,604

 

 

 

2,008

 

 

 

18.9

%

Noninterest expense

 

 

86,446

 

 

 

65,171

 

 

 

21,275

 

 

 

32.6

%

Operating income (loss)

 

$

32,733

 

 

$

25,100

 

 

$

7,633

 

 

 

30.4

%

Our Banking segment’s operating income increased $7.6 million, or 30.4%.

 

67


 

Interest income increased primarily as a result of increases in the average balances of our interest earning assets, primarily loans, which was attributable to the impact of the FBD and SCC acquisitions which contributed $287.8 million of loans and $270.7 million of securities. Additionally, interest income increased as a result of the Valley and Acquired Branch acquisitions which contributed $267.0 million of loans and $97.7 million of securities and organic loan growth.  Average loans in our Banking segment increased 41.6% from $2.049 billion for the nine months ended September 30, 2017 to $2.901 billion for the nine months ended September 30, 2018.

Interest expense increased primarily as a result of growth in average customer deposits and other borrowings due to $674.7 million of customer deposits assumed in the FBD and SCC acquisitions as well as $454.1 million of customer deposits assumed in the Valley and Acquired Branches acquisitions.  Excluding the acquired customer deposits, we also experienced growth in our certificates of deposit and brokered deposits as these higher cost deposit products were used to fund our growth period over period.  In addition, our use of other interest bearing borrowings, consisting primarily of FHLB advances, was also increased to fund our growth however, our outstanding balance of FHLB advances at period end decreased period over period.  We also experienced increased rates across several of our interest bearing borrowings.

The increase in the provision for loan loss was primarily the result of an increase in net loan charge-offs recorded during the nine months ended September 30, 2018.  We experienced higher total net charge-offs at our Banking segment of $4.9 million in the nine months ended September 30, 2018 compared to $3.7 million for the same period in 2017.  Approximately $1.2 million and $1.7 million of the charge-offs for the nine months ended September 30, 2018 and 2017, respectively, had specific reserves previously recorded at our Banking segment. Net new specific reserves our Banking segment were $1.8 million and $1.6 million for the nine months ended September 30, 2018 and 2017 respectively. Additionally, loans in our Banking segment grew at a slower pace for the nine months ended September 30, 2018 compared to the same period in 2017 which, when combined with changes in the mix of our portfolio and loss factors used to calculate the ALLL, partially offset the increased provision for loan loss.

Noninterest income increased primarily due to the realization of the $1.1 million gain associated with the sale of THF during the first quarter as well as additional service charges and card income associated with the increase in customer deposit and credit/debit card accounts acquired in the FBD, SCC, Valley and Acquired Branches acquisitions. These increases were impacted by a combined loss on the sale of municipal securities and OREO valuation adjustments of $0.9 million during the nine months ended September 30, 2018. Noninterest income for our Banking Segment includes $0.4 million incentive payment from our card provider for the achievement of certain growth goals during the three months ended September 30, 2018. The incentive payment is not expected to continue in future periods. It also includes a write-down on signage and other assets of $0.3 million related to rebranding of Triumph Community Bank to our standardized TBK Bank brand during the three months ended September 30, 2018. In addition, other sources of noninterest income, such as check cashing fees, wire transfer fees, and trust activities increased slightly due to incremental transaction volumes associated with the acquisitions.

For the nine months ended September 30, 2018 noninterest expense at our Banking segment includes $4.6 million of transaction costs as well as increased intangible amortization as a result of the FBD and SCC acquisitions with no comparable expenses for the three months ended September 30, 2017. Additionally, noninterest expense increased due to incremental costs associated with the growth in our Banking segment personnel and infrastructure in conjunction with our acquisitions of Valley and the Acquired Branches and to a lesser extent, our acquisitions of FBD and SCC, as well as personnel, facilities and infrastructure to support the continued organic growth in our lending operations. In addition, increases due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense contributed to the increase.

Factoring

(Dollars in thousands)

 

Nine Months Ended September 30,

 

 

 

 

 

Factoring

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

62,514

 

 

$

30,828

 

 

$

31,686

 

 

 

102.8

%

Intersegment interest allocations

 

 

(13,377

)

 

 

(5,211

)

 

 

(8,166

)

 

 

156.7

%

Total interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

 

49,137

 

 

 

25,617

 

 

 

23,520

 

 

 

91.8

%

Provision for loan losses

 

 

3,747

 

 

 

2,042

 

 

 

1,705

 

 

 

83.5

%

Net interest income (expense) after provision

 

 

45,390

 

 

 

23,575

 

 

 

21,815

 

 

 

92.5

%

Gain on sale of subsidiary or division

 

 

 

 

 

 

 

 

 

 

 

 

Other noninterest income

 

 

2,452

 

 

 

2,203

 

 

 

249

 

 

 

11.3

%

Noninterest expense

 

 

30,067

 

 

 

16,677

 

 

 

13,390

 

 

 

80.3

%

Operating income (loss)

 

$

17,775

 

 

$

9,101

 

 

$

8,674

 

 

 

95.3

%

 

 

68


 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Factored receivable period end balance

 

$

579,985,000

 

 

$

315,742,000

 

Yield on average receivable balance

 

 

18.50

%

 

 

17.11

%

Rolling twelve quarter annual charge-off rate

 

 

0.38

%

 

 

0.44

%

Factored receivables - transportation concentration

 

 

83

%

 

 

84

%

 

 

 

 

 

 

 

 

 

Interest income, including fees

 

$

62,514,000

 

 

$

30,828,000

 

Non-interest income

 

 

2,452,000

 

 

 

2,203,000

 

Factored receivable total revenue

 

 

64,966,000

 

 

 

33,031,000

 

Average net funds employed

 

 

413,361,000

 

 

 

221,573,000

 

Yield on average net funds employed

 

 

21.01

%

 

 

19.93

%

 

 

 

 

 

 

 

 

 

Accounts receivable purchased

 

$

3,578,195,000

 

 

$

1,893,305,000

 

Number of invoices purchased

 

 

2,015,106

 

 

 

1,298,466

 

Average invoice size

 

$

1,773

 

 

$

1,453

 

Average invoice size - transportation

 

$

1,674

 

 

$

1,397

 

Average invoice size - non-transportation

 

$

2,806

 

 

$

1,905

 

 

 

 

 

 

 

 

 

 

Net new clients

 

 

2,774

 

 

 

483

 

Period end clients

 

 

5,932

 

 

 

2,925

 

Our Factoring segment’s operating income increased $8.7 million, or 95.3%.

Our average invoice size increased 22.0% from $1,453 for the nine months ended September 30, 2017 to $1,773 for the nine months ended September 30, 2018, and the number of invoices purchased increased 55.2% period over period. At September 30, 2018, Triumph Business Capital had 86 clients utilizing the TriumphPay platform. For the nine months ended September 30, 2018, TriumphPay processed 146,688 invoices paying 25,733 distinct carriers a total of $209.6 million.

Net interest income increased due to a 86.6% increase in overall average net funds employed during the nine months ended September 30, 2018 compared to the same period during the prior year. Net funds employed represent factored receivable balances net of customer reserves which we hold to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in our consolidated balance sheets. The increase in NFE was the result of the ICC acquisition as well as organic growth in the factored receivables portfolio. In addition to increased average net funds employed, yield on average net funds employed increased period over period as a result of an increased average invoice size. Our transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances, as a percentage of the overall Factoring segment portfolio decreased from 84% on September 30, 2017 to 83% on September 30, 2018.

The increase in the provision for loan losses was the result of higher growth in the ending balance of the factored receivables portfolio during the nine months ended September 30, 2018 compared to the same period in 2017. The ending balance of the factored receivables portfolio at our Factoring segment grew $233.7 million during the nine months ended September 30, 2018 compared to ending balance growth of $103.0 million over the same time period during the prior year. We recorded net new allowances on specific at-risk balances at our Factoring segment of $1.4 million during the nine months ended September 30, 2018 with no significant net new allowances on specific at-risk balances during the nine months ended September 30, 2017. We experienced lower total net charge-offs of $0.8 million in the nine months ended September 30, 2018 compared to $1.0 million for the same period in 2017.

Noninterest income was relatively flat and the increase in noninterest expense was driven primarily by increased personnel, operating, and technology costs incurred in connection with the ICC acquisition and growth in our factoring portfolio, particularly the increase in the number of clients and number of invoices processed period over period. Reflected in our Factoring segment’s noninterest expense for the nine months ended September 30, 2018 is $1.1 million in transaction costs related to the ICC acquisition.

 

69


 

Corporate

(Dollars in thousands)

 

Nine Months Ended September 30,

 

 

 

 

 

Corporate

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Total interest income

 

$

1,562

 

 

$

975

 

 

$

587

 

 

 

60.2

%

Intersegment interest allocations

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

4,536

 

 

 

3,942

 

 

 

594

 

 

 

15.1

%

Net interest income (expense)

 

 

(2,974

)

 

 

(2,967

)

 

 

(7

)

 

 

0.2

%

Provision for loan losses

 

 

 

 

 

84

 

 

 

(84

)

 

 

(100.0

%)

Net interest income (expense) after provision

 

 

(2,974

)

 

 

(3,051

)

 

 

77

 

 

 

(2.5

%)

Gain on sale of subsidiary or division

 

 

 

 

 

20,860

 

 

 

(20,860

)

 

 

(100.0

%)

Other noninterest income

 

 

41

 

 

 

2,991

 

 

 

(2,950

)

 

 

(98.6

%)

Noninterest expense

 

 

3,878

 

 

 

8,535

 

 

 

(4,657

)

 

 

(54.6

%)

Operating income (loss)

 

$

(6,811

)

 

$

12,265

 

 

$

(19,076

)

 

 

(155.5

%)

The Corporate segment’s operating income decreased primarily due to the net impact of the TCA sale transaction recorded during the nine months ended September 30, 2017.  As TCA was a wholly owned subsidiary of our parent company, the $20.9 million gain on sale of TCA was reported as noninterest income and the $5.1 million of bonus expense and transaction related costs associated with the TCA sale were reported as noninterest expense in the Corporate segment.  Excluding the impact of the TCA sale, the Corporate segment reported an operating loss of $6.8 million for the nine months ended September 30, 2018 compared to a loss of $3.5 million for the nine months ended September 30, 2017. This increase in operating loss was primarily the result of a $2.0 million decrease in noninterest income associated with CLO warehouse investments.  The CLO associated with our remaining CLO warehouse investment was issued and closed in June 2017, and as a result our invested funds were returned.  During the nine months ended September 30, 2018 we no longer held investments in CLO warehouse entities and, absent future investments in new CLO warehouse entities, we do not expect to realize CLO warehouse investment income ongoing.  As a result, there was no CLO warehouse investment income recorded for the nine months ended September 30, 2018. Additionally, $1.3 million of FBD and SCC-related transaction costs recorded during the nine months ended September 30, 2018. There were no other significant fluctuations in accounts in our Corporate segment period over period.

Financial Condition

Assets

Total assets were $4.537 billion at September 30, 2018, compared to $3.499 billion at December 31, 2017, an increase of $1,038.1 million, the components of which are discussed below.  

Loan Portfolio

Loans held for investment were $3.512 billion at September 30, 2018, compared with $2.811 billion at December 31, 2017.

The following table shows our total loan portfolio by portfolio segments:

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

 

$ Change

 

 

% Change

 

Commercial real estate

 

$

906,494

 

 

 

26

%

 

$

745,893

 

 

 

27

%

 

$

160,601

 

 

 

21.5

%

Construction, land development, land

 

 

190,920

 

 

 

5

%

 

 

134,812

 

 

 

5

%

 

 

56,108

 

 

 

41.6

%

1-4 family residential properties

 

 

194,752

 

 

 

6

%

 

 

125,827

 

 

 

4

%

 

 

68,925

 

 

 

54.8

%

Farmland

 

 

177,313

 

 

 

5

%

 

 

180,141

 

 

 

6

%

 

 

(2,828

)

 

 

(1.6

%)

Commercial

 

 

1,123,598

 

 

 

32

%

 

 

920,812

 

 

 

33

%

 

 

202,786

 

 

 

22.0

%

Factored receivables

 

 

611,285

 

 

 

17

%

 

 

374,410

 

 

 

13

%

 

 

236,875

 

 

 

63.3

%

Consumer

 

 

31,423

 

 

 

1

%

 

 

31,131

 

 

 

1

%

 

 

292

 

 

 

0.9

%

Mortgage warehouse

 

 

276,358

 

 

 

8

%

 

 

297,830

 

 

 

11

%

 

 

(21,472

)

 

 

(7.2

%)

Total Loans

 

$

3,512,143

 

 

 

100

%

 

$

2,810,856

 

 

 

100

%

 

$

701,287

 

 

 

24.9

%

  

Commercial Real Estate Loans. Our commercial real estate loans increased $160.6 million, or 21.5%, due primarily to $153.9 million of commercial real estate loans acquired from FBD and SCC. We continue to allocate internal resources to focus on and source additional commercial real estate opportunities on a nationwide basis.

 

70


 

Construction and Development Loans. Our construction and development loans increased $56.1 million, or 41.6%, due primarily to new loan origination activity during 2018 and $22.3 million of construction and development loans acquired from FBD and SCC.

Residential Real Estate Loans. Our one-to-four family residential loans increased $68.9 million, or 54.8%, due primarily to $69.5 million of residential real estate loans acquired from FBD and SCC offset slightly by paydowns during 2018.  

Farmland Loans. Our farmland loans decreased $2.8 million, or 1.6%, due to paydowns that outpaced new loan origination activity for the period. The decrease was partially offset by $6.9 million of farmland loans acquired from FBD and SCC.

Commercial Loans. Our commercial loans held for investment increased $202.8 million, or 22.0%, primarily due to growth in the asset based loans, equipment finance loans, and premium finance loans as we continue to execute on our growth strategy for such products. In addition, our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, increased $48.8 million, or 18.7% as a result of organic growth and $29.3 million of commercial loans acquired from FBD and SCC.

The following table shows our commercial loans:

 

September 30,

 

 

December 31,

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

$

323,832

 

 

$

254,119

 

 

$

69,713

 

 

 

27.4

%

Asset based lending

 

 

273,096

 

 

 

213,471

 

 

 

59,625

 

 

 

27.9

%

Premium finance

 

 

75,293

 

 

 

55,520

 

 

 

19,773

 

 

 

35.6

%

Agriculture

 

 

141,501

 

 

 

136,649

 

 

 

4,852

 

 

 

3.6

%

Other commercial lending

 

 

309,876

 

 

 

261,053

 

 

 

48,823

 

 

 

18.7

%

Total commercial loans

 

$

1,123,598

 

 

$

920,812

 

 

$

202,786

 

 

 

22.0

%

Factored Receivables. Our factored receivables increased $236.9 million, or 63.3%, primarily due to the ICC acquisition which has allowed us to increase the size of our factored receivables operations. We continue to execute on our growth strategy for this product at Triumph Business Capital, our factoring subsidiary, as well as through growth in factored receivables purchased under our Triumph Commercial Finance brand.  

Consumer Loans. Our consumer loans increased $0.3 million, or 0.9%, due primarily to $6.0 million of consumer loans acquired from FBD and SCC offset by paydowns in excess of new loan origination activity during the period.

Mortgage Warehouse. Our mortgage warehouse facilities decreased $21.5 million, or 7.2%, due to lower utilization by our clients due to typical seasonality associated with the mortgage business during the period. Client utilization of mortgage warehouse facilities may experience significant fluctuation on a day-to-day basis given mortgage origination market conditions. Our average mortgage warehouse lending balance was $289.7 million for the three months ended September 30, 2018 compared to $177.8 million for the three months ended September 30, 2017 and $238.8 million for the nine months ended September 30, 2018 compared to $144.3 million for the nine months ended September 30, 2017.

 

71


 

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:

 

  

 

September 30, 2018

 

(Dollars in thousands)

 

One Year or

Less

 

 

After One

but within

Five Years

 

 

After Five

Years

 

 

Total

 

Commercial real estate

 

$

89,027

 

 

$

541,548

 

 

$

275,919

 

 

$

906,494

 

Construction, land development, land

 

 

69,866

 

 

 

76,528

 

 

 

44,526

 

 

 

190,920

 

1-4 family residential properties

 

 

51,228

 

 

 

50,084

 

 

 

93,440

 

 

 

194,752

 

Farmland

 

 

7,558

 

 

 

58,112

 

 

 

111,643

 

 

 

177,313

 

Commercial

 

 

492,122

 

 

 

568,111

 

 

 

63,365

 

 

 

1,123,598

 

Factored receivables

 

 

611,285

 

 

 

 

 

 

 

 

 

611,285

 

Consumer

 

 

4,037

 

 

 

14,874

 

 

 

12,512

 

 

 

31,423

 

Mortgage warehouse

 

 

276,358

 

 

 

 

 

 

 

 

 

276,358

 

 

 

$

1,601,481

 

 

$

1,309,257

 

 

$

601,405

 

 

$

3,512,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sensitivity of loans to changes in interest rates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predetermined (fixed) interest rates

 

 

 

 

 

$

885,633

 

 

$

194,751

 

 

 

 

 

Floating interest rates

 

 

 

 

 

 

423,624

 

 

 

406,654

 

 

 

 

 

Total

 

 

 

 

 

$

1,309,257

 

 

$

601,405

 

 

 

 

 

  

As of September 30, 2018, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Colorado (28%), Texas (19%), Illinois (14%), and Iowa (7%) make up 68% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2017, the states of Colorado (26%), Texas (24%), Illinois (17%) and Iowa (7%) made up 74% of the Company’s gross loans, excluding factored receivables.

Further, a majority (78%) of our factored receivables, representing approximately 14% of our total loan portfolio as of September 30, 2018, are receivables purchased from trucking fleets, owner-operators, and freight brokers 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, and small-to-mid-sized operators in such industry specifically, we feel that the credit risk with respect to our outstanding portfolio is appropriately mitigated as we limit the amount of receivables acquired from individual debtors and creditors thereby achieving diversification across a number of companies and industries. At December 31, 2017, 77% of our factored receivables, representing approximately 10% of our total loan portfolio, were receivables purchased from trucking fleets, owner-operators, and freight brokers in the transportation industry.

 

72


 

Nonperforming Assets

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

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. We classify nonperforming assets as nonaccrual loans, loans modified under restructurings as a result of the borrower experiencing financial difficulties (“TDR”), factored receivables greater than 90 days past due, OREO, and other repossessed assets. The balances of nonperforming loans reflect the recorded investment in these assets, including deductions for purchase discounts.

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Nonperforming loans:

 

 

 

 

 

 

 

 

Commercial real estate

 

$

7,873

 

 

$

1,012

 

Construction, land development, land

 

 

221

 

 

 

136

 

1-4 family residential properties

 

 

2,239

 

 

 

2,638

 

Farmland

 

 

4,156

 

 

 

4,182

 

Commercial

 

 

19,616

 

 

 

26,592

 

Factored receivables

 

 

2,252

 

 

 

1,454

 

Consumer

 

 

276

 

 

 

384

 

Mortgage warehouse

 

 

 

 

 

 

Purchased credit impaired

 

 

2,969

 

 

 

2,333

 

Total nonperforming loans

 

 

39,602

 

 

 

38,731

 

Other real estate owned, net

 

 

2,442

 

 

 

9,191

 

Other repossessed assets

 

 

165

 

 

 

320

 

Assets held for sale

 

 

 

 

 

245

 

Total nonperforming assets

 

$

42,209

 

 

$

48,487

 

 

 

 

 

 

 

 

 

 

Nonperforming assets to total assets

 

 

0.93

%

 

 

1.39

%

Nonperforming loans to total loans held for investment

 

 

1.13

%

 

 

1.38

%

Total past due loans to total loans held for investment

 

 

2.23

%

 

 

2.33

%

Nonperforming loans, including nonaccrual PCI loans, increased $0.9 million, or 2.2%, primarily due to the additions of a $5.2 million nonperforming commercial real estate relationship carrying a 90% government guarantee and secured by an assisted living facility. A $1.2 million nonperforming agriculture relationship secured by underlying land and farm equipment was also added during the period. These increases were offset by a $5.8 million commercial loan that was paid off from the proceeds of the sale of the collateral to a third party buyer. The purchase was financed with a significant equity investment as well as financing from TBK Bank. Additionally, we charged-off $4.0 million on a single nonaccrual asset based lending relationship during the period.  Refer to the Provision for Loan Losses discussion for further details regarding the charge-off. The remaining activity in nonperforming loans was also impacted by additions and removals of smaller credits to and from nonperforming loans.

OREO decreased $6.7 million, or 73.4%, primarily due to the sale of five properties during 2018 resulting in total proceeds of $7.8 million and an insignificant total gain on sale. The decrease driven by the sale of OREO properties was partially offset by the addition of individually insignificant OREO properties as well as valuation adjustments made throughout the year.

As a result of the above activity, the ratio of nonperforming loans to total loans held for investment decreased to 1.13% at September 30, 2018 compared to 1.38% at December 31, 2017, and our ratio of nonperforming assets to total assets decreased to 0.93% at September 30, 2018 compared to 1.39% at December 31, 2017.  

Past due loans to total loans held for investment decreased to 2.23% at September 30, 2018 compared to 2.33% at December 31, 2017, primarily due to the nonperforming loan activity factors described above and other payment performance activity.

 

73


 

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate.  At September 30, 2018, we had $10.2 million in loans of this type which are not included in any of the nonperforming loan categories.  

 

Allowance for Loan and Lease Losses

ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the ALLL when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL. Management estimates the ALLL 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 ALLL may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

In addition, the product types associated with fluctuations within the loan portfolio also contribute to the allowance allocation, as different loan products require different levels of ALLL based upon their credit risk characteristics. Loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of impaired loans and factored invoices greater than 90 days past due with negative cash reserves.

Under accounting standards for business combinations, acquired loans are recorded at fair value on the date of acquisition. This fair value adjustment eliminates any of the seller’s ALLL associated with such loans as of the purchase date as any credit exposure associated with such loans is incorporated into the fair value adjustment. A provision for loan losses is recorded for the emergence of new incurred and estimable losses on acquired loans after the acquisition date in excess of the recorded discount.

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

 

  

 

September 30, 2018

 

 

December 31, 2017

 

(Dollars in thousands)

 

Allocated

Allowance

 

 

% of Loan

Portfolio

 

 

ALLL to

Loans

 

 

Allocated

Allowance

 

 

% of Loan

Portfolio

 

 

ALLL to

Loans

 

Commercial real estate

 

$

4,042

 

 

 

26

%

 

 

0.45

%

 

$

3,435

 

 

 

27

%

 

 

0.46

%

Construction, land development, land

 

 

1,271

 

 

 

5

%

 

 

0.67

%

 

 

883

 

 

 

5

%

 

 

0.65

%

1-4 family residential properties

 

 

259

 

 

 

6

%

 

 

0.13

%

 

 

293

 

 

 

4

%

 

 

0.23

%

Farmland

 

 

503

 

 

 

5

%

 

 

0.28

%

 

 

310

 

 

 

6

%

 

 

0.17

%

Commercial

 

 

12,753

 

 

 

32

%

 

 

1.14

%

 

 

8,150

 

 

 

33

%

 

 

0.89

%

Factored receivables

 

 

7,571

 

 

 

17

%

 

 

1.24

%

 

 

4,597

 

 

 

13

%

 

 

1.23

%

Consumer

 

 

581

 

 

 

1

%

 

 

1.85

%

 

 

783

 

 

 

1

%

 

 

2.52

%

Mortgage warehouse

 

 

276

 

 

 

8

%

 

 

0.10

%

 

 

297

 

 

 

11

%

 

 

0.10

%

Total Loans

 

$

27,256

 

 

 

100

%

 

 

0.78

%

 

$

18,748

 

 

 

100

%

 

 

0.67

%

 

The ALLL increased $8.5 million, or 45.4%, which was driven by $5.7 million of net charge-offs (which carried a reserve of $1.6 million at the time of charge-off), $3.2 million of net new specific allowances recorded on impaired loans and growth in the underlying portfolio during the nine months ended September 30, 2018.

 

74


 

The following table presents the unpaid principal and recorded investment for loans at September 30, 2018. The difference between the unpaid principal balance and recorded investment is principally (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $20.9 million at September 30, 2018, and (2) net deferred origination costs and fees totaling $3.1 million at September 30, 2018. The net difference can provide protection from credit loss in addition to the ALLL as future potential charge-offs for an individual loan is limited to the recorded investment plus unpaid accrued interest.

 

(Dollars in thousands)

 

Recorded

 

 

Unpaid

 

 

 

 

 

September 30, 2018

 

Investment

 

 

Principal

 

 

Difference

 

Commercial real estate

 

$

906,494

 

 

$

914,503

 

 

$

(8,009

)

Construction, land development, land

 

 

190,920

 

 

 

195,075

 

 

 

(4,155

)

1-4 family residential properties

 

 

194,752

 

 

 

196,361

 

 

 

(1,609

)

Farmland

 

 

177,313

 

 

 

180,599

 

 

 

(3,286

)

Commercial

 

 

1,123,598

 

 

 

1,127,844

 

 

 

(4,246

)

Factored receivables

 

 

611,285

 

 

 

613,832

 

 

 

(2,547

)

Consumer

 

 

31,423

 

 

 

31,576

 

 

 

(153

)

Mortgage warehouse

 

 

276,358

 

 

 

276,358

 

 

 

 

 

 

$

3,512,143

 

 

$

3,536,148

 

 

$

(24,005

)

 

At September 30, 2018 and December 31, 2017, we had on deposit $54.9 million and $32.5 million, respectively, of customer reserves associated with factored receivables. These deposits represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits on our consolidated balance sheets.

 

75


 

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

 

  

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Balance at beginning of period

 

$

24,547

 

 

$

19,797

 

 

$

18,748

 

 

$

15,405

 

Loans charged-off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

(2

)

 

 

(137

)

Construction, land development, land

 

 

 

 

 

 

 

 

 

 

 

(582

)

1-4 family residential properties

 

 

(3

)

 

 

(1

)

 

 

(17

)

 

 

(29

)

Farmland

 

 

 

 

 

 

 

 

(200

)

 

 

 

Commercial

 

 

(4,074

)

 

 

(755

)

 

 

(4,701

)

 

 

(3,833

)

Factored receivables

 

 

(228

)

 

 

(136

)

 

 

(928

)

 

 

(1,102

)

Consumer

 

 

(286

)

 

 

(270

)

 

 

(776

)

 

 

(877

)

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

Total loans charged-off

 

$

(4,591

)

 

$

(1,162

)

 

$

(6,624

)

 

$

(6,560

)

Recoveries of loans charged-off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

103

 

 

 

 

 

 

103

 

 

 

 

Construction, land development, land

 

 

2

 

 

 

 

 

 

12

 

 

 

7

 

1-4 family residential properties

 

 

7

 

 

 

23

 

 

 

12

 

 

 

42

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

273

 

 

 

929

 

 

 

409

 

 

 

1,307

 

Factored receivables

 

 

8

 

 

 

30

 

 

 

52

 

 

 

82

 

Consumer

 

 

104

 

 

 

178

 

 

 

287

 

 

 

387

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

 

 

 

Total loans recoveries

 

$

497

 

 

$

1,160

 

 

$

875

 

 

$

1,825

 

Net loans charged-off

 

$

(4,094

)

 

$

(2

)

 

$

(5,749

)

 

$

(4,735

)

Provision for (reversal of) loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

136

 

 

 

58

 

 

 

506

 

 

 

888

 

Construction, land development, land

 

 

244

 

 

 

210

 

 

 

376

 

 

 

1,235

 

1-4 family residential properties

 

 

15

 

 

 

111

 

 

 

(29

)

 

 

16

 

Farmland

 

 

(6

)

 

 

(22

)

 

 

393

 

 

 

69

 

Commercial

 

 

6,324

 

 

 

(629

)

 

 

8,895

 

 

 

4,660

 

Factored receivables

 

 

64

 

 

 

645

 

 

 

3,850

 

 

 

1,978

 

Consumer

 

 

93

 

 

 

208

 

 

 

287

 

 

 

813

 

Mortgage warehouse

 

 

(67

)

 

 

(9

)

 

 

(21

)

 

 

38

 

Total provision for loan losses

 

$

6,803

 

 

$

572

 

 

$

14,257

 

 

$

9,697

 

Balance at end of period

 

$

27,256

 

 

$

20,367

 

 

$

27,256

 

 

$

20,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total loans held for investment

 

$

3,293,218

 

 

$

2,295,356

 

 

$

2,995,970

 

 

$

2,126,532

 

Net charge-offs to average total loans held for investment

 

 

0.12

%

 

 

0.00

%

 

 

0.19

%

 

 

0.22

%

Allowance to total loans held for investment

 

 

0.78

%

 

 

0.84

%

 

 

0.78

%

 

 

0.84

%

Quarter to date net loans charged off increased $4.1 million primarily due to a $4.0 million charge-off on a single asset based lending relationship during the three months ended September 30, 2018.  Refer to the Provision for Loan Losses discussion for further details regarding the charge-off. Remaining charge-off and recovery activity during the periods was insignificant individually and in the aggregate.

 

Year to date net loans charged off increased $1.0 million, or 21.4%, primarily due to the aforementioned $4.0 million charge-off on a single asset based lending relationship during the nine months ended September 30, 2018. This was partially offset by a $2.7 million charge-off of an individual healthcare finance relationship during the nine months ended September 30, 2017. Remaining charge-off and recovery activity during the periods was insignificant individually and in the aggregate.

 

76


 

Securities

As of September 30, 2018, we held debt securities classified as available for sale with a fair value of $356.0 million, an increase of $105.4 million from $250.6 million at December 31, 2017. The increase is attributable to the acquisition of $270.7 million of securities available for sale from FBD and SCC. This increase was offset by the sale of $123 million of securities during the nine months ended September 30, 2018 which were primarily made up of municipal securities acquired as part of the FBD, SCC and Valley acquisitions. Our available for sale securities can be used for pledging to secure FHLB borrowings and public deposits, or can be sold to meet liquidity needs.

As of September 30, 2018 and December 31, 2017, we held equity securities with a fair value of $5.0 million. These securities represent investments in a publicly traded Community Reinvestment Act mutual fund and are subject to market pricing volatility. As a result of our adoption of ASU 2016-01, Financial Instruments, on January 1, 2018, equity securities were reclassified from securities available for sale.

As of September 30, 2018, we held investments classified as held to maturity with an amortized cost of $8.4 million, a decrease of $0.2 million from $8.6 million at December 31, 2017. These held to maturity securities represent a minority investment in the unrated subordinated notes of recently issued CLOs managed by Trinitas Capital Management.  

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

 

 

Maturity as of September 30, 2018

 

 

 

One Year or Less

 

 

After One but within Five Years

 

 

After Five but within Ten Years

 

 

After Ten Years

 

 

Total

 

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

(Dollars in thousands)

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

U.S. Government agency obligations

 

$

28,240

 

 

 

1.53

%

 

$

67,862

 

 

 

1.73

%

 

$

 

 

 

 

 

$

 

 

 

 

 

$

96,102

 

 

 

1.67

%

U.S. Treasury notes

 

 

 

 

 

 

 

 

1,952

 

 

 

1.94

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,952

 

 

 

1.94

%

Mortgage-backed securities

 

 

72

 

 

 

6.86

%

 

 

2,929

 

 

 

2.08

%

 

 

5,131

 

 

 

2.32

%

 

 

22,935

 

 

 

2.92

%

 

 

31,067

 

 

 

2.75

%

Asset backed securities

 

 

 

 

 

 

 

 

2,634

 

 

 

2.90

%

 

 

5,560

 

 

 

2.68

%

 

 

2,609

 

 

 

3.43

%

 

 

10,803

 

 

 

2.91

%

State and municipal

 

 

47,777

 

 

 

1.59

%

 

 

49,002

 

 

 

1.90

%

 

 

37,923

 

 

 

1.92

%

 

 

10,315

 

 

 

1.82

%

 

 

145,017

 

 

 

1.79

%

Corporate bonds

 

 

11,873

 

 

 

2.25

%

 

 

56,436

 

 

 

2.54

%

 

 

505

 

 

 

2.78

%

 

 

274

 

 

 

5.09

%

 

 

69,088

 

 

 

2.50

%

SBA pooled securities

 

 

 

 

 

 

 

 

41

 

 

 

4.44

%

 

 

73

 

 

 

4.54

%

 

 

4,838

 

 

 

3.77

%

 

 

4,952

 

 

 

3.79

%

Total available for sale securities

 

$

87,962

 

 

 

1.66

%

 

$

180,856

 

 

 

2.05

%

 

$

49,192

 

 

 

2.06

%

 

$

40,971

 

 

 

2.81

%

 

$

358,981

 

 

 

2.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities:

 

$

 

 

 

 

 

$

 

 

 

 

 

$

3,052

 

 

 

13.04

%

 

$

5,351

 

 

 

11.03

%

 

$

8,403

 

 

 

11.80

%

Liabilities

Total liabilities were $3.920 billion as of September 30, 2018, compared to $3.107 billion at December 31, 2017, an increase of $813 million, the components of which are discussed below.

Deposits

Our total deposits were $3.439 billion as of September 30, 2018, compared to $2.621 billion as of December 31, 2017, an increase of $817.7 million. This increase was primarily attributable to the addition of $674.7 million of deposits as a result of the FBD and SCC acquisitions. The increase in deposits was also due in part to growth in several of our deposit products offset by an intentional reduction in our reliance on the use of public funds during the period.  As of September 30, 2018, interest bearing demand deposits, noninterest bearing deposits, money market deposits and savings deposits accounted for 61% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered deposits made up 39% of total deposits. See Note 7 – Deposits in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of our deposit balances as of September 30, 2018 and December 31, 2017.

 

 

77


 

The following table provides information on the maturity distribution of time deposits with individual balances of $100,000 to $250,000 and of time deposits with individual balances of $250,000 or more as of September 30, 2018:

 

  

 

$100,000 to

 

 

$250,000 and

 

 

 

 

 

(Dollars in thousands)

 

$250,000

 

 

Over

 

 

Total

 

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

3 months or less

 

$

109,011

 

 

$

38,684

 

 

$

147,695

 

Over 3 through 6 months

 

 

76,780

 

 

 

26,549

 

 

 

103,329

 

Over 6 through 12 months

 

 

150,691

 

 

 

78,586

 

 

 

229,277

 

Over 12 months

 

 

85,874

 

 

 

41,624

 

 

 

127,498

 

 

 

$

422,356

 

 

$

185,443

 

 

$

607,799

 

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

 

  

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

 

Average

 

 

Weighted

 

 

% of

 

 

Average

 

 

Weighted

 

 

% of

 

(Dollars in thousands)

 

Balance

 

 

Avg Yields

 

 

Total

 

 

Balance

 

 

Avg Yields

 

 

Total

 

Interest bearing demand

 

$

418,226

 

 

 

0.19

%

 

 

14

%

 

$

312,009

 

 

 

0.17

%

 

 

15

%

Individual retirement accounts

 

 

105,774

 

 

 

1.27

%

 

 

4

%

 

 

98,713

 

 

 

1.24

%

 

 

5

%

Money market

 

 

303,843

 

 

 

0.78

%

 

 

11

%

 

 

201,462

 

 

 

0.23

%

 

 

10

%

Savings

 

 

272,230

 

 

 

0.09

%

 

 

9

%

 

 

167,908

 

 

 

0.05

%

 

 

8

%

Certificates of deposit

 

 

793,685

 

 

 

1.53

%

 

 

28

%

 

 

773,075

 

 

 

1.22

%

 

 

38

%

Brokered deposits

 

 

384,337

 

 

 

2.02

%

 

 

13

%

 

 

72,094

 

 

 

1.69

%

 

 

4

%

Total interest bearing deposits

 

 

2,278,095

 

 

 

1.08

%

 

 

79

%

 

 

1,625,261

 

 

 

0.80

%

 

 

80

%

Noninterest bearing demand

 

 

608,245

 

 

 

 

 

 

21

%

 

 

398,774

 

 

 

 

 

 

20

%

Total deposits

 

$

2,886,340

 

 

 

0.85

%

 

 

100

%

 

$

2,024,035

 

 

 

0.64

%

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

 

Average

 

 

Weighted

 

 

% of

 

 

Average

 

 

Weighted

 

 

% of

 

(Dollars in thousands)

 

Balance

 

 

Avg Yields

 

 

Total

 

 

Balance

 

 

Avg Yields

 

 

Total

 

Interest bearing demand

 

$

396,550

 

 

 

0.20

%

 

 

15

%

 

$

326,798

 

 

 

0.16

%

 

 

16

%

Individual retirement accounts

 

 

105,337

 

 

 

1.22

%

 

 

4

%

 

 

100,224

 

 

 

1.20

%

 

 

5

%

Money market

 

 

281,205

 

 

 

0.62

%

 

 

11

%

 

 

205,585

 

 

 

0.23

%

 

 

10

%

Savings

 

 

251,108

 

 

 

0.06

%

 

 

9

%

 

 

170,431

 

 

 

0.06

%

 

 

8

%

Certificates of deposit

 

 

791,400

 

 

 

1.39

%

 

 

30

%

 

 

767,680

 

 

 

1.16

%

 

 

39

%

Brokered deposits

 

 

272,997

 

 

 

1.90

%

 

 

10

%

 

 

69,359

 

 

 

1.52

%

 

 

3

%

Total interest bearing deposits

 

 

2,098,597

 

 

 

0.96

%

 

 

79

%

 

 

1,640,077

 

 

 

0.75

%

 

 

81

%

Noninterest bearing demand

 

 

569,123

 

 

 

 

 

 

21

%

 

 

388,217

 

 

 

 

 

 

19

%

Total deposits

 

$

2,667,720

 

 

 

0.76

%

 

 

100

%

 

$

2,028,294

 

 

 

0.61

%

 

 

100

%

Other Borrowings

Customer Repurchase Agreements

The following provides a summary of our customer repurchase agreements as of and for the nine months ended September 30, 2018 and the year ended December 31, 2017:

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Amount outstanding at end of period

 

$

13,248

 

 

$

11,488

 

Weighted average interest rate at end of period

 

 

0.03

%

 

 

0.02

%

Average daily balance during the period

 

$

8,927

 

 

$

12,906

 

Weighted average interest rate during the period

 

 

0.02

%

 

 

0.02

%

Maximum month-end balance during the period

 

$

13,844

 

 

$

21,041

 

 

78


 

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

FHLB Advances

The following provides a summary of our FHLB advances as of and for the nine months ended September 30, 2018 and the year ended December 31, 2017:

  

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Amount outstanding at end of period

 

$

330,000

 

 

$

365,000

 

Weighted average interest rate at end of period

 

 

2.21

%

 

 

1.39

%

Average amount outstanding during the period

 

 

375,995

 

 

 

300,451

 

Weighted average interest rate during the period

 

 

1.88

%

 

 

1.05

%

Highest month end balance during the period

 

 

455,000

 

 

 

385,000

 

Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. At September 30, 2018 and December 31, 2017, we had $349.6 million and $231.2 million, respectively, in unused and available advances from the FHLB.

Subordinated Notes

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

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

Issuance costs related to the Notes totaled $1.3 million, including an underwriting discount of 1.5%, or $0.8 million, and have been netted against the subordinated notes liability on the consolidated balance sheets. The underwriting discount and other debt issuance costs are being amortized using the effective interest method over the life of the Notes as a component of interest expense. The carrying value of the Notes totaled $48.9 million at September 30, 2018.  

Junior Subordinated Debentures

The following provides a summary of our junior subordinated debentures as of September 30, 2018:

(Dollars in thousands)

 

Face Value

 

 

Carrying Value

 

 

Maturity Date

 

Interest Rate

National Bancshares Capital Trust II

 

$

15,464

 

 

$

12,947

 

 

September 2033

 

LIBOR + 3.00%

National Bancshares Capital Trust III

 

 

17,526

 

 

 

12,528

 

 

July 2036

 

LIBOR + 1.64%

ColoEast Capital Trust I

 

 

5,155

 

 

 

3,462

 

 

September 2035

 

LIBOR + 1.60%

ColoEast Capital Trust II

 

 

6,700

 

 

 

4,536

 

 

March 2037

 

LIBOR + 1.79%

Valley Bancorp Statutory Trust I

 

 

3,093

 

 

 

2,852

 

 

September 2032

 

LIBOR + 3.40%

Valley Bancorp Statutory Trust II

 

 

3,093

 

 

 

2,641

 

 

July 2034

 

LIBOR + 2.75%

 

 

$

51,031

 

 

$

38,966

 

 

 

 

 

 

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

 

79


 

The debentures are included on our consolidated balance sheet as liabilities; however, for regulatory purposes, these obligations are eligible for inclusion in regulatory capital, subject to certain limitations. All of the carrying value of $39.0 million was allowed in the calculation of Tier I capital as of September 30, 2018.

Capital Resources and Liquidity Management

Capital Resources

Our stockholders’ equity totaled $616.6 million as of September 30, 2018, compared to $391.7 million as of December 31, 2017, an increase of $224.9 million. Stockholders’ equity increased during this period primarily due to $192.1 million of net proceeds from the April 12, 2018 common stock offering previously discussed, and net income for the period of $33.6 million. Offsetting these increases were dividends paid on our preferred stock.

Liquidity Management

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

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

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

In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of September 30, 2018, TBK Bank had unsecured federal funds lines of credit with seven unaffiliated banks totaling $137.5 million, with no amounts advanced against those lines at that time.

Regulatory Capital Requirements

Our capital management consists of providing equity to support our current and future operations. We are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. For further information regarding our regulatory capital requirements, see Note 11 – Regulatory Matters in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report. 

 

80


 

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of September 30, 2018. The amount of the obligations presented in the table reflects principal amounts only and excludes the amount of interest we are obligated to pay. Also excluded from the table are a number of obligations to be settled in cash. These excluded items are reflected in our consolidated balance sheet and include deposits with no stated maturity, trade payables, and accrued interest payable.

 

 

Payments Due by Period - September 30, 2018

 

(Dollars in thousands)

 

Total

 

 

One Year or

Less

 

 

After One

but within

Three Years

 

 

After Three

but within

Five Years

 

 

After Five

Years

 

Customer repurchase agreements

 

$

13,248

 

 

$

13,248

 

 

$

 

 

$

 

 

$

 

Federal Home Loan Bank advances

 

 

330,000

 

 

 

300,000

 

 

 

 

 

 

 

 

 

30,000

 

Subordinated notes

 

 

50,000

 

 

 

 

 

 

 

 

 

 

 

 

50,000

 

Junior subordinated debentures

 

 

51,031

 

 

 

 

 

 

 

 

 

 

 

 

51,031

 

Operating lease agreements

 

 

21,863

 

 

 

3,126

 

 

 

6,000

 

 

 

5,266

 

 

 

7,471

 

Time deposits with stated maturity dates

 

 

1,345,907

 

 

 

1,052,802

 

 

 

239,390

 

 

 

47,002

 

 

 

6,713

 

Total contractual obligations

 

$

1,812,049

 

 

$

1,369,176

 

 

$

245,390

 

 

$

52,268

 

 

$

145,215

 

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. For further information, see Note 9 – Off-Balance Sheet Loan Commitments in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Policies and Estimates

Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for loan and lease losses. Since December 31, 2017, there have been no changes in critical accounting policies as further described under “Critical Accounting Policies and Estimates” and in Note 1 to the Consolidated Financial Statements in our 2017 Form 10-K.

Recently Issued Accounting Pronouncements

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

Forward-Looking Statements

This document contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable of a future or forward-looking nature. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. 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.

 

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

 

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

 

our ability to mitigate our risk exposures;

 

our ability to maintain our historical earnings trends;

 

risks related to the integration of acquired businesses (including our acquisitions of First Bancorp of Durango, Inc., Southern Colorado Corp., the operating assets of Interstate Capital Corporation and certain of its affiliates, Valley Bancorp, Inc., and nine branches from Independent Bank in Colorado) and any future acquisitions;

 

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

 

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;

 

our risk management strategies;

 

environmental liability associated with our lending activities;

 

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

 

the accuracy of our financial statements and related disclosures;

 

material weaknesses in our internal control over financial reporting;

 

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

 

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

 

changes in carry-forwards of net operating losses;

 

changes in federal tax law or policy;

 

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

 

governmental monetary and fiscal policies;

 

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

 

failure to receive regulatory approval for future acquisitions; and

 

increases in our capital requirements.

The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

 

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Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Asset/Liability Management and Interest Rate Risk

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

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

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

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

The following table summarizes simulated change in net interest income versus unchanged rates as of September 30, 2018 and December 31, 2017:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Following 12 Months

 

 

Months

13-24

 

 

Following 12 Months

 

 

Months

13-24

 

+400 basis points

 

 

11.3

%

 

 

9.6

%

 

 

4.8

%

 

 

0.7

%

+300 basis points

 

 

9.0

%

 

 

7.8

%

 

 

3.9

%

 

 

0.9

%

+200 basis points

 

 

6.7

%

 

 

6.1

%

 

 

2.7

%

 

 

0.6

%

+100 basis points

 

 

4.3

%

 

 

4.3

%

 

 

1.7

%

 

 

0.6

%

Flat rates

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

-100 basis points

 

 

(0.8

%)

 

 

0.3

%

 

 

(2.2

%)

 

 

(2.5

%)

 

 

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The following table presents the change in our economic value of equity as of September 30, 2018 and December 31, 2017, assuming immediate parallel shifts in interest rates:

 

  

 

Economic Value of Equity at Risk (%)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

+400 basis points

 

 

12.0

%

 

 

11.9

%

+300 basis points

 

 

10.3

%

 

 

10.5

%

+200 basis points

 

 

8.0

%

 

 

8.1

%

+100 basis points

 

 

4.6

%

 

 

4.9

%

Flat rates

 

 

0.0

%

 

 

0.0

%

-100 basis points

 

 

(6.2

%)

 

 

(9.6

%)

 

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

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

 

 

ITEM 4

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

 

Item 1. 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.

 

Item 1A. Risk Factors

There have been no other material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

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

None.

 

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Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

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

3.1

 

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

3.2

 

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

3.3

 

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

3.4

 

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

31.1

 

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

31.2

 

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

32.1

 

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

101

 

XBRL Instance Document

 

85


 

SIGNATURES

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

 

 

 

 

TRIUMPH BANCORP, INC.

 

 

 

(Registrant)

 

 

 

 

Date:

October 19, 2018

 

 /s/ Aaron P. Graft

 

 

 

Aaron P. Graft

 

 

 

President and Chief Executive Officer

 

 

 

 

Date:

October 19, 2018

 

 /s/ R. Bryce Fowler

 

 

 

R. Bryce Fowler

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86