UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20202021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number 001-36722
TRIUMPH BANCORP, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Texas | | 20-0477066 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
12700 Park Central Drive, Suite 1700
Dallas, Texas 75251
(Address of principal executive offices)
(214) 365-6900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | x | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock — $0.01 par value, 24,851,58125,123,978 shares, as of October 17, 2020.18, 2021.
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, par value $0.01 per share | | TBK | | NASDAQ Global Select Market |
Depositary Shares Each Representing a 1/40th Interest in a Share of 7.125% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share | | TBKCP | | NASDAQ Global Select Market |
TRIUMPH BANCORP, INC.
FORM 10-Q
September 30, 20202021
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 20202021 and December 31, 20192020
(Dollar amounts in thousands)
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| | (Unaudited) | | | | (Unaudited) | | |
ASSETS | ASSETS | | ASSETS | |
Cash and due from banks | Cash and due from banks | | $ | 54,740 | | | $ | 67,747 | | Cash and due from banks | | $ | 66,672 | | | $ | 85,525 | |
Interest bearing deposits with other banks | Interest bearing deposits with other banks | | 233,538 | | | 130,133 | | Interest bearing deposits with other banks | | 466,092 | | | 228,868 | |
Total cash and cash equivalents | Total cash and cash equivalents | | 288,278 | | | 197,880 | | Total cash and cash equivalents | | 532,764 | | | 314,393 | |
Securities - equity investments | Securities - equity investments | | 6,040 | | | 5,437 | | Securities - equity investments | | 5,623 | | | 5,826 | |
Securities - available for sale | Securities - available for sale | | 242,802 | | | 248,820 | | Securities - available for sale | | 164,816 | | | 224,310 | |
Securities - held to maturity, net of allowance for credit losses of $1,961 and $0, respectively, fair value of $5,473 and $6,907, respectively | | 6,096 | | | 8,417 | | |
Securities - held to maturity, net of allowance for credit losses of $1,737 and $2,026, respectively, fair value of $5,534 and $5,850, respectively | | Securities - held to maturity, net of allowance for credit losses of $1,737 and $2,026, respectively, fair value of $5,534 and $5,850, respectively | | 5,488 | | | 5,919 | |
Loans held for sale | Loans held for sale | | 36,716 | | | 2,735 | | Loans held for sale | | 26,437 | | | 24,546 | |
Loans, net of allowance for credit losses of $90,995 and $29,092, respectively | | 4,761,916 | | | 4,165,420 | | |
Loans, net of allowance for credit losses of $41,017 and $95,739, respectively | | Loans, net of allowance for credit losses of $41,017 and $95,739, respectively | | 4,741,713 | | | 4,901,037 | |
Federal Home Loan Bank and other restricted stock, at cost | Federal Home Loan Bank and other restricted stock, at cost | | 18,464 | | | 19,860 | | Federal Home Loan Bank and other restricted stock, at cost | | 4,901 | | | 6,751 | |
Premises and equipment, net | Premises and equipment, net | | 105,455 | | | 96,595 | | Premises and equipment, net | | 104,311 | | | 103,404 | |
Other real estate owned, net | Other real estate owned, net | | 1,704 | | | 3,009 | | Other real estate owned, net | | 893 | | | 1,432 | |
Goodwill | Goodwill | | 163,263 | | | 158,743 | | Goodwill | | 233,727 | | | 163,209 | |
Intangible assets, net | Intangible assets, net | | 28,778 | | | 31,543 | | Intangible assets, net | | 46,328 | | | 26,713 | |
Bank-owned life insurance | Bank-owned life insurance | | 41,440 | | | 40,954 | | Bank-owned life insurance | | 41,540 | | | 41,608 | |
Deferred tax assets, net | | 7,716 | | | 3,812 | | |
Deferred tax asset, net | | Deferred tax asset, net | | — | | | 6,427 | |
Indemnification asset | | Indemnification asset | | 4,786 | | | 36,225 | |
Other assets | Other assets | | 128,119 | | | 77,072 | | Other assets | | 111,208 | | | 73,991 | |
Total assets | Total assets | | $ | 5,836,787 | | | $ | 5,060,297 | | Total assets | | $ | 6,024,535 | | | $ | 5,935,791 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Liabilities | Liabilities | | Liabilities | |
Deposits | Deposits | | Deposits | |
Noninterest bearing | Noninterest bearing | | $ | 1,315,900 | | | $ | 809,696 | | Noninterest bearing | | $ | 2,020,984 | | | $ | 1,352,785 | |
Interest bearing | Interest bearing | | 2,932,201 | | | 2,980,210 | | Interest bearing | | 2,801,591 | | | 3,363,815 | |
Total deposits | Total deposits | | 4,248,101 | | | 3,789,906 | | Total deposits | | 4,822,575 | | | 4,716,600 | |
Customer repurchase agreements | Customer repurchase agreements | | 14,192 | | | 2,033 | | Customer repurchase agreements | | 11,990 | | | 3,099 | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 435,000 | | | 430,000 | | Federal Home Loan Bank advances | | 30,000 | | | 105,000 | |
Paycheck Protection Program Liquidity Facility | Paycheck Protection Program Liquidity Facility | | 223,713 | | | 0 | | Paycheck Protection Program Liquidity Facility | | 97,554 | | | 191,860 | |
Subordinated notes | Subordinated notes | | 87,455 | | | 87,327 | | Subordinated notes | | 106,755 | | | 87,509 | |
Junior subordinated debentures | Junior subordinated debentures | | 39,944 | | | 39,566 | | Junior subordinated debentures | | 40,467 | | | 40,072 | |
Deferred tax liability, net | | Deferred tax liability, net | | 982 | | | — | |
Other liabilities | Other liabilities | | 94,540 | | | 74,875 | | Other liabilities | | 93,538 | | | 64,870 | |
Total liabilities | Total liabilities | | 5,142,945 | | | 4,423,707 | | Total liabilities | | 5,203,861 | | | 5,209,010 | |
Commitments and contingencies - See Note 9 and Note 10 | Commitments and contingencies - See Note 9 and Note 10 | | Commitments and contingencies - See Note 9 and Note 10 | | 0 | | 0 |
Stockholders' equity - See Note 13 | Stockholders' equity - See Note 13 | | Stockholders' equity - See Note 13 | |
Preferred stock | Preferred stock | | 45,000 | | | 0 | | Preferred stock | | 45,000 | | | 45,000 | |
Common stock, 24,851,601 and 24,964,961 shares outstanding, respectively | | 279 | | | 272 | | |
Common stock, 25,123,342 and 24,868,218 shares outstanding, respectively | | Common stock, 25,123,342 and 24,868,218 shares outstanding, respectively | | 282 | | | 280 | |
Additional paid-in-capital | Additional paid-in-capital | | 488,094 | | | 473,251 | | Additional paid-in-capital | | 499,282 | | | 489,151 | |
Treasury stock, at cost | Treasury stock, at cost | | (102,942) | | | (67,069) | | Treasury stock, at cost | | (104,600) | | | (103,052) | |
Retained earnings | Retained earnings | | 258,254 | | | 229,030 | | Retained earnings | | 373,512 | | | 289,583 | |
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | 5,157 | | | 1,106 | | Accumulated other comprehensive income (loss) | | 7,198 | | | 5,819 | |
Total stockholders’ equity | Total stockholders’ equity | | 693,842 | | | 636,590 | | Total stockholders’ equity | | 820,674 | | | 726,781 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | | $ | 5,836,787 | | | $ | 5,060,297 | | Total liabilities and stockholders' equity | | $ | 6,024,535 | | | $ | 5,935,791 | |
See accompanying condensed notes to consolidated financial statements.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 20202021 and 20192020
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Interest and dividend income: | Interest and dividend income: | | | | | | | | | Interest and dividend income: | | | | | | | | |
Loans, including fees | Loans, including fees | | $ | 48,774 | | | $ | 50,249 | | | $ | 147,491 | | | $ | 143,253 | | Loans, including fees | | $ | 44,882 | | | $ | 48,774 | | | $ | 139,576 | | | $ | 147,491 | |
Factored receivables, including fees | Factored receivables, including fees | | 31,468 | | | 25,570 | | | 76,861 | | | 75,684 | | Factored receivables, including fees | | 50,516 | | | 31,468 | | | 135,639 | | | 76,861 | |
Securities | Securities | | 1,927 | | | 2,784 | | | 6,710 | | | 8,095 | | Securities | | 1,126 | | | 1,927 | | | 3,963 | | | 6,710 | |
FHLB and other restricted stock | FHLB and other restricted stock | | 122 | | | 209 | | | 474 | | | 547 | | FHLB and other restricted stock | | 28 | | | 122 | | | 131 | | | 474 | |
Cash deposits | Cash deposits | | 73 | | | 603 | | | 640 | | | 2,403 | | Cash deposits | | 183 | | | 73 | | | 467 | | | 640 | |
Total interest income | Total interest income | | 82,364 | | | 79,415 | | | 232,176 | | | 229,982 | | Total interest income | | 96,735 | | | 82,364 | | | 279,776 | | | 232,176 | |
Interest expense: | Interest expense: | | Interest expense: | |
Deposits | Deposits | | 5,834 | | | 11,036 | | | 23,095 | | | 29,264 | | Deposits | | 1,948 | | | 5,834 | | | 7,790 | | | 23,095 | |
Subordinated notes | Subordinated notes | | 1,348 | | | 840 | | | 4,016 | | | 2,518 | | Subordinated notes | | 2,449 | | | 1,348 | | | 5,148 | | | 4,016 | |
Junior subordinated debentures | Junior subordinated debentures | | 462 | | | 719 | | | 1,662 | | | 2,223 | | Junior subordinated debentures | | 443 | | | 462 | | | 1,331 | | | 1,662 | |
Other borrowings | Other borrowings | | 341 | | | 2,055 | | | 2,273 | | | 6,482 | | Other borrowings | | 124 | | | 341 | | | 434 | | | 2,273 | |
Total interest expense | Total interest expense | | 7,985 | | | 14,650 | | | 31,046 | | | 40,487 | | Total interest expense | | 4,964 | | | 7,985 | | | 14,703 | | | 31,046 | |
Net interest income | Net interest income | | 74,379 | | | 64,765 | | | 201,130 | | | 189,495 | | Net interest income | | 91,771 | | | 74,379 | | | 265,073 | | | 201,130 | |
Credit loss expense (benefit) | Credit loss expense (benefit) | | (258) | | | 2,865 | | | 33,649 | | | 7,560 | | Credit loss expense (benefit) | | (1,187) | | | (258) | | | (10,838) | | | 33,649 | |
Net interest income after credit loss expense | | 74,637 | | | 61,900 | | | 167,481 | | | 181,935 | | |
Net interest income after credit loss expense (benefit) | | Net interest income after credit loss expense (benefit) | | 92,958 | | | 74,637 | | | 275,911 | | | 167,481 | |
Noninterest income: | Noninterest income: | | Noninterest income: | |
Service charges on deposits | Service charges on deposits | | 1,470 | | | 1,937 | | | 3,631 | | | 5,243 | | Service charges on deposits | | 2,030 | | | 1,470 | | | 5,674 | | | 3,631 | |
Card income | Card income | | 2,091 | | | 2,015 | | | 5,832 | | | 5,930 | | Card income | | 2,144 | | | 2,091 | | | 6,341 | | | 5,832 | |
Net OREO gains (losses) and valuation adjustments | Net OREO gains (losses) and valuation adjustments | | (41) | | | (56) | | | (399) | | | 301 | | Net OREO gains (losses) and valuation adjustments | | (9) | | | (41) | | | (376) | | | (399) | |
Net gains (losses) on sale or call of securities | Net gains (losses) on sale or call of securities | | 3,109 | | | 19 | | | 3,210 | | | 22 | | Net gains (losses) on sale or call of securities | | 4 | | | 3,109 | | | 5 | | | 3,210 | |
Fee income | Fee income | | 1,402 | | | 1,624 | | | 4,392 | | | 4,755 | | Fee income | | 5,198 | | | 1,402 | | | 11,917 | | | 4,392 | |
Insurance commissions | Insurance commissions | | 990 | | | 1,247 | | | 2,905 | | | 3,127 | | Insurance commissions | | 1,231 | | | 990 | | | 3,989 | | | 2,905 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | | 0 | | | 0 | | | 9,758 | | | 0 | | Gain on sale of subsidiary or division | | — | | | — | | | — | | | 9,758 | |
Other | Other | | 1,472 | | | 956 | | | 8,670 | | | 3,525 | | Other | | 1,457 | | | 1,472 | | | 12,692 | | | 8,670 | |
Total noninterest income | Total noninterest income | | 10,493 | | | 7,742 | | | 37,999 | | | 22,903 | | Total noninterest income | | 12,055 | | | 10,493 | | | 40,242 | | | 37,999 | |
Noninterest expense: | Noninterest expense: | | | | | | | | | Noninterest expense: | | | | | | | | |
Salaries and employee benefits | Salaries and employee benefits | | 31,651 | | | 28,717 | | | 93,177 | | | 83,276 | | Salaries and employee benefits | | 43,769 | | | 31,651 | | | 121,407 | | | 93,177 | |
Occupancy, furniture and equipment | Occupancy, furniture and equipment | | 5,574 | | | 4,505 | | | 15,720 | | | 13,529 | | Occupancy, furniture and equipment | | 6,388 | | | 5,574 | | | 18,279 | | | 15,720 | |
FDIC insurance and other regulatory assessments | FDIC insurance and other regulatory assessments | | 360 | | | (2) | | | 1,170 | | | 600 | | FDIC insurance and other regulatory assessments | | 353 | | | 360 | | | 1,830 | | | 1,170 | |
Professional fees | Professional fees | | 3,265 | | | 1,969 | | | 7,023 | | | 5,384 | | Professional fees | | 2,362 | | | 3,265 | | | 9,959 | | | 7,023 | |
Amortization of intangible assets | Amortization of intangible assets | | 2,141 | | | 2,228 | | | 6,265 | | | 6,977 | | Amortization of intangible assets | | 3,274 | | | 2,141 | | | 7,677 | | | 6,265 | |
Advertising and promotion | Advertising and promotion | | 1,105 | | | 1,379 | | | 3,548 | | | 4,779 | | Advertising and promotion | | 1,403 | | | 1,105 | | | 3,534 | | | 3,548 | |
Communications and technology | Communications and technology | | 5,569 | | | 5,382 | | | 16,514 | | | 15,244 | | Communications and technology | | 7,090 | | | 5,569 | | | 19,018 | | | 16,514 | |
Other | Other | | 5,632 | | | 7,975 | | | 19,359 | | | 21,634 | | Other | | 8,174 | | | 5,632 | | | 22,799 | | | 19,359 | |
Total noninterest expense | Total noninterest expense | | 55,297 | | | 52,153 | | | 162,776 | | | 151,423 | | Total noninterest expense | | 72,813 | | | 55,297 | | | 204,503 | | | 162,776 | |
Net income before income tax expense | Net income before income tax expense | | 29,833 | | | 17,489 | | | 42,704 | | | 53,415 | | Net income before income tax expense | | 32,200 | | | 29,833 | | | 111,650 | | | 42,704 | |
Income tax expense | Income tax expense | | 6,929 | | | 3,172 | | | 10,810 | | | 11,580 | | Income tax expense | | 7,771 | | | 6,929 | | | 25,316 | | | 10,810 | |
Net income | Net income | | $ | 22,904 | | | $ | 14,317 | | | $ | 31,894 | | | $ | 41,835 | | Net income | | $ | 24,429 | | | $ | 22,904 | | | $ | 86,334 | | | $ | 31,894 | |
Dividends on preferred stock | Dividends on preferred stock | | (899) | | | 0 | | | (899) | | | 0 | | Dividends on preferred stock | | (802) | | | (899) | | | (2,405) | | | (899) | |
Net income available to common stockholders | Net income available to common stockholders | | $ | 22,005 | | | $ | 14,317 | | | $ | 30,995 | | | $ | 41,835 | | Net income available to common stockholders | | $ | 23,627 | | | $ | 22,005 | | | $ | 83,929 | | | $ | 30,995 | |
Earnings per common share | Earnings per common share | | | | | | | | | Earnings per common share | | | | | | | | |
Basic | Basic | | $ | 0.89 | | | $ | 0.56 | | | $ | 1.28 | | | $ | 1.60 | | Basic | | $ | 0.95 | | | $ | 0.89 | | | $ | 3.40 | | | $ | 1.28 | |
Diluted | Diluted | | $ | 0.89 | | | $ | 0.56 | | | $ | 1.27 | | | $ | 1.59 | | Diluted | | $ | 0.94 | | | $ | 0.89 | | | $ | 3.33 | | | $ | 1.27 | |
See accompanying condensed notes to consolidated financial statements.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 20202021 and 20192020
(Dollar amounts in thousands)
(Unaudited)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Net income | Net income | | $ | 22,904 | | | $ | 14,317 | | | $ | 31,894 | | | $ | 41,835 | | Net income | | $ | 24,429 | | | $ | 22,904 | | | $ | 86,334 | | | $ | 31,894 | |
Other comprehensive income: | Other comprehensive income: | | Other comprehensive income: | |
Unrealized gains (losses) on securities: | Unrealized gains (losses) on securities: | | Unrealized gains (losses) on securities: | |
Unrealized holding gains (losses) arising during the period | Unrealized holding gains (losses) arising during the period | | 2,443 | | | (40) | | | 8,589 | | | 3,361 | | Unrealized holding gains (losses) arising during the period | | (378) | | | 2,443 | | | (1,303) | | | 8,589 | |
Tax effect | Tax effect | | (637) | | | 9 | | | (2,144) | | | (777) | | Tax effect | | 89 | | | (637) | | | 300 | | | (2,144) | |
Unrealized holding gains (losses) arising during the period, net of taxes | Unrealized holding gains (losses) arising during the period, net of taxes | | 1,806 | | | (31) | | | 6,445 | | | 2,584 | | Unrealized holding gains (losses) arising during the period, net of taxes | | (289) | | | 1,806 | | | (1,003) | | | 6,445 | |
Reclassification of amount realized through sale or call of securities | Reclassification of amount realized through sale or call of securities | | (3,109) | | | (19) | | | (3,210) | | | (22) | | Reclassification of amount realized through sale or call of securities | | (4) | | | (3,109) | | | (5) | | | (3,210) | |
Tax effect | Tax effect | | 761 | | | 4 | | | 805 | | | 5 | | Tax effect | | 1 | | | 761 | | | 1 | | | 805 | |
Reclassification of amount realized through sale or call of securities, net of taxes | Reclassification of amount realized through sale or call of securities, net of taxes | | (2,348) | | | (15) | | | (2,405) | | | (17) | | Reclassification of amount realized through sale or call of securities, net of taxes | | (3) | | | (2,348) | | | (4) | | | (2,405) | |
Change in unrealized gains (losses) on securities, net of tax | Change in unrealized gains (losses) on securities, net of tax | | (542) | | | (46) | | | 4,040 | | | 2,567 | | Change in unrealized gains (losses) on securities, net of tax | | (292) | | | (542) | | | (1,007) | | | 4,040 | |
| Unrealized gains (losses) on derivative financial instruments: | Unrealized gains (losses) on derivative financial instruments: | | Unrealized gains (losses) on derivative financial instruments: | |
Unrealized holding gains (losses) arising during the period | Unrealized holding gains (losses) arising during the period | | 357 | | | 0 | | | 32 | | | 0 | | Unrealized holding gains (losses) arising during the period | | (9) | | | 357 | | | 3,062 | | | 32 | |
Tax effect | Tax effect | | (88) | | | (9) | | | Tax effect | | 2 | | | (88) | | | (729) | | | (9) | |
Unrealized holding gains (losses) arising during the period, net of taxes | Unrealized holding gains (losses) arising during the period, net of taxes | | 269 | | | 0 | | | 23 | | | 0 | | Unrealized holding gains (losses) arising during the period, net of taxes | | (7) | | | 269 | | | 2,333 | | | 23 | |
Reclassification of amount of gains (losses) recognized into income | Reclassification of amount of gains (losses) recognized into income | | (16) | | | 0 | | | (16) | | | 0 | | Reclassification of amount of gains (losses) recognized into income | | 18 | | | (16) | | | 70 | | | (16) | |
Tax effect | Tax effect | | 4 | | | 0 | | | 4 | | | 0 | | Tax effect | | (4) | | | 4 | | | (17) | | | 4 | |
Reclassification of amount of gains (losses) recognized into income, net of taxes | Reclassification of amount of gains (losses) recognized into income, net of taxes | | (12) | | | 0 | | | (12) | | | 0 | | Reclassification of amount of gains (losses) recognized into income, net of taxes | | 14 | | | (12) | | | 53 | | | (12) | |
Change in unrealized gains (losses) on derivative financial instruments | Change in unrealized gains (losses) on derivative financial instruments | | 257 | | | 0 | | | 11 | | | 0 | | Change in unrealized gains (losses) on derivative financial instruments | | 7 | | | 257 | | | 2,386 | | | 11 | |
| Total other comprehensive income (loss) | Total other comprehensive income (loss) | | (285) | | | (46) | | | 4,051 | | | 2,567 | | Total other comprehensive income (loss) | | (285) | | | (285) | | | 1,379 | | | 4,051 | |
Comprehensive income | Comprehensive income | | $ | 22,619 | | | $ | 14,271 | | | $ | 35,945 | | | $ | 44,402 | | Comprehensive income | | $ | 24,144 | | | $ | 22,619 | | | $ | 87,713 | | | $ | 35,945 | |
See accompanying condensed notes to consolidated financial statements.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 20202021 and 20192020
(Dollar amounts in thousands)
(Unaudited)
| | | Preferred Stock | | Common Stock | | | Additional Paid-in- Capital | | Treasury Stock | | | Retained Earnings | | Accumulated | | Total Stockholders' Equity | | Preferred Stock | | Common Stock | | Additional Paid-in- Capital | | Treasury Stock | | Retained Earnings | | Accumulated | | Total Stockholders' Equity |
| | Liquidation Preference Amount | | Shares Outstanding | | Par Amount | | | | Shares Outstanding | | Cost | | | | Other Comprehensive Income (Loss) | | | Total Stockholders' Equity | | Liquidation Preference Amount | | Shares Outstanding | | Par Amount | | Additional Paid-in- Capital | Shares Outstanding | | Cost | | Retained Earnings | Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
Balance, January 1, 2020 | | $ | — | | | 24,964,961 | | | $ | 271 | | | $ | 473,251 | | | 2,198,681 | | | $ | (67,068) | | | $ | 229,030 | | | $ | 1,106 | | | $ | 636,590 | | |
Impact of adoption of ASU 2016-13 | | — | | | — | | | — | | | — | | | — | | | — | | | (1,771) | | | — | | | (1,771) | | |
Balance, January 1, 2021 | | Balance, January 1, 2021 | | $ | 45,000 | | | 24,868,218 | | | $ | 280 | | | $ | 489,151 | | | 3,083,503 | | | $ | (103,052) | | | $ | 289,583 | | | $ | 5,819 | | | $ | 726,781 | |
Issuance of restricted stock awards | Issuance of restricted stock awards | | — | | | 8,079 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | Issuance of restricted stock awards | | — | | | 4,613 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock option exercises, net | | Stock option exercises, net | | — | | | 10,205 | | | — | | | 191 | | | — | | | — | | | — | | | — | | | 191 | |
Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 1,168 | | | — | | | — | | | — | | | — | | | 1,168 | | Stock based compensation | | — | | | — | | | — | | | 1,350 | | | — | | | — | | | — | | | — | | | 1,350 | |
Forfeiture of restricted stock awards | Forfeiture of restricted stock awards | | — | | | (601) | | | — | | | 23 | | | 601 | | | (23) | | | — | | | — | | | — | | Forfeiture of restricted stock awards | | — | | | (107) | | | — | | | 7 | | | 107 | | | (7) | | | — | | | — | | | — | |
Purchase of treasury stock | Purchase of treasury stock | | — | | | (871,319) | | | — | | | — | | | 871,319 | | | (35,586) | | | — | | | — | | | (35,586) | | Purchase of treasury stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Dividends declared | | Dividends declared | | — | | | — | | | — | | | — | | | — | | | — | | | (801) | | | — | | | (801) | |
Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (4,450) | | | — | | | (4,450) | | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 33,923 | | | — | | | 33,923 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | (6,604) | | | (6,604) | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | 2,560 | | | 2,560 | |
Balance, March 31, 2020 | | $ | — | | | 24,101,120 | | | $ | 272 | | | $ | 474,441 | | | 3,070,601 | | | $ | (102,677) | | | $ | 222,809 | | | $ | (5,498) | | | 589,347 | | |
Issuance of preferred stock, net of issuance costs | | 45,000 | | | — | | | — | | | (2,636) | | | — | | | — | | | — | | | — | | | 42,364 | | |
Balance, March 31, 2021 | | Balance, March 31, 2021 | | $ | 45,000 | | | 24,882,929 | | | $ | 280 | | | $ | 490,699 | | | 3,083,610 | | | $ | (103,059) | | | $ | 322,705 | | | $ | 8,379 | | | 764,004 | |
Issuance of restricted stock awards | Issuance of restricted stock awards | | — | | | 110,035 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | Issuance of restricted stock awards | | — | | | 224,287 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | | | — | |
Stock option exercises, net | | Stock option exercises, net | | — | | | 18,934 | | | — | | | (45) | | | — | | | — | | | — | | | — | | | (45) | |
Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 966 | | | — | | | — | | | — | | | — | | | 966 | | Stock based compensation | | — | | | — | | | — | | | 3,386 | | | — | | | — | | | — | | | — | | | 3,386 | |
Forfeiture of restricted stock awards | Forfeiture of restricted stock awards | | — | | | (1,033) | | | — | | | 25 | | | 1,033 | | | (25) | | | — | | | — | | | — | | Forfeiture of restricted stock awards | | — | | | (2,278) | | | — | | | 186 | | | 2,278 | | | (186) | | | — | | | — | | | — | |
Purchase of treasury stock | Purchase of treasury stock | | — | | | (7,436) | | | — | | | — | | | 7,436 | | | (186) | | | — | | | — | | | (186) | | Purchase of treasury stock | | — | | | (14,169) | | | — | | | — | | | 14,169 | | | (1,241) | | | — | | | — | | | (1,241) | |
Dividends declared | | Dividends declared | | — | | | — | | | — | | | — | | | — | | | — | | | (802) | | | — | | | (802) | |
Net income | Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 13,440 | | | — | | | 13,440 | | Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 27,982 | | | — | | | 27,982 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,940 | | | 10,940 | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (896) | | | (896) | |
Balance, June 30, 2020 | | $ | 45,000 | | | 24,202,686 | | | $ | 273 | | | $ | 472,795 | | | 3,079,070 | | | $ | (102,888) | | | $ | 236,249 | | | $ | 5,442 | | | 656,871 | | |
Balance, June 30, 2021 | | Balance, June 30, 2021 | | $ | 45,000 | | | 25,109,703 | | | $ | 282 | | | $ | 494,224 | | | 3,100,057 | | | $ | (104,486) | | | $ | 349,885 | | | $ | 7,483 | | | 792,388 | |
Issuance of restricted stock awards | Issuance of restricted stock awards | | — | | | 20,303 | | | (1) | | | 1 | | | — | | | — | | | — | | | — | | | — | | Issuance of restricted stock awards | | — | | | 3,651 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock | | — | | | 630,268 | | | 7 | | | 13,935 | | | — | | | — | | | — | | | — | | | 13,942 | | |
Stock option exercises, net | Stock option exercises, net | | — | | | 344 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Stock option exercises, net | | — | | | 2,409 | | | — | | | 50 | | | — | | | — | | | — | | | — | | | 50 | |
Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 1,309 | | | — | | | — | | | — | | | — | | | 1,309 | | Stock based compensation | | — | | | — | | | — | | | 4,445 | | | — | | | — | | | — | | | — | | | 4,445 | |
Forfeiture of restricted stock awards | Forfeiture of restricted stock awards | | — | | | (2,000) | | | — | | | 54 | | | 2,000 | | | (54) | | | — | | | — | | | — | | Forfeiture of restricted stock awards | | — | | | (1,522) | | | — | | | 114 | | | 1,522 | | | (114) | | | — | | | — | | | — | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | (899) | | | — | | | (899) | | |
Issuance of common stock pursuant to the employee stock purchase plan | | Issuance of common stock pursuant to the employee stock purchase plan | | — | | | 9,101 | | | — | | | 449 | | | — | | | — | | | — | | | — | | | 449 | |
Purchase of treasury stock | | Purchase of treasury stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Dividends declared | | Dividends declared | | — | | | — | | | — | | | — | | | — | | | — | | | (802) | | | — | | | (802) | |
Net income | Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 22,904 | | | — | | | 22,904 | | Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 24,429 | | | — | | | 24,429 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (285) | | | (285) | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (285) | | | (285) | |
Balance, September 30, 2020 | | $ | 45,000 | | | 24,851,601 | | | $ | 279 | | | $ | 488,094 | | | 3,081,070 | | | $ | (102,942) | | | $ | 258,254 | | | $ | 5,157 | | | $ | 693,842 | | |
Balance, September 30, 2021 | | Balance, September 30, 2021 | | $ | 45,000 | | | 25,123,342 | | | $ | 282 | | | $ | 499,282 | | | 3,101,579 | | | $ | (104,600) | | | $ | 373,512 | | | $ | 7,198 | | | $ | 820,674 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 20202021 and 20192020
(Dollar amounts in thousands)
(Unaudited)
| | | Preferred Stock | | Common Stock | | | Additional Paid-in- Capital | | Treasury Stock | | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | Preferred Stock | | Common Stock | | Additional Paid-in- Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Liquidation Preference Amount | | Shares Outstanding | | Par Amount | | | | Shares Outstanding | | Cost | | | | | | | | Liquidation Preference Amount | | Shares Outstanding | | Par Amount | | Shares Outstanding | | Cost | |
Balance, January 1, 2019 | | $ | — | | | 26,949,936 | | | $ | 271 | | | $ | 469,341 | | | 104,063 | | | $ | (2,288) | | | $ | 170,486 | | | $ | (1,203) | | | $ | 636,607 | | |
Balance, January 1, 2020 | | Balance, January 1, 2020 | | $ | — | | | 24,964,961 | | | $ | 271 | | | $ | 473,251 | | | 2,198,681 | | | $ | (67,068) | | | $ | 229,030 | | | $ | 1,106 | | | $ | 636,590 | |
Impact of adoption of ASU 2016-13 | | Impact of adoption of ASU 2016-13 | | — | | | — | | | — | | | — | | | — | | | — | | | (1,771) | | | — | | | (1,771) | |
Issuance of restricted stock awards | Issuance of restricted stock awards | | — | | | 8,063 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Issuance of restricted stock awards | | — | | | 8,079 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | |
Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 911 | | | — | | | — | | | — | | | — | | | 911 | | Stock based compensation | | — | | | — | | | — | | | 1,168 | | | — | | | — | | | — | | | — | | | 1,168 | |
Forfeiture of restricted stock awards | Forfeiture of restricted stock awards | | — | | | (1,276) | | | — | | | 40 | | | 1,276 | | | (40) | | | — | | | — | | | — | | Forfeiture of restricted stock awards | | — | | | (601) | | | — | | | 23 | | | 601 | | | (23) | | | — | | | — | | | — | |
Purchase of treasury stock | Purchase of treasury stock | | — | | | (247,312) | | | — | | | — | | | 247,312 | | | (7,553) | | | — | | | — | | | (7,553) | | Purchase of treasury stock | | — | | | (871,319) | | | — | | | — | | | 871,319 | | | (35,586) | | | — | | | — | | | (35,586) | |
Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 14,788 | | | — | | | 14,788 | | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (4,450) | | | — | | | (4,450) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,463 | | | 1,463 | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | (6,604) | | | (6,604) | |
Balance, March 31, 2019 | | $ | — | | | 26,709,411 | | | $ | 271 | | | $ | 470,292 | | | 352,651 | | | $ | (9,881) | | | $ | 185,274 | | | $ | 260 | | | $ | 646,216 | | |
Balance, March 31, 2020 | | Balance, March 31, 2020 | | $ | — | | | 24,101,120 | | | $ | 272 | | | $ | 474,441 | | | 3,070,601 | | | $ | (102,677) | | | $ | 222,809 | | | $ | (5,498) | | | $ | 589,347 | |
Issuance of preferred stock, net of issuance costs | | Issuance of preferred stock, net of issuance costs | | 45,000 | | | — | | | — | | | (2,636) | | | — | | | — | | | — | | | — | | | 42,364 | |
Issuance of restricted stock awards | Issuance of restricted stock awards | | — | | | 85,503 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Issuance of restricted stock awards | | — | | | 110,035 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | |
Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 825 | | | — | | | — | | | — | | | — | | | 825 | | Stock based compensation | | — | | | — | | | — | | | 966 | | | — | | | — | | | — | | | — | | | 966 | |
Forfeiture of restricted stock awards | Forfeiture of restricted stock awards | | — | | | (920) | | | — | | | 28 | | | 920 | | | (28) | | | — | | | — | | | — | | Forfeiture of restricted stock awards | | — | | | (1,033) | | | — | | | 25 | | | 1,033 | | | (25) | | | — | | | — | | | — | |
Purchase of treasury stock | | Purchase of treasury stock | | — | | | (7,436) | | | — | | | — | | | 7,436 | | | (186) | | | — | | | — | | | (186) | |
Net income | | Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 13,440 | | | — | | | 13,440 | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,940 | | | 10,940 | |
Balance, June 30, 2020 | | Balance, June 30, 2020 | | $ | 45,000 | | | 24,202,686 | | | $ | 273 | | | $ | 472,795 | | | 3,079,070 | | | $ | (102,888) | | | $ | 236,249 | | | $ | 5,442 | | | $ | 656,871 | |
Issuance of common stock | | Issuance of common stock | | — | | | 630,268 | | | 7 | | | 13,935 | | | — | | | — | | | — | | | — | | | 13,942 | |
Issuance of restricted stock awards | | Issuance of restricted stock awards | | — | | | 20,303 | | | (1) | | | 1 | | | — | | | — | | | — | | | — | | | — | |
Stock option exercises, net | Stock option exercises, net | | — | | | 368 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Stock option exercises, net | | — | | | 344 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchase of treasury stock | | — | | | (596,054) | | | — | | | — | | | 596,054 | | | (17,559) | | | — | | | — | | | (17,559) | | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 12,730 | | | — | | | 12,730 | | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,150 | | | 1,150 | | |
Balance, June 30, 2019 | | $ | — | | | 26,198,308 | | | $ | 271 | | | $ | 471,145 | | | 949,625 | | | $ | (27,468) | | | $ | 198,004 | | | $ | 1,410 | | | $ | 643,362 | | |
Issuance of restricted stock awards | | — | | | 10,847 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | $ | — | | |
Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 1,058 | | | — | | | — | | | — | | | — | | | 1,058 | | Stock based compensation | | — | | | — | | | — | | | 1,309 | | | — | | | — | | | — | | | — | | | 1,309 | |
Forfeiture of restricted stock awards | Forfeiture of restricted stock awards | | — | | | (5,730) | | | — | | | 166 | | | 5,730 | | | (166) | | | — | | | — | | | — | | Forfeiture of restricted stock awards | | — | | | (2,000) | | | — | | | 54 | | | 2,000 | | | (54) | | | — | | | — | | | — | |
Stock option exercises, net | | — | | | 4,653 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Purchase of treasury stock | | — | | | (850,093) | | | — | | | — | | | 850,093 | | | (24,998) | | | — | | | — | | | (24,998) | | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 14,317 | | | — | | | 14,317 | | |
Dividends declared | | Dividends declared | | — | | | — | | | — | | | — | | | — | | | — | | | (899) | | | — | | | (899) | |
Net income | | Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 22,904 | | | — | | | 22,904 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (46) | | | (46) | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (285) | | | (285) | |
Balance, September 30, 2019 | | $ | — | | | 25,357,985 | | | $ | 272 | | | $ | 472,368 | | | 1,805,448 | | | $ | (52,632) | | | $ | 212,321 | | | $ | 1,364 | | | $ | 633,693 | | |
Balance, September 30, 2020 | | Balance, September 30, 2020 | | $ | 45,000 | | | 24,851,601 | | | $ | 279 | | | $ | 488,094 | | | 3,081,070 | | | $ | (102,942) | | | $ | 258,254 | | | $ | 5,157 | | | $ | 693,842 | |
See accompanying condensed notes to consolidated financial statements.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 20202021 and 20192020
(Dollar amounts in thousands)
(Unaudited)
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net income | Net income | | $ | 31,894 | | | $ | 41,835 | | Net income | | $ | 86,334 | | | $ | 31,894 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
Depreciation | Depreciation | | 7,378 | | | 6,020 | | Depreciation | | 8,992 | | | 7,378 | |
Net accretion on loans | Net accretion on loans | | (8,377) | | | (4,013) | | Net accretion on loans | | (7,615) | | | (8,377) | |
Amortization of subordinated notes issuance costs | Amortization of subordinated notes issuance costs | | 128 | | | 81 | | Amortization of subordinated notes issuance costs | | 1,022 | | | 128 | |
Amortization of junior subordinated debentures | Amortization of junior subordinated debentures | | 378 | | | 360 | | Amortization of junior subordinated debentures | | 395 | | | 378 | |
Net amortization on securities | Net amortization on securities | | (104) | | | 234 | | Net amortization on securities | | (465) | | | (104) | |
Amortization of intangible assets | Amortization of intangible assets | | 6,265 | | | 6,977 | | Amortization of intangible assets | | 7,677 | | | 6,265 | |
Deferred taxes | Deferred taxes | | (3,320) | | | 1,693 | | Deferred taxes | | 5,432 | | | (3,320) | |
Credit Loss Expense | | 33,649 | | | 7,560 | | |
Credit Loss Expense (benefit) | | Credit Loss Expense (benefit) | | (10,838) | | | 33,649 | |
Stock based compensation | Stock based compensation | | 3,443 | | | 2,794 | | Stock based compensation | | 9,181 | | | 3,443 | |
Net (gains) losses on sale or call of debt securities | Net (gains) losses on sale or call of debt securities | | (3,210) | | | (22) | | Net (gains) losses on sale or call of debt securities | | (5) | | | (3,210) | |
Net (gains) losses on equity securities | Net (gains) losses on equity securities | | (603) | | | (499) | | Net (gains) losses on equity securities | | 203 | | | (603) | |
Net OREO (gains) losses and valuation adjustments | Net OREO (gains) losses and valuation adjustments | | 399 | | | (301) | | Net OREO (gains) losses and valuation adjustments | | 376 | | | 399 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | | (9,758) | | | 0 | | Gain on sale of subsidiary or division | | — | | | (9,758) | |
Origination of loans held for sale | Origination of loans held for sale | | (45,220) | | | (21,017) | | Origination of loans held for sale | | (32,645) | | | (45,220) | |
Purchases of loans held for sale | Purchases of loans held for sale | | (33,811) | | | (24,733) | | Purchases of loans held for sale | | (19,001) | | | (33,811) | |
Proceeds from sale of loans originated for sale | | 71,782 | | | 42,753 | | |
Net gains on sale of loans | | (2,323) | | | (409) | | |
Proceeds from sale of loans originated or purchased for sale | | Proceeds from sale of loans originated or purchased for sale | | 50,931 | | | 71,782 | |
Net (gains) losses on sale of loans | | Net (gains) losses on sale of loans | | (1,289) | | | (2,323) | |
Net (gains) losses on transfer of loans to loans held for sale | Net (gains) losses on transfer of loans to loans held for sale | | 466 | | | (229) | | Net (gains) losses on transfer of loans to loans held for sale | | (1,676) | | | 466 | |
Net change in operating leases | Net change in operating leases | | 92 | | | 145 | | Net change in operating leases | | 468 | | | 92 | |
(Increase) decrease in other assets | (Increase) decrease in other assets | | (4,206) | | | (6,759) | | (Increase) decrease in other assets | | (19,275) | | | (4,206) | |
Increase (decrease) in other liabilities | Increase (decrease) in other liabilities | | 15,387 | | | 4,017 | | Increase (decrease) in other liabilities | | 11,071 | | | 15,387 | |
Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | | 60,329 | | | 56,487 | | Net cash provided by (used in) operating activities | | 89,273 | | | 60,329 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Purchases of securities available for sale | Purchases of securities available for sale | | (128,970) | | | (80,459) | | Purchases of securities available for sale | | (18,250) | | | (128,970) | |
Proceeds from sales of securities available for sale | Proceeds from sales of securities available for sale | | 65,184 | | | 40,617 | | Proceeds from sales of securities available for sale | | — | | | 65,184 | |
Proceeds from maturities, calls, and pay downs of securities available for sale | Proceeds from maturities, calls, and pay downs of securities available for sale | | 78,276 | | | 75,777 | | Proceeds from maturities, calls, and pay downs of securities available for sale | | 76,864 | | | 78,276 | |
Proceeds from maturities, calls, and pay downs of securities held to maturity | Proceeds from maturities, calls, and pay downs of securities held to maturity | | 581 | | | 668 | | Proceeds from maturities, calls, and pay downs of securities held to maturity | | 762 | | | 581 | |
Purchases of loans held for investment | Purchases of loans held for investment | | (277,333) | | | (26,714) | | Purchases of loans held for investment | | (77,571) | | | (277,333) | |
Proceeds from sale of loans | Proceeds from sale of loans | | 145,513 | | | 25,653 | | Proceeds from sale of loans | | 63,028 | | | 145,513 | |
Net change in loans | Net change in loans | | (524,820) | | | (603,694) | | Net change in loans | | 227,650 | | | (524,820) | |
Purchases of premises and equipment, net | Purchases of premises and equipment, net | | (16,283) | | | (9,740) | | Purchases of premises and equipment, net | | (9,899) | | | (16,283) | |
Net proceeds from sale of OREO | Net proceeds from sale of OREO | | 1,918 | | | 2,513 | | Net proceeds from sale of OREO | | 807 | | | 1,918 | |
(Purchases) redemptions of FHLB and other restricted stock, net | (Purchases) redemptions of FHLB and other restricted stock, net | | 1,396 | | | (8,017) | | (Purchases) redemptions of FHLB and other restricted stock, net | | 1,850 | | | 1,396 | |
Net cash (paid for) received in acquisitions | Net cash (paid for) received in acquisitions | | (108,375) | | | 0 | | Net cash (paid for) received in acquisitions | | (96,926) | | | (108,375) | |
Proceeds from sale of subsidiary or division, net | Proceeds from sale of subsidiary or division, net | | 93,835 | | | 0 | | Proceeds from sale of subsidiary or division, net | | — | | | 93,835 | |
Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | | (669,078) | | | (583,396) | | Net cash provided by (used in) investing activities | | 168,315 | | | (669,078) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Net increase (decrease) in deposits | Net increase (decrease) in deposits | | 452,582 | | | 247,484 | | Net increase (decrease) in deposits | | 105,975 | | | 452,582 | |
Increase (decrease) in customer repurchase agreements | Increase (decrease) in customer repurchase agreements | | 12,159 | | | 9,639 | | Increase (decrease) in customer repurchase agreements | | 8,891 | | | 12,159 | |
Increase (decrease) in Federal Home Loan Bank advances | Increase (decrease) in Federal Home Loan Bank advances | | 5,000 | | | 200,000 | | Increase (decrease) in Federal Home Loan Bank advances | | (75,000) | | | 5,000 | |
Proceeds from Paycheck Protection Program Liquidity Facility borrowings | Proceeds from Paycheck Protection Program Liquidity Facility borrowings | | 231,370 | | | 0 | | Proceeds from Paycheck Protection Program Liquidity Facility borrowings | | 226,630 | | | 231,370 | |
Repayment of Paycheck Protection Program Liquidity Facility borrowings | Repayment of Paycheck Protection Program Liquidity Facility borrowings | | (7,657) | | | 0 | | Repayment of Paycheck Protection Program Liquidity Facility borrowings | | (320,936) | | | (7,657) | |
Proceeds from issuance of subordinated notes, net | | Proceeds from issuance of subordinated notes, net | | 68,224 | | | — | |
Repayment of subordinated notes | | Repayment of subordinated notes | | (50,000) | | | — | |
Issuance of preferred stock, net of issuance costs | Issuance of preferred stock, net of issuance costs | | 42,364 | | | 0 | | Issuance of preferred stock, net of issuance costs | | — | | | 42,364 | |
Preferred dividends | Preferred dividends | | (899) | | | 0 | | Preferred dividends | | (2,405) | | | (899) | |
Stock option exercises | | Stock option exercises | | 196 | | | — | |
Proceeds from employee stock purchase plan common stock issuance | | Proceeds from employee stock purchase plan common stock issuance | | 449 | | | — | |
Purchase of treasury stock | Purchase of treasury stock | | (35,772) | | | (50,110) | | Purchase of treasury stock | | (1,241) | | | (35,772) | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | | 699,147 | | | 407,013 | | Net cash provided by (used in) financing activities | | (39,217) | | | 699,147 | |
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | | 90,398 | | | (119,896) | | Net increase (decrease) in cash and cash equivalents | | 218,371 | | | 90,398 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 197,880 | | | 234,939 | | Cash and cash equivalents at beginning of period | | 314,393 | | | 197,880 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 288,278 | | | $ | 115,043 | | Cash and cash equivalents at end of period | | 532,764 | | | 288,278 | |
See accompanying condensed notes to consolidated financial statements.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 20202021 and 20192020
(Dollar amounts in thousands)
(Unaudited)
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Supplemental cash flow information: | Supplemental cash flow information: | | | | | Supplemental cash flow information: | | | | |
Interest paid | Interest paid | | $ | 33,868 | | | $ | 37,336 | | Interest paid | | $ | 15,551 | | | $ | 33,868 | |
Income taxes paid, net | Income taxes paid, net | | $ | 4,572 | | | $ | 12,797 | | Income taxes paid, net | | $ | 36,353 | | | $ | 4,572 | |
Cash paid for operating lease liabilities | Cash paid for operating lease liabilities | | $ | 3,183 | | | $ | 3,138 | | Cash paid for operating lease liabilities | | $ | 3,440 | | | $ | 3,183 | |
Supplemental noncash disclosures: | Supplemental noncash disclosures: | | Supplemental noncash disclosures: | |
Loans transferred to OREO | Loans transferred to OREO | | $ | 1,012 | | | $ | 3,001 | | Loans transferred to OREO | | $ | 644 | | | $ | 1,012 | |
Loans held for investment transferred to loans held for sale | Loans held for investment transferred to loans held for sale | | $ | 172,565 | | | $ | 27,411 | | Loans held for investment transferred to loans held for sale | | $ | 76,976 | | | $ | 172,565 | |
Assets transferred to assets held for sale | Assets transferred to assets held for sale | | $ | 84,077 | | | $ | 0 | | Assets transferred to assets held for sale | | $ | — | | | $ | 84,077 | |
Lease liabilities arising from obtaining right-of-use assets | Lease liabilities arising from obtaining right-of-use assets | | $ | 1,777 | | | $ | 2,179 | | Lease liabilities arising from obtaining right-of-use assets | | $ | 19,404 | | | $ | 1,777 | |
Securities available for sale purchased, not settled | | Securities available for sale purchased, not settled | | $ | — | | | $ | — | |
Indemnification recognized | | Indemnification recognized | | $ | 35,633 | | | $ | — | |
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 June 30, 2020, the Company sold the assets TriumphPay operates as a division of Triumph Premium Finance (“TPF”) and exited its premium finance line of business. TPF operated within the Company’s TBK Bank, subsidiary. See Note 2 – Business Combinations and Divestitures for details of the TPF sale and its impact on our consolidated financial statements.SSB.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission (“SEC”). Accordingly, the condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. Operating results for the three and nine months ended September 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021.
Operating Segments
The Company’s reportable segments are comprised of strategic business units primarily based upon industry categories and, to a lesser extent, the core competencies relating to product origination, distribution methods, operations and servicing. Segment determination also considered organizational structure and is consistent with the presentation of financial information to the chief operating decision maker to evaluate segment performance, develop strategy, and allocate resources. The Company's chief operating decision maker is the Chief Executive Officer of Triumph Bancorp, Inc. Management has determined that the Company has 4 reportable segments consisting of Banking, Factoring, Payments, and Corporate.
The Banking segment includes the operations of TBK Bank. The Banking segment derives its revenue principally from investments in interest-earning assets as well as noninterest income typical for the banking industry.
The Factoring segment includes the operations of TBC with revenue derived from factoring services.
The Payments segment includes the operations of the TBK Bank's TriumphPay division, which is the payments network for trucking; creating frictionless presentment, audit, and payment of invoices. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a carrier a QuickPay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering freight brokers the ability to settle their invoices with us on an extended term following our payment to their carriers as an additional liquidity option for such freight brokers.
The corporate segment includes holding company financing and investment activities and management and administrative expenses to support the overall operations of the Company.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Prior to June 30, 2021, management determined that the Company had 3 reportable segments consisting of Banking, Factoring, and Corporate.Corporate, and the Banking segment included the operations of TBK Bank and TriumphPay. On June 1, 2021, TriumphPay acquired HubTran, Inc., a cloud-based provider of automation software for the trucking industry’s back office (see Note 2 – Business Combinations and Divestitures for further disclosures regarding the acquisition of HubTran). The Company’s Chief Executive Officer usesacquisition of HubTran allows TriumphPay to create a fully integrated payments network for trucking; servicing brokers and factors. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to a payments network for the trucking industry with a focus on fee revenue. In terms of total revenue, operating income (loss), and total assets, TriumphPay is currently, and has historically been, quantitatively immaterial; however, given the shift in strategy brought on by the acquisition of HubTran as well as significant management and chief operating decision maker focus on TriumphPay operations, management believes disclosing TriumphPay's operations through the Payments segment resultsis qualitatively useful for readers of these financial statements. This change also brings the Company's reportable segments in line with its reporting units used for goodwill impairment evaluation. Prior to make operating and strategic decisions.the acquisition of HubTran, the Payments reporting unit carried no goodwill. Prior period business segment disclosures have been revised as appropriate to reflect the current period change in reportable segments.
Risks and Uncertainties
TheSignificant progress has been made to combat the outbreak of COVID-19COVID-19; however, the global pandemic has adversely impacted a broad range of industries in which the Company’sCompany's customers operate and could still impair their ability to fulfill their financial obligations to the Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. IfWhile it appears that the global response to contain COVID-19 escalates further orepidemiological and macroeconomic conditions are trending in a positive direction as of September 30, 2021, if there is unsuccessful,a resurgence in the virus, the Company could experience further material adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company’sCompany's future operations, the Company is disclosing potentially material items of which it is aware.
Financial position and results of operations
In keeping with guidance from regulators, the Company continues to actively work with COVID-19 affected customers. During the second quarter of 2020 we waived fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020 resulting in a decrease in service charges on deposits fee income for the nine months ended September 30, 2020 compared to the same period during 2019. Should the pandemic and the global response escalate further, it is possible that the Company could reduce such fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of September 30, 20202021 the Company has recognized $695,000carries $121,000 of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.
Capital and liquidity
OurThe Company's reported and regulatory capital ratios could be adversely impacted by further credit loss expense. We relyThe Company relies on cash on hand as well as dividends from ourits subsidiary bank to service ourits debt. If ourthe Company's capital deteriorates such that ourits subsidiary bank is unable to pay dividends to usthe Company for an extended period of time, wethe Company may not be able to service ourits debt. We maintainThe Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us,the Company, but rates for short termshort-term funding have recently beencan be volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on ourthe Company's net interest margin. If an extended recession caused large numbers of ourthe Company's deposit customers to withdraw their funds, wethe Company might become more reliant on volatile or more expensive sources of funding.
AssetIntangible asset valuation
The lingering effects COVID-19 could cause a decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Lending operations and accommodations to borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company is executing a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days.a stated period of time. As of September 30, 2020,2021, the Company’s balance sheet reflected 773 of these deferrals on outstanding loan balances of $102,987,000.$32,220,000. In accordance with the CARES Act and March 2020 interagency guidance, these short term deferrals are not considered troubled debt restructurings. It is possible that these deferrals could be extended further under the CARES Act; however, the volume of these future potential extensions is unknown. It is also possible that in spite of ourthe Company's best efforts to assist ourits borrowers and achieve full collection of ourthe Company's investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown. At September 30, 2021, 94% of the $32,220,000 COVID deferral balance was made up of one relationship.
With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company has actively participated in assisting its customers with applications for resources through the program. PPP loans have two-year and five-year terms and earn interest at a 1% coupon. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020,2021, the Company carried 2,080815 PPP loans representing a book value of $223,000,000.$87,413,000. The Company has received approximately $7,700,000recognized $1,584,000 and $4,524,000 in total fees from the SBA $2,600,000 of which were recognized in interest income and feeson PPP loans during the three and nine months ended September 30, 2020.2021 and carried $3,580,000 of deferred fees on PPP loans at September 30, 2021. The remaining fees will be amortized and recognized over the remaining lives of the loans. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit
The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing itthe Company to respond proactively as needs and issues arise. Should the economy experience a prolonged period of poor economic conditions or should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses (“ACL”) and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
Held to Maturity Securities
At September 30, 2020, we held $8,057,000 in subordinated notes of 3 CLO securities managed by our former subsidiary. These securities areNOTE 2 – BUSINESS COMBINATIONS AND DIVESTITURES
HubTran Inc.
On June 1, 2021, the junior-most in securitization capital structures, and are subject to suspension of distributions if the creditCompany, through TriumphPay, a division of the underlying loan portfolios deteriorates materially.Company's wholly-owned subsidiary TBK Bank, SSB, acquired HubTran, Inc. ("HubTran"), a cloud-based provider of automation software for the trucking industry's back-office.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Initial Values | | Measurement Period Adjustments | | Adjusted Values |
Assets acquired: | | | | | | |
Cash | | $ | 170 | | | $ | — | | | $ | 170 | |
Intangible assets - capitalized software | | 16,932 | | | — | | | 16,932 | |
Intangible assets - customer relationship | | 10,360 | | | — | | | 10,360 | |
Other assets | | 1,546 | | | 24 | | | 1,570 | |
| | 29,008 | | | 24 | | | 29,032 | |
Liabilities assumed: | | | | | | |
Deferred income taxes | | 4,703 | | | (3,230) | | | 1,473 | |
Other liabilities | | 906 | | | 16 | | | 922 | |
| | 5,609 | | | (3,214) | | | 2,395 | |
Fair value of net assets acquired | | $ | 23,399 | | | $ | 3,238 | | | $ | 26,637 | |
Consideration: | | | | | | |
Cash paid | | $ | 97,096 | | | $ | — | | | $ | 97,096 | |
Goodwill | | $ | 73,697 | | | $ | (3,238) | | | $ | 70,459 | |
The Company has recognized goodwill of $70,459,000, which included measurement period adjustments related to customary settlement adjustments and the finalization of the HubTran stub period tax return and its impact on the acquired deferred tax liability. Goodwill was calculated as the excess of the fair value of consideration exchanged as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Payments segment. The goodwill in this acquisition resulted from expected synergies and progress in the development of a fully integrated open loop payments network for the transportation industry. The goodwill will not be deducted for tax purposes. The 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.
The intangible assets recognized include a capitalized software intangible asset with an acquisition date fair value of $16,932,000 which will be amortized on a straight-line basis over its four year estimated useful life and a customer relationship intangible asset with an acquisition date fair value of $10,360,000 which will be amortized utilizing an accelerated method over its eleven year estimated useful life.
Revenue and earnings of HubTran since the acquisition date have not been disclosed as the acquired company was merged into the Company and separate financial information is not readily available.
Expenses related to the acquisition, including professional fees and other transaction costs, totaling $2,992,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended June 30, 2021.
Transportation Financial Solutions
On July 8, 2020, the Company, through its wholly-owned subsidiary Advance Business Capital LLC (“ABC”), acquired the transportation factoring assets (the “TFS Acquisition”) of Transport Financial Solutions (“TFS”), a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), in exchange for cash consideration of $108,375,000, 630,268 shares of the Company’s common stock valued at approximately $13,942,000, and contingent consideration of up to approximately $9,900,000 to be paid in cash following the twelve-month period ending July 31, 2021.
Subsequent to the closing of the TFS Acquisition, the Company identified that approximately $62,200,000 of the assets acquired at closing were advances against future payments to be made to 3 large clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements between the obligor on such contracts and such clients (and their affiliated entities) for services that had not yet been performed.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On September 23, 2020, the Company and ABC entered into an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (the “Agreement”) with CVLG and Covenant Transport Solutions, LLC, a wholly owned subsidiary of CVLG (“CTS” and, together with CVLG, "Covenant"). Pursuant to the Agreement, the parties agreed to certain amendments to that certain Accounts Receivable Purchase Agreement (the “ARPA”), dated as of July 8, 2020, by and among ABC, as buyer, CTS, as seller, and the Company, as buyer indirect parent. Such amendments include:
•Return of the portion of the purchase price paid under the ARPA consisting of 630,268 shares of Company common stock, which will be accomplished through the sale of such shares by Covenant pursuant to the terms of the Agreement and the surrender of the cash proceeds of such sale (net of brokerage or underwriting fees and commissions) to the Company;
•Elimination of the earn-out consideration potentially payable to CTS under the ARPA; and
•Modification of the indemnity provisions under the ARPA to eliminate the existing indemnifications for breaches of representations and warranties and to replace such with a newly established indemnification by Covenant in the event ABC incurs losses related to the $62,200,000 in over-formula advances made to specified clients identified in the Agreement (the “Over-Formula Advance Portfolio”). Under the terms of the new indemnification arrangement, Covenant will be responsible for and will indemnify ABC for 100% of the first $30,000,000 of any losses incurred by ABC related to the Over-Formula Advance Portfolio, and for 50% of the next $30,000,000 of any losses incurred by ABC, for total indemnification by Covenant of $45,000,000.
Covenant’s indemnification obligations under the Agreement were secured by a pledge of equipment collateral by Covenant with an estimated net orderly liquidation value of $60,000,000 (the “Equipment Collateral”). The Company’s wholly-owned bank subsidiary, TBK Bank, SSB, has provided Covenant with a $45,000,000 line of credit, also secured by the Equipment Collateral, the proceeds of which may be drawn to satisfy Covenant’s indemnification obligations under the Agreement.
Pursuant to the Agreement, Triumph and Covenant have agreed to certain terms related to the management of the Over-Formula Advance Portfolio, and the terms by which Covenant may provide assistance to maximize recovery on the Over-Formula Advance Portfolio.
Pursuant to the Agreement, the Company and Covenant have provided mutual releases to each other related to any and all claims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio.
The measurement period for this transaction remained open at the time the Agreement was executed, and the Company determined that there is a clear and direct link between the Agreement and the ARPA. Therefore, the terms of the Agreement were incorporated into the Company's purchase accounting which resulted in the elimination of the contingent consideration component of the ARPA, the recognition of cash due from Covenant as part of the consideration for the transaction, and an indemnification asset to reflect the modification of Covenant's indemnification obligations.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Initial Values Recorded at Acquisition Date | | Measurement Period Adjustments | | Adjusted Values |
Assets acquired: | | | | | |
Factored receivables | $107,524 | | $— | | $107,524 |
Allowance for credit losses | (37,415) | | — | | (37,415) |
Factored receivables, net of ACL | 70,109 | | — | | 70,109 |
Intangible assets | 3,500 | | — | | 3,500 |
Indemnification asset | 30,959 | | — | | 30,959 |
Deferred income taxes | 1,448 | | (59) | | 1,389 |
| 106,016 | | (59) | | 105,957 |
Liabilities assumed: | | | | | |
Deposits | 5,361 | | — | | 5,361 |
| 5,361 | | — | | 5,361 |
Fair value of net assets acquired | $100,655 | | $ | (59) | | | $100,596 |
Consideration: | | | | | |
Cash paid | $108,375 | | — | | $108,375 |
Stock consideration | 13,942 | | — | | 13,942 |
Cash due from seller subsequent to liquidation of stock consideration | (17,196) | | — | | (17,196) |
Total consideration | $105,121 | | $— | | $105,121 |
Goodwill | $4,466 | | $59 | | $4,525 |
The Company recognized goodwill of $4,525,000, which included measurement period adjustments related to the finalization of the tax basis of Covenant’s customer intangibles and its impact on the deferred tax liability associated with these intangibles. Goodwill was calculated as the excess of the fair value of consideration exchanged as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Factoring segment. The goodwill in this acquisition resulted from expected synergies and expansion in the factoring market. The goodwill will not be deducted for tax purposes.
Consideration included cash due from Covenant subsequent to liquidation of the stock consideration with an acquisition date fair value of $17,196,000. The fair value of cash due from Covenant was based on the Company's stock price on the date of the Agreement, less an estimate of broker commissions and discounts. During the nineyear ended December 31, 2020, the entirety of the acquired stock was sold by Covenant, Covenant delivered net proceeds of $28,064,000, and the Company recognized $10,868,000 of other noninterest income measured as the difference between the initial purchase accounting measurement and the amount of net proceeds delivered to the Company upon liquidation. Of the total $10,868,000 of noninterest income recognized, $2,007,000 was recognized during the three months ended September 30, 2020, pandemic-related downgrades and default activity caused overcollateralization triggersthe remainder was recognized during the three months ended December 31, 2020.
The intangible assets recognized include a customer relationship intangible asset with an acquisition date fair value of $3,500,000 which will be amortized utilizing an accelerated method over its eight year estimated useful life.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The indemnification asset was measured separately from the related covered portfolio. It is not contractually embedded in the covered portfolio nor is it transferable with the covered portfolio should the Company choose to dispose of the portfolio or a portion of the portfolio. The indemnification asset was initially recorded in other assets in the Consolidated Balance Sheets at the time of the TFS Acquisition at a fair value of $30,959,000, measured as the present value of the estimated cash payments expected to be trippedreceived from Covenant for probable losses on 2the covered Over-Formula Advance Portfolio. These cash flows were discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. The amount ultimately collected for this asset will be dependent upon the performance of the underlying covered portfolio, the passage of time, and Covenant's willingness and ability to make necessary payments. The terms of the Agreement are such that indemnification has no expiration date and the Company will continue to carry the indemnification asset until ultimate resolution of the covered portfolio. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income, as appropriate, within the Consolidated Statements of Income. The value of the indemnification asset was $4,786,000 and $36,225,000 at September 30, 2021 and December 31, 2020, respectively.
During the three months ended March 31, 2021, new adverse developments with the largest of the three CLO investments whichOver-Formula Advance clients caused the Company to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $41,265,000; however, this net charge-off had a materialno impact on expected cash flows used to calculate the ACL. The required ACL on these balances was $1,961,000 September 30, 2020 resulting in $1,835,000 of credit loss expense recognized duringfor the ninethree months ended March 31, 2021 as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed the Company for $35,633,000 of this charge-off by drawing on its secured line of credit, which was reflected on the Company's March 31, 2021 Consolidated Balance Sheet as a current and performing equipment loan held for investment. Given separate developments with the other two Over-Formula Advance clients, the Company reserved an additional $2,844,000 reflected in credit loss expense for the three months ended March 31, 2021. The $2,844,000 increase in required ACL as well as accretion of most of the fair value discount on the indemnification asset held at December 31, 2020 resulted in a $4,654,000 gain on the indemnification asset which was recorded through non-interest income. Since March 31, 2021, Covenant has paid down its secured line of credit with TBK in its entirety and carries no outstanding balance at September 30, 2021. At September 30, 2021, Covenant had remaining availability of $9,361,000 on its TBK line of credit available to cover our indemnification balance of up to $5,038,000.
During the three months ended September 30, 2020. Ultimately,2021, there were no material changes in the realized cash flows on CLO securities such as these will be driven by a variety of factors, includingunderlying credit performancequality of the underlying loan portfolio,remaining two Over-Formula Advance clients. As such, there were no charge-offs related to these balances and no material adjustments were made to the portfolio bycorresponding ACL balances or the indemnification asset manager,during that period.
The contractually required payments and the timingfair value at acquisition of a potential call. Thus, we mayfactored receivables purchased for which there was not, receiveat acquisition, evidence of more than insignificant deterioration of credit quality since origination (non-PCD loans) totaled $45,228,000 and $44,962,000, respectively.
Management determined that the full$62,200,000 in Over-Formula Advances obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those Over-Formula Advances to be purchased credit deteriorated ("PCD"). Other, less significant factored receivables were also considered to be PCD. The following table presents information at the acquisition date for factored receivables purchased for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination:
| | | | | |
(Dollars in thousands) | |
Purchase price of loans at acquisition | $25,147 |
Allowance for credit losses at acquisition | 37,415 |
Non-credit discount/(premium) at acquisition | 941 |
Par value of acquired loans at acquisition | $63,503 |
Revenue and earnings of TFS since the acquisition date have not been disclosed as the acquired company was merged into the Company and separate financial information is not readily available.
Expenses related to the acquisition, including professional fees and other transaction costs, totaling $827,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended September 30, 2020.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Triumph Premium Finance
On April 20, 2020, the Company entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit its premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of cash distributions we expectthe Disposal Group was transferred to receive, which would cause us to record additional allowanceassets held for credit lossessale. The sale closed on June 30, 2020.
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 | $ | 84,504 | |
Premises and equipment, net | 45 | |
Other assets | 11 | |
| 84,560 | |
Carrying amount of liabilities in the disposal group: | |
Other liabilities | 479 | |
Total carrying amount | $ | 84,081 | |
Total consideration received | 94,531 | |
Gain on sale of division | 10,450 | |
Transaction costs | 692 | |
Gain on sale of division, net of transaction costs | $ | 9,758 | |
The Disposal Group was included in the Banking segment, and the loans in the Disposal Group were previously included in the commercial loan portfolio.
NOTE 3 - SECURITIES
Equity Securities with a corresponding charge to credit loss expense through earnings. AsReadily Determinable Fair Values
The Company held equity securities with fair values of $5,623,000 and $5,826,000 at September 30, 2021 and December 31, 2020, respectively. The gross realized and unrealized losses recognized on equity securities with readily determinable fair values in noninterest income in the Company’s held to maturity securitiesconsolidated statements of income were classified as nonaccrual.follows:
Transportation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gains (losses) on equity securities held at the reporting date | | $ | (231) | | | $ | (371) | | | $ | (203) | | | $ | 603 | |
Realized gains (losses) on equity securities sold during the period | | — | | | — | | | — | | | — | |
| | $ | (231) | | | $ | (371) | | | $ | (203) | | | $ | 603 | |
The Company’s transportation businesses may be affected by COVID-19 and the volatility in oil prices. The global supply disruption from China and Mexico, in combination with the U.S. supply chain challenges due to business disruptions and an overall decrease in consumer demand could have a material impact on freight volumes in the U.S., which could impact our factoring and transportation lending operations in future periods; however, the ultimate impact is unknown.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt SecuritiesTransportation Financial Solutions
The Company determines the classification of debt securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Debt securities not classified as held to maturity or trading are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity using the interest method, except for premiums on callable debt securities, which are amortized to their earliest call date.
The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in other assets in the consolidated balance sheets. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is reversed against interest income. There was 0 accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30,On July 8, 2020, and 2019.
Allowance for Credit Losses – Available for Sale Securities
For available for sale debt securities in an unrealized loss position, the Company, evaluatesthrough its wholly-owned subsidiary Advance Business Capital LLC (“ABC”), acquired the securitiestransportation factoring assets (the “TFS Acquisition”) of Transport Financial Solutions (“TFS”), a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), in exchange for cash consideration of $108,375,000, 630,268 shares of the Company’s common stock valued at approximately $13,942,000, and contingent consideration of up to determine whetherapproximately $9,900,000 to be paid in cash following the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limitedtwelve-month period ending July 31, 2021.
Subsequent to the amount by whichclosing of the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, ifTFS Acquisition, the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviewsidentified that approximately $62,200,000 of the issuers’ financial condition, among other factors.
Changes inassets acquired at closing were advances against future payments to be made to 3 large clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements between the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable is excluded from the estimate of credit losses.
Allowance for Credit Losses – Held to Maturity Securities
The allowance for credit losses on held to maturity securities is estimated on a collective basis by major security type. At September 30, 2020 and December 31, 2019, the Company’s held to maturity securities consisted of investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
Accrued interest receivable is excluded from the estimate of credit losses.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their amortized cost basis, which is the unpaid principal balance outstanding, net of unearned income, deferred loan fees and costs, premiums and discounts associated with acquisition date fair value adjustments on acquired loans, and any direct principal charge-offs. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in other assets on consolidated balance sheets.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the remaining life of the loan without anticipating prepayments.
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. The accrual of interest income on loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or if full collection of interest or principal becomes uncertain. Consumer loans are typically charged off no later than 120 days past due. All interest accrued but not received for a loan placed on nonaccrual is reversed against interest income. Interest receivedobligor on such loans is accountedcontracts and such clients (and their affiliated entities) for on the cash-basis or cost recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income isservices that had not recognized until the loan balance is reduced to 0. Under the cash basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Factored Receivables
The Company purchases invoices from its factoring clients in schedules or batches. To a much lesser extent, the Company will also make short-term advances to its clients on transportation contracts for upcoming loads. Cash is advanced to the client to the extent of the applicable advance rate, less fees, as set forth in the individual factoring agreements. The face value of the invoices purchased or amount advanced is recorded by the Company as factored receivables, and the unadvanced portions of the invoices purchased, less fees, are considered client reserves. The client reserves are held to settle any payment disputes or collection shortfalls, may be used to pay clients’ obligations to various third parties as directed by the client, are periodically released to or withdrawn by clients, and are reported as deposits in the consolidated balance sheets.
Unearned factoring fees and unearned net origination fees are deferred and recognized over the weighted average collection period for each client. Subsequent factoring fees are recognized in interest income as incurred by the client and deducted from the clients’ reserve balances.yet been performed.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other factoring-related fees, which include wire transfer fees, carrier payment fees, fuel advance fees,On September 23, 2020, the Company and other similar fees, are reportedABC entered into an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (the “Agreement”) with CVLG and Covenant Transport Solutions, LLC, a wholly owned subsidiary of CVLG (“CTS” and, together with CVLG, "Covenant"). Pursuant to the Agreement, the parties agreed to certain amendments to that certain Accounts Receivable Purchase Agreement (the “ARPA”), dated as of July 8, 2020, by and among ABC, as buyer, CTS, as seller, and the Company, as non-interest income asbuyer indirect parent. Such amendments include:
•Return of the portion of the purchase price paid under the ARPA consisting of 630,268 shares of Company common stock, which will be accomplished through the sale of such shares by Covenant pursuant to the terms of the Agreement and the surrender of the cash proceeds of such sale (net of brokerage or underwriting fees and commissions) to the Company;
•Elimination of the earn-out consideration potentially payable to CTS under the ARPA; and
•Modification of the indemnity provisions under the ARPA to eliminate the existing indemnifications for breaches of representations and warranties and to replace such with a newly established indemnification by Covenant in the event ABC incurs losses related to the $62,200,000 in over-formula advances made to specified clients identified in the Agreement (the “Over-Formula Advance Portfolio”). Under the terms of the new indemnification arrangement, Covenant will be responsible for and will indemnify ABC for 100% of the first $30,000,000 of any losses incurred by ABC related to the client.Over-Formula Advance Portfolio, and for 50% of the next $30,000,000 of any losses incurred by ABC, for total indemnification by Covenant of $45,000,000.
Acquired Loans
Acquired loans are recorded at fairCovenant’s indemnification obligations under the Agreement were secured by a pledge of equipment collateral by Covenant with an estimated net orderly liquidation value atof $60,000,000 (the “Equipment Collateral”). The Company’s wholly-owned bank subsidiary, TBK Bank, SSB, has provided Covenant with a $45,000,000 line of credit, also secured by the date of acquisition based on a discounted cash flow methodology that considers various factors includingEquipment Collateral, the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, allproceeds of which may be susceptibledrawn to significant change.satisfy Covenant’s indemnification obligations under the Agreement.
PriorPursuant to January 1, 2020, loans acquired in a business combination that had evidencethe Agreement, Triumph and Covenant have agreed to certain terms related to the management of deterioration of credit quality since originationthe Over-Formula Advance Portfolio, and forthe terms by which it was probable, at acquisition, thatCovenant may provide assistance to maximize recovery on the Over-Formula Advance Portfolio.
Pursuant to the Agreement, the Company would be unableand Covenant have provided mutual releases to collecteach other related to any and all contractually required payments receivable were considered purchased credit impaired (“PCI”). PCI loans were individually evaluated and recorded at fair valueclaims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio.
The measurement period for this transaction remained open at the datetime the Agreement was executed, and the Company determined that there is a clear and direct link between the Agreement and the ARPA. Therefore, the terms of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or notAgreement were incorporated into the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherentCompany's purchase accounting which resulted in the cash flow estimates. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the lifeelimination of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” were not recognized on the balance sheet and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustmentcontingent consideration component of the yield onARPA, the loan over its remaining life. Decreases in expectedrecognition of cash flows were recognizeddue from Covenant as impairment. Valuation allowances on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).
Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basispart of the PCD loans. Asconsideration for the initial allowance for credit losses is addedtransaction, and an indemnification asset to reflect the purchase price, there is no credit loss expense recognized upon acquisitionmodification of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.
For acquired loans not deemed purchased credit deteriorated at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense.
The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
Allowance for Credit Losses – Loans
Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with US GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.
The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.Covenant's indemnification obligations.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Expected credit losses are reflected inA summary of the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portionestimated fair values of a financial asset to be uncollectible the appropriate amount is written offassets acquired, liabilities assumed, consideration transferred, and the ACLresulting goodwill is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.as follows:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Initial Values Recorded at Acquisition Date | | Measurement Period Adjustments | | Adjusted Values |
Assets acquired: | | | | | |
Factored receivables | $107,524 | | $— | | $107,524 |
Allowance for credit losses | (37,415) | | — | | (37,415) |
Factored receivables, net of ACL | 70,109 | | — | | 70,109 |
Intangible assets | 3,500 | | — | | 3,500 |
Indemnification asset | 30,959 | | — | | 30,959 |
Deferred income taxes | 1,448 | | (59) | | 1,389 |
| 106,016 | | (59) | | 105,957 |
Liabilities assumed: | | | | | |
Deposits | 5,361 | | — | | 5,361 |
| 5,361 | | — | | 5,361 |
Fair value of net assets acquired | $100,655 | | $ | (59) | | | $100,596 |
Consideration: | | | | | |
Cash paid | $108,375 | | — | | $108,375 |
Stock consideration | 13,942 | | — | | 13,942 |
Cash due from seller subsequent to liquidation of stock consideration | (17,196) | | — | | (17,196) |
Total consideration | $105,121 | | $— | | $105,121 |
Goodwill | $4,466 | | $59 | | $4,525 |
The Company measures expected credit lossesrecognized goodwill of financial assets on a collective (pool)$4,525,000, which included measurement period adjustments related to the finalization of the tax basis when the financial assets share similar risk characteristics. Dependingof Covenant’s customer intangibles and its impact on the naturedeferred tax liability associated with these intangibles. Goodwill was calculated as the excess of the poolfair value of financialconsideration exchanged 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 not be deducted for tax purposes.
Consideration included cash due from Covenant subsequent to liquidation of the stock consideration with similar risk characteristics,an acquisition date fair value of $17,196,000. The fair value of cash due from Covenant was based on the Company's stock price on the date of the Agreement, less an estimate of broker commissions and discounts. During the year ended December 31, 2020, the entirety of the acquired stock was sold by Covenant, Covenant delivered net proceeds of $28,064,000, and the Company uses a discounted cash flow (“DCF”) method or a loss-rate methodrecognized $10,868,000 of other noninterest income measured as the difference between the initial purchase accounting measurement and the amount of net proceeds delivered to estimate expected credit losses.the Company upon liquidation. Of the total $10,868,000 of noninterest income recognized, $2,007,000 was recognized during the three months ended September 30, 2020, and the remainder was recognized during the three months ended December 31, 2020.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectabilityintangible assets recognized include a customer relationship intangible asset with an acquisition date fair value of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for$3,500,000 which the historical loss experience was observed. The Company’s methodologies revert back to historical loss information on a straight line basiswill be amortized utilizing an accelerated method over its eight quarters when it can no longer develop reasonable and supportable forecasts.
The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:
Commercial Real Estate — This category of loans consists of the following loan types:
Non-farm Non-residential — This category includes real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. This category also includes investment real estate loans that are primarily secured by office and industrial buildings, warehouses, small retail shopping centers and various special purpose properties. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions.
Multi-family residential — Investment real estate loans are primarily secured by non-owner occupied apartment or multifamily residential buildings. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions.
Construction, land development, land —This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied residential and commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt.
1-4 family residential — This category of loans includes both first and junior liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans.
Farmland — These loans are principally loans to purchase farmland.
Commercial — Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, agriculture operating loans and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other business assets.year estimated useful life.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AThe indemnification asset was measured separately from the related covered portfolio. It is not contractually embedded in the covered portfolio nor is it transferable with the covered portfolio should the Company choose to dispose of the portfolio or a portion of the commercial loan portfolio consists of specialty commercial finance products as follows:
Equipment — Equipment finance loans are commercial loans primarily secured by new or used revenue producing, essential-use equipment from major manufacturers that is movable, may be usedportfolio. The indemnification asset was initially recorded in more than one type of business, and generally has broad resale markets. Core markets include transportation, construction, and waste. Loan terms do not exceedother assets in the economic lifeConsolidated Balance Sheets at the time of the equipmentTFS Acquisition at a fair value of $30,959,000, measured as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio. These cash flows were discounted at a rate to reflect the uncertainty of the timing and typicallyreceipt of the payments from Covenant. The amount ultimately collected for this asset will be dependent upon the performance of the underlying covered portfolio, the passage of time, and Covenant's willingness and ability to make necessary payments. The terms of the Agreement are 60 months or less.such that indemnification has no expiration date and the Company will continue to carry the indemnification asset until ultimate resolution of the covered portfolio. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income, as appropriate, within the Consolidated Statements of Income. The value of the indemnification asset was $4,786,000 and $36,225,000 at September 30, 2021 and December 31, 2020, respectively.
Asset-based Lending — These loans are originated to borrowers to support general working capital needs. The asset-based loan structure involves advances of loan proceeds against a borrowing base which typically consists of accounts receivable, identified readily marketable inventory, or other collateralDuring the three months ended March 31, 2021, new adverse developments with the largest of the borrower. The maximumthree Over-Formula Advance clients caused the Company to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a customer may borrow at any time is fixednet charge-off of $41,265,000; however, this net charge-off had no impact on credit loss expense for the three months ended March 31, 2021 as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed the Company for $35,633,000 of this charge-off by drawing on its secured line of credit, which was reflected on the Company's March 31, 2021 Consolidated Balance Sheet as a percentagecurrent and performing equipment loan held for investment. Given separate developments with the other two Over-Formula Advance clients, the Company reserved an additional $2,844,000 reflected in credit loss expense for the three months ended March 31, 2021. The $2,844,000 increase in required ACL as well as accretion of most of the borrowing base outstanding.fair value discount on the indemnification asset held at December 31, 2020 resulted in a $4,654,000 gain on the indemnification asset which was recorded through non-interest income. Since March 31, 2021, Covenant has paid down its secured line of credit with TBK in its entirety and carries no outstanding balance at September 30, 2021. At September 30, 2021, Covenant had remaining availability of $9,361,000 on its TBK line of credit available to cover our indemnification balance of up to $5,038,000.
A portionDuring the three months ended September 30, 2021, there were no material changes in the underlying credit quality of the commercial loan portfolio also consists of the following national lending product:
Liquid Credit — Broadlysyndicated leveraged loans secured by a variety of collateral types.
Factored Receivables — The Company operates as a factor by purchasing accounts receivable from its clients, then collecting the receivable from the account debtor. The Company’s smaller factoring relationships are typically structured as “non-recourse” relationships (i.e., the Company retains the credit risk associated with the ability of the account debtor on a purchased invoiceremaining two Over-Formula Advance clients. As such, there were no charge-offs related to ultimately make payment)these balances and the Company’s larger factoring relationships are typically structured as “recourse” relationships (i.e., the Company’s client agrees to repurchase any invoices for which payment is not ultimately received from the account debtor). Advances initiallyno material adjustments were made to the clientcorresponding ACL balances or the indemnification asset during that period.
The contractually required payments and the fair value at acquisition of factored receivables purchased for which there was not, at acquisition, evidence of more than insignificant deterioration of credit quality since origination (non-PCD loans) totaled $45,228,000 and $44,962,000, respectively.
Management determined that the $62,200,000 in Over-Formula Advances obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those Over-Formula Advances to acquirebe purchased credit deteriorated ("PCD"). Other, less significant factored receivables were also considered to be PCD. The following table presents information at the acquisition date for factored receivables are typicallypurchased for which there was, at a discountacquisition, evidence of more than insignificant deterioration of credit quality since origination:
| | | | | |
(Dollars in thousands) | |
Purchase price of loans at acquisition | $25,147 |
Allowance for credit losses at acquisition | 37,415 |
Non-credit discount/(premium) at acquisition | 941 |
Par value of acquired loans at acquisition | $63,503 |
Revenue and earnings of TFS since the acquisition date have not been disclosed as the acquired company was merged into the Company and separate financial information is not readily available.
Expenses related to the invoice value. The discount balance is heldacquisition, including professional fees and other transaction costs, totaling $827,000 were recorded in client reserves, net of the Company’s compensation. The client reserves are held to settle any payment disputes or collection shortfalls, may be used to pay clients’ obligations to various third parties as directed by the client, are periodically released to or withdrawn by clients, and are reported as deposits.
Consumer — Loans used for personal use, typically on an unsecured basis, and client overdrafts.
Mortgage Warehouse — Mortgage Warehouse facilities are provided to unaffiliated mortgage origination companies and are collateralized by 1-4 family residential loans. The originator closes new mortgage loans with the intent to sell these loans to third party investors for a profit. The Company provides funding to the mortgage companies for the period between the origination and their sale of the loan. The Company has a policy that requires that it separately validate that each residential mortgage loan was underwritten consistent with the underwriting requirements of the final investor or market standards prior to advancing funds. The Company is repaid with the proceeds received from sale of the mortgage loan to the final investor.
Discounted Cash Flow Method
The Company uses the discounted cash flow method to estimate expected credit losses for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit), and consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as a loss driver. Management also utilizes and forecasts either one-year percentage change in national retail sales, one-year percentage changenoninterest expense in the national home price index, or one-year percentage change in national gross domestic product as a second loss driver depending onconsolidated statements of income during the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.three months ended September 30, 2020.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Triumph Premium Finance
On April 20, 2020, the Company entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit its premium finance line of business. The combination of adjustments for credit expectations (defaultdecision to sell TPF was made during the three months ended March 31, 2020, and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at March 31, 2020, the instrument level. Instrument effective yield is calculated, netcarrying amount of the impactsDisposal Group was transferred to assets held for sale. The sale closed on June 30, 2020.
A summary of prepayment assumptions,the carrying amount of the assets in the Disposal Group and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACLgain on sale is established foras follows:
| | | | | |
(Dollars in thousands) | |
Carrying amount of assets in the disposal group: | |
Loans | $ | 84,504 | |
Premises and equipment, net | 45 | |
Other assets | 11 | |
| 84,560 | |
Carrying amount of liabilities in the disposal group: | |
Other liabilities | 479 | |
Total carrying amount | $ | 84,081 | |
Total consideration received | 94,531 | |
Gain on sale of division | 10,450 | |
Transaction costs | 692 | |
Gain on sale of division, net of transaction costs | $ | 9,758 | |
The Disposal Group was included in the difference betweenBanking segment, and the instrument’s NPV and amortized cost basis.loans in the Disposal Group were previously included in the commercial loan portfolio.
Loss-Rate Method
NOTE 3 - SECURITIES
Equity Securities with Readily Determinable Fair Values
The Company uses a loss-rate method to estimate expected creditheld equity securities with fair values of $5,623,000 and $5,826,000 at September 30, 2021 and December 31, 2020, respectively. The gross realized and unrealized losses for the farmland, liquid credit, premium finance, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio basedrecognized on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changesequity securities with readily determinable fair values in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be includednoninterest income in the Company’s existing pools based on the underlying risk characteristicsconsolidated statements of the loan to measure the ACL.income were as follows:
Paycheck Protection Program
With the passage of the PPP, the Company has actively participated in assisting its customers with applications for loans through the program. Loans funded through the PPP program are fully guaranteed by the U.S. government subject to certain representations and warranties. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans. Given that the loans are fully guaranteed by the U.S. government and absent any specific loss information on any of our PPP loans, the Company does not carry an ACL on its PPP loans at September 30, 2020.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commitments to purchase broadly syndicated loans, and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gains (losses) on equity securities held at the reporting date | | $ | (231) | | | $ | (371) | | | $ | (203) | | | $ | 603 | |
Realized gains (losses) on equity securities sold during the period | | — | | | — | | | — | | | — | |
| | $ | (231) | | | $ | (371) | | | $ | (203) | | | $ | 603 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense in the Company’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.
Derivative Financial Instruments
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. At September 30, 2020, the Company had one cash flow hedge position and 0 fair value or foreign currency hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
To qualify for the use of hedge accounting, a derivative must be effective at inception and expected to be continuously effective in offsetting the risk being hedged. A statistical regression analysis is performed at inception and at each reporting period thereafter to evaluate hedge effectiveness.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Adoption of New Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis and disclosures about them. The new current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow (“DCF”) method, loss-rate method and roll-rate method. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.
The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net reduction of retained earnings of $1,771,000 upon adoption. The transition adjustment includes an increase in the allowance for credit losses on loans of $269,000, an increase in the allowance for credit losses on held to maturity debt securities of $126,000, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $1,918,000, net of the corresponding increases in deferred tax assets of $542,000.
The Company adopted ASU 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the life of the loans.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (“TDR”) for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All modifications are eligible so long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) the 60th day after the end of the COVID-19 national emergency declared by the President of the U.S. Multiple modifications of the same credits are allowed and there is no cap on the duration of the modification. See Note 4 of the condensed footnotes to the consolidated financial statements for disclosure of the impact to date.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grands a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Almost all of the Company’s modifications fall under Section 4013 of the CARES Act and thus, the interagency statement has had very little impact on the Company to date.
NOTE 2 – BUSINESS COMBINATIONS AND DIVESTITURES
Transportation Financial Solutions
On July 8, 2020, the Company, through its wholly-owned subsidiary Advance Business Capital LLC (“ABC”), acquired the transportation factoring assets (the “TFS Acquisition”) of Transport Financial Solutions (“TFS”), a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), in exchange for cash consideration of $108,375,000, 630,268 shares of the Company’s common stock valued at approximately $13,942,000, and contingent consideration of up to approximately $9,900,000 to be paid in cash following the twelve-month period ending July 31, 2021.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Subsequent to the closing of the TFS Acquisition, the Company identified that approximately $62,200,000 of the assets acquired at closing were advances against future payments to be made to 3 large clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements between the obligor on such contracts and such clients (and their affiliated entities) for services that had not yet been performed.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On September 23, 2020, the Company and ABC entered into an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (the “Agreement”) with CVLG and Covenant Transport Solutions, LLC, a wholly owned subsidiary of CVLG (“CTS” and, together with CVLG, "Covenant"). Pursuant to the Agreement, the parties agreed to certain amendments to that certain Accounts Receivable Purchase Agreement (the “ARPA”), dated as of July 8, 2020, by and among ABC, as buyer, CTS, as seller, and the Company, as buyer indirect parent. Such amendments include:
•Return of the portion of the purchase price paid under the ARPA consisting of 630,268 shares of Company common stock, which will be accomplished through the sale of such shares by Covenant pursuant to the terms of the Agreement and the surrender of the cash proceeds of such sale (net of brokerage or underwriting fees and commissions) to the Company;
•Elimination of the up to $9,900,000 in earn-out consideration potentially payable to CTS under the ARPA; and
•Modification of the indemnity provisions under the ARPA to eliminate the existing indemnifications for breaches of representations and warranties and to replace such with a newly established indemnification by Covenant in the event ABC incurs losses related to the $62,200,000 in over-formula advances made to specified clients identified in the Agreement (the “Over-Formula Advance Portfolio”). Under the terms of the new indemnification arrangement, Covenant will be responsible for and will indemnify ABC for 100% of the first $30,000,000 of any losses incurred by ABC related to the Over-Formula Advance Portfolio, and for 50% of the next $30,000,000 of any losses incurred by ABC, for total indemnification by Covenant of $45,000,000.
Covenant’s indemnification obligations under the Agreement arewere secured by a pledge of equipment collateral by Covenant with an estimated net orderly liquidation value of $60,000,000 (the “Equipment Collateral”). The Company’s wholly-owned bank subsidiary, TBK Bank, SSB, has provided Covenant with a $45,000,000 line of credit, also secured by the Equipment Collateral, the proceeds of which may be drawn to satisfy Covenant’s indemnification obligations under the Agreement.
Pursuant to the Agreement, Triumph and Covenant have agreed to certain terms related to the management of the Over-Formula Advance Portfolio, and the terms by which Covenant may provide assistance to maximize recovery on the Over-Formula Advance Portfolio.
Pursuant to the Agreement, the Company and Covenant have provided mutual releases to each other related to any and all claims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio. Also in connection the Agreement, Covenant agreed to dismiss, with prejudice, the declaratory judgment action filed in the 95th Judicial District Court of Dallas County, Texas (removed to the United States District Court, Northern District of Texas), related to the ARPA and the transactions contemplated thereby.
The measurement period for this transaction remainsremained open at the time the Agreement was executed, and the Company has determined that there is a clear and direct link between the Agreement and the ARPA. Therefore, the terms of the Agreement have beenwere incorporated into the Company's purchase accounting which has resulted in the elimination of the contingent consideration component of the ARPA, the recognition of cash due from Covenant as part of the consideration for the transaction, and an indemnification asset to reflect the modification of Covenant's indemnification obligations.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:
| | | | | |
(Dollars in thousands) | |
Assets acquired: | |
Factored receivables | $107,524 |
Allowance for credit losses | (37,415) |
Factored receivables, net of ACL | 70,109 |
Intangible assets | 3,500 |
Indemnification asset | 31,218 |
Deferred income taxes | 1,387 |
| 106,214 |
Liabilities assumed: | |
Deposits | 5,613 |
| 5,613 |
Fair value of net assets acquired | $100,601 |
Consideration: | |
Cash paid | $108,375 |
Stock consideration | 13,942 |
Cash due from seller subsequent to liquidation of stock consideration | (17,196) |
Total consideration | $105,121 |
Goodwill | $4,520 |
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Initial Values Recorded at Acquisition Date | | Measurement Period Adjustments | | Adjusted Values |
Assets acquired: | | | | | |
Factored receivables | $107,524 | | $— | | $107,524 |
Allowance for credit losses | (37,415) | | — | | (37,415) |
Factored receivables, net of ACL | 70,109 | | — | | 70,109 |
Intangible assets | 3,500 | | — | | 3,500 |
Indemnification asset | 30,959 | | — | | 30,959 |
Deferred income taxes | 1,448 | | (59) | | 1,389 |
| 106,016 | | (59) | | 105,957 |
Liabilities assumed: | | | | | |
Deposits | 5,361 | | — | | 5,361 |
| 5,361 | | — | | 5,361 |
Fair value of net assets acquired | $100,655 | | $ | (59) | | | $100,596 |
Consideration: | | | | | |
Cash paid | $108,375 | | — | | $108,375 |
Stock consideration | 13,942 | | — | | 13,942 |
Cash due from seller subsequent to liquidation of stock consideration | (17,196) | | — | | (17,196) |
Total consideration | $105,121 | | $— | | $105,121 |
Goodwill | $4,466 | | $59 | | $4,525 |
The acquired assets were allocated to the Company’s Factoring segment. The Company has recognized goodwill of $4,520,000,$4,525,000, which included measurement period adjustments related to the finalization of the tax basis of Covenant’s customer intangibles and its impact on the deferred tax liability associated with these intangibles. Goodwill was calculated as the excess of the fair value of consideration exchanged as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Factoring segment. The goodwill in this acquisition resulted from expected synergies and expansion in the factoring market. The goodwill will not be deducted for tax purposes.
Consideration included cash due from Covenant subsequent to liquidation of the stock consideration with an acquisition date fair value of $17,196,000. The fair value of cash due from Covenant was based on the Company's stock price on the date of the Agreement, less an estimate of broker commissions and discounts. Final consideration payout will be determinedDuring the year ended December 31, 2020, the entirety of the acquired stock was sold by the price at which the Company's stock is sold less broker commissions and discounts. The Company has elected the fair value optionCovenant, Covenant delivered net proceeds of $28,064,000, and the fair valueCompany recognized $10,868,000 of the associated asset will be remeasured each reporting period with changes in fair value recorded inother noninterest income inmeasured as the consolidated statementsdifference between the initial purchase accounting measurement and the amount of income. The fair valuenet proceeds delivered to the Company upon liquidation. Of the total $10,868,000 of the considerationnoninterest income recognized, $2,007,000 was $19,248,000 at September 30, 2020. Duringrecognized during the three months ended September 30, 2020, and the Companyremainder was recognized $2.0 million of other noninterest income related toduring the change in fair value of the consideration during that period.three months ended December 31, 2020.
The intangible assets recognized include a customer relationship intangible asset with an acquisition date fair value of $3,500,000 which will be amortized utilizing an accelerated method over its eight year estimated useful life.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The indemnification asset was measured separately from the related covered portfolio. It is not contractually embedded in the covered portfolio nor is it transferable with the covered portfolio should the Company choose to dispose of the portfolio or a portion of the portfolio. The indemnification asset was initially recorded in other assets in the Consolidated Balance Sheets at the time of the TFS Acquisition at a fair value of $31,218,000,$30,959,000, measured as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio. These cash flows were discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. The amount ultimately collected for this asset will be dependent upon the performance of the underlying covered portfolio, the passage of time, and Covenant's willingness and ability to make necessary payments. The terms of the Agreement are such that indemnification has no expiration date and the Company will continue to carry the indemnification asset until ultimate resolution of the covered portfolio. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income, or expense, as appropriate, within the Consolidated Statements of Income. The Company's estimatevalue of probable losses on the covered portfolio did not change between the acquisition date and September 30, 2020 and therefore, no activity related to the indemnification asset was recorded during$4,786,000 and $36,225,000 at September 30, 2021 and December 31, 2020, respectively.
During the three months ended March 31, 2021, new adverse developments with the largest of the three Over-Formula Advance clients caused the Company to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $41,265,000; however, this net charge-off had no impact on credit loss expense for the three months ended March 31, 2021 as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed the Company for $35,633,000 of this charge-off by drawing on its secured line of credit, which was reflected on the Company's March 31, 2021 Consolidated Balance Sheet as a current and nineperforming equipment loan held for investment. Given separate developments with the other two Over-Formula Advance clients, the Company reserved an additional $2,844,000 reflected in credit loss expense for the three months ended March 31, 2021. The $2,844,000 increase in required ACL as well as accretion of most of the fair value discount on the indemnification asset held at December 31, 2020 resulted in a $4,654,000 gain on the indemnification asset which was recorded through non-interest income. Since March 31, 2021, Covenant has paid down its secured line of credit with TBK in its entirety and carries no outstanding balance at September 30, 2021. At September 30, 2021, Covenant had remaining availability of $9,361,000 on its TBK line of credit available to cover our indemnification balance of up to $5,038,000.
During the three months ended September 30, 2020.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the remaining two Over-Formula Advance clients. As such, there were no charge-offs related to these balances and no material adjustments were made to the corresponding ACL balances or the indemnification asset during that period.The contractually required payments and the fair value at acquisition of factored receivables purchased for which there was not, at acquisition, evidence of more than insignificant deterioration of credit quality since origination (non-PCD loans) totaled $45,228,000 and $44,962,000, respectively.
Management determined that the $62,200,000$62,200,000 in Over-Formula Advances obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those Over-Formula Advances to be purchased credit deteriorated ("PCD"). Other, less significant factored receivables were also considered to be PCD. The following table presents information at the acquisition date for factored receivables purchased for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination:
| | | | | |
(Dollars in thousands) | |
Purchase price of loans at acquisition | $25,14825,147 |
Allowance for credit losses at acquisition | 37,415 |
Non-credit discount/(premium) at acquisition | 941 |
Par value of acquired loans at acquisition | $63,50463,503 |
Revenue and earnings of TFS since the acquisition date have not been disclosed as the acquired company was merged into the Company and separate financial information is not readily available. 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 $827,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended September 30, 2020.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Triumph Premium Finance
On April 20, 2020, the Company entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit its premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of the Disposal Group was transferred to assets held for sale. The sale closed on June 30, 2020.
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 | $ | 84,504 | |
Premises and equipment, net | 45 | |
Other assets | 11 | |
| 84,560 | |
Carrying amount of liabilities in the disposal group: | |
Other liabilities | 479 | |
Total carrying amount | $ | 84,081 | |
Total consideration received | 94,531 | |
Gain on sale of division | 10,450 | |
Transaction costs | 692 | |
Gain on sale of division, net of transaction costs | $ | 9,758 | |
The Disposal Group was included in the Banking segment, and the loans in the Disposal Group were previously included in the commercial loan portfolio.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - SECURITIES
Equity Securities with Readily Determinable Fair Values
The Company held equity securities with fair values of $6,040,000$5,623,000 and $5,437,000$5,826,000 at September 30, 20202021 and December 31, 2019,2020, respectively. The gross realized and unrealized losses recognized on equity securities with readily determinable fair values in noninterest income in the Company’s consolidated statements of income were as follows:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gains (losses) on equity securities still held at the reporting date | | $ | (371) | | | $ | 64 | | | $ | 603 | | | $ | 499 | | |
Unrealized gains (losses) on equity securities held at the reporting date | | Unrealized gains (losses) on equity securities held at the reporting date | | $ | (231) | | | $ | (371) | | | $ | (203) | | | $ | 603 | |
Realized gains (losses) on equity securities sold during the period | Realized gains (losses) on equity securities sold during the period | | 0 | | | 0 | | | 0 | | | 0 | | Realized gains (losses) on equity securities sold during the period | | — | | | — | | | — | | | — | |
| | $ | (371) | | | $ | 64 | | | $ | 603 | | | $ | 499 | | | $ | (231) | | | $ | (371) | | | $ | (203) | | | $ | 603 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt Securities
Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, fair value, and allowance for credit losses of debt securities and the corresponding amounts of gross unrealized gains and losses of available for sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities:
| (Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
September 30, 2020 | | | | | | | | | | | |
September 30, 2021 | | September 30, 2021 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Available for sale securities: | Available for sale securities: | | | | | | | | | | | Available for sale securities: | |
U.S. Government agency obligations | U.S. Government agency obligations | | $ | 18,227 | | | $ | 221 | | | $ | 0 | | | $ | 0 | | | $ | 18,448 | | U.S. Government agency obligations | | $ | 4,999 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 5,001 | |
Mortgage-backed securities, residential | Mortgage-backed securities, residential | | 28,604 | | | 1,189 | | | (3) | | | 0 | | | 29,790 | | Mortgage-backed securities, residential | | 17,308 | | | 860 | | | (1) | | | — | | | 18,167 | |
Asset-backed securities | Asset-backed securities | | 7,173 | | | 0 | | | (82) | | | 0 | | | 7,091 | | Asset-backed securities | | 6,860 | | | 5 | | | (1) | | | — | | | 6,864 | |
State and municipal | State and municipal | | 42,034 | | | 1,328 | | | 0 | | | 0 | | | 43,362 | | State and municipal | | 28,513 | | | 662 | | | — | | | — | | | 29,175 | |
CLO securities | CLO securities | | 113,795 | | | 4,058 | | | (362) | | | 0 | | | 117,491 | | CLO securities | | 96,928 | | | 3,806 | | | (15) | | | — | | | 100,719 | |
Corporate bonds | Corporate bonds | | 22,615 | | | 319 | | | (7) | | | 0 | | | 22,927 | | Corporate bonds | | 1,990 | | | 71 | | | — | | | — | | | 2,061 | |
SBA pooled securities | SBA pooled securities | | 3,536 | | | 162 | | | (5) | | | 0 | | | 3,693 | | SBA pooled securities | | 2,735 | | | 94 | | | — | | | — | | | 2,829 | |
Total available for sale securities | Total available for sale securities | | $ | 235,984 | | | $ | 7,277 | | | $ | (459) | | | $ | 0 | | | $ | 242,802 | | Total available for sale securities | | $ | 159,333 | | | $ | 5,500 | | | $ | (17) | | | $ | — | | | $ | 164,816 | |
| (Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrecognized Losses | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrecognized Losses | | Fair Value |
September 30, 2020 | | | | | | | | | |
September 30, 2021 | | September 30, 2021 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrecognized Losses | | Fair Value |
Held to maturity securities: | Held to maturity securities: | | | | | | | | | Held to maturity securities: | |
CLO securities | CLO securities | | $ | 8,057 | | | $ | 0 | | | $ | (2,584) | | | $ | 5,473 | | CLO securities | | $ | 7,225 | | | $ | — | | | $ | (1,691) | | | $ | 5,534 | |
Allowance for credit losses | Allowance for credit losses | | (1,961) | | | | | | | | Allowance for credit losses | | (1,737) | | | | | | | |
Total held to maturity securities, net of ACL | Total held to maturity securities, net of ACL | | $ | 6,096 | | | Total held to maturity securities, net of ACL | | $ | 5,488 | | |
| (Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
December 31, 2019 | | | | | | | | | |
December 31, 2020 | | December 31, 2020 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Available for sale securities: | Available for sale securities: | | | | | | | | | Available for sale securities: | |
U.S. Government agency obligations | U.S. Government agency obligations | | $ | 39,679 | | | $ | 115 | | | $ | (34) | | | $ | 39,760 | | U.S. Government agency obligations | | $ | 14,942 | | | $ | 146 | | | $ | — | | | $ | — | | | $ | 15,088 | |
Mortgage-backed securities, residential | Mortgage-backed securities, residential | | 37,324 | | | 728 | | | (36) | | | 38,016 | | Mortgage-backed securities, residential | | 26,547 | | | 1,139 | | | (2) | | | — | | | 27,684 | |
Asset-backed securities | Asset-backed securities | | 8,039 | | | 0 | | | (80) | | | 7,959 | | Asset-backed securities | | 7,091 | | | — | | | (52) | | | — | | | 7,039 | |
State and municipal | State and municipal | | 31,746 | | | 327 | | | (8) | | | 32,065 | | State and municipal | | 36,238 | | | 1,157 | | | — | | | — | | | 37,395 | |
CLO Securities | CLO Securities | | 75,592 | | | 39 | | | (358) | | | 75,273 | | CLO Securities | | 118,128 | | | 4,335 | | | (259) | | | — | | | 122,204 | |
Corporate bonds | Corporate bonds | | 50,889 | | | 695 | | | (1) | | | 51,583 | | Corporate bonds | | 11,373 | | | 205 | | | (5) | | | — | | | 11,573 | |
SBA pooled securities | SBA pooled securities | | 4,112 | | | 53 | | | (1) | | | 4,164 | | SBA pooled securities | | 3,200 | | | 133 | | | (6) | | | — | | | 3,327 | |
Total available for sale securities | Total available for sale securities | | $ | 247,381 | | | $ | 1,957 | | | $ | (518) | | | $ | 248,820 | | Total available for sale securities | | $ | 217,519 | | | $ | 7,115 | | | $ | (324) | | | $ | — | | | $ | 224,310 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrecognized Losses | | Fair Value |
December 31, 2020 | | | | |
Held to maturity securities: | | | | | | | | |
CLO securities | | $ | 7,945 | | | $ | — | | | $ | (2,095) | | | $ | 5,850 | |
Allowance for credit losses | | (2,026) | | | | | | | |
Total held to maturity securities, net of ACL | | $ | 5,919 | | | | | | | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrecognized Losses | | Fair Value |
December 31, 2019 | | | | | | | | |
Held to maturity securities: | | | | | | | | |
CLO securities | | $ | 8,417 | | | $ | 0 | | | $ | (1,510) | | | $ | 6,907 | |
The amortized cost and estimated fair value of securities at September 30, 2020,2021, 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 | | | Available for Sale Securities | | Held to Maturity Securities |
(Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | Due in one year or less | | $ | 38,449 | | | $ | 38,799 | | | $ | 0 | | | $ | 0 | | Due in one year or less | | $ | 14,984 | | | $ | 15,046 | | | $ | — | | | $ | — | |
Due from one year to five years | Due from one year to five years | | 19,799 | | | 20,264 | | | 0 | | | 0 | | Due from one year to five years | | 3,697 | | | 3,770 | | | — | | | — | |
Due from five years to ten years | Due from five years to ten years | | 24,878 | | | 26,456 | | | 8,057 | | | 5,473 | | Due from five years to ten years | | 72,591 | | | 75,497 | | | 7,225 | | | 5,534 | |
Due after ten years | Due after ten years | | 113,545 | | | 116,709 | | | 0 | | | 0 | | Due after ten years | | 41,158 | | | 42,643 | | | — | | | — | |
| | 196,671 | | | 202,228 | | | 8,057 | | | 5,473 | | | 132,430 | | | 136,956 | | | 7,225 | | | 5,534 | |
Mortgage-backed securities, residential | Mortgage-backed securities, residential | | 28,604 | | | 29,790 | | | 0 | | | 0 | | Mortgage-backed securities, residential | | 17,308 | | | 18,167 | | | — | | | — | |
Asset-backed securities | Asset-backed securities | | 7,173 | | | 7,091 | | | 0 | | | 0 | | Asset-backed securities | | 6,860 | | | 6,864 | | | — | | | — | |
SBA pooled securities | SBA pooled securities | | 3,536 | | | 3,693 | | | 0 | | | 0 | | SBA pooled securities | | 2,735 | | | 2,829 | | | — | | | — | |
| | $ | 235,984 | | | $ | 242,802 | | | $ | 8,057 | | | $ | 5,473 | | | $ | 159,333 | | | $ | 164,816 | | | $ | 7,225 | | | $ | 5,534 | |
Proceeds from sales of debt securities and the associated gross gains and losses as well as net gains and losses from calls of debt securities are as follows:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Proceeds | Proceeds | | $ | 65,184 | | | $ | 0 | | | $ | 65,184 | | | $ | 40,617 | | Proceeds | | $ | — | | | $ | 65,184 | | | $ | — | | | $ | 65,184 | |
Gross gains | Gross gains | | 3,217 | | | 0 | | | 3,217 | | | 133 | | Gross gains | | — | | | 3,217 | | | — | | | 3,217 | |
Gross losses | Gross losses | | (140) | | | 0 | | | (140) | | | (130) | | Gross losses | | — | | | (140) | | | — | | | (140) | |
Net gains and losses from calls of securities | Net gains and losses from calls of securities | | 32 | | | 19 | | | 133 | | | 19 | | Net gains and losses from calls of securities | | 4 | | | 32 | | | 5 | | | 133 | |
Debt securities with a carrying amount of approximately $83,013,000$88,968,000 and $48,237,000$73,056,000 at September 30, 20202021 and December 31, 2019,2020, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.
Accrued interest on available for sale securities totaled $1,316,000$776,000 and $1,685,000$1,233,000 at September 30, 20202021 and December 31, 2019,2020, respectively, and was included in other assets in the consolidated balance sheets.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2021 and 2020.The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
| | | Less than 12 Months | | | 12 Months or More | | | Total | | | Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | (Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2020 | | | | | | | | | | | | | |
September 30, 2021 | | September 30, 2021 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale securities: | Available for sale securities: | | | | | | | | | | | | | Available for sale securities: | |
U.S. Government agency obligations | U.S. Government agency obligations | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | U.S. Government agency obligations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Mortgage-backed securities, residential | Mortgage-backed securities, residential | | 127 | | | (1) | | | 288 | | | (2) | | | 415 | | | (3) | | Mortgage-backed securities, residential | | — | | | — | | | 18 | | | (1) | | | 18 | | | (1) | |
Asset-backed securities | Asset-backed securities | | 150 | | | (1) | | | 6,941 | | | (81) | | | 7,091 | | | (82) | | Asset-backed securities | | — | | | — | | | 5,060 | | | (1) | | | 5,060 | | | (1) | |
State and municipal | State and municipal | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | State and municipal | | — | | | — | | | — | | | — | | | — | | | — | |
CLO securities | CLO securities | | 16,591 | | | (144) | | | 34,739 | | | (218) | | | 51,330 | | | (362) | | CLO securities | | 9,972 | | | (9) | | | 2,766 | | | (6) | | | 12,738 | | | (15) | |
Corporate bonds | Corporate bonds | | 996 | | | (7) | | | 150 | | | 0 | | 1,146 | | | (7) | | Corporate bonds | | — | | | — | | | — | | | — | | | — | | | — | |
SBA pooled securities | SBA pooled securities | | 726 | | | (5) | | | 32 | | | 0 | | 758 | | | (5) | | SBA pooled securities | | — | | | — | | | — | | | — | | | — | | | — | |
| | $ | 18,590 | | | $ | (158) | | | $ | 42,150 | | | $ | (301) | | | $ | 60,740 | | | $ | (459) | | | $ | 9,972 | | | $ | (9) | | | $ | 7,844 | | | $ | (8) | | | $ | 17,816 | | | $ | (17) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | | 12 Months or More | | | | Total | | |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2019 | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | |
U.S. Government agency obligations | | $ | 0 | | | $ | 0 | | | $ | 12,331 | | | $ | (34) | | | $ | 12,331 | | | $ | (34) | |
Mortgage-backed securities, residential | | 3,549 | | | (29) | | | 777 | | | (7) | | | 4,326 | | | (36) | |
Asset-backed securities | | 2,986 | | | (36) | | | 4,973 | | | (44) | | | 7,959 | | | (80) | |
State and municipal | | 562 | | | 0 | | | 3,426 | | | (8) | | | 3,988 | | | (8) | |
CLO Securities | | 58,160 | | | (358) | | | 0 | | | 0 | | | 58,160 | | | (358) | |
Corporate bonds | | 0 | | | 0 | | | 149 | | | (1) | | | 149 | | | (1) | |
SBA pooled securities | | 354 | | | 0 | | | 9 | | | (1) | | | 363 | | | (1) | |
| | $ | 65,611 | | | $ | (423) | | | $ | 21,665 | | | $ | (95) | | | $ | 87,276 | | | $ | (518) | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2020 | | | | | | |
Available for sale securities: | | | | | | | | | | | | |
U.S. Government agency obligations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Mortgage-backed securities, residential | | 100 | | | (1) | | | 215 | | | (1) | | | 315 | | | (2) | |
Asset-backed securities | | 129 | | | — | | | 6,911 | | | (52) | | | 7,040 | | | (52) | |
State and municipal | | — | | | — | | | — | | | — | | | — | | | — | |
CLO Securities | | 12,083 | | | (93) | | | 29,785 | | | (166) | | | 41,868 | | | (259) | |
Corporate bonds | | 498 | | | (5) | | | 150 | | | — | | | 648 | | | (5) | |
SBA pooled securities | | 889 | | | (6) | | | 29 | | | — | | | 918 | | | (6) | |
| | $ | 13,699 | | | $ | (105) | | | $ | 37,090 | | | $ | (219) | | | $ | 50,789 | | | $ | (324) | |
Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1)the extent to which the fair value is less than cost, (2)the financial condition and near-term prospects of the issuer, and (3)the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
At September 30, 2020,2021, the Company had 4512 available for sale debt securities in an unrealized loss position without an allowance for credit losses. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2020,2021, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company’s consolidated statements of income.
The following table presents the activity in the allowance for credit losses for held to maturity debt securities:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 |
Held to Maturity CLO Securities | | | | |
Allowance for credit losses: | | | | |
Beginning balance | | $ | 1,855 | | | $ | 0 | |
Impact of adopting ASC 326 | | 0 | | | 126 | |
Credit loss expense | | 106 | | | 1,835 | |
Allowance for credit losses ending balance | | $ | 1,961 | | | $ | 1,961 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Held to Maturity CLO Securities | | 2021 | | 2020 | | 2021 | | 2020 |
Allowance for credit losses: | | | | | | | | |
Beginning balance | | $ | 1,727 | | | $ | 1,855 | | | $ | 2,026 | | | $ | — | |
Impact of adopting ASC 326 | | — | | | — | | | — | | | 126 | |
Credit loss expense | | 10 | | | 106 | | | (289) | | | 1,835 | |
Allowance for credit losses ending balance | | $ | 1,737 | | | $ | 1,961 | | | $ | 1,737 | | | $ | 1,961 | |
The Company’s held to maturity securities are investments in the unrated subordinated notes of collateralized loan obligation funds. These securities are the junior-most in securitization capital structures, and are subject to suspension of distributions if the credit of the underlying loan portfolios deteriorates materially. During the nine months endedThe ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At September 30, 2021 and December 31, 2020, pandemic-related downgradesthe Company’s held to maturity securities consisted of 3 investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and default activity caused overcollateralization triggers to be tripped on 2 of the three CLO investments which had a material impact on expected cash flows used to calculate the ACL.reasonable and supportable forecasts. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call. As of September 30, 2020,2021, $5,810,000 of the Company’s held to maturity securities were classified as nonaccrual.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans Held for Sale
The following table presents loans held for sale:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Commercial real estate | | $ | 19,919 | | | $ | 0 | |
1-4 family residential | | 11,644 | | 2,735 |
Commercial | | 5,153 | | | 0 | |
Total loans held for sale | | $ | 36,716 | | | $ | 2,735 | |
Commercial real estate loans held for sale totaling $19,919,000 were on nonaccrual status and risk graded as classified at September 30, 2020. | | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Commercial real estate | | $ | 19,519 | | | $ | — | |
1-4 family residential | | 1,554 | | | 6,319 | |
Commercial | | 5,364 | | | 18,227 | |
Total loans held for sale | | $ | 26,437 | | | $ | 24,546 | |
Loans Held for Investment
Loans
The following table presents the amortized cost and unpaid principal balance of loans held for investment:
| | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Unpaid Principal | | Difference | | Amortized Cost | | Unpaid Principal | | Difference | (Dollars in thousands) | | Amortized Cost | | Unpaid Principal | | Difference | | Amortized Cost | | Unpaid Principal | | Difference |
Commercial real estate | Commercial real estate | | $ | 762,531 | | | $ | 766,471 | | | $ | (3,940) | | | $ | 1,046,961 | | | $ | 1,051,684 | | | $ | (4,723) | | Commercial real estate | | $ | 630,106 | | | $ | 632,182 | | | $ | (2,076) | | | $ | 779,158 | | | $ | 782,614 | | | $ | (3,456) | |
Construction, land development, land | Construction, land development, land | | 244,512 | | | 244,966 | | | (454) | | | 160,569 | | | 162,335 | | | (1,766) | | Construction, land development, land | | 171,814 | | | 171,998 | | | (184) | | | 219,647 | | | 220,021 | | | (374) | |
1-4 family residential | 1-4 family residential | | 164,785 | | | 165,442 | | | (657) | | | 179,425 | | | 180,340 | | | (915) | | 1-4 family residential | | 127,073 | | | 127,446 | | | (373) | | | 157,147 | | | 157,731 | | | (584) | |
Farmland | Farmland | | 110,966 | | | 111,870 | | | (904) | | | 154,975 | | | 156,995 | | | (2,020) | | Farmland | | 82,990 | | | 83,549 | | | (559) | | | 103,685 | | | 104,522 | | | (837) | |
Commercial | Commercial | | 1,536,903 | | | 1,554,805 | | | (17,902) | | | 1,342,683 | | | 1,346,444 | | | (3,761) | | Commercial | | 1,398,497 | | | 1,410,739 | | | (12,242) | | | 1,562,957 | | | 1,579,841 | | | (16,884) | |
Factored receivables | Factored receivables | | 1,016,337 | | | 1,017,805 | | | (1,468) | | | 619,986 | | | 621,697 | | | (1,711) | | Factored receivables | | 1,607,028 | | | 1,611,525 | | | (4,497) | | | 1,120,770 | | | 1,122,008 | | | (1,238) | |
Consumer | Consumer | | 17,106 | | | 17,139 | | | (33) | | | 21,925 | | | 21,994 | | | (69) | | Consumer | | 12,677 | | | 12,689 | | | (12) | | | 15,838 | | | 15,863 | | | (25) | |
Mortgage warehouse | Mortgage warehouse | | 999,771 | | | 999,771 | | | 0 | | | 667,988 | | | 667,988 | | | 0 | | Mortgage warehouse | | 752,545 | | | 752,545 | | | — | | | 1,037,574 | | | 1,037,574 | | | — | |
Total loans held for investment | Total loans held for investment | | 4,852,911 | | | $ | 4,878,269 | | | $ | (25,358) | | | 4,194,512 | | | $ | 4,209,477 | | | $ | (14,965) | | Total loans held for investment | | 4,782,730 | | | $ | 4,802,673 | | | $ | (19,943) | | | 4,996,776 | | | $ | 5,020,174 | | | $ | (23,398) | |
Allowance for credit losses | Allowance for credit losses | | (90,995) | | | | | | | (29,092) | | | | | | Allowance for credit losses | | (41,017) | | | | | | | (95,739) | | | | | |
| | $ | 4,761,916 | | | $ | 4,165,420 | | | | $ | 4,741,713 | | | $ | 4,901,037 | | |
The difference between the amortized cost and the unpaid principal is primarily (1) premiums and discounts associated with acquired loans totaling $20,121,000$12,119,000 and $13,573,000$18,511,000 at September 30, 20202021 and December 31, 2019,2020, respectively, and (2) net deferred origination and factoring fees totaling $5,237,000$7,824,000 and $1,392,000$4,887,000 at September 30, 20202021 and December 31, 2019,2020, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $18,933,000$15,235,000 and $18,553,000$18,198,000 at September 30, 20202021 and December 31, 2019,2020, respectively, and was included in other assets in the consolidated balance sheets.
At September 30, 20202021 and December 31, 2019,2020, the Company had $110,510,000$189,565,000 and $66,754,000,$145,892,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.
At September 30, 2021 and December 31, 2020 the balance of the Over-Formula Advance Portfolio included in factored receivables was $10,077,000 and $62,100,000, respectively.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AtAs of September 30, 20202021 the balance ofCompany carried a separate $19,361,000 receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest Over-Formula Advance Portfolio includedcarrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in factored receivablescontravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was $62.2 million.then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. In addition to commencing litigation against such customer, we have commenced litigation against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. During the third quarter of 2021 we, together with the USPS, entered into a stipulation of dismissal without prejudice for our initial action with respect to this matter in United States Federal District Court and filed a new action seeking recourse from the USPS in the United States Court of Federal Claims.Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, the Company has not reserved for such balance as of September 30, 2021.
Loans with carrying amounts of $2,185,499,000$1,652,900,000 and $1,301,851,000$2,255,441,000 at September 30, 20202021 and December 31, 2019,2020, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity, and, beginning in 2020, to secure Paycheck Protection Program Liquidity Facility borrowings and Federal Reserve Bank discount window borrowing capacity.
During the three and nine months ended September 30, 2020,2021, loans with carrying amounts of $56,934,000$12,373,000 and $172,565,000,$76,976,000, respectively, were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. During the three and nine months ended September 30, 2021, loans transferred to held for sale were sold resulting in proceeds of $17,446,000 and $63,028,000, respectively. The Company recorded net gains on transfers and sales of loans of $210,000 and $1,676,000, respectively, for the three and nine months ended September 30, 2021, which are recorded as other noninterest income in the consolidated statements of income.
During the three and nine months ended September 30, 2020, loans with a carrying amount of $56,934,000 and $172,565,000, respectively, were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. During the three and nine months ended September 30, 2020, loans transferred to held for sale were sold resulting in proceeds of $58,313,000 and $145,513,000, respectively. The Company recorded net losses on transfers and sales of loans of $515,000 and $466,000 for the three and nine months ended September 30, 2020, respectively. Net gains and losses on transfers and sales of loans are recorded as other noninterest income in the consolidated statements of income. During the three and nine months ended September 30, 2019, loans with a carrying amount of $21,180,000 and $27,411,000, respectively, were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. During the three and nine months ended September 30, 2019, loans transferred to held for sale were sold resulting in proceeds of $19,322,000 and $25,653,000, respectively, and net gains on transfers and sales of loans of $129,000 and $229,000, respectively, which were recorded as other noninterest income in the consolidated statements of income.2020.
Allowance for Credit Losses
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The activity in the allowance for credit losses (“ACL”) related to loans held for investment is as follows:
| (Dollars in thousands) | (Dollars in thousands) | | Beginning Balance | | Impact of Adopting ASC 326 | | Initial ACL on Loans Purchased with Credit Deterioration | | Credit Loss Expense | | Charge-offs | | Recoveries | | Reclassification to Held For Sale | | Ending Balance | (Dollars in thousands) | | Beginning Balance | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Three months ended September 30, 2020 | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2021 | | Three months ended September 30, 2021 | | Beginning Balance | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Commercial real estate | Commercial real estate | | $ | 15,539 | | | $ | 0 | | | $ | 0 | | | $ | (2,440) | | | $ | 0 | | | $ | 53 | | | $ | 0 | | | $ | 13,152 | | Commercial real estate | |
Construction, land development, land | Construction, land development, land | | 5,917 | | | 0 | | | 0 | | | (319) | | | 0 | | | 2 | | | 0 | | | 5,600 | | Construction, land development, land | | 1,490 | | | (434) | | | — | | | 1 | | | 1,057 | |
1-4 family residential | 1-4 family residential | | 2,027 | | | 0 | | | 0 | | | (56) | | | (6) | | | 7 | | | 0 | | | 1,972 | | 1-4 family residential | | 545 | | | (64) | | | (1) | | | 5 | | | 485 | |
Farmland | Farmland | | 958 | | | 0 | | | 0 | | | (95) | | | 0 | | | 0 | | | 0 | | | 863 | | Farmland | | 669 | | | (59) | | | — | | | — | | | 610 | |
Commercial | Commercial | | 23,283 | | | 0 | | | 0 | | | (657) | | | (528) | | | 615 | | | 0 | | | 22,713 | | Commercial | | 15,674 | | | (1,187) | | | (211) | | | — | | | 14,276 | |
Factored receivables | Factored receivables | | 5,244 | | | 0 | | | 37,415 | | | 3,059 | | | (773) | | | 40 | | | 0 | | | 44,985 | | Factored receivables | | 21,823 | | | 1,186 | | | (3,597) | | | 239 | | | 19,651 | |
Consumer | Consumer | | 768 | | | 0 | | | 0 | | | 29 | | | (118) | | | 31 | | | 0 | | | 710 | | Consumer | | 236 | | | 153 | | | (139) | | | — | | | 250 | |
Mortgage warehouse | Mortgage warehouse | | 877 | | | 0 | | | 0 | | | 123 | | | 0 | | | 0 | | | 0 | | | 1,000 | | Mortgage warehouse | | 853 | | | (101) | | | — | | | — | | | 752 | |
| | $ | 54,613 | | | $ | 0 | | | $ | 37,415 | | | $ | (356) | | | $ | (1,425) | | | $ | 748 | | | $ | 0 | | | $ | 90,995 | | | $ | 45,694 | | | $ | (959) | | | $ | (3,965) | | | $ | 247 | | | $ | 41,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Beginning Balance | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Three months ended September 30, 2019 | | | | | | | | | | |
Commercial real estate | | $ | 5,677 | | | $ | 147 | | | $ | (26) | | | $ | 0 | | | $ | 5,798 | |
Construction, land development, land | | 1,035 | | | 47 | | | 0 | | | 2 | | | 1,084 | |
1-4 family residential | | 409 | | | 4 | | | 0 | | | 4 | | | 417 | |
Farmland | | 590 | | | 349 | | | 0 | | | 0 | | | 939 | |
Commercial | | 13,899 | | | 1,195 | | | (557) | | | 234 | | | 14,771 | |
Factored receivables | | 6,861 | | | 851 | | | (210) | | | 215 | | | 7,717 | |
Consumer | | 563 | | | 66 | | | (85) | | | 37 | | | 581 | |
Mortgage warehouse | | 382 | | | 206 | | | 0 | | | 0 | | | 588 | |
| | $ | 29,416 | | | $ | 2,865 | | | $ | (878) | | | $ | 492 | | | $ | 31,895 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (Dollars in thousands) | (Dollars in thousands) | | Beginning Balance | | Impact of Adopting ASC 326 | | Initial ACL on Loans Purchased with Credit Deterioration | | Credit Loss Expense | | Charge-offs | | Recoveries | | Reclassification to Held For Sale | | Ending Balance | (Dollars in thousands) | | Beginning Balance | | Initial ACL on Loans Purchased with Credit Deterioration | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2020 | | Three months ended September 30, 2020 | | Beginning Balance | | Initial ACL on Loans Purchased with Credit Deterioration | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Commercial real estate | Commercial real estate | | $ | 5,353 | | | $ | 1,372 | | | $ | 0 | | | $ | 6,366 | | | $ | 0 | | | $ | 61 | | | $ | 0 | | | $ | 13,152 | | Commercial real estate | |
Construction, land development, land | Construction, land development, land | | 1,382 | | | (187) | | | 0 | | | 4,400 | | | 0 | | | 5 | | | 0 | | | 5,600 | | Construction, land development, land | | 5,917 | | | — | | | (319) | | | — | | | 2 | | | 5,600 | |
1-4 family residential | 1-4 family residential | | 308 | | | 513 | | | 0 | | | 1,138 | | | (27) | | | 40 | | | 0 | | | 1,972 | | 1-4 family residential | | 2,027 | | | — | | | (56) | | | (6) | | | 7 | | | 1,972 | |
Farmland | Farmland | | 670 | | | 437 | | | 0 | | | (324) | | | 0 | | | 80 | | | 0 | | 863 | | Farmland | | 958 | | | — | | | (95) | | | — | | | — | | | 863 | |
Commercial | Commercial | | 12,566 | | | (184) | | | 0 | | | 11,004 | | | (1,173) | | | 949 | | | (449) | | | 22,713 | | Commercial | | 23,283 | | | — | | | (657) | | | (528) | | | 615 | | | 22,713 | |
Factored receivables | Factored receivables | | 7,657 | | | (1,630) | | | 37,415 | | | 4,475 | | | (3,027) | | | 95 | | | 0 | | 44,985 | | Factored receivables | | 5,244 | | | 37,415 | | | 3,059 | | | (773) | | | 40 | | | 44,985 | |
Consumer | Consumer | | 488 | | | (52) | | | 0 | | | 583 | | | (410) | | | 101 | | | 0 | | 710 | | Consumer | | 768 | | | — | | | 29 | | | (118) | | | 31 | | | 710 | |
Mortgage warehouse | Mortgage warehouse | | 668 | | | 0 | | | 0 | | | 332 | | | 0 | | | 0 | | | 0 | | 1,000 | | Mortgage warehouse | | 877 | | | — | | | 123 | | | — | | | — | | | 1,000 | |
| | $ | 29,092 | | | $ | 269 | | | $ | 37,415 | | | $ | 27,974 | | | $ | (4,637) | | | $ | 1,331 | | | $ | (449) | | | $ | 90,995 | | | $ | 54,613 | | | $ | 37,415 | | | $ | (356) | | | $ | (1,425) | | | $ | 748 | | | $ | 90,995 | |
| (Dollars in thousands) | (Dollars in thousands) | | Beginning Balance | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance | (Dollars in thousands) | | Beginning Balance | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Nine months ended September 30, 2019 | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | Beginning Balance | | Credit Loss Expense | | Charge-offs | | Recoveries | | Ending Balance |
Commercial real estate | Commercial real estate | | $ | 4,493 | | | $ | 1,343 | | | $ | (39) | | | $ | 1 | | | $ | 5,798 | | Commercial real estate | |
Construction, land development, land | Construction, land development, land | | 1,134 | | | (63) | | | (78) | | | 91 | | | 1,084 | | Construction, land development, land | | 3,418 | | | (2,352) | | | (12) | | | 3 | | | 1,057 | |
1-4 family residential | 1-4 family residential | | 317 | | | 86 | | | (43) | | | 57 | | | 417 | | 1-4 family residential | | 1,225 | | | (804) | | | (26) | | | 90 | | | 485 | |
Farmland | Farmland | | 535 | | | 404 | | | 0 | | | 0 | | | 939 | | Farmland | | 832 | | | (222) | | | — | | | — | | | 610 | |
Commercial | Commercial | | 12,865 | | | 3,252 | | | (1,671) | | | 325 | | | 14,771 | | Commercial | | 22,040 | | | (7,936) | | | (426) | | | 598 | | | 14,276 | |
Factored receivables | Factored receivables | | 7,299 | | | 1,839 | | | (1,682) | | | 261 | | | 7,717�� | | Factored receivables | | 56,463 | | | 8,547 | | | (45,683) | | | 324 | | | 19,651 | |
Consumer | Consumer | | 615 | | | 424 | | | (594) | | | 136 | | | 581 | | Consumer | | 542 | | | (99) | | | (285) | | | 92 | | | 250 | |
Mortgage warehouse | Mortgage warehouse | | 313 | | | 275 | | | 0 | | | 0 | | | 588 | | Mortgage warehouse | | 1,037 | | | (285) | | | — | | | — | | | 752 | |
| | $ | 27,571 | | | $ | 7,560 | | | $ | (4,107) | | | $ | 871 | | | $ | 31,895 | | | $ | 95,739 | | | $ | (9,390) | | | $ | (46,449) | | | $ | 1,117 | | | $ | 41,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Beginning Balance | | Impact of Adopting ASC 326 | | Initial ACL on Loans Purchased with Credit Deterioration | | Credit Loss Expense | | Charge-offs | | Recoveries | | Reclassification to Held For Sale | | Ending Balance |
Nine months ended September 30, 2020 | | | | | | | | |
Commercial real estate | | $ | 5,353 | | | $ | 1,372 | | | $ | — | | | $ | 6,366 | | | $ | — | | | $ | 61 | | | $ | — | | | $ | 13,152 | |
Construction, land development, land | | 1,382 | | | (187) | | | — | | | 4,400 | | | — | | | 5 | | | — | | | 5,600 | |
1-4 family residential | | 308 | | | 513 | | | — | | | 1,138 | | | (27) | | | 40 | | | — | | | 1,972 | |
Farmland | | 670 | | | 437 | | | — | | | (324) | | | — | | | 80 | | | — | | | 863 | |
Commercial | | 12,566 | | | (184) | | | — | | | 11,004 | | | (1,173) | | | 949 | | | (449) | | | 22,713 | |
Factored receivables | | 7,657 | | | (1,630) | | | 37,415 | | | 4,475 | | | (3,027) | | | 95 | | | — | | | 44,985 | |
Consumer | | 488 | | | (52) | | | — | | | 583 | | | (410) | | | 101 | | | — | | | 710 | |
Mortgage warehouse | | 668 | | | — | | | — | | | 332 | | | — | | | — | | | — | | | 1,000 | |
| | $ | 29,092 | | | $ | 269 | | | $ | 37,415 | | | $ | 27,974 | | | $ | (4,637) | | | $ | 1,331 | | | $ | (449) | | | $ | 90,995 | |
The ACL as of September 30, 2020 was estimated using the current expected credit loss model. The primary reasons for the decrease in required ACL during the nine months ended September 30, 2021 are net charge-offs on PCD Over-Formula Advances (classified as factored receivables) and improvement of the loss drivers that the Company forecasts to calculate expected losses during the period.
The primary reason for the decrease in required ACL during the three months ended September 30, 2021 is a decrease in specific reserves commensurate with a decrease in nonperforming loans.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Management determined that the $62,200,000 in Over-Formula Advances obtained through the TFS Acquisition during 2020 had experienced more than insignificant credit deterioration since origination and thus deemed those Over-Formula Advances to be purchased credit deteriorated ("PCD"). This resulted in recording a $37,400,000The total remaining ACL on theall acquired PCD Over-Formula Advance Portfolio through purchase accounting during the three months ended September 30, 2020. ThereAdvances was no impact to credit loss expense resulting from the PCD determination. The Company's expectation of loss on the Over-Formula Advance Portfolio did not change between the acquisition date and September 30, 2020 and thus, the PCD ACL was held constantapproximately $10,077,000 at September 30, 2021 compared to $48,485,000 at December 31, 2020. The primary reason fordriver of the increase in required ACL during the three months ended September 30, 2020 is related to the $37,400,000 PCD ACL. There was relatively little change to the loss drivers that the Company forecasts to calculate expected losses during the three months ended September 30, 2020.
The primary reasons for the increasedecrease in required ACL during the nine months ended September 30, 2020 are2021 was a net charge-off of $41,265,000 due from the largest acquired Over-Formula Advance client. This was partially offset by an additional $2,844,000 million of reserve required across the two remaining Over-Formula Advance clients. As of September 30, 2021, the entire remaining acquired PCD ACL increase discussed previouslyOver-Formula Advance balance was fully reserved. See Note 2 – Business Combinations and significant projected deteriorationDivestitures for further discussion of the loss drivers that the Company forecasts to calculate expected losses and, to a much lesser extent, changes in qualitative loss factors during the period.Over-Formula Advance activity.
The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For all DCF models at September 30, 2020,2021, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At September 30, 2020,2021, as compared to January 1,December 31, 2020, the Company forecasted a significant increasedecrease in national unemployment, significant decreasean increase in one-year percentage change in national retail sales, significant decreasean increase in one-year percentage change in the national home price index, and a significant decreasean increase in one-year percentage change in national gross domestic product for the first forecasted quarter. The Company projected little to no improvement in the loss drivers over the first three quarters with these loss drivers remaining significantly worse compared to recent historical trends over the past several years. Some improvement is expected in the fourth projected quarter.product. At September 30, 2020, as compared2021, for percentage changes in national retail sales, national home price index and national gross domestic product, the Company projected significant growth in the first projected quarter followed by percentage change growth for the last three projected quarters resembling something closer to June 30, 2020,pre-COVID-19 levels albeit slightly more modest. Projected unemployment rates used by the Company forecastsare relatively stable over the reasonable and supportable forecast period werefour projected quarters at levels somewhat comparable.higher than pre-COVID-19 conditions.
The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, premium finance, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.
For the nine months ended September 30, 2020,2021, in addition to the TFS Acquisition created the need for an additional $37,400,000 of PCD ACL previously discussed. The projected economic impact of COVID-19changes to the ACL on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period created the need for $23,300,000 of additional ACL. The increase in required ACL was also driven by net charge-offs of $3,300,000 (which carried reserves of $1,600,000 at the time of charge-off), and net new specific allowances recorded on individual loans of $5,700,000. The increase was offset by contraction and changes in mix in the underlying portfolio.
For the three months ended September 30, 2020, the TFS Acquisition created the need for an additional $37,400,000 ofacquired PCD ACLOver-Formula Advances previously discussed. Thediscussed, changes in projected loss drivers and assumptions over the reasonable and supportable forecast period increaseddecreased the required ACL by $600,000. The increase in required ACL was also driven by$10,319,000. Further, the Company experienced a net charge-offsreserve release of $700,000 (which carriedspecific reserves of $800,000 at the time of charge-off), and net new specific allowances recorded on individual loans of $800,000.non-PCD loans. Changes in loan volume and mix during the nine months ended September 30, 2021 also decreased the ACL during the period. Non-PCD-related net charge-offs reduced the ACL by $4,067,000 during the nine months ended September 30, 2021.
For the three months ended September 30, 2021, changes in projected loss drivers and assumptions over the reasonable and supportable forecast period decreased the required ACL by $177,000. Further, the Company experienced a net reserve release of specific reserves on non-PCD loans. Changes in loan volume and mix induring the underlying portfolio also increasedthree months ended September 30, 2021 did not have a significant impact the reserve.ACL during the period. Non-PCD-related net charge-offs reduced the ACL by $3,718,000 during the three months ended September 30, 2021.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
| (Dollars in thousands) | (Dollars in thousands) | | Real Estate | | Accounts Receivable | | Equipment | | Other | | Total | | ACL Allocation | (Dollars in thousands) | | Real Estate | | Accounts Receivable | | Equipment | | Other | | Total | | ACL Allocation |
September 30, 2020 | | | | | | | | | | | | | |
September 30, 2021 | | September 30, 2021 | | Real Estate | | Accounts Receivable | | Equipment | | Other | | Total | | ACL Allocation |
Commercial real estate | Commercial real estate | | $ | 14,198 | | | $ | 0 | | | $ | 0 | | | $ | 366 | | | $ | 14,564 | | | $ | 1,668 | | Commercial real estate | |
Construction, land development, land | Construction, land development, land | | 2,112 | | | 0 | | | 0 | | | 0 | | | 2,112 | | | 271 | | Construction, land development, land | | 1,008 | | | — | | | — | | | — | | | 1,008 | | | — | |
1-4 family residential | 1-4 family residential | | 1,962 | | | 0 | | | 0 | | | 181 | | | 2,143 | | | 24 | | 1-4 family residential | | 1,260 | | | — | | | — | | | 168 | | | 1,428 | | | 10 | |
Farmland | Farmland | | 1,914 | | | 0 | | | 148 | | | 572 | | | 2,634 | | | 0 | | Farmland | | 1,916 | | | — | | | 130 | | | — | | | 2,046 | | | — | |
Commercial | Commercial | | 2,875 | | | 4,893 | | | 7,034 | | | 4,124 | | | 18,926 | | | 4,563 | | Commercial | | 569 | | | — | | | 4,266 | | | 3,062 | | | 7,897 | | | 2,187 | |
Factored receivables | Factored receivables | | 0 | | | 73,875 | | | 0 | | | 0 | | | 73,875 | | | 40,072 | | Factored receivables | | — | | | 45,524 | | | — | | | — | | | 45,524 | | | 11,650 | |
Consumer | Consumer | | 0 | | | 0 | | | 0 | | | 322 | | | 322 | | | 29 | | Consumer | | — | | | — | | | — | | | 251 | | | 251 | | | — | |
Mortgage warehouse | Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Mortgage warehouse | | — | | | — | | | — | | | — | | | — | | | — | |
Total | Total | | $ | 23,061 | | | $ | 78,768 | | | $ | 7,182 | | | $ | 5,565 | | | $ | 114,576 | | | $ | 46,627 | | Total | | $ | 8,297 | | | $ | 45,524 | | | $ | 4,396 | | | $ | 3,623 | | | $ | 61,840 | | | $ | 14,114 | |
At September 30, 2021 the balance of the Over-Formula Advance Portfolio included in factored receivables $10,077,000 and was fully reserved. At September 30, 2021 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Real Estate | | Accounts Receivable | | Equipment | | Other | | Total | | ACL Allocation |
December 31, 2020 | | | | | | |
Commercial real estate | | $ | 12,454 | | | $ | — | | | $ | — | | | $ | 162 | | | $ | 12,616 | | | $ | 1,334 | |
Construction, land development, land | | 2,317 | | | — | | | — | | | — | | | 2,317 | | | 271 | |
1-4 family residential | | 1,948 | | | — | | | — | | | 248 | | | 2,196 | | | 34 | |
Farmland | | 2,189 | | | — | | | 143 | | | 198 | | | 2,530 | | | — | |
Commercial | | 1,813 | | | — | | | 5,842 | | | 9,352 | | | 17,007 | | | 5,163 | |
Factored receivables | | — | | | 92,437 | | | — | | | — | | | 92,437 | | | 51,371 | |
Consumer | | — | | | — | | | — | | | 253 | | | 253 | | | 37 | |
Mortgage warehouse | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | $ | 20,721 | | | $ | 92,437 | | | $ | 5,985 | | | $ | 10,213 | | | $ | 129,356 | | | $ | 58,210 | |
At December 31, 2020 the balance of the Over-Formula Advance Portfolio included in factored receivables was $62,200,000$62,100,000 and carried an ACL allocation of $37,400,000$48,485,000. At December 31, 2020 the balance of Misdirected Payments included in factored receivables was $19,600,000 and carried no ACL allocation.
Past Due and Nonaccrual Loans
The following table presents loans individually and collectively evaluated for impairment, as well as purchased credit impaired (“PCI”) loans, and their respective allowance for credit loss allocations astables present an aging of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:contractually past due loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Past Due 30-59 Days | | Past Due 60-90 Days | | Past Due 90 Days or More | | Total Past Due | | Current | | Total | | Past Due 90 Days or More and Accruing |
September 30, 2021 | | | | | | | |
Commercial real estate | | $ | 376 | | | $ | — | | | $ | 16 | | | $ | 392 | | | $ | 629,714 | | | $ | 630,106 | | | $ | — | |
Construction, land development, land | | — | | | — | | | 977 | | | 977 | | | 170,837 | | | 171,814 | | | — | |
1-4 family residential | | 680 | | | 437 | | | 720 | | | 1,837 | | | 125,236 | | | 127,073 | | | — | |
Farmland | | — | | | — | | | 550 | | | 550 | | | 82,440 | | | 82,990 | | | — | |
Commercial | | 1,541 | | | 141 | | | 3,843 | | | 5,525 | | | 1,392,972 | | | 1,398,497 | | | 84 | |
Factored receivables | | 49,084 | | | 14,643 | | | 36,936 | | | 100,663 | | | 1,506,365 | | | 1,607,028 | | | 36,936 | |
Consumer | | 300 | | | 41 | | | 85 | | | 426 | | | 12,251 | | | 12,677 | | | — | |
Mortgage warehouse | | — | | | — | | | — | | | — | | | 752,545 | | | 752,545 | | | — | |
Total | | $ | 51,981 | | | $ | 15,262 | | | $ | 43,127 | | | $ | 110,370 | | | $ | 4,672,360 | | | $ | 4,782,730 | | | $ | 37,020 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Loan Evaluation | | | | | | | | ALLL Allocations | | | | | | |
December 31, 2019 | | Individually | | Collectively | | PCI | | Total loans | | Individually | | Collectively | | PCI | | Total ALLL |
Commercial real estate | | $ | 7,455 | | | $ | 1,030,439 | | | $ | 9,067 | | | $ | 1,046,961 | | | $ | 344 | | | $ | 5,009 | | | $ | 0 | | | $ | 5,353 | |
Construction, land development, land | | 2,138 | | | 155,985 | | | 2,446 | | | 160,569 | | | 271 | | | 1,111 | | | 0 | | | 1,382 | |
1-4 family residential | | 1,728 | | | 177,189 | | | 508 | | | 179,425 | | | 33 | | | 275 | | | 0 | | | 308 | |
Farmland | | 6,638 | | | 148,233 | | | 104 | | | 154,975 | | | 0 | | | 670 | | | 0 | | | 670 | |
Commercial | | 15,618 | | | 1,326,515 | | | 550 | | | 1,342,683 | | | 1,278 | | | 11,284 | | | 4 | | | 12,566 | |
Factored receivables | | 15,947 | | | 604,039 | | | 0 | | | 619,986 | | | 3,178 | | | 4,479 | | | 0 | | | 7,657 | |
Consumer | | 327 | | | 21,598 | | | 0 | | | 21,925 | | | 9 | | | 479 | | | 0 | | | 488 | |
Mortgage warehouse | | 0 | | | 667,988 | | | 0 | | | 667,988 | | | 0 | | | 668 | | | 0 | | | 668 | |
| | $ | 49,851 | | | $ | 4,131,986 | | | $ | 12,675 | | | $ | 4,194,512 | | | $ | 5,113 | | | $ | 23,975 | | | $ | 4 | | | $ | 29,092 | |
The following table presents information pertaining to impaired loans as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Impaired Loans and Purchased Credit Impaired Loans With a Valuation Allowance | | | | | | Impaired Loans Without a Valuation Allowance | | |
(Dollars in thousands) | | Recorded Investment | | Unpaid Principal | | Related Allowance | | Recorded Investment | | Unpaid Principal |
December 31, 2019 | | | | | | | | | | |
Commercial real estate | | $ | 878 | | | $ | 907 | | | $ | 344 | | | $ | 6,577 | | | $ | 6,643 | |
Construction, land development, land | | 935 | | | 935 | | | 271 | | | 1,203 | | | 1,305 | |
1-4 family residential | | 35 | | | 22 | | | 33 | | | 1,693 | | | 1,799 | |
Farmland | | 0 | | | 0 | | | 0 | | | 6,638 | | | 6,819 | |
Commercial | | 6,032 | | | 6,053 | | | 1,278 | | | 9,586 | | | 9,751 | |
Factored receivables | | 15,940 | | | 15,940 | | | 3,178 | | | 7 | | | 7 | |
Consumer | | 17 | | | 16 | | | 9 | | | 310 | | | 311 | |
Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
PCI | | 71 | | | 55 | | | 4 | | | 0 | | | 0 | |
| | $ | 23,908 | | | $ | 23,928 | | | $ | 5,117 | | | $ | 26,014 | | | $ | 26,635 | |
The following table presents average impaired loans, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three and nine months ended September 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | Nine Months Ended September 30, 2019 | | |
| Average Impaired Loans | | Interest Recognized | | Average Impaired Loans | | Interest Recognized |
(Dollars in thousands) | | | | | | | |
Commercial real estate | $ | 7,500 | | | $ | 180 | | | $ | 7,675 | | | $ | 180 | |
Construction, land development, land | 1,087 | | | 5 | | | 624 | | | 5 | |
1-4 family residential | 2,353 | | | 13 | | | 2,326 | | | 15 | |
Farmland | 6,737 | | | 31 | | | 7,186 | | | 75 | |
Commercial | 15,222 | | | 321 | | | 16,397 | | | 373 | |
Factored receivables | 10,453 | | | 0 | | | 9,455 | | | 0 | |
Consumer | 458 | | | 5 | | | 411 | | | 5 | |
Mortgage warehouse | 0 | | | 0 | | | 0 | | | 0 | |
PCI | 71 | | | 0 | | | 71 | | | 0 | |
| $ | 43,881 | | | $ | 555 | | | $ | 44,145 | | | $ | 653 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Past Due and Nonaccrual Loans
The following tables present an aging of contractually past due loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Past Due 30-59 Days | | Past Due 60-90 Days | | Past Due 90 Days or More | | Total Past Due | | Current | | Total | | Past Due 90 Days or More and Accruing |
September 30, 2020 | | | | | | | | | | | | | | |
Commercial real estate | | $ | 1,714 | | | $ | 6,993 | | | $ | 2,666 | | | $ | 11,373 | | | $ | 751,158 | | | $ | 762,531 | | | $ | 1,287 | |
Construction, land development, land | | 608 | | | 894 | | | 1,184 | | | 2,686 | | | 241,826 | | | 244,512 | | | 0 | |
1-4 family residential | | 1,049 | | | 849 | | | 1,061 | | | 2,959 | | | 161,826 | | | 164,785 | | | 143 | |
Farmland | | 400 | | | 0 | | | 284 | | | 684 | | | 110,282 | | | 110,966 | | | 0 | |
Commercial | | 5,954 | | | 1,548 | | | 6,319 | | | 13,821 | | | 1,523,082 | | | 1,536,903 | | | 276 | |
Factored receivables | | 68,522 | | | 7,247 | | | 8,638 | | | 84,407 | | | 931,930 | | | 1,016,337 | | | 8,638 | |
Consumer | | 442 | | | 83 | | | 141 | | | 666 | | | 16,440 | | | 17,106 | | | 0 | |
Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | | 999,771 | | | 999,771 | | | 0 | |
Total | | $ | 78,689 | | | $ | 17,614 | | | $ | 20,293 | | | $ | 116,596 | | | $ | 4,736,315 | | | $ | 4,852,911 | | | $ | 10,344 | |
| (Dollars in thousands) | (Dollars in thousands) | | Past Due 30-59 Days | | Past Due 60-90 Days | | Past Due 90 Days or More | | Total Past Due | | Current | | Total | | Past Due 90 Days or More and Accruing | (Dollars in thousands) | | Past Due 30-59 Days | | Past Due 60-90 Days | | Past Due 90 Days or More | | Total Past Due | | Current | | Total | | Past Due 90 Days or More and Accruing |
December 31, 2019 | | | | | | | | | | | | | | | |
December 31, 2020 | | December 31, 2020 | | Past Due 30-59 Days | | Past Due 60-90 Days | | Past Due 90 Days or More | | Total Past Due | | Current | | Total | | Past Due 90 Days or More and Accruing |
Commercial real estate | Commercial real estate | | $ | 1,752 | | | $ | 1,328 | | | $ | 1,759 | | | $ | 4,839 | | | $ | 1,042,122 | | | $ | 1,046,961 | | | $ | 0 | | Commercial real estate | |
Construction, land development, land | Construction, land development, land | | 1,785 | | | 842 | | | 361 | | | 2,988 | | | 157,581 | | | 160,569 | | | 0 | | Construction, land development, land | | 185 | | | 1,001 | | | 323 | | | 1,509 | | | 218,138 | | | 219,647 | | | 22 | |
1-4 family residential | 1-4 family residential | | 1,396 | | | 723 | | | 554 | | | 2,673 | | | 176,752 | | | 179,425 | | | 286 | | 1-4 family residential | | 1,978 | | | 448 | | | 952 | | | 3,378 | | | 153,769 | | | 157,147 | | | — | |
Farmland | Farmland | | 52 | | | 132 | | | 2,376 | | | 2,560 | | | 152,415 | | | 154,975 | | | 0 | | Farmland | | 407 | | | 1,000 | | | 300 | | | 1,707 | | | 101,978 | | | 103,685 | | | — | |
Commercial | Commercial | | 4,444 | | | 4,154 | | | 9,555 | | | 18,153 | | | 1,324,530 | | | 1,342,683 | | | 808 | | Commercial | | 2,084 | | | 1,765 | | | 5,770 | | | 9,619 | | | 1,553,338 | | | 1,562,957 | | | 35 | |
Factored receivables | Factored receivables | | 29,118 | | | 7,182 | | | 4,226 | | | 40,526 | | | 579,460 | | | 619,986 | | | 4,226 | | Factored receivables | | 33,377 | | | 28,506 | | | 72,717 | | | 134,600 | | | 986,170 | | | 1,120,770 | | | 72,717 | |
Consumer | Consumer | | 508 | | | 429 | | | 183 | | | 1,120 | | | 20,805 | | | 21,925 | | | 49 | | Consumer | | 385 | | | 116 | | | 81 | | | 582 | | | 15,256 | | | 15,838 | | | — | |
Mortgage warehouse | Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | | 667,988 | | | 667,988 | | | 0 | | Mortgage warehouse | | — | | | — | | | — | | | — | | | 1,037,574 | | | 1,037,574 | | | — | |
Total | Total | | $ | 39,055 | | | $ | 14,790 | | | $ | 19,014 | | | $ | 72,859 | | | $ | 4,121,653 | | | $ | 4,194,512 | | | $ | 5,369 | | Total | | $ | 39,928 | | | $ | 32,983 | | | $ | 87,766 | | | $ | 160,677 | | | $ | 4,836,099 | | | $ | 4,996,776 | | | $ | 72,774 | |
At September 30, 2021 and December 31, 2020, total past due Over-Formula Advances recorded in factored receivables was $38,500,000. This balance$10,077,000 and $62,100,000, respectively, all of which was considered past due 30-59 Days.90 days or more. Aging of the Over-Formula Advances is based upon the service month on which the advances were made by TFS prior to acquisition. At September 30, 2021 and December 31, 2020, the Misdirected Payments totaled $19,361,000 and $19,600,000, respectively. At September 30, 2021, the entire $19,361,000 balance of the Misdirected Payments was considered past due 90 days or more, and at December 31, 2020 approximately $6,000,000 was considered past due 90 days or more. Given the nature of factored receivables, these assets are disclosed as past due 90 days or more still accruing; however, the Company is not recognizing income on the assets at September 30, 2021. Historically, any income recognized on factored receivables that are past due 90 days or more has not been material.
The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses:
| | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | | Nonaccrual | | Nonaccrual With No ACL | | Nonaccrual | | Nonaccrual With No ACL | (Dollars in thousands) | | Nonaccrual | | Nonaccrual With No ACL | | Nonaccrual | | Nonaccrual With No ACL |
Commercial real estate | Commercial real estate | | $ | 12,235 | | | $ | 4,700 | | | $ | 7,501 | | | $ | 6,623 | | Commercial real estate | | $ | 2,113 | | | $ | 1,438 | | | $ | 9,945 | | | $ | 3,461 | |
Construction, land development, land | Construction, land development, land | | 2,089 | | | 1,180 | | | 3,922 | | | 2,987 | | Construction, land development, land | | 986 | | | 986 | | | 2,294 | | | 1,199 | |
1-4 family residential | 1-4 family residential | | 1,761 | | | 1,640 | | | 1,730 | | | 1,694 | | 1-4 family residential | | 1,310 | | | 1,262 | | | 1,848 | | | 1,651 | |
Farmland | Farmland | | 2,452 | | | 2,452 | | | 6,494 | | | 6,494 | | Farmland | | 2,046 | | | 2,046 | | | 2,531 | | | 2,531 | |
Commercial | Commercial | | 19,462 | | | 5,210 | | | 16,080 | | | 9,977 | | Commercial | | 7,828 | | | 4,262 | | | 17,202 | | | 4,891 | |
Factored receivables | Factored receivables | | 0 | | | 0 | | | 0 | | | 0 | | Factored receivables | | — | | | — | | | — | | | — | |
Consumer | Consumer | | 322 | | | 247 | | | 327 | | | 310 | | Consumer | | 251 | | | 251 | | | 253 | | | 188 | |
Mortgage warehouse | Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | Mortgage warehouse | | — | | | — | | | — | | | — | |
| | $ | 38,321 | | | $ | 15,429 | | | $ | 36,054 | | | $ | 28,085 | | | $ | 14,534 | | | $ | 10,245 | | | $ | 34,073 | | | $ | 13,921 | |
The following table presents accrued interest on nonaccrual loans reversed through interest income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Commercial real estate | | $ | — | | | $ | 371 | | | $ | 8 | | | $ | 435 | |
Construction, land development, land | | — | | | 1 | | | — | | | 1 | |
1-4 family residential | | — | | | 21 | | | 1 | | | 31 | |
Farmland | | — | | | 36 | | | 6 | | | 36 | |
Commercial | | — | | | 37 | | | 23 | | | 76 | |
Factored receivables | | — | | | — | | | — | | | — | |
Consumer | | 3 | | | — | | | 3 | | | 2 | |
Mortgage warehouse | | — | | | — | | | — | | | — | |
| | $ | 3 | | | $ | 466 | | | $ | 41 | | | $ | 581 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents accrued interest on nonaccrual loans reversed through interest income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Commercial real estate | | $ | 371 | | | $ | 13 | | | $ | 435 | | | $ | 32 | |
Construction, land development, land | | 1 | | | 0 | | | 1 | | | 9 | |
1-4 family residential | | 21 | | | 0 | | | 31 | | | 12 | |
Farmland | | 36 | | | 26 | | | 36 | | | 27 | |
Commercial | | 37 | | | 13 | | | 76 | | | 50 | |
Factored receivables | | 0 | | | 0 | | | 0 | | | 0 | |
Consumer | | 0 | | | 2 | | | 2 | | | 3 | |
Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | |
| | $ | 466 | | | $ | 54 | | | $ | 581 | | | $ | 133 | |
There was 0no interest earned on nonaccrual loans during the three and nine months ended September 30, 20202021 and 2019.2020.
The following table presents information regarding nonperforming loans:
| (Dollars in thousands) | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Nonaccrual loans(1) | Nonaccrual loans(1) | | $ | 38,321 | | | $ | 36,054 | | Nonaccrual loans(1) | | $ | 14,534 | | | $ | 34,073 | |
Factored receivables greater than 90 days past due | Factored receivables greater than 90 days past due | | 8,638 | | | 4,226 | | Factored receivables greater than 90 days past due | | 26,859 | | | 13,927 | |
Other nonperforming factored receivables(2) | Other nonperforming factored receivables(2) | | 10,029 | | | 0 | | Other nonperforming factored receivables(2) | | 1,428 | | | 10,029 | |
Troubled debt restructurings accruing interest | Troubled debt restructurings accruing interest | | 3 | | | 333 | | Troubled debt restructurings accruing interest | | 17 | | | 3 | |
| | $ | 56,991 | | | $ | 40,613 | | | $ | 42,838 | | | $ | 58,032 | |
(1)Includes troubled debt restructurings of $15,743,000$5,048,000 and $4,888,000$13,321,000 at September 30, 20202021 and December 31, 2019,2020, respectively.
(2)Other nonperforming factored receivables represent the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification. This amount is also considered Classified from a risk rating perspective.
Credit Quality Information
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:
Pass – Pass rated loans have low to average risk and are not otherwise classified.
Classified – Classified loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Certain classified loans have the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
PCI (Prior to the Adoption of ASU 2016-13) – At acquisition, PCI loans had the characteristics of classified loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of September 30, 20202021 and December 31, 2019,2020, based on the most recent analysis performed, the risk category of loans is as follows:
| | | | | Revolving Loans | | Revolving Loans Converted To Term Loans | | Total | | | Revolving Loans | | Revolving Loans Converted To Term Loans | | Total |
(Dollars in thousands) | (Dollars in thousands) | | Year of Origination | | | | | | | | (Dollars in thousands) | | Year of Origination | Revolving Loans | Revolving Loans Converted To Term Loans | Total |
September 30, 2020 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | | | | | | Revolving Loans | Revolving Loans Converted To Term Loans | Total | |
September 30, 2021 | | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving Loans | | Revolving Loans Converted To Term Loans | | Total |
Commercial real estate | Commercial real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | Pass | | $ | 374,993 | | | $ | 85,458 | | | $ | 95,818 | | | $ | 92,112 | | | $ | 35,576 | | | $ | 53,189 | | | $ | 7,124 | | | $ | 908 | | | $ | 745,178 | | Pass | | $ | 161,022 | | | $ | 254,852 | | | $ | 48,186 | | | $ | 33,865 | | | $ | 56,081 | | | $ | 46,685 | | |
Classified | Classified | | 13,918 | | | 437 | | | 182 | | | 636 | | | 852 | | | 1,328 | | | 0 | | | 0 | | | 17,353 | | Classified | | 690 | | | 3,425 | | | 41 | | | — | | | 16 | | | — | | | — | | | — | | | 4,172 | |
Total commercial real estate | Total commercial real estate | | $ | 388,911 | | | $ | 85,895 | | | $ | 96,000 | | | $ | 92,748 | | | $ | 36,428 | | | $ | 54,517 | | | $ | 7,124 | | | $ | 908 | | | $ | 762,531 | | Total commercial real estate | | $ | 161,712 | | | $ | 258,277 | | | $ | 48,227 | | | $ | 33,865 | | | $ | 56,097 | | | $ | 46,685 | | | $ | 25,243 | | | $ | — | | | $ | 630,106 | |
| Construction, land development, land | Construction, land development, land | | Construction, land development, land | |
Pass | Pass | | $ | 141,940 | | | $ | 29,654 | | | $ | 55,887 | | | $ | 12,362 | | | $ | 268 | | | $ | 1,776 | | | $ | 13 | | | $ | 500 | | | $ | 242,400 | | Pass | | $ | 76,239 | | | $ | 57,943 | | | $ | 12,580 | | | $ | 21,680 | | | $ | 1,214 | | | $ | 1,159 | | | $ | 9 | | | $ | — | | | $ | 170,824 | |
Classified | Classified | | 905 | | | 838 | | | 0 | | | 0 | | | 0 | | | 369 | | | 0 | | | 0 | | | 2,112 | | Classified | | — | | | 845 | | | — | | | — | | | — | | | 145 | | | — | | | — | | | 990 | |
Total construction, land development, land | Total construction, land development, land | | $ | 142,845 | | | $ | 30,492 | | | $ | 55,887 | | | $ | 12,362 | | | $ | 268 | | | $ | 2,145 | | | $ | 13 | | | $ | 500 | | | $ | 244,512 | | Total construction, land development, land | | $ | 76,239 | | | $ | 58,788 | | | $ | 12,580 | | | $ | 21,680 | | | $ | 1,214 | | | $ | 1,304 | | | $ | 9 | | | $ | — | | | $ | 171,814 | |
| 1-4 family residential | 1-4 family residential | | 1-4 family residential | |
Pass | Pass | | $ | 35,959 | | | $ | 12,614 | | | $ | 15,172 | | | $ | 13,316 | | | $ | 11,773 | | | $ | 30,076 | | | $ | 38,669 | | | $ | 5,320 | | | $ | 162,899 | | Pass | | $ | 21,915 | | | $ | 18,191 | | | $ | 9,961 | | | $ | 7,170 | | | $ | 10,068 | | | $ | 25,998 | | | $ | 32,018 | | | $ | 327 | | | $ | 125,648 | |
Classified | Classified | | 570 | | | 76 | | | 16 | | | 0 | | | 359 | | | 758 | | | 107 | | | 0 | | | 1,886 | | Classified | | 219 | | | 240 | | | 53 | | | 7 | | | 8 | | | 816 | | | 82 | | | — | | | 1,425 | |
Total 1-4 family residential | Total 1-4 family residential | | $ | 36,529 | | | $ | 12,690 | | | $ | 15,188 | | | $ | 13,316 | | | $ | 12,132 | | | $ | 30,834 | | | $ | 38,776 | | | $ | 5,320 | | | $ | 164,785 | | Total 1-4 family residential | | $ | 22,134 | | | $ | 18,431 | | | $ | 10,014 | | | $ | 7,177 | | | $ | 10,076 | | | $ | 26,814 | | | $ | 32,100 | | | $ | 327 | | | $ | 127,073 | |
| Farmland | Farmland | | Farmland | |
Pass | Pass | | $ | 19,870 | | | $ | 17,100 | | | $ | 16,458 | | | $ | 15,168 | | | $ | 13,829 | | | $ | 21,150 | | | $ | 2,130 | | | $ | 486 | | | $ | 106,191 | | Pass | | $ | 11,922 | | | $ | 14,111 | | | $ | 11,021 | | | $ | 8,749 | | | $ | 10,212 | | | $ | 22,761 | | | $ | 1,283 | | | $ | 130 | | | $ | 80,189 | |
Classified | Classified | | 1,207 | | | 417 | | | 1,672 | | | 145 | | | 0 | | | 560 | | | 774 | | | 0 | | | 4,775 | | Classified | | 699 | | | 524 | | | 650 | | | 336 | | | 128 | | | 307 | | | 157 | | | — | | | 2,801 | |
Total farmland | Total farmland | | $ | 21,077 | | | $ | 17,517 | | | $ | 18,130 | | | $ | 15,313 | | | $ | 13,829 | | | $ | 21,710 | | | $ | 2,904 | | | $ | 486 | | | $ | 110,966 | | Total farmland | | $ | 12,621 | | | $ | 14,635 | | | $ | 11,671 | | | $ | 9,085 | | | $ | 10,340 | | | $ | 23,068 | | | $ | 1,440 | | | $ | 130 | | | $ | 82,990 | |
| Commercial | Commercial | | Commercial | |
Pass | Pass | | $ | 848,660 | | | $ | 135,269 | | | $ | 48,573 | | | $ | 41,531 | | | $ | 6,013 | | | $ | 5,548 | | | $ | 405,676 | | | $ | 11,396 | | | $ | 1,502,666 | | Pass | | $ | 419,788 | | | $ | 401,324 | | | $ | 92,389 | | | $ | 25,544 | | | $ | 17,534 | | | $ | 7,485 | | | $ | 413,973 | | | $ | 436 | | | $ | 1,378,473 | |
Classified | Classified | | 7,186 | | | 7,357 | | | 4,725 | | | 1,445 | | | 731 | | | 348 | | | 12,445 | | | 0 | | | 34,237 | | Classified | | 1,422 | | | 7,995 | | | 5,493 | | | 571 | | | 66 | | | 464 | | | 4,013 | | | — | | | 20,024 | |
Total commercial | Total commercial | | $ | 855,846 | | | $ | 142,626 | | | $ | 53,298 | | | $ | 42,976 | | | $ | 6,744 | | | $ | 5,896 | | | $ | 418,121 | | | $ | 11,396 | | | $ | 1,536,903 | | Total commercial | | $ | 421,210 | | | $ | 409,319 | | | $ | 97,882 | | | $ | 26,115 | | | $ | 17,600 | | | $ | 7,949 | | | $ | 417,986 | | | $ | 436 | | | $ | 1,398,497 | |
| Factored receivables | Factored receivables | | Factored receivables | |
Pass | Pass | | $ | 995,046 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 995,046 | | Pass | | $ | 1,575,756 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,575,756 | |
Classified | Classified | | 21,291 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 21,291 | | Classified | | 10,594 | | | 20,678 | | | — | | | — | | | — | | | — | | | — | | | — | | | 31,272 | |
Total factored receivables | Total factored receivables | | $ | 1,016,337 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,016,337 | | Total factored receivables | | $ | 1,586,350 | | | $ | 20,678 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,607,028 | |
| Consumer | Consumer | | Consumer | |
Pass | Pass | | $ | 3,820 | | | $ | 2,617 | | | $ | 1,614 | | | $ | 4,694 | | | $ | 3,088 | | | $ | 875 | | | $ | 73 | | | $ | 0 | | | $ | 16,781 | | Pass | | $ | 2,173 | | | $ | 2,072 | | | $ | 805 | | | $ | 689 | | | $ | 2,739 | | | $ | 3,881 | | | $ | 68 | | | $ | — | | | $ | 12,427 | |
Classified | Classified | | 0 | | | 18 | | | 7 | | | 94 | | | 162 | | | 44 | | | 0 | | | 0 | | | 325 | | Classified | | 5 | | | — | | | — | | | 1 | | | 123 | | | 121 | | | — | | | — | | | 250 | |
Total consumer | Total consumer | | $ | 3,820 | | | $ | 2,635 | | | $ | 1,621 | | | $ | 4,788 | | | $ | 3,250 | | | $ | 919 | | | $ | 73 | | | $ | 0 | | | $ | 17,106 | | Total consumer | | $ | 2,178 | | | $ | 2,072 | | | $ | 805 | | | $ | 690 | | | $ | 2,862 | | | $ | 4,002 | | | $ | 68 | | | $ | — | | | $ | 12,677 | |
| Mortgage warehouse | Mortgage warehouse | | Mortgage warehouse | |
Pass | Pass | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 999,771 | | | $ | 0 | | | $ | 999,771 | | Pass | | $ | 752,545 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 752,545 | |
Classified | Classified | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Classified | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total mortgage warehouse | Total mortgage warehouse | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 999,771 | | | $ | 0 | | | $ | 999,771 | | Total mortgage warehouse | | $ | 752,545 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 752,545 | |
| Total loans | Total loans | | Total loans | |
Pass | Pass | | $ | 2,420,288 | | | $ | 282,712 | | | $ | 233,522 | | | $ | 179,183 | | | $ | 70,547 | | | $ | 112,614 | | | $ | 1,453,456 | | | $ | 18,610 | | | $ | 4,770,932 | | Pass | | $ | 3,021,360 | | | $ | 748,493 | | | $ | 174,942 | | | $ | 97,697 | | | $ | 97,848 | | | $ | 107,969 | | | $ | 472,594 | | | $ | 893 | | | $ | 4,721,796 | |
Classified | Classified | | 45,077 | | | 9,143 | | | 6,602 | | | 2,320 | | | 2,104 | | | 3,407 | | | 13,326 | | | 0 | | | 81,979 | | Classified | | 13,629 | | | 33,707 | | | 6,237 | | | 915 | | | 341 | | | 1,853 | | | 4,252 | | | — | | | 60,934 | |
Total loans | Total loans | | $ | 2,465,365 | | | $ | 291,855 | | | $ | 240,124 | | | $ | 181,503 | | | $ | 72,651 | | | $ | 116,021 | | | $ | 1,466,782 | | | $ | 18,610 | | | $ | 4,852,911 | | Total loans | | $ | 3,034,989 | | | $ | 782,200 | | | $ | 181,179 | | | $ | 98,612 | | | $ | 98,189 | | | $ | 109,822 | | | $ | 476,846 | | | $ | 893 | | | $ | 4,782,730 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | Revolving Loans | | Revolving Loans Converted To Term Loans | | Total |
(Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | | Year of Origination | |
December 31, 2019 | | Pass | | Classified | | PCI | | Total | |
December 31, 2020 | | December 31, 2020 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans | | Revolving Loans Converted To Term Loans | | Total |
Commercial real estate | Commercial real estate | | $ | 1,030,358 | | | $ | 7,536 | | | $ | 9,067 | | | $ | 1,046,961 | | Commercial real estate | | | | | | | | | | | | | |
Pass | | Pass | | $ | 271,406 | | | $ | 94,085 | | | $ | 62,075 | | | $ | 49,115 | | | $ | 27,921 | | | $ | 230,731 | | |
Classified | | Classified | | 10,298 | | | 2,239 | | | 133 | | | 1,367 | | | 664 | | | 550 | | | — | | | — | | | 15,251 | |
Total commercial real estate | | Total commercial real estate | | $ | 281,704 | | | $ | 96,324 | | | $ | 62,208 | | | $ | 50,482 | | | $ | 28,585 | | | $ | 231,281 | | | $ | 27,666 | | | $ | 908 | | | $ | 779,158 | |
| Construction, land development, land | Construction, land development, land | | 155,985 | | | 2,138 | | | 2,446 | | | 160,569 | | Construction, land development, land | |
Pass | | Pass | | $ | 72,149 | | | $ | 12,490 | | | $ | 11,829 | | | $ | 5,820 | | | $ | 8,946 | | | $ | 105,584 | | | $ | 12 | | | $ | 500 | | | $ | 217,330 | |
Classified | | Classified | | 2,031 | | | 34 | | | — | | | — | | | — | | | 252 | | | — | | | — | | | 2,317 | |
Total construction, land development, land | | Total construction, land development, land | | $ | 74,180 | | | $ | 12,524 | | | $ | 11,829 | | | $ | 5,820 | | | $ | 8,946 | | | $ | 105,836 | | | $ | 12 | | | $ | 500 | | | $ | 219,647 | |
| 1-4 family residential | 1-4 family residential | | 177,177 | | | 1,740 | | | 508 | | | 179,425 | | 1-4 family residential | |
Pass | | Pass | | $ | 58,300 | | | $ | 11,280 | | | $ | 11,425 | | | $ | 8,982 | | | $ | 4,400 | | | $ | 20,167 | | | $ | 35,326 | | | $ | 5,320 | | | $ | 155,200 | |
Classified | | Classified | | 1,473 | | | 149 | | | 137 | | | 23 | | | 11 | | | 49 | | | 105 | | | — | | | 1,947 | |
Total 1-4 family residential | | Total 1-4 family residential | | $ | 59,773 | | | $ | 11,429 | | | $ | 11,562 | | | $ | 9,005 | | | $ | 4,411 | | | $ | 20,216 | | | $ | 35,431 | | | $ | 5,320 | | | $ | 157,147 | |
| Farmland | Farmland | | 144,777 | | | 10,094 | | | 104 | | | 154,975 | | Farmland | |
Pass | | Pass | | $ | 37,212 | | | $ | 10,095 | | | $ | 7,388 | | | $ | 15,262 | | | $ | 7,908 | | | $ | 20,572 | | | $ | 1,421 | | | $ | 486 | | | $ | 100,344 | |
Classified | | Classified | | 994 | | | 407 | | | 403 | | | — | | | 22 | | | 590 | | | 925 | | | — | | | 3,341 | |
Total farmland | | Total farmland | | $ | 38,206 | | | $ | 10,502 | | | $ | 7,791 | | | $ | 15,262 | | | $ | 7,930 | | | $ | 21,162 | | | $ | 2,346 | | | $ | 486 | | | $ | 103,685 | |
| Commercial | Commercial | | 1,313,042 | | | 29,091 | | | 550 | | | 1,342,683 | | Commercial | |
Pass | | Pass | | $ | 470,477 | | | $ | 162,203 | | | $ | 127,569 | | | $ | 94,154 | | | $ | 70,405 | | | $ | 181,312 | | | $ | 416,197 | | | $ | 11,396 | | | $ | 1,533,713 | |
Classified | | Classified | | 8,128 | | | 2,390 | | | 983 | | | 190 | | | 4,470 | | | 2,787 | | | 10,296 | | | — | | | 29,244 | |
Total commercial | | Total commercial | | $ | 478,605 | | | $ | 164,593 | | | $ | 128,552 | | | $ | 94,344 | | | $ | 74,875 | | | $ | 184,099 | | | $ | 426,493 | | | $ | 11,396 | | | $ | 1,562,957 | |
| Factored receivables | Factored receivables | | 604,774 | | | 15,212 | | | 0 | | | 619,986 | | Factored receivables | |
Pass | | Pass | | $ | 1,081,316 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,081,316 | |
Classified | | Classified | | 39,454 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 39,454 | |
Total factored receivables | | Total factored receivables | | $ | 1,120,770 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,120,770 | |
| Consumer | Consumer | | 21,594 | | | 331 | | | 0 | | | 21,925 | | Consumer | |
Pass | | Pass | | $ | 8,382 | | | $ | 2,251 | | | $ | 1,336 | | | $ | 1,258 | | | $ | 688 | | | $ | 1,594 | | | $ | 74 | | | $ | — | | | $ | 15,583 | |
Classified | | Classified | | 146 | | | 28 | | | 18 | | | 36 | | | 11 | | | 16 | | | — | | | — | | | 255 | |
Total consumer | | Total consumer | | $ | 8,528 | | | $ | 2,279 | | | $ | 1,354 | | | $ | 1,294 | | | $ | 699 | | | $ | 1,610 | | | $ | 74 | | | $ | — | | | $ | 15,838 | |
| Mortgage warehouse | Mortgage warehouse | | 667,988 | | | 0 | | | 0 | | | 667,988 | | Mortgage warehouse | |
Pass | | Pass | | $ | 1,037,574 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,037,574 | |
Classified | | Classified | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total mortgage warehouse | | Total mortgage warehouse | | $ | 1,037,574 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,037,574 | |
| | $ | 4,115,695 | | | $ | 66,142 | | | $ | 12,675 | | | $ | 4,194,512 | | | | | | | | | | | | | | | | | | | |
Total loans | | Total loans | |
Pass | | Pass | | $ | 3,036,816 | | | $ | 292,404 | | | $ | 221,622 | | | $ | 174,591 | | | $ | 120,268 | | | $ | 559,960 | | | $ | 480,696 | | | $ | 18,610 | | | $ | 4,904,967 | |
Classified | | Classified | | 62,524 | | | 5,247 | | | 1,674 | | | 1,616 | | | 5,178 | | | 4,244 | | | 11,326 | | | — | | | 91,809 | |
Total loans | | Total loans | | $ | 3,099,340 | | | $ | 297,651 | | | $ | 223,296 | | | $ | 176,207 | | | $ | 125,446 | | | $ | 564,204 | | | $ | 492,022 | | | $ | 18,610 | | | $ | 4,996,776 | |
Troubled Debt Restructurings and Loan Modifications
The Company had troubled debt restructurings with an amortized cost of $18,326,000$5,065,000 and $5,221,000$13,324,000 as of September 30, 20202021 and December 31, 2019,2020, respectively. The Company had allocated $2,030,000$1,292,000 and $718,000$2,469,000 of allowance for those loans at September 30, 20202021 and December 31, 2019,2020, respectively, and had not committed to lend additional amounts.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the pre- and post-modification recorded investment of loans modified as troubled debt restructurings during the three and nine months ended September 30, 20202021 and 2019.2020. The Company did not grant principal reductions on any restructured loans.
| (Dollars in thousands) | (Dollars in thousands) | | Extended Amortization Period | | Payment Deferrals | | AB Note Restructure | | Interest Rate Reduction | | Total Modifications | | Number of Loans | (Dollars in thousands) | | Extended Amortization Period | | Payment Deferrals | | Protective Advances | | Total Modifications | | Number of Loans | |
| Nine months ended September 30, 2021 | | Nine months ended September 30, 2021 | | | | | | | | | | | |
Commercial real estate | | Commercial real estate | | $ | — | | | $ | — | | | $ | 741 | | | $ | 741 | | | 1 | | |
| | Three months ended September 30, 2020 | | Three months ended September 30, 2020 | | |
Commercial | | Commercial | | 123 | | | 3,503 | | | — | | | 3,626 | | | 14 | | |
| | Nine months ended September 30, 2020 | Nine months ended September 30, 2020 | | | | | | | | | | | | | Nine months ended September 30, 2020 | | |
Commercial real estate | Commercial real estate | | $ | 0 | | | $ | 246 | | | $ | 0 | | | $ | 0 | | | $ | 246 | | | 2 | | Commercial real estate | | $ | — | | | $ | 246 | | | $ | — | | | $ | 246 | | | 2 | | |
Construction, land development, land | Construction, land development, land | | 8 | | | 0 | | | 0 | | | 0 | | | 8 | | | 1 | | Construction, land development, land | | $ | 8 | | | $ | — | | | $ | — | | | $ | 8 | | | 1 | | |
Farmland | Farmland | | 3,486 | | | 0 | | | 0 | | | 0 | | | 3,486 | | | 1 | | Farmland | | 3,486 | | | — | | | — | | | 3,486 | | | 1 | | |
Commercial | Commercial | | 4,714 | | | 9,296 | | | 0 | | | 0 | | | 14,010 | | | 19 | | Commercial | | 4,714 | | | 9,296 | | | — | | | 14,010 | | | 19 | | |
| | $ | 8,208 | | | $ | 9,542 | | | $ | 0 | | | $ | 0 | | | $ | 17,750 | | | 23 | | | $ | 8,208 | | | $ | 9,542 | | | $ | — | | | $ | 17,750 | | | 23 | | |
| Three months ended September 30, 2020 | | |
Commercial | | 123 | | | 3,503 | | | 0 | | | 0 | | | 3,626 | | | 14 | | |
| $ | 123 | | | $ | 3,503 | | | $ | 0 | | | $ | 0 | | | $ | 3,626 | | | 14 | | |
| Nine months ended September 30, 2019 | | |
Commercial real estate | | $ | 0 | | | $ | 0 | | | $ | 4,597 | | | $ | 0 | | | $ | 4,597 | | | 1 | | |
Commercial | | 1,649 | | | 84 | | | 0 | | | 593 | | | 2,326 | | | 6 | | |
| $ | 1,649 | | | $ | 84 | | | $ | 4,597 | | | $ | 593 | | | $ | 6,923 | | | 7 | | |
Three months ended September 30, 2019 | | | | | | | | | | | | | |
Commercial real estate | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | 0 | | |
Commercial | | 554 | | | 0 | | | 0 | | | 0 | | | 554 | | | 1 | | |
| $ | 554 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 554 | | | 1 | | |
There were no loans modified as troubled debt restructurings during the three months ended September 30, 2021.
During the nine months ended September 30, 2021, the Company had 3 loans modified as troubled debt restructurings with a recorded investment of $1,681,000 for which there were payment defaults within twelve months following the modification. During the nine months ended September 30, 2020, the Company had 2 loans modified as troubled debt restructurings with a recorded investment of $18,000 for which there were payment defaults within twelve months following the modification.During the nine months ended September 30, 2019, the Company had 2 loans modified as troubled debt restructurings with a recorded investment of $240,000 for which there were payment defaults within twelve months following the modification. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three and nine months ended September 30, 2020, the Companyloans modified $12,625,000 and $617,976,000, respectively, in loans for borrowers impacted by the COVID-19 pandemic.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Total modifications | | — | | | 12,625 | | 10,459 | | 617,976 |
These modifications primarily consisted of short-term payment deferrals generally no more than six months in duration to assist customers. As these modifications related to the COVID-19 pandemic and qualify under the provisions of either Section 4013 of the CARES act or Interagency Guidance, they are not considered troubled debt restructurings. The following table summarized the amortized cost of loans with payments currently in deferral and the accrued interest related to the loans with payments currently in deferral at September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Total Loans | | Balance of Loans Currently in Deferral | | Percentage of Portfolio | | Accrued Interest Receivable |
| | | | | | | | |
September 30, 2020 | | | | | | | | |
Commercial real estate | | $ | 762,531 | | | $ | 77,419 | | | 10.2 | % | | $ | 464 | |
Construction, land development, land | | 244,512 | | | 116 | | | 0 | % | | 1 | |
1-4 family residential | | 164,785 | | | 8,560 | | | 5.2 | % | | 127 | |
Farmland | | 110,966 | | | 0 | | | 0 | % | | 0 | |
Commercial | | 1,536,903 | | | 16,787 | | | 1.1 | % | | 99 | |
Factored receivables | | 1,016,337 | | | 0 | | | 0 | % | | 0 | |
Consumer | | 17,106 | | | 105 | | | 0.6 | % | | 4 | |
Mortgage warehouse | | 999,771 | | | 0 | | | 0 | % | | 0 | |
Total | | $ | 4,852,911 | | | $ | 102,987 | | | 2.1 | % | | $ | 695 | |
Residential Real Estate Loans In Process of Foreclosure
At September 30, 20202021 and December 31, 2019, the Company had $208,000 and $87,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.2020:
Purchased Credit Impaired Loans (Prior to the Adoption of ASU 2016-13)
The following table summarizes information pertaining to loans that were identified as purchased credit impaired prior to the adoption of ASU 2016-13:
| | | | | |
| December 31, 2019 |
Contractually required principal and interest: | |
Real estate loans | $ | 14,015 | |
Commercial loans | 677 | |
Outstanding contractually required principal and interest | $ | 14,692 | |
Gross carrying amount included in loans receivable | $ | 12,675 | |
The changes in accretable yield related to loans that were identified as purchased credit impaired prior to the adoption of ASU 2016-13 were as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Accretable yield, beginning balance | $ | 4,793 | | | $ | 5,711 | |
Additions | 0 | | | 0 | |
Accretion | (460) | | | (1,228) | |
Reclassification from nonaccretable to accretable yield | 50 | | | 64 | |
Disposals | (54) | | | (218) | |
Accretable yield, ending balance | $ | 4,329 | | | $ | 4,329 | |
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | | Total Loans | | Balance of Loans Currently in Deferral | | Percentage of Portfolio | | Accrued Interest Receivable |
Goodwill | $ | 163,263 | | | $ | 158,743 | | |
(Dollars in thousands) | | (Dollars in thousands) | |
| | Total Loans | | Balance of Loans Currently in Deferral | | Percentage of Portfolio | | Accrued Interest Receivable |
Commercial real estate | | Commercial real estate | |
Construction, land development, land | | Construction, land development, land | |
1-4 family residential | | 1-4 family residential | | 127,073 | | | 491 | | | 0.4 | % | | 11 | |
Farmland | | Farmland | | 82,990 | | | — | | | — | % | | — | |
Commercial | | Commercial | | 1,398,497 | | | — | | | — | % | | — | |
Factored receivables | | Factored receivables | | 1,607,028 | | | — | | | — | % | | — | |
Consumer | | Consumer | | 12,677 | | | — | | | — | % | | — | |
Mortgage warehouse | | Mortgage warehouse | | 752,545 | | | — | | | — | % | | — | |
Total | | Total | | $ | 4,782,730 | | | $ | 32,220 | | | 0.7 | % | | $ | 121 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | | | | | December 31, 2019 | | | | |
(Dollars in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Core deposit intangibles | $ | 43,578 | | | $ | (26,217) | | | $ | 17,361 | | | $ | 43,578 | | | $ | (22,258) | | | $ | 21,320 | |
Other intangible assets | 19,200 | | | (7,783) | | | 11,417 | | | 15,700 | | | (5,477) | | | 10,223 | |
| $ | 62,778 | | | $ | (34,000) | | | $ | 28,778 | | | $ | 59,278 | | | $ | (27,735) | | | $ | 31,543 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Total Loans | | Balance of Loans Currently in Deferral | | Percentage of Portfolio | | Accrued Interest Receivable |
| | | |
December 31, 2020 | | | | |
Commercial real estate | | $ | 779,158 | | | $ | 69,980 | | | 9.0 | % | | $ | 357 | |
Construction, land development, land | | 219,647 | | | 18,821 | | | 8.6 | % | | 183 | |
1-4 family residential | | 157,147 | | | 1,129 | | | 0.7 | % | | 15 | |
Farmland | | 103,685 | | | — | | | — | % | | — | |
Commercial | | 1,562,957 | | | 14,561 | | | 0.9 | % | | 166 | |
Factored receivables | | 1,120,770 | | | — | | | — | % | | — | |
Consumer | | 15,838 | | | 106 | | | 0.7 | % | | 5 | |
Mortgage warehouse | | 1,037,574 | | | — | | | — | % | | — | |
Total | | $ | 4,996,776 | | | $ | 104,597 | | | 2.1 | % | | $ | 726 | |
Residential Real Estate Loans In Process of Foreclosure
At September 30, 2021 and December 31, 2020, the Company had $375,000 and $251,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Goodwill | $ | 233,727 | | | $ | 163,209 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Core deposit intangibles | $ | 43,578 | | | $ | (30,784) | | | $ | 12,794 | | | $ | 43,578 | | | $ | (27,436) | | | $ | 16,142 | |
Software intangible assets | 16,932 | | | (1,411) | | | 15,521 | | | — | | | — | | | — | |
Other intangible assets | 29,560 | | | (11,547) | | | 18,013 | | | 19,200 | | | (8,629) | | | 10,571 | |
| $ | 90,070 | | | $ | (43,742) | | | $ | 46,328 | | | $ | 62,778 | | | $ | (36,065) | | | $ | 26,713 | |
The changes in goodwill and intangible assets during the three and nine months ended September 30, 20202021 and 20192020 are as follows:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Beginning balance | Beginning balance | $ | 186,162 | | | $ | 194,668 | | | $ | 190,286 | | | $ | 199,417 | | Beginning balance | $ | 286,567 | | | $ | 186,162 | | | $ | 189,922 | | | $ | 190,286 | |
Acquired goodwill | Acquired goodwill | 4,520 | | | 0 | | | 4,520 | | | 0 | | Acquired goodwill | — | | | 4,520 | | | 73,697 | | | 4,520 | |
Acquired intangibles | 3,500 | | | 0 | | | 3,500 | | | 0 | | |
Acquired intangible assets | | Acquired intangible assets | — | | | 3,500 | | | 27,292 | | | 3,500 | |
Acquired goodwill - measurement period adjustment | | Acquired goodwill - measurement period adjustment | (3,238) | | | — | | | (3,179) | | | — | |
Amortization of intangibles | Amortization of intangibles | (2,141) | | | (2,228) | | | (6,265) | | | (6,977) | | Amortization of intangibles | (3,274) | | | (2,141) | | | (7,677) | | | (6,265) | |
Ending balance | Ending balance | $ | 192,041 | | | $ | 192,440 | | | $ | 192,041 | | | $ | 192,440 | | Ending balance | $ | 280,055 | | | $ | 192,041 | | | $ | 280,055 | | | $ | 192,041 | |
Management performed a goodwill impairment test on the Company's reporting units as of September 30, 2020. The goodwill impairment test did not identify any goodwill impairment.TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s interest bearing deposits.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Beginning in June 2020, such derivatives were used to hedge the variable cash flows associated with interest bearing deposits.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate interest bearing deposits. During 2020,2021, the Company estimates that an additional $132,000$58,000 will be reclassified as an increase in interest expense.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2020. There were no such derivatives outstanding at December 31, 2019.Sheet:
| | | | | | | | | | | | | | | | | | | | |
| | Derivative Liabilities | | | | |
| | As of September 30, 2020 | | | | |
(Dollars in thousands) | | Notional Amount | | Balance Sheet Location | | Fair Value Total |
Derivatives designated as hedging instruments: | | | | | | |
Interest rate swaps | | $ | 200,000 | | | Other Liabilities | | $ | 16 | |
The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income, net of tax, as of September 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets |
| | As of September 30, 2021 | | As of December 31, 2020 |
(Dollars in thousands) | | Notional Amount | | Balance Sheet Location | | Fair Value Total | | Notional Amount | | Balance Sheet Location | | Fair Value Total |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Interest rate swaps | | $ | 200,000 | | | Other Assets | | $ | 3,948 | | | $ | 200,000 | | | Other Assets | | $ | 816 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Amount of Gain or (Loss) Recognized in OCI on Derivative | | Amount of Gain or (Loss) Recognized in OCI Included Component | | Location of Gain or (Loss) Recognized from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component |
Three Months Ended September 30, 2020 | | | | | | | | | | |
Derivatives in cash flow hedging relationships: | | | | | | | | | | |
Interest rate swaps | | $ | 257 | | | $ | 257 | | | Interest Expense | | $ | (16) | | | $ | (16) | |
The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income, net of tax:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain or (Loss) Recognized in OCI on Derivative | | Amount of Gain or (Loss) Recognized in OCI Included Component | | Location of Gain or (Loss) Recognized from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component |
(Dollars in thousands) | (Dollars in thousands) | | Amount of Gain or (Loss) Recognized in OCI on Derivative | | Amount of Gain or (Loss) Recognized in OCI Included Component | | Location of Gain or (Loss) Recognized from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component | (Dollars in thousands) | |
Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | | | | | | | | | |
Derivatives in cash flow hedging relationships: | | Derivatives in cash flow hedging relationships: | |
Interest rate swaps | | Interest rate swaps | | $ | 7 | | | $ | 7 | | | Interest Expense | | $ | 18 | | | $ | 18 | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | |
Derivatives in cash flow hedging relationships: | | Derivatives in cash flow hedging relationships: | |
Interest rate swaps | | Interest rate swaps | | $ | 257 | | | $ | 257 | | | Interest Expense | | $ | (16) | | | $ | (16) | |
| Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | |
Derivatives in cash flow hedging relationships: | | Derivatives in cash flow hedging relationships: | |
Interest rate swaps | | Interest rate swaps | | $ | 2,386 | | | $ | 2,386 | | | Interest Expense | | $ | 70 | | | $ | 70 | |
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | | Amount of Gain or (Loss) Recognized in OCI on Derivative | | Amount of Gain or (Loss) Recognized in OCI Included Component | | Location of Gain or (Loss) Recognized from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income | | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component | | | | | | Nine Months Ended September 30, 2020 | |
Derivatives in cash flow hedging relationships: | Derivatives in cash flow hedging relationships: | | Derivatives in cash flow hedging relationships: | |
Interest rate swaps | Interest rate swaps | | $ | 11 | | | $ | 11 | | | Interest Expense | | $ | (16) | | | $ | (16) | | Interest rate swaps | | $ | 11 | | | $ | 11 | | | Interest Expense | | $ | (16) | | | $ | (16) | |
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company has agreements with certain of its derivative counterparties that contain a provision where if the company fails to maintain its status as a well capitalized institution, then the Company could be required to post additional collateral.
As of September 30, 2020,2021, the fair value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $0. As of September 30, 2020,2021, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2020,2021, it could have been required to settle its obligations under the agreements at their termination value of $0.$3,940,000.
NOTE 7 – VARIABLE INTEREST ENTITIES
Collateralized Loan Obligation Funds – Closed
The Company holds investments in the subordinated notes of the following closed Collateralized Loan Obligation (“CLO”) funds:
| | | | | | | | | | | |
(Dollars in thousands) | Offering Date | | Offering Amount |
Trinitas CLO IV, LTD (Trinitas IV) | June 2, 2016 | | $ | 406,650 | |
Trinitas CLO V, LTD (Trinitas V) | September 22, 2016 | | $ | 409,000 | |
Trinitas CLO VI, LTD (Trinitas VI) | June 20, 2017 | | $ | 717,100 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The net carrying amounts of the Company’s investments in the subordinated notes of the CLO funds, which represent the Company’s maximum exposure to loss as a result of its involvement with the CLO funds, totaled $6,096,000$5,488,000 and $8,417,000$5,919,000 at September 30, 20202021 and December 31, 2019,2020, respectively, and are classified as held to maturity securities within the Company’s consolidated balance sheets.
The Company performed a consolidation analysis to confirm whether the Company was required to consolidate the assets, liabilities, equity or operations of the closed CLO funds in its financial statements. The Company concluded that the closed CLO funds were variable interest entities and that the Company holds variable interests in the entities in the form of its investments in the subordinated notes of entities. However, the Company also concluded that the Company does not have the power to direct the activities that most significantly impact the entities’ economic performance. As a result, the Company was not the primary beneficiary and therefore was not required to consolidate the assets, liabilities, equity, or operations of the closed CLO funds in the Company’s financial statements.
NOTE 8 –- BORROWINGS AND BORROWING CAPACITY
Customer Repurchase Agreements
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Customer repurchase agreements are overnight customer sweep arrangements. Information concerning customer repurchase agreements is summarized as follows for the nine months ended September 30, 2020 and the year ended December 31, 2019:
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2020 | | December 31, 2019 |
Amount outstanding at end of period | $ | 14,192 | | | $ | 2,033 | |
Weighted average interest rate at end of period | 0.03 | % | | 0.03 | % |
Average daily balance during the period | $ | 6,520 | | | $ | 7,823 | |
Weighted average interest rate during the period | 0.03 | % | | 0.02 | % |
Maximum month-end balance during the period | $ | 14,192 | | | $ | 14,463 | |
Customer repurchase agreements were secured by pledged securities with carrying amounts of $14,544,000 and $2,997,000 at September 30, 2020 and December 31, 2019, respectively.
FHLB Advances
FHLB advances are collateralized by assets, including a blanket pledge of certain loans. FHLB advances and weighted average interest rates at end of period by contractual maturity are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed Rate | | | | Variable Rate | | |
(Dollars in thousands) | | Balance Outstanding | | Weighted Average Interest Rate | | Balance Outstanding | | Weighted Average Interest Rate |
2020 | | $ | 405,000 | | | 0.13 | % | | $ | 0 | | | 0 | |
2027 | | 0 | | | 0 | | | 30,000 | | | 0.33 | % |
| | $ | 405,000 | | | 0.13 | % | | 30,000 | | | 0.33 | % |
Information concerning FHLB advances is summarized as follows for the nine months ended September 30, 2020 and the year ended December 31, 2019:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Amount outstanding at end of period | | $ | 435,000 | | | $ | 430,000 | |
Weighted average interest rate at end of period | | 0.15 | % | | 1.58 | % |
Average amount outstanding during the period | | 430,250 | | | 369,548 | |
Weighted average interest rate during the period | | 0.61 | % | | 2.32 | % |
Highest month end balance during the period | | 850,000 | | | 530,000 | |
The Company’s unused borrowing capacity with the FHLB is as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Borrowing capacity | | $ | 1,323,927 | | | $ | 1,300,985 | |
Borrowings outstanding | | 435,000 | | | 430,000 | |
Unused borrowing capacity | | $ | 888,927 | | | $ | 870,985 | |
Paycheck Protection Program Liquidity Facility (“PPPLF”)
The PPPLF is a lending facility offered by the Federal Reserve Banks to facilitate lending to small businesses under the Paycheck Protection Program. Borrowings under the PPPLF are secured by Paycheck Protection Program Loans (“PPP loans”) guaranteed by the Small Business Administration (“SBA”) and mature at the same time as the PPP Loan pledged to secure the extension of credit. The maturity dates of the borrowings will be accelerated if the underlying PPP Loan goes into default and Company sells the PPP Loan to the SBA to realize on the SBA guarantee or if the Company receives any loan forgiveness reimbursement from the SBA for the underlying PPP Loan.
Information concerning borrowings under the PPPLF is summarized as follows for the nine months ended September 30, 2020:
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | |
(Dollars in thousands) | | September 30, 2020 |
Amount outstanding at end of period | | $ | 223,713 | |
Weighted average interest rate at end of period | | 0.35 | % |
Average amount outstanding during the period | | 119,236 | |
Weighted average interest rate during the period | | 0.35 | % |
Highest month end balance during the period | | 223,809 | |
At September 30, 2020, scheduled maturities of PPPLF borrowings are as follows:
| | | | | | | | |
(Dollars in thousands) | | September 30, 2020 |
Within one year | | $ | 0 | |
After one but within two years | | 223,713 | |
Total | | $ | 223,713 | |
At September 30, 2020, the PPPLF borrowings are secured by PPP Loans totaling $223,713,000 and bear interest at a fixed rate of 0.35% annually. There were 0 borrowings under the PPPLF during the year ended December 31, 2019.
Federal Funds Purchased
The Company had 0 federal funds purchased at September 30, 2020 or December 31, 2019. However, as of September 30, 2020, the Company had unsecured federal funds lines of credit with seven unaffiliated banks totaling $227,500,000.
Federal Reserve Bank Discount Window
During the nine months ended September 30, 2020, the Company entered into agreements with the Federal Reserve Bank of Dallas to borrow from its discount window. The Company had 0 Federal Reserve Bank discount window borrowings outstanding at September 30, 2020. At September 30, 2020, the Company had $467,256,000 of unused borrowing capacity from the Federal Reserve Bank discount window, to which the Company pledged loans with an outstanding balance of $636,992,000. The Company did not participate in the Federal Reserve Bank discount window program during the year ended December 31, 2019.
Subordinated Notes
On September 30, 2016, the Company issued $50,000,000 of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2016 Notes”). The 2016 Notes initially bear interest at 6.50% per annum, 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%. The Company may, at its option, beginning on September 30, 2021 and on any scheduled interest payment date thereafter, redeemredeemed the 2016 Notes in whole oron September 30, 2021 at which time $755,000 in part, at a redemption price equal to the outstanding principal amount of the 2016 Notes to be redeemed plus accrued and unpaidremaining deferred costs were recognized through interest to, but excluding, the date of redemption.expense.
On November 27, 2019, the Company issued $39,500,000 of Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2019 Notes”). The 2019 Notes initially bear interest at 4.875% per annum, payable semi-annually in arrears, to, but excluding, November 27, 2024, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to a benchmark rate, initially three-month LIBOR,, as determined for the applicable quarterly period, plus 3.330%. The Company may, at its option, beginning on November 27, 2024 and on any scheduled interest payment date thereafter, redeem the 2019 Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the 2019 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.
The 2016 Notes and the 2019 Notes are included on ourthe consolidated balance sheetsheets as liabilities;liabilities at their carrying values of $38,479,000 and $38,356,000 at September 30, 2021 and December 31, 2020, respectively; however, for regulatory purposes, the carrying value of these obligations iswere eligible for inclusion in Tier 2 regulatory capital.
Issuance costs related to the 2016 Notes and the 2019 Notes totaled $1,324,000 and $1,218,000, respectively,including an underwriting discount of $593,000, and have been netted against the subordinated notes liability on the consolidated balance sheets.sheet. The underwriting discount and other debt issuance costs are being amortized using the effective interest method overthrough the life of the 2016 Notesearliest redemption date and the 2019 Notesrecognized as a component of interest expense.
On August 26, 2021, the Company issued $70,000,000 of Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2021 Notes”). The 2021 Notes initially bear interest at 3.500% per annum, payable semi-annually in arrears, to, but excluding, September 1, 2026, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to a benchmark rate, initially the three-month term secured overnight financing rate ("SOFR"), as determined for the applicable quarterly period, plus 2.860%. The Company may, at its option, beginning on September 1, 2026 and on any scheduled interest payment date thereafter, redeem the 2021 Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.
The 2021 Notes are included on the consolidated balance sheets as liabilities at their carrying values of $68,276,000 at September 30, 2021; however, for regulatory purposes, the carrying value of these obligations were eligible for inclusion in Tier 2 regulatory capital. Issuance costs related to the 2016 Notes and the 20192021 Notes totaled $87,455,000$1,776,000, including a placement fee of $1,225,000, and $87,327,000 at September 30, 2020have been netted against the subordinated notes liability on the balance sheet. The underwriting discount and December 31, 2019, respectively.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interest expense.The 2016 Notes and the 2019 Notessubordinated notes are subordinated in right of payment to the Company’s existing and future senior indebtedness and are structurally subordinated to the Company’s subsidiaries’ existing and future indebtedness and other obligations.
Junior Subordinated Debentures
The following provides a summaryThere have been no other material changes to the Company's borrowings disclosed in Note 12 of the Company’s junior subordinated debentures as2020 Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Face Value | | Carrying Value | | Maturity Date | | Interest Rate |
National Bancshares Capital Trust II | | $ | 15,464 | | | $ | 13,187 | | | September 2033 | | LIBOR + 3.00% |
National Bancshares Capital Trust III | | 17,526 | | | 12,924 | | | July 2036 | | LIBOR + 1.64% |
ColoEast Capital Trust I | | 5,155 | | | 3,594 | | | September 2035 | | LIBOR + 1.60% |
ColoEast Capital Trust II | | 6,700 | | | 4,684 | | | March 2037 | | LIBOR + 1.79% |
Valley Bancorp Statutory Trust I | | 3,093 | | | 2,876 | | | September 2032 | | LIBOR + 3.40% |
Valley Bancorp Statutory Trust II | | 3,093 | | | 2,679 | | | July 2034 | | LIBOR + 2.75% |
| | $ | 51,031 | | | $ | 39,944 | | | | | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIESThese debentures are unsecured obligations due to trusts that are unconsolidated subsidiaries. The debentures were issued in conjunction with the trusts’ issuances of obligated capital securities. The trusts used the proceeds from the issuances of their capital securities to buy floating rate junior subordinated deferrable interest debentures that bear the same interest rate and terms as the capital securities. These debentures are the trusts’ only assets and the interest payments from the debentures finance the distributions paid on the capital securities. These debentures rank junior and are subordinate in the right of payment to all other debt of the Company.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the Company adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition dates. The discount on the debentures will continue to be amortized through maturity and recognized as a component of interest expense.(Unaudited)
The debentures may be called by the Company at par plus any accrued but unpaid interest. 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%. The distribution rate payable on the capital securities is cumulative and payable quarterly in arrears. The Company has the right to defer payments on interest on the debentures at any time by extending the interest payment period for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the debentures.
The debentures are included on the consolidated balance sheet as liabilities; however, for regulatory purposes, the carrying value of these obligations are eligible for inclusion in Tier I regulatory capital, subject to certain limitations. All of the carrying value of $39,944,000 and $39,566,000 was allowed in the calculation of Tier I regulatory capital as of September 30, 2020 and December 31, 2019, respectively.
NOTE 9 - Legal ContingenciesLEGAL 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 10 - OFF-BALANCE SHEET LOAN COMMITMENTS
From time to time, the Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.
The contractual amounts of financial instruments with off-balance sheet risk were as follows:
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | Fixed Rate | | Variable Rate | | Total | | Fixed Rate | | Variable Rate | | Total | (Dollars in thousands) | Fixed Rate | | Variable Rate | | Total | | Fixed Rate | | Variable Rate | | Total |
Unused lines of credit | Unused lines of credit | $ | 35,764 | | | $ | 594,305 | | | $ | 630,069 | | | $ | 49,057 | | | $ | 444,028 | | | $ | 493,085 | | Unused lines of credit | $ | 25,574 | | | $ | 381,584 | | | $ | 407,158 | | | $ | 43,406 | | | $ | 547,430 | | | $ | 590,836 | |
Standby letters of credit | Standby letters of credit | $ | 5,382 | | | $ | 3,259 | | | $ | 8,641 | | | $ | 3,017 | | | $ | 3,781 | | | $ | 6,798 | | Standby letters of credit | $ | 7,819 | | | $ | 5,782 | | | $ | 13,601 | | | $ | 5,464 | | | $ | 8,429 | | | $ | 13,893 | |
Commitments to purchase loans | Commitments to purchase loans | $ | 0 | | | $ | 51,747 | | | $ | 51,747 | | | $ | 0 | | | $ | 22,004 | | | $ | 22,004 | | Commitments to purchase loans | $ | — | | | $ | 88,620 | | | $ | 88,620 | | | $ | — | | | $ | 66,373 | | | $ | 66,373 | |
Mortgage warehouse commitments | Mortgage warehouse commitments | $ | 0 | | | $ | 318,972 | | | $ | 318,972 | | | $ | 0 | | | $ | 340,502 | | | $ | 340,502 | | Mortgage warehouse commitments | $ | — | | | $ | 844,903 | | | $ | 844,903 | | | $ | — | | | $ | 417,722 | | | $ | 417,722 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.
Commitments to purchase loans represent loans purchased by the Company that have not yet settled.
Mortgage warehouse commitments are unconditionally cancellable and represent the unused capacity on mortgage warehouse facilities the Company has approved. The Company reserves the right to refuse to buy any mortgage loans offered for sale by a customer, for any reason, at the Company’s sole and absolute discretion.
The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to credit loss expense on the Company’s consolidated statements of income. At September 30, 20202021 and December 31, 2019,2020, the allowance for credit losses on off-balance sheet credit exposures totaled $6,395,000$3,846,000 and $638,000,$5,005,000, respectively, and was included in other liabilities on the Company’s consolidated balance sheets. For the three and nine months ended September 30, 2020,The following table presents credit loss expense for off balance sheet credit exposures was $(8,000) and $3,840,000, respectively. For the three and nine months ended September 30, 2019, credit loss expense for off balance sheet credit exposures was a creditexposures:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Credit loss expense (benefit) | $ | (238) | | | $ | (8) | | | $ | (1,159) | | | $ | 3,840 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 - Fair Value Disclosures
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The methods of determining the fair value of assets and liabilities presented in this note are consistent with ourthe methodologies disclosed in Note 1517 of the Company’s 20192020 Form 10-K, except for10-K.
Assets and liabilities measured at fair value on a recurring basis are summarized in the valuation of derivative financial instruments, the indemnification asset recognized in connection with the factored receivables acquired from TFS, and Paycheck Protection Program Liquidity Fund borrowings, which the Company entered into in during the three months ended June 30, 2020.table below.
Derivative Financial Instruments
Currently, the Company uses interest rate swaps as part of its cash flow strategy to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | Total Fair Value |
September 30, 2021 | | Level 1 | | Level 2 | | Level 3 | |
Assets measured at fair value on a recurring basis | | | | | | | | |
Securities available for sale | | | | | | | | |
U.S. Government agency obligations | | $ | — | | | $ | 5,001 | | | $ | — | | | $ | 5,001 | |
Mortgage-backed securities, residential | | — | | | 18,167 | | | — | | | 18,167 | |
Asset-backed securities | | — | | | 6,864 | | | — | | | 6,864 | |
State and municipal | | — | | | 29,175 | | | — | | | 29,175 | |
CLO securities | | — | | | 100,719 | | | — | | | 100,719 | |
Corporate bonds | | — | | | 2,061 | | | — | | | 2,061 | |
SBA pooled securities | | — | | | 2,829 | | | — | | | 2,829 | |
| | $ | — | | | $ | 164,816 | | | $ | — | | | $ | 164,816 | |
| | | | | | | | |
Equity securities | | | | | | | | |
Mutual fund | | $ | 5,623 | | | $ | — | | | $ | — | | | $ | 5,623 | |
| | | | | | | | |
Loans held for sale | | $ | — | | | $ | 26,437 | | | $ | — | | | $ | 26,437 | |
| | | | | | | | |
Derivative financial instruments (cash flow hedges) | | | | | | | | |
Interest rate swap | | $ | — | | | $ | 3,948 | | | $ | — | | | $ | 3,948 | |
| | | | | | | | |
Indemnification asset | | $ | — | | | $ | — | | | $ | 4,786 | | | $ | 4,786 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The derivative financial instrument fair value is considered a Level 2 classification. | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | Total Fair Value |
December 31, 2020 | | Level 1 | | Level 2 | | Level 3 | |
Assets measured at fair value on a recurring basis | | | | | | | | |
Securities available for sale | | | | | | | | |
U.S. Government agency obligations | | $ | — | | | $ | 15,088 | | | $ | — | | | $ | 15,088 | |
Mortgage-backed securities, residential | | — | | | 27,684 | | | — | | | 27,684 | |
Asset-backed securities | | — | | | 7,039 | | | — | | | 7,039 | |
State and municipal | | — | | | 37,395 | | | — | | | 37,395 | |
CLO Securities | | — | | | 122,204 | | | — | | | 122,204 | |
Corporate bonds | | — | | | 11,573 | | | — | | | 11,573 | |
SBA pooled securities | | — | | | 3,327 | | | — | | | 3,327 | |
| | $ | — | | | $ | 224,310 | | | $ | — | | | $ | 224,310 | |
| | | | | | | | |
Equity securities | | | | | | | | |
Mutual fund | | $ | 5,826 | | | $ | — | | | $ | — | | | $ | 5,826 | |
| | | | | | | | |
Loans held for sale | | $ | — | | | $ | 24,546 | | | $ | — | | | $ | 24,546 | |
| | | | | | | | |
Derivative financial instruments (cash flow hedges) | | | | | | | | |
Interest rate swap | | $ | — | | | $ | 816 | | | $ | — | | | $ | 816 | |
| | | | | | | | |
Indemnification asset | | $ | — | | | $ | — | | | $ | 36,225 | | | $ | 36,225 | |
Indemnification AssetThere were no transfers between levels during 2021 or 2020.
The fair value of the indemnification asset is calculated as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio. The cash flows are discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. This discount rate was 4% at September 30, 2020.Covenant. The indemnification asset which is included in other assets in the Consolidated Balance Sheets, is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income or expense, as appropriate, within the Consolidated Statements of Income. The Company's estimate of probable losses on the covered portfolio did not change between the acquisition date and September 30, 2020 and therefore, no activity related to the indemnification asset was recorded during the three and nine months ended September 30, 2020. The indemnification asset fair value is considered a Level 3 classification.
Paycheck Protection Program Liquidity Fund
The Company’s PPPLF borrowings correspond to PPP loans At September 30, 2021 and areDecember 31, 2020, the estimated cash payments expected to be short term in duration, thereforereceived from Covenant for probable losses on the covered Over-Formula Advance Portfolio were approximately $5,038,000 and $39,200,000, respectively, and a discount rate of 5.0% and 8.8%, respectively, was applied to calculate the present value of the indemnification asset. A reconciliation of the opening balance to the closing balance of the fair value materially approximates carrying value andof the indemnification asset is considered a Level 2 classification.as follows:
Assets and liabilities measured at fair value on a recurring basis are summarized in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | | | | | Total Fair Value |
September 30, 2020 | | Level 1 | | Level 2 | | Level 3 | | |
Assets measured at fair value on a recurring basis | | | | | | | | |
Securities available for sale | | | | | | | | |
U.S. Government agency obligations | | $ | 0 | | | $ | 18,448 | | | $ | 0 | | | $ | 18,448 | |
Mortgage-backed securities, residential | | 0 | | | 29,790 | | | 0 | | | 29,790 | |
Asset-backed securities | | 0 | | | 7,091 | | | 0 | | | 7,091 | |
State and municipal | | 0 | | | 43,362 | | | 0 | | | 43,362 | |
CLO securities | | 0 | | | 117,491 | | | 0 | | | 117,491 | |
Corporate bonds | | 0 | | | 22,927 | | | 0 | | | 22,927 | |
SBA pooled securities | | 0 | | | 3,693 | | | 0 | | | 3,693 | |
| | $ | 0 | | | $ | 242,802 | | | $ | 0 | | | $ | 242,802 | |
| | | | | | | | |
Equity securities | | | | | | | | |
Mutual fund | | $ | 6,040 | | | $ | 0 | | | $ | 0 | | | $ | 6,040 | |
| | | | | | | | |
Loans held for sale | | $ | 0 | | | $ | 36,716 | | | $ | 0 | | | $ | 36,716 | |
| | | | | | | | |
Derivative financial instruments (cash flow hedges) | | | | | | | | |
Interest rate swap | | $ | 0 | | | $ | 16 | | | $ | 0 | | | $ | 16 | |
| | | | | | | | |
Liabilities measured at fair value on a recurring basis | | | | | | | | |
ICC Contingent consideration | | $ | 0 | | | $ | 0 | | | $ | 21,991 | | | $ | 21,991 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Beginning balance | | $ | 5,246 | | | $ | — | | | $ | 36,225 | | | $ | — | |
Indemnification asset recognized in business combination | | — | | | 30,959 | | | — | | | 30,959 | |
Change in fair value of indemnification asset recognized in earnings | | (460) | | | — | | | 4,194 | | | — | |
Indemnification recognized | | — | | | — | | | (35,633) | | | — | |
Ending balance | | $ | 4,786 | | | $ | 30,959 | | | $ | 4,786 | | | $ | 30,959 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | | | | | Total Fair Value |
December 31, 2019 | | Level 1 | | Level 2 | | Level 3 | | |
Assets measured at fair value on a recurring basis | | | | | | | | |
Securities available for sale | | | | | | | | |
U.S. Government agency obligations | | $ | 0 | | | $ | 39,760 | | | $ | 0 | | | $ | 39,760 | |
Mortgage-backed securities, residential | | 0 | | | 38,016 | | | 0 | | | 38,016 | |
Asset-backed securities | | 0 | | | 7,959 | | | 0 | | | 7,959 | |
State and municipal | | 0 | | | 32,065 | | | 0 | | | 32,065 | |
CLO Securities | | 0 | | | 75,273 | | | 0 | | | 75,273 | |
Corporate bonds | | 0 | | | 51,583 | | | 0 | | | 51,583 | |
SBA pooled securities | | 0 | | | 4,164 | | | 0 | | | 4,164 | |
| | $ | 0 | | | $ | 248,820 | | | $ | 0 | | | $ | 248,820 | |
| | | | | | | | |
Equity securities | | | | | | | | |
Mutual fund | | $ | 5,437 | | | $ | 0 | | | $ | 0 | | | $ | 5,437 | |
| | | | | | | | |
Loans held for sale | | $ | 0 | | | $ | 2,735 | | | $ | 0 | | | $ | 2,735 | |
| | | | | | | | |
Liabilities measured at fair value on a recurring basis | | | | | | | | |
ICC Contingent consideration | | $ | 0 | | | $ | 0 | | | $ | 21,622 | | | $ | 21,622 | |
There were no transfers between levels during 2020 or 2019.
On June 2, 2018, the Company acquired substantially all of the operating assets of, and assumed certain liabilities associated with, Interstate Capital Corporation’s (“ICC”) accounts receivable factoring business and other related financial services. Consideration for the acquisition included contingent consideration, which is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition. The index is calculated by a third party data analytics firm and is correlated to monthly movements in average invoice prices historically experienced by ICC. At the end of a 30 month earnout period after closing, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price, with a payout ranging from $0 to $22,000,000. The fair value of the contingent consideration is calculated each reporting period, and changes in the fair value of the contingent consideration are recorded in noninterest income in the consolidated statements of income. At September 30, 2020 and December 31, 2019, the ICC contingent consideration liability was the only recurring fair value measurement with Level 3 unobservable inputs. At September 30, 2020 and December 31, 2019, the fair value calculation of the contingent consideration resulted in a payout of $22,000,000, and discount rates of 0.2% and 1.7%, respectively, were applied to calculate the present value of the contingent consideration. A reconciliation of the opening balance to the closing balance of the fair value of the contingent consideration is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Beginning balance | | $ | 21,963 | | | $ | 21,302 | | | $ | 21,622 | | | $ | 20,745 | |
Contingent consideration recognized in business combination | | 0 | | | 0 | | | 0 | | | 0 | |
Change in fair value of contingent consideration recognized in earnings | | 28 | | | 124 | | | 369 | | | 681 | |
Consideration settlement payments | | 0 | | | 0 | | | 0 | | | 0 | |
Ending balance | | $ | 21,991 | | | $ | 21,426 | | | $ | 21,991 | | | $ | 21,426 | |
Assets measured at fair value on a non-recurring basis are summarized in the table below. There were 0no liabilities measured at fair value on a non-recurring basis at September 30, 20202021 and December 31, 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | Total Fair Value |
September 30, 2021 | | Level 1 | | Level 2 | | Level 3 | |
Collateral dependent loans | | | | | | | | |
Commercial real estate | | $ | — | | | $ | — | | | $ | 408 | | | $ | 408 | |
Construction, land development, land | | — | | | — | | | — | | | — | |
1-4 family residential | | — | | | — | | | 38 | | | 38 | |
Commercial | | — | | | — | | | 1,379 | | | 1,379 | |
Factored receivables | | — | | | — | | | 33,874 | | | 33,874 | |
Consumer | | — | | | — | | | — | | | — | |
Other real estate owned (1) | | | | | | | | |
Commercial real estate | | — | | | — | | | 18 | | | 18 | |
1-4 family residential | | — | | | — | | | 65 | | | 65 | |
Construction | | — | | | — | | | 167 | | | 167 | |
| | $ | — | | | $ | — | | | $ | 35,949 | | | $ | 35,949 | |
42 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | Total Fair Value |
December 31, 2020 | | Level 1 | | Level 2 | | Level 3 | |
Collateral dependent loans | | | | | | | | |
Commercial real estate | | $ | — | | | $ | — | | | $ | 5,107 | | | $ | 5,107 | |
Construction, land development, land | | — | | | — | | | 824 | | | 824 | |
1-4 family residential | | — | | | — | | | — | | | — | |
Commercial | | — | | | — | | | 2,355 | | | 2,355 | |
Factored receivables | | — | | | — | | | 41,065 | | | 41,065 | |
Consumer | | — | | | — | | | 3 | | | 3 | |
PCI | | 0 | | 0 | | 0 | | 0 |
Other real estate owned (1) | | | | | | | | |
Commercial real estate | | — | | | — | | | 273 | | | 273 | |
1-4 family residential | | — | | | — | | | 114 | | | 114 | |
Farmland | | — | | | — | | | 209 | | | 209 | |
| | $ | — | | | $ | — | | | $ | 49,950 | | | $ | 49,950 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | | | | | Total Fair Value |
September 30, 2020 | | Level 1 | | Level 2 | | Level 3 | | |
Collateral dependent loans | | | | | | | | |
Commercial real estate | | $ | 0 | | | $ | 0 | | | $ | 5,302 | | | $ | 5,302 | |
Construction, land development, land | | 0 | | | 0 | | | 637 | | | 637 | |
1-4 family residential | | 0 | | | 0 | | | 5 | | | 5 | |
Commercial | | 0 | | | 0 | | | 3,584 | | | 3,584 | |
Factored receivables | | 0 | | | 0 | | | 33,803 | | | 33,803 | |
Consumer | | 0 | | | 0 | | | 46 | | | 46 | |
Other real estate owned (1) | | | | | | | | |
1-4 family residential properties | | 0 | | | 0 | | | 189 | | | 189 | |
| | $ | 0 | | | $ | 0 | | | $ | 43,566 | | | $ | 43,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair Value Measurements Using | | | | | | Total Fair Value |
December 31, 2019 | | Level 1 | | Level 2 | | Level 3 | | |
Impaired loans | | | | | | | | |
Commercial real estate | | $ | 0 | | | $ | 0 | | | $ | 534 | | | $ | 534 | |
Construction, land development, land | | 0 | | | 0 | | | 664 | | | 664 | |
1-4 family residential | | 0 | | | 0 | | | 2 | | | 2 | |
Commercial | | 0 | | | 0 | | | 4,754 | | | 4,754 | |
Factored receivables | | 0 | | | 0 | | | 12,762 | | | 12,762 | |
Consumer | | 0 | | | 0 | | | 8 | | | 8 | |
PCI | | 0 | | | 0 | | | 67 | | | 67 | |
Other real estate owned (1) | | | | | | | | |
Commercial real estate | | 0 | | | 0 | | | 388 | | | 388 | |
1-4 family residential | | 0 | | | 0 | | | 89 | | | 89 | |
| | $ | 0 | | | $ | 0 | | | $ | 19,268 | | | $ | 19,268 | |
(1)Represents the fair value of OREO that was adjusted during the year to date period and subsequent to its initial classification as OREO.
Collateral Dependent Loans Specific Allocation of ACL: A loan is considered to be a collateral dependent loan when, based on current information and events, the Company expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Company has determined that the borrower is experiencing financial difficulty as of the measurement date. The ACL is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OREO: OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 20202021 and December 31, 20192020 were as follows:
| (Dollars in thousands) | (Dollars in thousands) | | Carrying Amount | | Fair Value Measurements Using | | | Total Fair Value | (Dollars in thousands) | | Carrying Amount | | Fair Value Measurements Using | | Total Fair Value |
September 30, 2020 | | | | Level 1 | | Level 2 | | Level 3 | | | Total Fair Value | |
September 30, 2021 | | September 30, 2021 | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 288,278 | | | $ | 288,278 | | | $ | 0 | | | $ | 0 | | | $ | 288,278 | | Cash and cash equivalents | | $ | 532,764 | | | $ | 532,764 | | | $ | — | | | $ | — | | | $ | 532,764 | |
Securities - held to maturity | Securities - held to maturity | | 6,096 | | | 0 | | | 0 | | | 5,473 | | | 5,473 | | Securities - held to maturity | | 5,488 | | | — | | | — | | | 5,534 | | | 5,534 | |
Loans not previously presented, gross | Loans not previously presented, gross | | 4,810,731 | | | 197,859 | | | 0 | | | 4,593,233 | | | 4,791,092 | | Loans not previously presented, gross | | 4,747,031 | | | 142,996 | | | — | | | 4,611,706 | | | 4,754,702 | |
FHLB and other restricted stock | FHLB and other restricted stock | | 18,464 | | | N/A | | N/A | | N/A | | N/A | FHLB and other restricted stock | | 4,901 | | | N/A | | N/A | | N/A | | N/A |
Indemnification asset | | 31,218 | | | — | | | — | | | 31,218 | | | 31,218 | | |
Accrued interest receivable | Accrued interest receivable | | 20,254 | | | 20,254 | | | 0 | | | 0 | | | 20,254 | | Accrued interest receivable | | 16,031 | | | 16,031 | | | — | | | — | | | 16,031 | |
| Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | 4,248,101 | | | 0 | | | 4,254,371 | | | 0 | | | 4,254,371 | | Deposits | | 4,822,575 | | | — | | | 4,823,597 | | | — | | | 4,823,597 | |
Customer repurchase agreements | Customer repurchase agreements | | 14,192 | | | 0 | | | 14,192 | | | 0 | | | 14,192 | | Customer repurchase agreements | | 11,990 | | | — | | | 11,990 | | | — | | | 11,990 | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 435,000 | | | 0 | | | 435,000 | | | 0 | | | 435,000 | | Federal Home Loan Bank advances | | 30,000 | | | — | | | 30,000 | | | — | | | 30,000 | |
Paycheck Protection Program Liquidity Facility | Paycheck Protection Program Liquidity Facility | | 223,713 | | | 0 | | | 223,713 | | | 0 | | | 223,713 | | Paycheck Protection Program Liquidity Facility | | 97,554 | | | — | | | 97,554 | | | — | | | 97,554 | |
Subordinated notes | Subordinated notes | | 87,455 | | | 0 | | | 89,806 | | | 0 | | | 89,806 | | Subordinated notes | | 106,755 | | | — | | | 107,536 | | | — | | | 107,536 | |
Junior subordinated debentures | Junior subordinated debentures | | 39,944 | | | 0 | | | 40,135 | | | 0 | | | 40,135 | | Junior subordinated debentures | | 40,467 | | | — | | | 41,085 | | | — | | | 41,085 | |
Accrued interest payable | Accrued interest payable | | 6,006 | | | 6,006 | | | 0 | | | 0 | | | 6,006 | | Accrued interest payable | | 1,976 | | | 1,976 | | | — | | | — | | | 1,976 | |
| (Dollars in thousands) | (Dollars in thousands) | | Carrying Amount | | Fair Value Measurements Using | | | Total Fair Value | (Dollars in thousands) | | Carrying Amount | | Fair Value Measurements Using | | Total Fair Value |
December 31, 2019 | | | | Level 1 | | Level 2 | | Level 3 | | | Total Fair Value | |
December 31, 2020 | | December 31, 2020 | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 197,880 | | | $ | 197,880 | | | $ | 0 | | | $ | 0 | | | $ | 197,880 | | Cash and cash equivalents | | $ | 314,393 | | | $ | 314,393 | | | $ | — | | | $ | — | | | $ | 314,393 | |
Securities - held to maturity | Securities - held to maturity | | 8,417 | | | 0 | | | 0 | | | 6,907 | | | 6,907 | | Securities - held to maturity | | 5,919 | | | — | | | — | | | 5,850 | | | 5,850 | |
Loans not previously presented, gross | Loans not previously presented, gross | | 4,170,604 | | | 83,454 | | | 0 | | | 4,086,597 | | | 4,170,051 | | Loans not previously presented, gross | | 4,953,399 | | | 195,739 | | | — | | | 4,783,143 | | | 4,978,882 | |
FHLB and other restricted stock | FHLB and other restricted stock | | 19,860 | | | N/A | | N/A | | N/A | | N/A | FHLB and other restricted stock | | 6,751 | | | N/A | | N/A | | N/A | | N/A |
Accrued interest receivable | Accrued interest receivable | | 20,322 | | | 20,322 | | | 0 | | | 0 | | | 20,322 | | Accrued interest receivable | | 19,435 | | | 19,435 | | | — | | | — | | | 19,435 | |
| Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | 3,789,906 | | | 0 | | | 3,793,603 | | | 0 | | | 3,793,603 | | Deposits | | 4,716,600 | | | — | | | 4,719,625 | | | — | | | 4,719,625 | |
Customer repurchase agreements | Customer repurchase agreements | | 2,033 | | | 0 | | | 2,033 | | | 0 | | | 2,033 | | Customer repurchase agreements | | 3,099 | | | — | | | 3,099 | | | — | | | 3,099 | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 430,000 | | | 0 | | | 430,000 | | | 0 | | | 430,000 | | Federal Home Loan Bank advances | | 105,000 | | | — | | | 105,000 | | | — | | | 105,000 | |
Paycheck Protection Program Liquidity Facility | | Paycheck Protection Program Liquidity Facility | | 191,860 | | | — | | | 191,860 | | | — | | | 191,860 | |
Subordinated notes | Subordinated notes | | 87,327 | | | 0 | | | 93,877 | | | 0 | | | 93,877 | | Subordinated notes | | 87,509 | | | — | | | 89,413 | | | — | | | 89,413 | |
Junior subordinated debentures | Junior subordinated debentures | | 39,566 | | | 0 | | | 40,700 | | | 0 | | | 40,700 | | Junior subordinated debentures | | 40,072 | | | — | | | 40,379 | | | — | | | 40,379 | |
Accrued interest payable | Accrued interest payable | | 9,367 | | | 9,367 | | | 0 | | | 0 | | | 9,367 | | Accrued interest payable | | 4,270 | | | 4,270 | | | — | | | — | | | 4,270 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 - Regulatory MattersREGULATORY 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.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 20202021 and December 31, 2019,2020, the Company and TBK Bank meet all capital adequacy requirements to which they are subject.
As of September 30, 20202021 and December 31, 2019,2020, 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, 20202021 that management believes have changed TBK Bank’s category.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The actual capital amounts and ratios for the Company and TBK Bank are presented in the following table.
| (Dollars in thousands) | (Dollars in thousands) | | Actual | | | Minimum for Capital Adequacy Purposes | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | | (Dollars in thousands) | | Actual | | Minimum for Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
September 30, 2020 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
September 30, 2021 | | September 30, 2021 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Total capital (to risk weighted assets) | Total capital (to risk weighted assets) | | | | | | | | | | | | | Total capital (to risk weighted assets) | | | | | | | | | | | | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 689,050 | | | 12.9% | | $ | 427,318 | | | 8.0% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 727,171 | | | 13.7% | | $ | 424,625 | | | 8.0% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 624,406 | | | 11.9% | | $ | 419,769 | | | 8.0% | | $ | 524,711 | | | 10.0% | TBK Bank, SSB | | $ | 655,551 | | | 12.5% | | $ | 419,553 | | | 8.0% | | $ | 524,441 | | | 10.0% |
| Tier 1 capital (to risk weighted assets) | Tier 1 capital (to risk weighted assets) | | Tier 1 capital (to risk weighted assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 549,445 | | | 10.3% | | $ | 320,065 | | | 6.0% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 587,326 | | | 11.1% | | $ | 317,474 | | | 6.0% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 573,637 | | | 10.9% | | $ | 315,763 | | | 6.0% | | $ | 421,018 | | | 8.0% | TBK Bank, SSB | | $ | 623,674 | | | 11.9% | | $ | 314,457 | | | 6.0% | | $ | 419,277 | | | 8.0% |
| Common equity Tier 1 capital (to risk weighted assets) | Common equity Tier 1 capital (to risk weighted assets) | | Common equity Tier 1 capital (to risk weighted assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 464,501 | | | 8.7% | | $ | 240,259 | | | 4.5% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 501,859 | | | 9.4% | | $ | 240,252 | | | 4.5% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 573,637 | | | 10.9% | | $ | 236,823 | | | 4.5% | | $ | 342,077 | | | 6.5% | TBK Bank, SSB | | $ | 623,674 | | | 11.9% | | $ | 235,843 | | | 4.5% | | $ | 340,662 | | | 6.5% |
| Tier 1 capital (to average assets) | Tier 1 capital (to average assets) | | Tier 1 capital (to average assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 549,445 | | | 10.8% | | $ | 203,498 | | | 4.0% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 587,326 | | | 10.4% | | $ | 225,895 | | | 4.0% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 573,637 | | | 11.3% | | $ | 203,057 | | | 4.0% | | $ | 253,822 | | | 5.0% | TBK Bank, SSB | | $ | 623,674 | | | 11.1% | | $ | 224,747 | | | 4.0% | | $ | 280,934 | | | 5.0% |
As of December 31, 2019 | | |
As of December 31, 2020 | | As of December 31, 2020 | |
Total capital (to risk weighted assets) | Total capital (to risk weighted assets) | | Total capital (to risk weighted assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 604,832 | | | 12.8% | | $ | 378,020 | | | 8.0% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 715,142 | | | 13.0% | | $ | 440,087 | | | 8.0% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 555,213 | | | 12.0% | | $ | 370,142 | | | 8.0% | | $ | 462,678 | | | 10.0% | TBK Bank, SSB | | $ | 653,359 | | | 12.1% | | $ | 431,973 | | | 8.0% | | $ | 539,966 | | | 10.0% |
| Tier 1 capital (to risk weighted assets) | Tier 1 capital (to risk weighted assets) | | Tier 1 capital (to risk weighted assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 487,775 | | | 10.3% | | $ | 284,141 | | | 6.0% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 581,580 | | | 10.6% | | $ | 329,196 | | | 6.0% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 525,490 | | | 11.4% | | $ | 276,574 | | | 6.0% | | $ | 368,765 | | | 8.0% | TBK Bank, SSB | | $ | 608,737 | | | 11.3% | | $ | 323,223 | | | 6.0% | | $ | 430,964 | | | 8.0% |
| Common equity Tier 1 capital (to risk weighted assets) | Common equity Tier 1 capital (to risk weighted assets) | | Common equity Tier 1 capital (to risk weighted assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 448,209 | | | 9.5% | | $ | 212,310 | | | 4.5% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 496,508 | | | 9.0% | | $ | 248,254 | | | 4.5% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 525,490 | | | 11.4% | | $ | 207,430 | | | 4.5% | | $ | 299,621 | | | 6.5% | TBK Bank, SSB | | $ | 608,737 | | | 11.3% | | $ | 242,417 | | | 4.5% | | $ | 350,158 | | | 6.5% |
| Tier 1 capital (to average assets) | Tier 1 capital (to average assets) | | Tier 1 capital (to average assets) | |
Triumph Bancorp, Inc. | Triumph Bancorp, Inc. | | $ | 487,775 | | | 10.0% | | $ | 195,110 | | | 4.0% | | N/A | | N/A | Triumph Bancorp, Inc. | | $ | 581,580 | | | 10.8% | | $ | 215,400 | | | 4.0% | | N/A | | N/A |
TBK Bank, SSB | TBK Bank, SSB | | $ | 525,490 | | | 10.9% | | $ | 192,840 | | | 4.0% | | $ | 241,050 | | | 5.0% | TBK Bank, SSB | | $ | 608,737 | | | 11.3% | | $ | 215,482 | | | 4.0% | | $ | 269,353 | | | 5.0% |
As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company has elected the option to delay the estimated impact on regulatory capital of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Measurement of Credit Losses on Financial Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13 as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”) will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.
Dividends paid by TBK Bank are limited to, without prior regulatory approval, current year earnings and earnings less dividends paid during the preceding two years.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The capital conservation buffer set forth by the Basel III regulatory capital framework was 2.5% at September 30, 20202021 and December 31, 2019.2020. 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, 20202021 and December 31, 2019,2020, the Company’s and TBK Bank’s risk based capital exceeded the required capital conservation buffer.
NOTE 13 – STOCKHOLDERS’ EQUITY
The following summarizes the capital structure of Triumph Bancorp, Inc.
Preferred Stock Series C
| | | | | | | | |
(Dollars in thousands, except per share amounts) | | September 30, 2020 |
Shares authorized | | 51,750 | |
Shares issued | | 45,000 | |
Shares outstanding | | 45,000 | |
Par value per share | | $ | 0.01 | |
Liquidation preference per share | | $ | 1,000 | |
Liquidation preference amount | | $ | 45,000 | |
Dividend rate | | 7.125 | % |
Dividend payment dates | | Quarterly |
There were 0 preferred shares issued or outstanding at December 31, 2019. | | | | | | | | | | | | | | |
(Dollars in thousands, except per share amounts) | | September 30, 2021 | | December 31, 2020 |
Shares authorized | | 51,750 | | | 51,750 | |
Shares issued | | 45,000 | | | 45,000 | |
Shares outstanding | | 45,000 | | | 45,000 | |
Par value per share | | $ | 0.01 | | | $ | 0.01 | |
Liquidation preference per share | | $ | 1,000 | | | $ | 1,000 | |
Liquidation preference amount | | $ | 45,000 | | | $ | 45,000 | |
Dividend rate | | 7.125 | % | | 7.125 | % |
Dividend payment dates | | Quarterly | | Quarterly |
Common Stock
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
Shares authorized | Shares authorized | | 50,000,000 | | | 50,000,000 | | Shares authorized | | 50,000,000 | | | 50,000,000 | |
Shares issued | Shares issued | | 27,932,671 | | | 27,163,642 | | Shares issued | | 28,224,921 | | | 27,951,721 | |
Treasury shares | Treasury shares | | (3,081,070) | | | (2,198,681) | | Treasury shares | | (3,101,579) | | | (3,083,503) | |
Shares outstanding | Shares outstanding | | 24,851,601 | | | 24,964,961 | | Shares outstanding | | 25,123,342 | | | 24,868,218 | |
Par value per share | Par value per share | | $ | 0.01 | | | $ | 0.01 | | Par value per share | | $ | 0.01 | | | $ | 0.01 | |
Preferred Stock Offering
On June 19, 2020, the Company issued 45,000 shares of 7.125% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, with a liquidation preference of $1,000 per share through an underwritten public offering of 1,800,000 depositary shares, each representing a 1/40th40th ownership interest in a share of the Series C Preferred Stock. Total gross proceeds from the preferred stock offering were $45,000,000. Net proceeds after underwriting discounts and offering expenses were $42,364,000. The net proceeds will be used for general corporate purposes.
Series C Preferred Stock holders are entitled to quarterly cash dividends accruing at the rate per annum of 7.125% beginning September 30, 2020, applied to the liquidation preference value of the stock. Any dividends not paid shall not accumulate but will be waived and not payable by the Company. Payments of dividends are subject to declaration by the board of the Company. The Series C Preferred Stock is not redeemable by the holder and is senior to the Company’s common stock. The Series C Preferred stock may be
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
redeemed in whole or in part by the Company at liquidation value (i) on any dividend payment date on or after June 30, 2025 or (ii) within 90 days following a regulatory capital treatment event (as defined in the Statement of Designation), subject to regulatory approval.
Stock Repurchase Programs
During the three months ended March 31, 2020, the Company repurchased 871,319 shares into treasury stock under the Company’s stock repurchase program at an average price of $40.81, for a total of $35,600,000, effectively completing the $50,000,000 stock repurchase program authorized by the Company’s board of directors on October 16, 2019. NaNNo shares were repurchased during the threenine months ended September 30, 2020 or June 30, 20202021 under a stock repurchase program.
During the three and nine months ended September 30, 2019, the Company repurchased 850,093 shares into treasury stock under the Company’s stock repurchase program at an average price
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – STOCK BASED COMPENSATION
Stock based compensation expense that has been charged against income was $4,445,000 and $1,309,000 for the three months ended September 30, 2021 and 2020, respectively, and $9,181,000 and $3,443,000 for the three and nine months ended September 30, 2020, respectively,2021 and $1,058,000 and $2,794,000 for the three and nine months ended September 30, 2019,2020, respectively.
2014 Omnibus Incentive Plan
The Company’s 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”) provides for the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards that may be settled in, or based upon the value of, the Company’s common stock. The maximum number of shares of common stock available for issuance under the Omnibus Incentive Plan is 2,000,0002,450,000 shares.
Restricted Stock Awards
A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the nine months ended September 30, 20202021 were as follows:
| Nonvested RSAs | Nonvested RSAs | | Shares | | Weighted-Average Grant-Date Fair Value | Nonvested RSAs | | Shares | | Weighted-Average Grant-Date Fair Value |
Nonvested at January 1, 2020 | | 148,349 | | | 31.86 | | |
Nonvested at January 1, 2021 | | Nonvested at January 1, 2021 | | 205,536 | | | 29.17 | |
Granted | Granted | | 138,417 | | | 26.54 | | Granted | | 232,551 | | | 87.60 | |
Vested | Vested | | (75,103) | | | 29.64 | | Vested | | (78,017) | | | 34.08 | |
Forfeited | Forfeited | | (3,634) | | | 31.07 | | Forfeited | | (3,907) | | | 50.51 | |
Nonvested at September 30, 2020 | | 208,029 | | | 29.14 | | |
Nonvested at September 30, 2021 | | Nonvested at September 30, 2021 | | 356,163 | | | 66.01 | |
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, 2020,2021, there was $3,597,000$15,794,000 of unrecognized compensation cost related to the nonvested RSAs. The cost is expected to be recognized over a remaining period of 3.143.42 years.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 20202021 were as follows:
| Nonvested RSUs | Nonvested RSUs | | Shares | | Weighted-Average Grant-Date Fair Value | Nonvested RSUs | | Shares | | Weighted-Average Grant-Date Fair Value |
Nonvested at January 1, 2020 | | 55,228 | | | 38.75 | | |
Nonvested at January 1, 2021 | | Nonvested at January 1, 2021 | | 89,713 | | | 33.34 | |
Granted | Granted | | 38,801 | | | 26.25 | | Granted | | 17,757 | | | 84.47 | |
Vested | Vested | | 0 | | | 0 | | Vested | | — | | | — | |
Forfeited | Forfeited | | (4,316) | | | 38.75 | | Forfeited | | — | | | — | |
Nonvested at September 30, 2020 | | 89,713 | | | 33.34 | | |
Nonvested at September 30, 2021 | | Nonvested at September 30, 2021 | | 107,470 | | | 41.79 | |
RSUs granted to employees under the Omnibus Incentive Plan typically vest afterfour to five years. Compensation expense for the RSUs will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of September 30, 2020,2021, there was $1,872,000$2,519,000 of unrecognized compensation cost related to the nonvested RSUs. The cost is expected to be recognized over a remaining period of 2.582.67 years.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Market Based Performance Stock Units
A summary of changes in the Company’s nonvested Market Based Performance Stock Units (“Market Based PSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 20202021 were as follows:
| Nonvested Market Based PSUs | Nonvested Market Based PSUs | | Shares | | Weighted-Average Grant-Date Fair Value | Nonvested Market Based PSUs | | Shares | | Weighted-Average Grant-Date Fair Value |
Nonvested at January 1, 2020 | | 67,707 | | | $ | 37.71 | | |
Nonvested at Nonvested at January 1, 2021 | | Nonvested at Nonvested at January 1, 2021 | | 85,611 | | | $ | 35.65 | |
Granted | Granted | | 22,220 | | | 29.93 | | Granted | | 13,520 | | | 98.03 | |
Vested | Vested | | 0 | | | 0 | | Vested | | — | | | — | |
Forfeited | Forfeited | | (4,316) | | | 38.57 | | Forfeited | | (4,147) | | | 55.02 | |
Nonvested at September 30, 2020 | | 85,611 | | | $ | 35.65 | | |
Nonvested at September 30, 2021 | | Nonvested at September 30, 2021 | | 94,984 | | | $ | 43.68 | |
Market Based PSUs granted to employees under the Omnibus Incentive Plan vest after three to five years. The number of shares issued upon vesting will range from 0% to 175% of the Market Based PSUs granted based on the Company’s relative total shareholder return (“TSR”) as compared to the TSR of a specified group of peer banks. Compensation expense for the Market Based PSUs will be recognized over the vesting period of the awards based on the fair value of the award at the grant date. The fair value of Market Based PSUs granted is estimated using a Monte Carlo simulation. Expected volatilities were determined based on the historical volatilities of the Company and the specified peer group. The risk-free interest rate for the performance period was derived from the Treasury constant maturities yield curve on the valuation date.dates.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2020 | | 2019 |
Grant date | | May 1, 2020 | | May 1, 2019 |
Performance period | | 3.00 years | | 3.00 years |
Stock price | | $ | 26.25 | | | $ | 30.82 | |
Triumph stock price volatility | | 43.02 | % | | 28.29 | % |
Risk-free rate | | 0.25 | % | | 2.25 | % |
The fair value of the Market Based PSUs granted was determined using the following weighted-average assumptions: | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
Grant date | | May 1, 2021 | | May 1, 2020 |
Performance period | | 3.00 years | | 3.00 years |
Stock price | | $ | 88.63 | | | $ | 26.25 | |
Triumph stock price volatility | | 51.71 | % | | 43.02 | % |
Risk-free rate | | 0.35 | % | | 0.25 | % |
As of September 30, 2020,2021, there was $1,786,000$1,962,000 of unrecognized compensation cost related to the nonvested Market Based PSUs. The cost is expected to be recognized over a remaining period of 2.462.06 years.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Performance Based Performance Stock Units
A summary of changes in the Company’s nonvested Performance Based Performance Stock Units (“Performance Based PSUs”) under the Omnibus Incentive Plan for the nine months ended September 30, 20202021 were as follows:
| Nonvested Performance Based PSUs | Nonvested Performance Based PSUs | | Shares | | Weighted Average Grant Date Fair Value | Nonvested Performance Based PSUs | | Shares | | Weighted Average Grant Date Fair Value |
Nonvested at January 1, 2020 | | 254,000 | | | $ | 38.02 | | |
Nonvested at January 1, 2021 | | Nonvested at January 1, 2021 | | 256,625 | | | $ | 37.56 | |
Granted | Granted | | 10,125 | | | 26.25 | | Granted | | 9,000 | | | 88.63 | |
Vested | Vested | | 0 | | | 0 | | Vested | | — | | | — | |
Forfeited | Forfeited | | (3,000) | | | 38.02 | | Forfeited | | (6,242) | | | 38.02 | |
Nonvested at September 30, 2020 | | 261,125 | | | $ | 37.56 | | |
Nonvested at September 30, 2021 | | Nonvested at September 30, 2021 | | 259,383 | | | $ | 39.32 | |
Performance Based PSUs granted to employees under the Omnibus Incentive Plan vest after three years. The number of shares issued upon vesting will range from 0% to 200% of the shares granted based on the Company’s cumulative diluted earnings per share over the performance period. Compensation expense for the Performance Based PSUs will be estimated each period based on the fair value of the stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the vesting period of the awards. As of September 30, 2020,2021, the maximum unrecognized compensation cost related to the nonvested Performance Based PSUs was $19,618,000,$20,396,000, and the remaining performance period over which the cost could be recognized was 2.251.25 years. NaNNo compensation cost was recorded during the three and nine months ended September 30, 2021 and 2020.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 20202021 were as follows:
| Stock Options | Stock Options | | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value (In Thousands) | Stock Options | | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value (In Thousands) |
Outstanding at January 1, 2020 | | 225,055 | | | $ | 24.10 | | | | | | |
Outstanding at January 1, 2021 | | Outstanding at January 1, 2021 | | 227,986 | | | $ | 25.16 | | | | | |
Granted | Granted | | 32,937 | | | 24.66 | | | Granted | | 16,939 | | | 88.63 | | |
Exercised | Exercised | | (743) | | | 15.87 | | | Exercised | | (48,541) | | | 24.30 | | |
Forfeited or expired | Forfeited or expired | | (443) | | | 38.75 | | | Forfeited or expired | | — | | | — | | |
Outstanding at September 30, 2020 | | 256,806 | | | $ | 24.18 | | | 6.82 | | $ | 2,141 | | |
Outstanding at September 30, 2021 | | Outstanding at September 30, 2021 | | 196,384 | | | $ | 31.11 | | | 6.41 | | $ | 13,554 | |
| Fully vested shares and shares expected to vest at September 30, 2020 | | 256,806 | | | $ | 24.18 | | | 6.82 | | $ | 2,141 | | |
Fully vested shares and shares expected to vest at September 30, 2021 | | Fully vested shares and shares expected to vest at September 30, 2021 | | 196,384 | | | $ | 31.11 | | | 6.41 | | $ | 13,554 | |
| Shares exercisable at September 30, 2020 | | 174,073 | | | $ | 21.48 | | | 6.06 | | $ | 1,859 | | |
Shares exercisable at September 30, 2021 | | Shares exercisable at September 30, 2021 | | 136,032 | | | $ | 24.02 | | | 5.51 | | $ | 10,163 | |
Information related to the stock options for the nine months ended September 30, 20202021 and 20192020 was as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(Dollars in thousands, except per share amounts) | | 2020 | | 2019 |
Aggregate intrinsic value of options exercised | | $ | 10 | | | $ | 148 | |
Cash received from option exercises | | 0 | | | 0 | |
Tax benefit realized from option exercises | | 2 | | | 31 | |
Weighted average fair value per share of options granted | | $ | 8.85 | | | $ | 10.03 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(Dollars in thousands, except per share amounts) | | 2021 | | 2020 |
Aggregate intrinsic value of options exercised | | $ | 2,407 | | | $ | 10 | |
Cash received from option exercises | | 196 | | | — | |
Tax benefit realized from option exercises | | 506 | | | 2 | |
Weighted average fair value per share of options granted | | $ | 35.37 | | | $ | 8.85 | |
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.
The fair value of the stock options granted was determined using the following weighted-average assumptions:
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Risk-free interest rate | Risk-free interest rate | | 0.46 | % | | 2.33 | % | Risk-free interest rate | | 1.16 | % | | 0.46 | % |
Expected term | Expected term | | 6.25 years | | 6.25 years | Expected term | | 6.25 years | | 6.25 years |
Expected stock price volatility | Expected stock price volatility | | 33.83 | % | | 27.46 | % | Expected stock price volatility | | 39.26 | % | | 33.83 | % |
Dividend yield | Dividend yield | | 0 | | | 0 | | Dividend yield | | — | | | — | |
As of September 30, 2020,2021, there was $401,000$512,000 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 2.862.94 years.
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Employee Stock Purchase Plan
On April 1, 2019, the Company’s Board of Directors adopted the Triumph Bancorp, Inc. 2019 Employee Stock Purchase Plan (“ESPP”) and reserved 2,500,000 shares of common stock for issuance. The ESPP was approved by the Company’s stockholders on May 16, 2019. The ESPP enables eligible employees to purchase the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each ninesix month offering period. The first offering period has not yet commenced.commenced on February 1, 2021 and during the three and nine months ended September 30, 2021, 9,101 shares were issued under the plan.
NOTE 15 – EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Basic | Basic | | | | | | | | Basic | | | | | | | |
Net income to common stockholders | Net income to common stockholders | $ | 22,005 | | | $ | 14,317 | | | $ | 30,995 | | | $ | 41,835 | | Net income to common stockholders | $ | 23,627 | | | $ | 22,005 | | | $ | 83,929 | | | $ | 30,995 | |
Weighted average common shares outstanding | Weighted average common shares outstanding | 24,592,092 | | | 25,621,054 | | | 24,298,897 | | | 26,228,499 | | Weighted average common shares outstanding | 24,759,419 | | | 24,592,092 | | | 24,719,861 | | | 24,298,897 | |
Basic earnings per common share | Basic earnings per common share | $ | 0.89 | | | $ | 0.56 | | | $ | 1.28 | | | $ | 1.60 | | Basic earnings per common share | $ | 0.95 | | | $ | 0.89 | | | $ | 3.40 | | | $ | 1.28 | |
Diluted | Diluted | | | | | | | | Diluted | | | | | | | |
Net income to common stockholders | Net income to common stockholders | $ | 22,005 | | | $ | 14,317 | | | $ | 30,995 | | | $ | 41,835 | | Net income to common stockholders | $ | 23,627 | | | $ | 22,005 | | | $ | 83,929 | | | $ | 30,995 | |
Weighted average common shares outstanding | Weighted average common shares outstanding | 24,592,092 | | | 25,621,054 | | | 24,298,897 | | | 26,228,499 | | Weighted average common shares outstanding | 24,759,419 | | | 24,592,092 | | | 24,719,861 | | | 24,298,897 | |
Dilutive effects of: | Dilutive effects of: | | Dilutive effects of: | |
Assumed exercises of stock options | Assumed exercises of stock options | 48,102 | | | 60,068 | | | 53,232 | | | 61,054 | | Assumed exercises of stock options | 121,110 | | | 48,102 | | | 129,149 | | | 53,232 | |
Restricted stock awards | Restricted stock awards | 67,907 | | | 45,631 | | | 65,893 | | | 40,572 | | Restricted stock awards | 141,204 | | | 67,907 | | | 146,172 | | | 65,893 | |
Restricted stock units | Restricted stock units | 18,192 | | | 3,045 | | | 15,198 | | | 57 | | Restricted stock units | 74,268 | | | 18,192 | | | 71,620 | | | 15,198 | |
Performance stock units - market based | Performance stock units - market based | 76,095 | | | 4,673 | | | 30,995 | | | 1,558 | | Performance stock units - market based | 131,346 | | | 76,095 | | | 131,275 | | | 30,995 | |
Performance stock units - performance based | Performance stock units - performance based | 0 | | | 0 | | | 0 | | | 0 | | Performance stock units - performance based | — | | | — | | | — | | | — | |
Employee stock purchase program | | Employee stock purchase program | 616 | | | — | | | 1,914 | | | — | |
Average shares and dilutive potential common shares | Average shares and dilutive potential common shares | 24,802,388 | | | 25,734,471 | | | 24,464,215 | | | 26,331,740 | | Average shares and dilutive potential common shares | 25,227,963 | | | 24,802,388 | | | 25,199,991 | | | 24,464,215 | |
Diluted earnings per common share | Diluted earnings per common share | $ | 0.89 | | | $ | 0.56 | | | $ | 1.27 | | | $ | 1.59 | | Diluted earnings per common share | $ | 0.94 | | | $ | 0.89 | | | $ | 3.33 | | | $ | 1.27 | |
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, |
| 2021 | | 2020 | | 2021 | | 2020 |
Stock options | 16,939 | | | 98,513 | | | 16,939 | | | 98,513 | |
Restricted stock awards | — | | | — | | | 195,640 | | | — | |
Restricted stock units | — | | | — | | | 17,757 | | | — | |
Performance stock units - market based | 12,020 | | | — | | | 12,020 | | | — | |
Performance stock units - performance based | 259,383 | | | 261,125 | | | 259,383 | | | 261,125 | |
Employee stock purchase program | — | | | — | | | — | | | — | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Stock options | 98,513 | | | 67,023 | | | 98,513 | | | 67,023 | |
Restricted stock awards | 0 | | | 3,209 | | | 0 | | | 3,209 | |
Restricted stock units | 0 | | | 0 | | | 0 | | | 54,077 | |
Performance stock units - market based | 0 | | | 55,228 | | | 0 | | | 55,228 | |
Performance stock units - performance based | 261,125 | | | 0 | | | 261,125 | | | 0 | |
NOTE 16 – BUSINESS SEGMENT INFORMATION
The following table presents the Company’s operating segments. The accounting policies of thepolicy for reportable segments are the same as those described in the “Summary of Significant Accounting Policies”is previously disclosed in Note 1 of the Company’s 2019 Form 10-K.1. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segmentand Payments segments based on Federal Home Loan Bank advance rates. Credit loss expense is allocated based on the segment’s allowance for credit losses determination. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis butand are not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC. General factoring services not originated through TBC are included in the Banking segment.
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Three months ended September 30, 2020 | | Banking | | Factoring | | Corporate | | Consolidated | |
Three months ended September 30, 2021 | | Three months ended September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 52,288 | | | $ | 30,068 | | | $ | 8 | | | $ | 82,364 | | Total interest income | | $ | 46,175 | | | $ | 47,222 | | | $ | 3,295 | | | $ | 43 | | | $ | 96,735 | |
Intersegment interest allocations | Intersegment interest allocations | | 3,312 | | | (3,312) | | | 0 | | | — | | Intersegment interest allocations | | 2,452 | | | (2,341) | | | (111) | | | — | | | — | |
Total interest expense | Total interest expense | | 6,176 | | | 0 | | | 1,809 | | | 7,985 | | Total interest expense | | 2,073 | | | — | | | — | | | 2,891 | | | 4,964 | |
Net interest income (expense) | Net interest income (expense) | | 49,424 | | | 26,756 | | | (1,801) | | | 74,379 | | Net interest income (expense) | | 46,554 | | | 44,881 | | | 3,184 | | | (2,848) | | | 91,771 | |
Credit loss expense (benefit) | Credit loss expense (benefit) | | (3,417) | | | 3,053 | | | 106 | | | (258) | | Credit loss expense (benefit) | | (2,399) | | | 1,164 | | | 38 | | | 10 | | | (1,187) | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 52,841 | | | 23,703 | | | (1,907) | | | 74,637 | | Net interest income after credit loss expense | | 48,953 | | | 43,717 | | | 3,146 | | | (2,858) | | | 92,958 | |
Other noninterest income | | 7,490 | | | 3,157 | | | (154) | | | 10,493 | | |
Noninterest income | | Noninterest income | | 7,371 | | | 1,557 | | | 3,086 | | | 41 | | | 12,055 | |
Noninterest expense | Noninterest expense | | 40,584 | | | 13,665 | | | 1,048 | | | 55,297 | | Noninterest expense | | 41,183 | | | 19,106 | | | 11,416 | | | 1,108 | | | 72,813 | |
Operating income (loss) | Operating income (loss) | | $ | 19,747 | | | $ | 13,195 | | | $ | (3,109) | | | $ | 29,833 | | Operating income (loss) | | $ | 15,141 | | | $ | 26,168 | | | $ | (5,184) | | | $ | (3,925) | | | $ | 32,200 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Three months ended September 30, 2019 | | Banking | | Factoring | | Corporate | | Consolidated | |
Three months ended September 30, 2020 | | Three months ended September 30, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 54,266 | | | $ | 24,869 | | | $ | 280 | | | $ | 79,415 | | Total interest income | | $ | 50,927 | | | $ | 30,068 | | | $ | 1,361 | | | $ | 8 | | | $ | 82,364 | |
Intersegment interest allocations | Intersegment interest allocations | | 2,918 | | | (2,918) | | | 0 | | | — | | Intersegment interest allocations | | 3,459 | | | (3,312) | | | (147) | | | — | | | — | |
Total interest expense | Total interest expense | | 13,091 | | | 0 | | | 1,559 | | | 14,650 | | Total interest expense | | 6,176 | | | — | | | — | | | 1,809 | | | 7,985 | |
Net interest income (expense) | Net interest income (expense) | | 44,093 | | | 21,951 | | | (1,279) | | | 64,765 | | Net interest income (expense) | | 48,210 | | | 26,756 | | | 1,214 | | | (1,801) | | | 74,379 | |
Credit loss expense | | 2,019 | | | 846 | | | 0 | | | 2,865 | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | | (3,419) | | | 3,053 | | | 2 | | | 106 | | | (258) | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 42,074 | | | 21,105 | | | (1,279) | | | 61,900 | | Net interest income after credit loss expense | | 51,629 | | | 23,703 | | | 1,212 | | | (1,907) | | | 74,637 | |
Noninterest income | Noninterest income | | 6,401 | | | 1,291 | | | 50 | | | 7,742 | | Noninterest income | | 7,443 | | | 3,157 | | | 47 | | | (154) | | | 10,493 | |
Noninterest expense | Noninterest expense | | 38,371 | | | 12,792 | | | 990 | | | 52,153 | | Noninterest expense | | 37,389 | | | 13,665 | | | 3,195 | | | 1,048 | | | 55,297 | |
Operating income (loss) | Operating income (loss) | | $ | 10,104 | | | $ | 9,604 | | | $ | (2,219) | | | $ | 17,489 | | Operating income (loss) | | $ | 21,683 | | | $ | 13,195 | | | $ | (1,936) | | | $ | (3,109) | | | $ | 29,833 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | | |
Nine months ended September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | | $ | 144,087 | | | $ | 127,699 | | | $ | 7,939 | | | $ | 51 | | | $ | 279,776 | |
Intersegment interest allocations | | 8,117 | | | (7,700) | | | (417) | | | — | | | — | |
Total interest expense | | 8,225 | | | — | | | — | | | 6,478 | | | 14,703 | |
Net interest income (expense) | | 143,979 | | | 119,999 | | | 7,522 | | | (6,427) | | | 265,073 | |
Credit loss expense (benefit) | | (19,187) | | | 8,091 | | | 548 | | | (290) | | | (10,838) | |
Net interest income after credit loss expense | | 163,166 | | | 111,908 | | | 6,974 | | | (6,137) | | | 275,911 | |
Noninterest income | | 25,139 | | | 10,710 | | | 4,242 | | | 151 | | | 40,242 | |
Noninterest expense | | 122,497 | | | 52,433 | | | 26,393 | | | 3,180 | | | 204,503 | |
Operating income (loss) | | $ | 65,808 | | | $ | 70,185 | | | $ | (15,177) | | | $ | (9,166) | | | $ | 111,650 | |
TRIUMPH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Nine months ended September 30, 2020 | Nine months ended September 30, 2020 | | Banking | | Factoring | | Corporate | | Consolidated | Nine months ended September 30, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 157,957 | | | $ | 73,952 | | | $ | 267 | | | $ | 232,176 | | Total interest income | | $ | 155,517 | | | $ | 73,952 | | | $ | 2,440 | | | $ | 267 | | | $ | 232,176 | |
Intersegment interest allocations | Intersegment interest allocations | | 8,873 | | | (8,873) | | | 0 | | | — | | Intersegment interest allocations | | 9,139 | | | (8,873) | | | (266) | | | — | | | — | |
Total interest expense | Total interest expense | | 25,368 | | | 0 | | | 5,678 | | | 31,046 | | Total interest expense | | 25,368 | | | — | | | — | | | 5,678 | | | 31,046 | |
Net interest income (expense) | Net interest income (expense) | | 141,462 | | | 65,079 | | | (5,411) | | | 201,130 | | Net interest income (expense) | | 139,288 | | | 65,079 | | | 2,174 | | | (5,411) | | | 201,130 | |
Credit loss expense | | 27,378 | | | 4,437 | | | 1,834 | | | 33,649 | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | | 27,211 | | | 4,437 | | | 167 | | | 1,834 | | | 33,649 | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 114,084 | | | 60,642 | | | (7,245) | | | 167,481 | | Net interest income after credit loss expense | | 112,077 | | | 60,642 | | | 2,007 | | | (7,245) | | | 167,481 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | | 9,758 | | | 0 | | | 0 | | | 9,758 | | Gain on sale of subsidiary or division | | 9,758 | | | — | | | — | | | — | | | 9,758 | |
Other noninterest income | Other noninterest income | | 22,586 | | | 5,524 | | | 131 | | | 28,241 | | Other noninterest income | | 22,512 | | | 5,524 | | | 74 | | | 131 | | | 28,241 | |
Noninterest expense | Noninterest expense | | 122,001 | | | 37,695 | | | 3,080 | | | 162,776 | | Noninterest expense | | 113,047 | | | 37,695 | | | 8,954 | | | 3,080 | | | 162,776 | |
Operating income (loss) | Operating income (loss) | | $ | 24,427 | | | $ | 28,471 | | | $ | (10,194) | | | $ | 42,704 | | Operating income (loss) | | $ | 31,300 | | | $ | 28,471 | | | $ | (6,873) | | | $ | (10,194) | | | $ | 42,704 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | |
Nine months ended September 30, 2019 | | Banking | | Factoring | | Corporate | | Consolidated |
Total interest income | | $ | 155,645 | | | $ | 73,435 | | | $ | 902 | | | $ | 229,982 | |
Intersegment interest allocations | | 8,188 | | | (8,188) | | | 0 | | | — | |
Total interest expense | | 35,746 | | | 0 | | | 4,741 | | | 40,487 | |
Net interest income (expense) | | 128,087 | | | 65,247 | | | (3,839) | | | 189,495 | |
Credit loss expense (benefit) | | 5,847 | | | 1,789 | | | (76) | | | 7,560 | |
Net interest income after credit loss expense | | 122,240 | | | 63,458 | | | (3,763) | | | 181,935 | |
Noninterest income | | 19,150 | | | 3,572 | | | 181 | | | 22,903 | |
Noninterest expense | | 109,406 | | | 39,340 | | | 2,677 | | | 151,423 | |
Operating income (loss) | | $ | 31,984 | | | $ | 27,690 | | | $ | (6,259) | | | $ | 53,415 | |
Total assets and gross loans below include intersegment loans, which eliminate in consolidation. | (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
September 30, 2020 | | Banking | | Factoring | | Corporate | | Eliminations | | Consolidated | |
September 30, 2021 | | September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Eliminations | | Consolidated |
Total assets | Total assets | | $ | 5,767,857 | | | $ | 1,042,571 | | | $ | 828,065 | | | $ | (1,801,706) | | | $ | 5,836,787 | | Total assets | | $ | 5,686,761 | | | $ | 1,559,378 | | | $ | 242,446 | | | $ | 975,939 | | | $ | (2,439,989) | | | $ | 6,024,535 | |
Gross loans | Gross loans | | $ | 4,759,135 | | | $ | 948,987 | | | $ | 800 | | | $ | (856,011) | | | $ | 4,852,911 | | Gross loans | | $ | 4,390,659 | | | $ | 1,479,989 | | | $ | 127,039 | | | $ | 700 | | | $ | (1,215,657) | | | $ | 4,782,730 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
December 31, 2019 | | Banking | | Factoring | | Corporate | | Eliminations | | Consolidated | |
December 31, 2020 | | December 31, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Eliminations | | Consolidated |
Total assets | Total assets | | $ | 4,976,009 | | | $ | 662,002 | | | $ | 771,048 | | | $ | (1,348,762) | | | $ | 5,060,297 | | Total assets | | $ | 5,791,537 | | | $ | 1,121,704 | | | $ | 115,836 | | | $ | 861,967 | | | $ | (1,955,253) | | | $ | 5,935,791 | |
Gross loans | Gross loans | | $ | 4,108,735 | | | $ | 573,372 | | | $ | 1,519 | | | $ | (489,114) | | | $ | 4,194,512 | | Gross loans | | $ | 4,788,093 | | | $ | 1,036,548 | | | $ | 84,222 | | | $ | 800 | | | $ | (912,887) | | | $ | 4,996,776 | |
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. 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. As of September 30, 2021, we had consolidated total assets of $6.025 billion, total loans held for investment of $4.783 billion, total deposits of $4.823 billion and total stockholders’ equity of $820.7 million.
Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services, commercial finance product lines focused on businesses that require specialized financial solutions and national lending product lines that further diversify our lending operations. Our traditionalTraditional banking offerings include a full suite of lending and deposit products and servicesservices. These activities are focused on our local market areas. These activitiesareas and some products are offered on a nationwide basis. They generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines generate attractive returns and include factoring, asset-based lending and equipment lending products offered on a nationwide basis. Our nationalAdditionally, we offer mortgage warehouse and liquid credit lending product linesproducts on a nationwide basis to provide further asset base diversification and include mortgage warehouse and liquid credit offered on a nationwide basis. As of September 30, 2020, we had consolidated total assets of $5.837 billion, total loans held for investment of $4.853 billion, total deposits of $4.248 billion and total stockholders’ equity of $693.8 million.stable deposits.
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 and equipment finance products. Year to date, our aggregate outstanding balances for these banking products has increased $436.4decreased $700.3 million, or 34.9%18.1%, to $1.687$3.176 billion as of September 30, 2020, due to increases in our equipment lending and factored receivables products. The increase in factored receivables reflects the acquired transportation factoring assets of Transport Financial Solutions detailed in a later discussion.2021. The following table sets forth our commercial finance product lines:banking loans:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Commercial finance | | | | |
Banking | | Banking | | | |
Commercial real estate | | Commercial real estate | $ | 630,106 | | | $ | 779,158 | |
Construction, land development, land | | Construction, land development, land | 171,814 | | | 219,647 | |
1-4 family residential | | 1-4 family residential | 127,073 | | | 157,147 | |
Farmland | | Farmland | 82,990 | | | 103,685 | |
Commercial - General | | Commercial - General | 289,242 | | | 340,850 | |
Commercial - Paycheck Protection Program | | Commercial - Paycheck Protection Program | 87,413 | | | 189,857 | |
Commercial - Agriculture | | Commercial - Agriculture | 77,263 | | | 94,572 | |
Commercial - Equipment | Commercial - Equipment | $ | 509,849 | | | $ | 461,555 | | Commercial - Equipment | 588,105 | | | 573,163 | |
Commercial - Asset-based lending | Commercial - Asset-based lending | 160,711 | | | 168,955 | | Commercial - Asset-based lending | 213,927 | | | 180,488 | |
Factored receivables | 1,016,337 | | | 619,986 | | |
Total commercial finance loans | $ | 1,686,897 | | | $ | 1,250,496 | | |
Commercial - Liquid Credit | | Commercial - Liquid Credit | 142,547 | | | 184,027 | |
Consumer | | Consumer | 12,677 | | | 15,838 | |
Mortgage Warehouse | | Mortgage Warehouse | 752,545 | | | 1,037,574 | |
Total banking loans | | Total banking loans | $ | 3,175,702 | | | $ | 3,876,006 | |
Our national lending product lines include mortgage warehouse and liquid credit. Mortgage warehouse lending provides portfolio diversification by allowing unaffiliated mortgage originators to close one-to-four family real estate loans in their own name and manage cash flow needs until the loans are sold to investors. Our liquid credit portfolio, which consists of broadly syndicated shared national credits, provides an accordion feature allowing us to opportunistically scale our loan portfolio. The following table sets forth our national lending lines:
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2020 | | December 31, 2019 |
National lending | | | |
Mortgage warehouse | $ | 999,771 | | | $ | 667,988 | |
Commercial - Liquid credit | 188,034 | | | 81,353 | |
Commercial - Premium finance | — | | | 101,015 | |
Total national lending loans | $ | 1,187,805 | | | $ | 850,356 | |
On April 20, 2020, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit our premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of the Disposal Group was transferred to assets held for sale. The transaction closed on June 30, 2020, and the assets of the Disposal Group, consisting primarily of $84.5 million of premium finance loans, was sold for a gain on sale of $9.8 million. For further information regarding this transaction, see Note 2 – Business Combinations and Divestitures in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Most of ourBanking products and services share basic processes and have similar economic characteristics. However, ourOur 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. Our payments business, TriumphPay, is a division of TBK Bank and also operates in a highly specialized niche with unique processes and key performance indicators.
We have determined our reportable segments are Banking, Factoring, Payments and Corporate. For the nine months ended September 30, 2020,2021, our Banking segment generated 69%53% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 29%43% of our total revenue, our Payments segment generated 4% of our total revenue, and our Corporate segment generated less than 1% of our total revenue.
Third Quarter 20202021 Overview
Net income available to common stockholders for the three months ended September 30, 20202021 was $22.0$23.6 million, or $0.89$0.94 per diluted share, compared to net income available to common stockholders for the three months ended September 30, 20192020 of $14.3$22.0 million, or $0.56$0.89 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $22.6 million, or $0.91 per diluted share, for the three months ended September 30, 2020. There were no merger and acquisition related activities during the three months ended September 30, 2019. For the three months ended September 30, 2020,2021, our return on average common equity was 13.61%12.13% and our return on average assets was 1.65%1.61%.
Net income available to common stockholders for the nine months ended September 30, 20202021 was $31.0$83.9 million, or $1.27$3.33 per diluted share, compared to net income available to common stockholders for the nine months ended September 30, 20192020 of $41.8$31.0 million, or $1.59$1.27 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $86.2 million, or $3.42 per diluted share, for the nine months ended September 30, 2021 and $24.3 million, or $0.99 per diluted share, for the nine months ended September 30, 2020. There were no merger and acquisition related activities during the nine months ended September 30, 2019. For the nine months ended September 30, 2020,2021, our return on average common equity was 6.62%15.18% and our return on average assets was 0.80%1.91%.
At September 30, 2020,2021, we had total assets of $5.837$6.025 billion, including gross loans of $4,852.9 million,$4.783 billion, compared to $5.060$5.936 billion of total assets and $4.195$4.997 billion of gross loans at December 31, 2019. Organic loan growth totaled $550.92020. Total loans decreased $214.0 million during the nine months ended September 30, 2020. Excluding the sale of premium finance2021. Our Banking loans, loan growth totaled $651.9 million, or 15.5%, $223.2 million of which consisted of PPP loans. Our national lending lines increased from $850.4 million in aggregate as of December 31, 2019 to $1.188 billion as of September 30, 2020, an increase of 39.7%, and constitute 24%66% of our total loan portfolio at September 30, 2020. Excluding premium finance loans, our national lending lines increased $438.5 million, or 51.6%. Our community bank lending lines2021, decreased from $2.094$3.876 billion in aggregate as of December 31, 20192020 to $1.978$3.176 billion as of September 30, 2020,2021, a decrease of 5.5%, and18.1%. Our Factoring factored receivables, which constitute 41%31% of our total loan portfolio at September 30, 2020. Our commercial finance product lines2021, increased from $1.250$1.037 billion in aggregate as of December 31, 20192020 to $1.687$1.480 billion as of September 30, 2020,2021, an increase of 34.9%, and42.8%. Our Payments factored receivables, which constitute 35%3.0% of our total loan portfolio at September 30, 2020. Excluding the acquisition2021, increased from $84.2 million in aggregate as of Transport Financial Services' factoring assets, our commercial finance product lines increased $328.9December 31, 2020 to $127.0 million or 26.3%as of September 30, 2021, an increase of 50.8%.
At September 30, 2020,2021, we had total liabilities of $5.143$5.204 billion, including total deposits of $4.248$4.823 billion, compared to $4.424$5.209 billion of total liabilities and $3.790$4.717 billion of total deposits at December 31, 2019.2020. Deposits increased $458.2$106.0 million during the nine months ended September 30, 2020.2021.
At September 30, 2020,2021, we had total stockholders' equity of $693.8$820.7 million. During the nine months ended September 30, 2020,2021, total stockholders’ equity increased $57.3$93.9 million, primarily due to preferred stock issued during the period and our net income offset in part by common stock repurchased during the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 10.32%11.06% and 12.94%13.69%, respectively, at September 30, 2020.2021.
2021 Items of Note
HubTran, Inc.
On June 1, 2021, we, through TriumphPay, a division of our wholly-owned subsidiary TBK Bank, SSB, entered into a definitive agreement to acquire HubTran, Inc., a cloud-based provider of automation software for the trucking industry's back-office, for $97 million in cash subject to customary purchase price adjustments.
The acquisition of HubTran enables us to create a payments network that will allow freight brokers and factors to lower costs, remove inefficiencies, reduce fraud and add value for their stakeholders. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to a payments network for the trucking industry with a focus on fee revenue. At the time of acquisition, HubTran brought integrations and in-process integrations with over 220 freight brokers and more than 50 factors.
For further information on the three months ended September 30, 2020, TriumphPay processed 1,364,606 invoices paying 57,953, distinct carriers a total of $1.161 billion. Forabove transaction, see Note 2 – Business Combinations and Divestitures in the nine months ended September 30, 2020, TriumphPay processed 2,636,036 invoices paying 81,514 distinct carriers a total of $2.360 billion.
accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Misdirected Payments
As of September 30, 2021 we carry a separate $19.4 million receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest over-formula advance carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. In addition to commencing litigation against such customer, we have commenced litigation against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. During the third quarter of 2021 we, together with the USPS, entered into a stipulation of dismissal without prejudice for our initial action with respect to this matter in United States Federal District Court and filed a new action seeking recourse from the USPS in the United States Court of Federal Claims.Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of September 30, 2021. The full amount of such receivable is reflected in non-performing and past due factored receivables as of September 30, 2021 in accordance with our policy. As of September 30, 2021, the entire $19.4 million Misdirected Payments amount was greater than 90 days past due.
2020 Items of Note
Transport Financial Solutions
On July 8, 2020, we, through our wholly-owned subsidiary Advance Business Capital LLC (“ABC”), acquired the transportation factoring assets (the “TFS Acquisition”) of Transport Financial Solutions (“TFS”), a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), in exchange for cash consideration of $108.4 million, 630,268 shares of the Company’s common stock valued at approximately $13.9 million, and contingent consideration of up to approximately $9.9 million to be paid in cash following the twelve-month period ending July 31, 2021.
Subsequent to the closing of the TFS Acquisition, the Company identified that approximately $62.2 million of the assets acquired at closing were advances against future payments to be made to three large clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements between the obligor on such contracts and such clients (and their affiliated entities) for services that had not yet been performed.
On September 23, 2020, the Company and ABC entered into an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (the “Agreement”) with CVLG and Covenant Transport Solutions, LLC a wholly owned subsidiary of CVLG (“CTS” and, together with CVLG, "Covenant"). Pursuant to the Agreement, the parties agreed to certain amendments to that certain Accounts Receivable Purchase Agreement (the “ARPA”), dated as of July 8, 2020, by and among ABC, as buyer, CTS, as seller, and the Company, as buyer indirect parent. Such amendments include:
•Return of the portion of the purchase price paid under the ARPA consisting of 630,268 shares of Company common stock, which will be accomplished through the sale of such shares by CVLG pursuant to the terms of the Agreement and the surrender of the cash proceeds of such sale (net of brokerage or underwriting fees and commissions) to the Company;
•Elimination of the up to $9.9 million in earn-out consideration potentially payable to CTS under the ARPA; and
•Modification of the indemnity provisions under the ARPA to eliminate the existing indemnifications for breaches of representations and warranties and to replace such with a newly established indemnification by Covenant in the event ABC incurs losses related to the $62.2 million in over-formula advances made to specified clients identified in the Agreement (the “Over-Formula Advance Portfolio”). Under the terms of the new indemnification arrangement, Covenant will be responsible for and will indemnify ABC for 100% of the first $30 million of any losses incurred by ABC related to the Over-Formula Advance Portfolio, and for 50% of the next $30 million of any losses incurred by ABC, for total indemnification by Covenant of $45 million.
Covenant’s indemnification obligations under the Agreement arewere secured by a pledge of equipment collateral by Covenant with an estimated net orderly liquidation value of $60 million (the “Equipment Collateral”). The Company’s wholly-owned bank subsidiary, TBK Bank, SSB, has provided Covenant with a $45 million line of credit, also secured by the Equipment Collateral, the proceeds of which may be drawn to satisfy Covenant’s indemnification obligations under the Agreement. During the first quarter of 2021, Covenant drew on the line of credit to fund its only $35.6 million indemnification payment thus far, but has since paid down that amount in its entirety. At September 30, 2021, Covenant had remaining availability of $9.4 million left on its TBK line of credit available to cover our indemnification balance up to of $5.0 million.
Pursuant to the Agreement, Triumph and Covenant have agreed to certain terms related to the management of the Over-Formula Advance Portfolio, and the terms by which Covenant may provide assistance to maximize recovery on the Over-Formula Advance Portfolio.
Pursuant to the Agreement, the Company and Covenant have provided mutual releases to each other related to any and all claims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio. Also in connection the Agreement, Covenant agreed to dismiss, with prejudice, the declaratory judgment action filed in the 95th Judicial District Court of Dallas County, Texas (removed to the United States District Court, Northern District of Texas), related to the ARPA and the transactions contemplated thereby.contemplated.
Further discussion regarding activity related to the TFS Acquisition can be found below.
Triumph Premium Finance
On April 20, 2020, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit our premium finance line of business. The decision to sell TPF was made during the three months ended March 31, 2020, and at March 31, 2020, the carrying amount of the Disposal Group was transferred to assets held for sale. The transaction closed on June 30, 2020, and the assets of the Disposal Group, consisting primarily of $84.5 million of premium finance loans, was sold for a gain on sale of $9.8 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.
Preferred Stock Offering
On June 19, 2020, we issued 45,000 shares of 7.125% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, with a liquidation preference of $1,000 per share through an underwritten public offering of 1,800,000 depositary shares, each representing a 1/40th ownership interest in a share of the Series C Preferred Stock. Total gross proceeds from the preferred stock offering were $45.0 million. Net proceeds after underwriting discounts and offering expenses were $42.4 million. The net proceeds will be used for general corporate purposes.
Stock Repurchase Program
During the three months ended March 31, 2020, we repurchased 871,319 shares into treasury stock under our stock repurchase program at an average price of $40.81, for a total of $35.6 million, effectively completing the $50.0 million stock repurchase program authorized by our board of directors on October 16, 2019. There were no shares repurchased during the three months ended June 30, 2020 and September 30,remainder of fiscal year 2020.
2019 Items of Note
Stock Repurchase Program
On October 29, 2018, we announced that our board of directors had authorized us to repurchase up to $25.0 million of our outstanding common stock in open market transactions or through privately negotiated transactions. No repurchases were made under this program during the year ended December 31, 2018; however, during the six months ended June 30, 2019, we repurchased 838,141 shares into treasury stock under our stock repurchase program at an average price of $29.74, for a total of $24.9 million, which effectively completed our previously announced $25.0 million repurchase program. On July 17, 2019, our board of directors authorized us to repurchase up to an additional $25.0 million of our outstanding common stock. During the three months ended September 30, 2019, we repurchased into treasury stock 850,093 shares at an average price of $29.38 for a total of $25.0 million, which effectively completed our previously announced $25.0 million repurchase program. During the nine months ended September 30, 2019, we repurchased into treasury stock 1,688,234 shares at an average price of $29.56 for a total of $49.9 million.
Recent Developments: COVID-19 and the CARES ActLegislative Action
TheSignificant progress has been made to combat the outbreak of COVID-19COVID-19; however, the global pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and could still impair their ability to fulfill their financial obligations to the Company. The World Health OrganizationWhile employee availability has declared COVID-19 to be a global pandemic and almost all public commerce and related business activities have been curtailed, to varying degrees, with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has beenhad no material impact to the Company’s employeeson operations to date, a resurgence of COVID-19 has the potential to create widespread business continuity issues for the Company.
Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, theThe Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act iswas to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program ("PPP") and Main Street Lending Program (“MSLP”). The package also included extensive emergency funding for hospitals and providers.During December 2020, many provisions of the CARES Act were extended through the end of 2021. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s 2020 and 2021 operations and could continue to impact operations going forward.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. IfWhile it appears that epidemiological and macroeconomic conditions are trending in a positive direction as of September 30, 2021, if there is a resurgence in the global response to contain COVID-19 escalates further or is unsuccessful,virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company’s future operations, the Company is disclosing potentially material items of which it is aware.
Financial position and results of operations
Pertaining to our September 30, 20202021 financial condition and year to date results of operations, improving conditions around COVID-19 had a material impact on our allowance for credit losses (“ACL”). While weWe have not yet experienced any significantmaterial charge-offs related to COVID-19, ourCOVID-19. Our ACL calculation, and resulting provision for credit losses, are significantly impacted by changes in forecasted economic conditions. Given that forecasted economic scenarios have darkenedbrightened significantly since the pandemic was declared in early March,December 31, 2020, our need for additional reserve for credit loss increased significantlyrequired ACL decreased during the nine months ended September 30, 2020.2021. Refer to our discussion of the ACL in Note 1 and Note 4 of our unaudited financial statements as well as further discussion later on in MD&A. Should economic conditions worsen as a result of a resurgence in the virus and resulting measures to curtail its spread, we could experience further increases in our required ACL and record additional credit loss expense. The execution of the payment deferral program discussed in the following commentary assisted our ratio of past due loans to total loans as well other asset quality ratios at September 30, 2020.2021. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
The Company’s fee income has been reduced due to COVID-19. In keeping with guidance from regulators, the Company actively worked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020 resulting in a $1.1 million reduction in service charges on deposits fee income for the nine months ended September 30, 2020 compared to the same period during 2019. Should the pandemic and the global response escalate further, it is possible that the Company could reduce such fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.
The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of September 30, 2020,2021, the Company carried $0.7$0.1 million of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers. This is down from $6.0$0.7 million of accrued interest income and fees on outstanding deferrals at June 30,December 31, 2020. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.
Capital and liquidity
As of September 30, 2020,2021, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extendeda double-dip economic recession brought about by a resurgence in COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit loss expense. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.
We maintain access to multiple sources of liquidity. During the nine months ended September 30, 2020, we were able to issue preferred equity as previously discussed. Wholesale funding markets have remained open to us, but rates for short term funding have recently beencan be volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Asset valuation
Currently, we doCOVID-19 has not expect COVID-19 to affectaffected our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will changehave changed to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
As of September 30, 2020,2021, our goodwill was not impaired. Management performed a goodwill impairment test on our reporting units as of September 30, 2020. The goodwill impairment test did not identify any goodwill impairment. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment testimpaired and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At September 30, 2020 we had goodwill of $163.3 million, representing approximately 24% of equity.
As of September 30, 2020 we did not have any impairment with respect to our intangible assets, premises and equipment or other long-lived assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At September 30, 2020 we had intangible assets of $28.8 million, representing approximately 4% of equity.
Our processes, controls and business continuity plan
The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the WHO’s pandemic declaration, the Company’s Enterprise Risk Management team invoked its Board approved Pandemic Preparedness Plan. Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts – including customer relief efforts. The Company’s preparedness efforts, coupled with quick and decisive plan implementation, has resulted in minimal impacts to operations as a result of COVID-19. At September 30, 2020, the majority2021, many of our employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.
As of September 30, 2020,2021, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.
Lending operations and accommodations to borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days. Asa stated period of time. The loans carried under this payment deferral program have decreased substantially since December 31, 2020, and as of September 30, 2020,2021, the Company’s balance sheet reflected 773 of these deferrals on outstanding loan balances of $103,000,000. This reflects a decrease in deferred balances from June 30, 2020 when the Company’s balance sheet reflected 1,320 of these deferrals on outstanding loan balances of $572,000,000.$32.2 million. In accordance with the CARES Act and March 2020 interagency guidance, these short term deferrals are not considered troubled debt restructurings. It is possible that these deferrals could be extended further under the CARES Act; however, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown. At September 30, 2021, 94% of the $32.2 million COVID deferral balance was made up of one relationship.
With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively participated in assisting its customers with applications for resources through the program. PPP loans generally have a two-year or five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020,2021, the Company carried 2,080815 PPP loans representing a book value of $223,000,000.$87.4 million. The Company has received approximately $7,700,000recognized $1.6 million and $4.5 million in total fees from the SBA $2,600,000 of which were recognized in interest income and feeson PPP loans during the three and nine months ended September 30, 2020.2021, respectively, and carries $3.6 million of deferred fees on PPP loans at quarter end. The remaining fees will be amortized and recognized over the life of the associated loans.loans or as the associated loans are forgiven. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.
Credit
While all industries have and will continue to experience adverse impacts as a result of COVID-19 virus, we had exposures (on balance sheet loans and commitments to lend) in the following loan categories considered to be “at-risk” of significant impact as of September 30, 2020.2021. The exposures reported below exclude fully guaranteed PPP loans.
Retail Lending:
The Company’s exposure to retail at September 30, 20202021 equated to approximately $202.5$188.6 million, or 4.2%3.9% of total loans, summarized as follows:
•37%36% retail real estate
•21%28% new and used vehicle lending; mostly dealer floorplan
•18%17% grocery stores, pet stores, pharmacies, gas stations and convenience stores
•9%7% factoring
•15%12% other types of retail lending
EnergyAt September 30, 2021 there were no retail loans in deferral through our CARES Act deferral program.
Office Lending:
The Company’s exposure to energyoffice lending at September 30, 20202021 equated to approximately $78.6$180.4 million, or 1.6%3.8% of total loans, summarized as follows:
•55% equipment finance; this portfolio consisted primarily of fully amortizing fixed rate loans on multi-use assets like trucks, trailers and cranes.85% non-owner occupied facilities.
•28% factoring consisting of purchased invoices from energy-related loads in our factoring operations. The Company typically collects out of these exposures in 30 - 90 days and continuously evaluates the credit worthiness of the ultimate account debtor, TBK’s source of repayment.15% owner occupied facilities
•3% asset-based lending
•14% other types of energyless than 1% construction development lending
At September 30, 2020, the Company did not have exposure to Exploration and Production (“E&P”) or Reserve-Based2021 there were no office lending and only had minimal exposure to specialized equipment lending. loans in deferral through our CARES Act deferral program.
Hospitality Lending:
The Company’s exposure to hospitality at September 30, 20202021 equated to approximately $129.1$121.9 million, or 2.7%2.5% of total loans. These were mostly smaller loans purchased through our bank acquisitions and secured by hotels. At September 30, 2021 there were no hospitality loans in deferral through our CARES Act deferral program.
Restaurants:
The Company’s exposure to restaurants at September 30, 20202021 equated to approximately $38.5$31.3 million, or less than 1% of total loans. At September 30, 2021 there were no restaurant loans in deferral through our CARES Act deferral program.
Health Care and Senior Care Lending:
The Company’s exposure to health care and senior care at September 30, 2020,2021 equated to $48.9$42.7 million, or less than 1% of total loans. At September 30, 2021 there were no health care and senior care loans in deferral through our CARES Act deferral program.
We continue to work with customers directly affected by COVID-19. We are prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, we are engagingcontinue to engage in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise.
Held to Maturity Securities
At September 30, 2020, we held $8.1 million in subordinated notes of three CLO securities managed by our former subsidiary. These securities are the junior-most in securitization capital structures, and are subject to suspension of distributions if the credit of the underlying loan portfolios deteriorates materially. During the nine months ended September 30, 2020, pandemic-related downgrades and default activity caused overcollateralization triggers to be tripped on two of the three CLO investments which had a material impact on expected cash flows used to calculate the ACL. The required ACL on these balances was $2.0 million at September 30, 2020 resulting in $1.8 million of credit loss expense recognized during the nine months ended September 30, 2020. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call. Thus, we may not receive the full amount of cash distributions we expect to receive, which would cause us to record additional allowance for credit losses with a corresponding charge to credit loss expense through earnings.
Retail operations
The Company is committed to assisting our customers and communities in this time of need. Most branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members. The branches with lobbies open have been retrofitted with sneeze guard protective screens and our branches have been supplied with gloves and disinfectant materials for lobby, drive through and ATM equipment. We have introduced temporary changes to help with the financial hardship caused by COVID-19 for both our customers and non-customers. This included waiving select deposit account fees including overdraft fees, ATM fees and excessive withdrawal fees for savings and money market accounts. These fee waivers expired on June 1, 2020. Daily deposit limits for ATMs and Mobile were increased. We have also provided check-cashing services for government issued stimulus checks for both customers and non-customers. We continue to support the communities we serve as demonstrated by local teams making donations to those in need and buying meals for first responders.
We continue to serve our customers that need emergency branch access for account issues, safe deposit access and similar items by appointment. The Company has been able to open and close accounts effectively, through its drive through facility, and our Customer Care 800 access is successfully managing the volume of incoming calls. Additionally, the Company temporarily waived account service charges during the three months ended June 30, 2020 in an effort to assist all of our customers that may be in need including our small business and commercial customers.
The Company continues to monitor the safety of our staff. With reduced access to the lobby, our staffing is adequate to address the requests for time off by any of our employees who are impacted by health or child care issues. For our retail staff being asked to work during this event, a temporary pay increase was implemented in appreciation for their service.
Transportation
During the third quarter of 2020, the Company’sTrucking transportation businesses benefited from high freight volume in a reduced capacity market. Spot rates returned to mid-2018 highs in all trailer categories. This resulted in a significant rise in the average invoice price. This was unusual as diesel prices held steady or dropped slightly, indicating all of the increase related to capacity shortage in many markets. Logistics capacity typically softens late in the third quarter, prior to peak logistics demand in the fourth quarter. A portion of the increased freight was catch-up, as U.S ports reached capacity on incoming imports. Loads from Mexico have risen to record high levels. Carriers report increased production in Mexico related to nearshoring as many U.S. firms have moved production from Asia to Mexico. The disruptions in early 2020 with the inability to obtain key components, parts and supplies has rebalanced capacity along with completion of the United States-Mexico-Canada Agreement.
The third quarter of 2020 saw many idle2021 featured a continuation of high spot market rates in all transportation modes; dry van, reefer and flat bed. The well-publicized difficulties in supply chain movements from port to warehouse have kept trucks utilized and demand at record levels. Ocean carriers respondand air freight also experienced record demand and at record price levels. Through August 2021, a record number of new motor carriers had received carrier authority. These are generally not new drivers to the higher spot rates and returnmarket but previously employed company drivers who have begun operating on their own to market, despite continued increasestake advantage of high rates. In addition there are owner operators that had been working under a lease arrangement with larger carriers, but became fully independent either voluntarily or after being terminated in insurance costs that threaten breakeven at lower freight rates. Purchases at Triumph Business Capital rose during the three months ended September 30, 2020. This reflected the capacity shortage and the beneficial pricing for those firms active in the market. Capacity problems and higher rates are expectedpart due to extend through the fourth quarter of 2020 and perhaps into fiscal year 2021 which would benefit Triumph Business Capital.labor law regulation.
Financial Highlights
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
Income Statement Data: | Income Statement Data: | | | | | | | | Income Statement Data: | | | | | | | |
Interest income | Interest income | $ | 82,364 | | | $ | 79,415 | | | $ | 232,176 | | | $ | 229,982 | | Interest income | $ | 96,735 | | | $ | 82,364 | | | $ | 279,776 | | | $ | 232,176 | |
Interest expense | Interest expense | 7,985 | | | 14,650 | | | 31,046 | | | 40,487 | | Interest expense | 4,964 | | | 7,985 | | | 14,703 | | | 31,046 | |
Net interest income | Net interest income | 74,379 | | | 64,765 | | | 201,130 | | | 189,495 | | Net interest income | 91,771 | | | 74,379 | | | 265,073 | | | 201,130 | |
Credit loss expense (benefit) | Credit loss expense (benefit) | (258) | | | 2,865 | | | 33,649 | | | 7,560 | | Credit loss expense (benefit) | (1,187) | | | (258) | | | (10,838) | | | 33,649 | |
Net interest income after credit loss expense | 74,637 | | | 61,900 | | | 167,481 | | | 181,935 | | |
Net interest income after credit loss expense (benefit) | | Net interest income after credit loss expense (benefit) | 92,958 | | | 74,637 | | | 275,911 | | | 167,481 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | — | | | — | | | 9,758 | | | — | | Gain on sale of subsidiary or division | — | | | — | | | — | | | 9,758 | |
Other noninterest income | Other noninterest income | 10,493 | | | 7,742 | | | 28,241 | | | 22,903 | | Other noninterest income | 12,055 | | | 10,493 | | | 40,242 | | | 28,241 | |
Noninterest income | Noninterest income | 10,493 | | | 7,742 | | | 37,999 | | | 22,903 | | Noninterest income | 12,055 | | | 10,493 | | | 40,242 | | | 37,999 | |
Noninterest expense | Noninterest expense | 55,297 | | | 52,153 | | | 162,776 | | | 151,423 | | Noninterest expense | 72,813 | | | 55,297 | | | 204,503 | | | 162,776 | |
Net income before income taxes | 29,833 | | | 17,489 | | | 42,704 | | | 53,415 | | |
Income tax expense | 6,929 | | | 3,172 | | | 10,810 | | | 11,580 | | |
Net income | $ | 22,904 | | | $ | 14,317 | | | $ | 31,894 | | | $ | 41,835 | | |
Net income (loss) before income taxes | | Net income (loss) before income taxes | 32,200 | | | 29,833 | | | 111,650 | | | 42,704 | |
Income tax expense (benefit) | | Income tax expense (benefit) | 7,771 | | | 6,929 | | | 25,316 | | | 10,810 | |
Net income (loss) | | Net income (loss) | $ | 24,429 | | | $ | 22,904 | | | $ | 86,334 | | | $ | 31,894 | |
Dividends on preferred stock | Dividends on preferred stock | (899) | | | — | | | (899) | | | — | | Dividends on preferred stock | (802) | | | (899) | | | (2,405) | | | (899) | |
Net income available to common stockholders | $ | 22,005 | | | $ | 14,317 | | | $ | 30,995 | | | $ | 41,835 | | |
Net income available (loss) to common stockholders | | Net income available (loss) to common stockholders | $ | 23,627 | | | $ | 22,005 | | | $ | 83,929 | | | $ | 30,995 | |
| Per Share Data: | Per Share Data: | | Per Share Data: | |
Basic earnings per common share | $ | 0.89 | | | $ | 0.56 | | | $ | 1.28 | | | $ | 1.60 | | |
Diluted earnings per common share | $ | 0.89 | | | $ | 0.56 | | | $ | 1.27 | | | $ | 1.59 | | |
Basic earnings (loss) per common share | | Basic earnings (loss) per common share | $ | 0.95 | | | $ | 0.89 | | | $ | 3.40 | | | $ | 1.28 | |
Diluted earnings (loss) per common share | | Diluted earnings (loss) per common share | $ | 0.94 | | | $ | 0.89 | | | $ | 3.33 | | | $ | 1.27 | |
Weighted average shares outstanding - basic | Weighted average shares outstanding - basic | 24,592,092 | | | 25,621,054 | | | 24,298,897 | | | 26,228,499 | | Weighted average shares outstanding - basic | 24,759,419 | | | 24,592,092 | | | 24,719,861 | | | 24,298,897 | |
Weighted average shares outstanding - diluted | Weighted average shares outstanding - diluted | 24,802,388 | | | 25,734,471 | | | 24,464,215 | | | 26,331,740 | | Weighted average shares outstanding - diluted | 25,227,963 | | | 24,802,388 | | | 25,199,991 | | | 24,464,215 | |
| Adjusted Per Share Data(1): | Adjusted Per Share Data(1): | | Adjusted Per Share Data(1): | |
Adjusted diluted earnings per common share | Adjusted diluted earnings per common share | $ | 0.91 | | | $ | 0.56 | | | $ | 0.99 | | | $ | 1.59 | | Adjusted diluted earnings per common share | $ | 0.94 | | | $ | 0.91 | | | $ | 3.42 | | | $ | 0.99 | |
Adjusted weighted average shares outstanding - diluted | Adjusted weighted average shares outstanding - diluted | 24,802,388 | | | 25,734,471 | | | 24,464,215 | | | 26,331,740 | | Adjusted weighted average shares outstanding - diluted | 25,227,963 | | | 24,802,388 | | | 25,199,991 | | | 24,464,215 | |
| Performance ratios - Annualized: | Performance ratios - Annualized: | | Performance ratios - Annualized: | |
Return on average assets | Return on average assets | 1.65 | % | | 1.17 | % | | 0.80 | % | | 1.20 | % | Return on average assets | 1.61 | % | | 1.65 | % | | 1.91 | % | | 0.80 | % |
Return on average total equity | Return on average total equity | 13.24 | % | | 8.79 | % | | 6.63 | % | | 8.63 | % | Return on average total equity | 11.85 | % | | 13.24 | % | | 14.72 | % | | 6.63 | % |
Return on average common equity | Return on average common equity | 13.61 | % | | 8.79 | % | | 6.62 | % | | 8.63 | % | Return on average common equity | 12.13 | % | | 13.61 | % | | 15.18 | % | | 6.62 | % |
Return on average tangible common equity (1) | Return on average tangible common equity (1) | 19.43 | % | | 12.56 | % | | 9.51 | % | | 12.38 | % | Return on average tangible common equity (1) | 19.21 | % | | 19.43 | % | | 22.12 | % | | 9.51 | % |
Yield on loans(2) | Yield on loans(2) | 7.05 | % | | 7.63 | % | | 6.92 | % | | 7.85 | % | Yield on loans(2) | 7.92 | % | | 7.05 | % | | 7.65 | % | | 6.92 | % |
Cost of interest bearing deposits | Cost of interest bearing deposits | 0.79 | % | | 1.49 | % | | 1.07 | % | | 1.39 | % | Cost of interest bearing deposits | 0.27 | % | | 0.79 | % | | 0.33 | % | | 1.07 | % |
Cost of total deposits | Cost of total deposits | 0.56 | % | | 1.19 | % | | 0.79 | % | | 1.11 | % | Cost of total deposits | 0.16 | % | | 0.56 | % | | 0.21 | % | | 0.79 | % |
Cost of total funds | Cost of total funds | 0.67 | % | | 1.41 | % | | 0.90 | % | | 1.36 | % | Cost of total funds | 0.38 | % | | 0.67 | % | | 0.38 | % | | 0.90 | % |
Net interest margin(2) | Net interest margin(2) | 5.83 | % | | 5.85 | % | | 5.52 | % | | 5.99 | % | Net interest margin(2) | 6.69 | % | | 5.83 | % | | 6.41 | % | | 5.52 | % |
Efficiency ratio | Efficiency ratio | 65.15 | % | | 71.93 | % | | 68.07 | % | | 71.29 | % | Efficiency ratio | 70.13 | % | | 65.15 | % | | 66.98 | % | | 68.07 | % |
Adjusted efficiency ratio (1) | Adjusted efficiency ratio (1) | 64.18 | % | | 71.93 | % | | 70.61 | % | | 71.29 | % | Adjusted efficiency ratio (1) | 70.13 | % | | 64.18 | % | | 66.00 | % | | 70.61 | % |
Net noninterest expense to average assets | Net noninterest expense to average assets | 3.23 | % | | 3.64 | % | | 3.14 | % | | 3.67 | % | Net noninterest expense to average assets | 4.00 | % | | 3.23 | % | | 3.63 | % | | 3.14 | % |
Adjusted net noninterest expense to average assets (1) | Adjusted net noninterest expense to average assets (1) | 3.17 | % | | 3.64 | % | | 3.37 | % | | 3.67 | % | Adjusted net noninterest expense to average assets (1) | 4.00 | % | | 3.17 | % | | 3.57 | % | | 3.37 | % |
| (Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands, except per share amounts) | September 30, 2021 | | December 31, 2020 |
Balance Sheet Data: | Balance Sheet Data: | | | | Balance Sheet Data: | | | |
Total assets | Total assets | $ | 5,836,787 | | | $ | 5,060,297 | | Total assets | $ | 6,024,535 | | | $ | 5,935,791 | |
Cash and cash equivalents | Cash and cash equivalents | 288,278 | | | 197,880 | | Cash and cash equivalents | 532,764 | | | 314,393 | |
Investment securities | Investment securities | 254,938 | | | 262,674 | | Investment securities | 175,927 | | | 236,055 | |
Loans held for investment, net | Loans held for investment, net | 4,761,916 | | | 4,165,420 | | Loans held for investment, net | 4,741,713 | | | 4,901,037 | |
Total liabilities | Total liabilities | 5,142,945 | | | 4,423,707 | | Total liabilities | 5,203,861 | | | 5,209,010 | |
Noninterest bearing deposits | Noninterest bearing deposits | 1,315,900 | | | 809,696 | | Noninterest bearing deposits | 2,020,984 | | | 1,352,785 | |
Interest bearing deposits | Interest bearing deposits | 2,932,201 | | | 2,980,210 | | Interest bearing deposits | 2,801,591 | | | 3,363,815 | |
FHLB advances | FHLB advances | 435,000 | | | 430,000 | | FHLB advances | 30,000 | | | 105,000 | |
Paycheck Protection Program Liquidity Facility | Paycheck Protection Program Liquidity Facility | 223,713 | | | — | | Paycheck Protection Program Liquidity Facility | 97,554 | | | 191,860 | |
Subordinated notes | Subordinated notes | 87,455 | | | 87,327 | | Subordinated notes | 106,755 | | | 87,509 | |
Junior subordinated debentures | Junior subordinated debentures | 39,944 | | | 39,566 | | Junior subordinated debentures | 40,467 | | | 40,072 | |
Total stockholders’ equity | Total stockholders’ equity | 693,842 | | | 636,590 | | Total stockholders’ equity | 820,674 | | | 726,781 | |
Preferred stockholders' equity | Preferred stockholders' equity | 45,000 | | | — | | Preferred stockholders' equity | 45,000 | | | 45,000 | |
Common stockholders' equity | Common stockholders' equity | 648,842 | | | 636,590 | | Common stockholders' equity | 775,674 | | | 681,781 | |
| Per Share Data: | Per Share Data: | | Per Share Data: | |
Book value per share | Book value per share | $ | 26.11 | | | $ | 25.50 | | Book value per share | $ | 30.87 | | | $ | 27.42 | |
Tangible book value per share (1) | Tangible book value per share (1) | $ | 18.38 | | | $ | 17.88 | | Tangible book value per share (1) | $ | 19.73 | | | $ | 19.78 | |
Shares outstanding end of period | Shares outstanding end of period | 24,851,601 | | | 24,964,961 | | Shares outstanding end of period | 25,123,342 | | | 24,868,218 | |
| Asset Quality ratios(3): | Asset Quality ratios(3): | | Asset Quality ratios(3): | |
Past due to total loans(4) | Past due to total loans(4) | 2.40 | % | | 1.74 | % | Past due to total loans(4) | 2.31 | % | | 3.22 | % |
Nonperforming loans to total loans | Nonperforming loans to total loans | 1.17 | % | | 0.97 | % | Nonperforming loans to total loans | 0.90 | % | | 1.16 | % |
Nonperforming assets to total assets | Nonperforming assets to total assets | 1.52 | % | | 0.87 | % | Nonperforming assets to total assets | 0.86 | % | | 1.15 | % |
ACL to nonperforming loans(5) | ACL to nonperforming loans(5) | 159.67 | % | | 71.63 | % | ACL to nonperforming loans(5) | 95.75 | % | | 164.98 | % |
ACL to total loans(5) | ACL to total loans(5) | 1.88 | % | | 0.69 | % | ACL to total loans(5) | 0.86 | % | | 1.92 | % |
Net charge-offs to average loans(6)(4) | Net charge-offs to average loans(6)(4) | 0.08 | % | | 0.17 | % | Net charge-offs to average loans(6)(4) | 0.94 | % | | 0.10 | % |
| Capital ratios: | Capital ratios: | | Capital ratios: | |
Tier 1 capital to average assets | Tier 1 capital to average assets | 10.75 | % | | 10.03 | % | Tier 1 capital to average assets | 10.43 | % | | 10.80 | % |
Tier 1 capital to risk-weighted assets | Tier 1 capital to risk-weighted assets | 10.32 | % | | 10.29 | % | Tier 1 capital to risk-weighted assets | 11.06 | % | | 10.60 | % |
Common equity Tier 1 capital to risk-weighted assets | Common equity Tier 1 capital to risk-weighted assets | 8.72 | % | | 9.46 | % | Common equity Tier 1 capital to risk-weighted assets | 9.45 | % | | 9.05 | % |
Total capital to risk-weighted assets | Total capital to risk-weighted assets | 12.94 | % | | 12.76 | % | Total capital to risk-weighted assets | 13.69 | % | | 13.03 | % |
Total stockholders' equity to total assets | Total stockholders' equity to total assets | 11.89 | % | | 12.58 | % | Total stockholders' equity to total assets | 13.62 | % | | 12.24 | % |
Tangible common stockholders' equity ratio (1) | Tangible common stockholders' equity ratio (1) | 8.09 | % | | 9.16 | % | Tangible common stockholders' equity ratio (1) | 8.63 | % | | 8.56 | % |
(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’ equityAdjusted 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.
•"Tangible common stockholders’stockholders' equity" is defined as common stockholders' equity less goodwill and other intangible assets.
•“Total tangible assets” is defined as total assets less goodwill and other intangible assets.
•“Tangible book value per share” is defined as tangible common stockholders’ equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets.
•“Tangible common stockholders’ equity ratio” is defined as the ratio of tangible common stockholders’ equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets.
•“Return on average tangible common equity” is defined as net income available to common stockholders divided by average tangible common stockholders’ equity.
•“Adjusted efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest income. Also excluded are material gains and expenses related to merger and acquisition-related activities, including divestitures. In our judgment, the adjustments made to operating revenue allow management and investors to better assess our performance in relation to our core operating revenue by removing the volatility associated with certain acquisition-related items and other discrete items that are unrelated to our core business.
•“Adjusted net noninterest expense to average total assets” is defined as noninterest expenses net of noninterest income divided by total average assets. Excluded are material gains and expenses related to merger and acquisition-related activities, including divestitures. This metric is used by our management to better assess our operating efficiency.
(2)Performance ratios include discount accretion on purchased loans for the periods presented as follows:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
Loan discount accretion | Loan discount accretion | $ | 4,104 | | | $ | 1,159 | | | $ | 8,377 | | | $ | 4,013 | | Loan discount accretion | $ | 1,953 | | | $ | 4,104 | | | $ | 7,615 | | | $ | 8,377 | |
(3)Asset quality ratios exclude loans held for sale, except for non-performing assets to total assets.
(4)Past due ratio has been revised to exclude nonaccrual loans with contractual payments less than 30 days past due.
(5)Beginning January 1, 2020, the allowance for credit losses was calculated in accordance with Accounting Standards Codification Topic 326, “Financial Instruments – Credit Losses” (“ASC 326”).
(6)Net charge-offs to average loans ratios are for the nine months ended September 30, 20202021 and the year ended December 31, 2019.2020.
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, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
Net income available to common stockholders | Net income available to common stockholders | $ | 22,005 | | | $ | 14,317 | | | $ | 30,995 | | | $ | 41,835 | | Net income available to common stockholders | $ | 23,627 | | | $ | 22,005 | | | $ | 83,929 | | | $ | 30,995 | |
Transaction costs | Transaction costs | 827 | | | — | | | 827 | | | — | | Transaction costs | — | | | 827 | | | 2,992 | | | 827 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | — | | | — | | | (9,758) | | | — | | Gain on sale of subsidiary or division | — | | | — | | | — | | | (9,758) | |
Tax effect of adjustments | Tax effect of adjustments | (197) | | | — | | | 2,254 | | | — | | Tax effect of adjustments | — | | | (197) | | | (715) | | | 2,254 | |
Adjusted net income available to common stockholders | Adjusted net income available to common stockholders | $ | 22,635 | | | $ | 14,317 | | | $ | 24,318 | | | $ | 41,835 | | Adjusted net income available to common stockholders | $ | 23,627 | | | $ | 22,635 | | | $ | 86,206 | | | $ | 24,318 | |
Weighted average shares outstanding - diluted | Weighted average shares outstanding - diluted | 24,802 | | | 25,734 | | | 24,464 | | | 26,332 | | Weighted average shares outstanding - diluted | 25,227,963 | | | 24,802,388 | | | 25,199,991 | | | 24,464,215 | |
Adjusted diluted earnings per common share | Adjusted diluted earnings per common share | $ | 0.91 | | | $ | 0.56 | | | $ | 0.99 | | | $ | 1.59 | | Adjusted diluted earnings per common share | $ | 0.94 | | | $ | 0.91 | | | $ | 3.42 | | | $ | 0.99 | |
| Average total stockholders' equity | Average total stockholders' equity | $ | 688,327 | | | $ | 646,041 | | | $ | 642,151 | | | $ | 647,787 | | Average total stockholders' equity | $ | 818,022 | | | $ | 688,327 | | | $ | 784,019 | | | $ | 642,151 | |
Average preferred stock liquidation preference | Average preferred stock liquidation preference | (45,000) | | | — | | | (17,080) | | | — | | Average preferred stock liquidation preference | (45,000) | | | (45,000) | | | (45,000) | | | (17,080) | |
Average total common stockholders' equity | Average total common stockholders' equity | 643,327 | | | 646,041 | | | 625,071 | | | 647,787 | | Average total common stockholders' equity | 773,022 | | | 643,327 | | | 739,019 | | | 625,071 | |
Average goodwill and other intangibles | Average goodwill and other intangibles | 192,682 | | | 193,765 | | | 189,776 | | | 196,035 | | Average goodwill and other intangibles | (284,970) | | | (192,682) | | | (231,751) | | | (189,776) | |
Average tangible common equity | Average tangible common equity | $ | 450,645 | | | $ | 452,276 | | | $ | 435,295 | | | $ | 451,752 | | Average tangible common equity | $ | 488,052 | | | $ | 450,645 | | | $ | 507,268 | | | $ | 435,295 | |
| Net income available to common stockholders | Net income available to common stockholders | $ | 22,005 | | | $ | 14,317 | | | $ | 30,995 | | | $ | 41,835 | | Net income available to common stockholders | $ | 23,627 | | | $ | 22,005 | | | $ | 83,929 | | | $ | 30,995 | |
Average tangible common equity | Average tangible common equity | 450,645 | | | 452,276 | | | 435,295 | | | 451,752 | | Average tangible common equity | 488,052 | | | 450,645 | | | 507,268 | | | 435,295 | |
Return on average tangible common equity | Return on average tangible common equity | 19.43 | % | | 12.56 | % | | 9.51 | % | | 12.38 | % | Return on average tangible common equity | 19.21 | % | | 19.43 | % | | 22.12 | % | | 9.51 | % |
| Adjusted efficiency ratio: | Adjusted efficiency ratio: | | Adjusted efficiency ratio: | |
Net interest income | Net interest income | $ | 74,379 | | | $ | 64,765 | | | $ | 201,130 | | | $ | 189,495 | | Net interest income | $ | 91,771 | | | $ | 74,379 | | | $ | 265,073 | | | $ | 201,130 | |
Noninterest income | Noninterest income | 10,493 | | | 7,742 | | | 37,999 | | | 22,903 | | Noninterest income | 12,055 | | | 10,493 | | | 40,242 | | | 37,999 | |
Operating revenue | Operating revenue | 84,872 | | | 72,507 | | | 239,129 | | | 212,398 | | Operating revenue | 103,826 | | | 84,872 | | | 305,315 | | | 239,129 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | — | | | — | | | (9,758) | | | — | | Gain on sale of subsidiary or division | — | | | — | | | — | | | (9,758) | |
Adjusted operating revenue | Adjusted operating revenue | $ | 84,872 | | | $ | 72,507 | | | $ | 229,371 | | | $ | 212,398 | | Adjusted operating revenue | $ | 103,826 | | | $ | 84,872 | | | $ | 305,315 | | | $ | 229,371 | |
Total noninterest expense | Total noninterest expense | $ | 55,297 | | | $ | 52,153 | | | $ | 162,776 | | | $ | 151,423 | | Total noninterest expense | $ | 72,813 | | | $ | 55,297 | | | $ | 204,503 | | | $ | 162,776 | |
Transaction costs | Transaction costs | (827) | | | — | | | (827) | | | — | | Transaction costs | — | | | (827) | | | (2,992) | | | (827) | |
Adjusted noninterest expense | Adjusted noninterest expense | $ | 54,470 | | | $ | 52,153 | | | $ | 161,949 | | | $ | 151,423 | | Adjusted noninterest expense | $ | 72,813 | | | $ | 54,470 | | | $ | 201,511 | | | $ | 161,949 | |
Adjusted efficiency ratio | Adjusted efficiency ratio | 64.18 | % | | 71.93 | % | | 70.61 | % | | 71.29 | % | Adjusted efficiency ratio | 70.13 | % | | 64.18 | % | | 66.00 | % | | 70.61 | % |
| Adjusted net noninterest expense to average assets ratio: | Adjusted net noninterest expense to average assets ratio: | | Adjusted net noninterest expense to average assets ratio: | |
Total noninterest expense | Total noninterest expense | $ | 55,297 | | | $ | 52,153 | | | $ | 162,776 | | | $ | 151,423 | | Total noninterest expense | $ | 72,813 | | | $ | 55,297 | | | $ | 204,503 | | | $ | 162,776 | |
Transaction costs | Transaction costs | (827) | | | — | | | (827) | | | — | | Transaction costs | — | | | (827) | | | (2,992) | | | (827) | |
Adjusted noninterest expense | Adjusted noninterest expense | 54,470 | | | 52,153 | | | 161,949 | | | 151,423 | | Adjusted noninterest expense | 72,813 | | | 54,470 | | | 201,511 | | | 161,949 | |
Total noninterest income | Total noninterest income | 10,493 | | | 7,742 | | | 37,999 | | | 22,903 | | Total noninterest income | 12,055 | | | 10,493 | | | 40,242 | | | 37,999 | |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | — | | | — | | | (9,758) | | | — | | Gain on sale of subsidiary or division | — | | | — | | | — | | | (9,758) | |
Adjusted noninterest income | Adjusted noninterest income | 10,493 | | | 7,742 | | | 28,241 | | | 22,903 | | Adjusted noninterest income | 12,055 | | | 10,493 | | | 40,242 | | | 28,241 | |
Adjusted net noninterest expenses | Adjusted net noninterest expenses | $ | 43,977 | | | $ | 44,411 | | | $ | 133,708 | | | $ | 128,520 | | Adjusted net noninterest expenses | $ | 60,758 | | | $ | 43,977 | | | $ | 161,269 | | | $ | 133,708 | |
Average total assets | Average total assets | 5,518,708 | | | 4,840,540 | | | 5,304,903 | | | 4,680,234 | | Average total assets | 6,020,631 | | | 5,518,708 | | | 6,042,677 | | | 5,304,903 | |
Adjusted net noninterest expense to average assets ratio | Adjusted net noninterest expense to average assets ratio | 3.17 | % | | 3.64 | % | | 3.37 | % | | 3.67 | % | Adjusted net noninterest expense to average assets ratio | 4.00 | % | | 3.17 | % | | 3.57 | % | | 3.37 | % |
| (Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | | September 30, 2020 | | December 31, 2019 | (Dollars in thousands, except per share amounts) | | September 30, 2021 | | December 31, 2020 |
Total stockholders' equity | Total stockholders' equity | | $ | 693,842 | | | $ | 636,590 | | Total stockholders' equity | | $ | 820,674 | | | $ | 726,781 | |
Preferred stock | Preferred stock | | (45,000) | | | — | | Preferred stock | | (45,000) | | | (45,000) | |
Total common stockholders' equity | | Total common stockholders' equity | | 775,674 | | | 681,781 | |
Goodwill and other intangibles | Goodwill and other intangibles | | (192,041) | | | (190,286) | | Goodwill and other intangibles | | (280,055) | | | (189,922) | |
Tangible common stockholders' equity | Tangible common stockholders' equity | | $ | 456,801 | | | $ | 446,304 | | Tangible common stockholders' equity | | $ | 495,619 | | | $ | 491,859 | |
Common shares outstanding | Common shares outstanding | | 24,852 | | | 24,965 | | Common shares outstanding | | 25,123,342 | | | 24,868,218 | |
Tangible book value per share | Tangible book value per share | | $ | 18.38 | | | $ | 17.88 | | Tangible book value per share | | $ | 19.73 | | | $ | 19.78 | |
| Total assets at end of period | Total assets at end of period | | $ | 5,836,787 | | | $ | 5,060,297 | | Total assets at end of period | | $ | 6,024,535 | | | $ | 5,935,791 | |
Goodwill and other intangibles | Goodwill and other intangibles | | (192,041) | | | (190,286) | | Goodwill and other intangibles | | (280,055) | | | (189,922) | |
Tangible assets at period end | Tangible assets at period end | | $ | 5,644,746 | | | $ | 4,870,011 | | Tangible assets at period end | | $ | 5,744,480 | | | $ | 5,745,869 | |
Tangible common stockholders' equity ratio | Tangible common stockholders' equity ratio | | 8.09 | % | | 9.16 | % | Tangible common stockholders' equity ratio | | 8.63 | % | | 8.56 | % |
Results of Operations
Three months ended September 30, 20202021 compared with three months ended September 30, 2019.2020.
Net Income
We earned net income of $24.4 million for the three months ended September 30, 2021 compared to net income of $22.9 million for the three months ended September 30, 2020, compared to $14.3 million for the three months ended September 30, 2019, an increase of $8.6$1.5 million.
The results for the three months ended September 30, 2020 were impacted by $0.8 million of transaction costs related to the TFS Acquisition reported as noninterest expense. Excluding the transaction costs, net of taxes, we earned adjusted net income to common stock holders of $22.6 million for the three months ended September 30, 2020. There were no merger and acquisition related activities during the three months ended September 30, 2019. Excluding the transaction costs,2021 and net of taxes, we earnedincome to common stockholders for that period was $23.6 million representing an increase in adjusted net income available to common stock holdersstockholders of $22.6$1.0 million for the three months ended September 30, 2020 compared to $14.3 million for the three months ended September 30, 2019, an increase of $8.3 million.year over year. The adjusted increase was primarily the result of a $9.6$17.4 million increase in net interest income, a $3.1$0.9 million decrease in credit loss expense, and a $2.8$1.6 million increase in noninterest income offset by a $2.3an $18.3 million increase in adjusted noninterest expense, a $4.0$0.5 million increase in adjusted income tax expense, and a $0.9$0.1 million increasedecrease in dividends on preferred stock.
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:
| | | Three Months Ended September 30, | | | Three Months Ended September 30, |
| | 2020 | | | 2019 | | | 2021 | | 2020 |
(Dollars in thousands) | (Dollars in thousands) | Average Balance | | Interest | | Average Rate(4) | | Average Balance | | Interest | | Average Rate(4) | (Dollars in thousands) | Average Balance | | Interest | | Average Rate(4) | | Average Balance | | Interest | | Average Rate(4) |
Interest earning assets: | Interest earning assets: | | | | | | | | | | | | Interest earning assets: | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | 224,958 | | | 73 | | | 0.13 | % | | 104,569 | | | 603 | | | 2.29 | % | Cash and cash equivalents | 474,122 | | | 183 | | | 0.15 | % | | 224,958 | | | 73 | | | 0.13 | % |
Taxable securities | Taxable securities | 259,470 | | | 1,674 | | | 2.57 | % | | 278,878 | | | 2,495 | | | 3.55 | % | Taxable securities | 154,017 | | | 948 | | | 2.44 | % | | 259,470 | | | 1,674 | | | 2.57 | % |
Tax-exempt securities | Tax-exempt securities | 39,847 | | | 253 | | | 2.53 | % | | 48,685 | | | 289 | | | 2.36 | % | Tax-exempt securities | 27,839 | | | 178 | | | 2.54 | % | | 39,847 | | | 253 | | | 2.53 | % |
FHLB and other restricted stock | FHLB and other restricted stock | 22,121 | | | 122 | | | 2.19 | % | | 19,698 | | | 209 | | | 4.21 | % | FHLB and other restricted stock | 7,956 | | | 28 | | | 1.40 | % | | 22,121 | | | 122 | | | 2.19 | % |
Loans (1) | Loans (1) | 4,526,063 | | | 80,242 | | | 7.05 | % | | 3,943,723 | | | 75,819 | | | 7.63 | % | Loans (1) | 4,777,409 | | | 95,398 | | | 7.92 | % | | 4,526,063 | | | 80,242 | | | 7.05 | % |
Total interest earning assets | Total interest earning assets | 5,072,459 | | | 82,364 | | | 6.46 | % | | 4,395,553 | | | 79,415 | | | 7.17 | % | Total interest earning assets | 5,441,343 | | | 96,735 | | | 7.05 | % | | 5,072,459 | | | 82,364 | | | 6.46 | % |
Noninterest earning assets: | Noninterest earning assets: | | | | | | | | | | | | Noninterest earning assets: | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | 56,871 | | | | | | 75,869 | | | | | Cash and cash equivalents | 75,374 | | | 56,871 | | |
Other noninterest earning assets | Other noninterest earning assets | 389,378 | | | 369,118 | | | Other noninterest earning assets | 503,914 | | | 389,378 | | |
Total assets | Total assets | 5,518,708 | | | | | | | 4,840,540 | | | | | | Total assets | 6,020,631 | | | 5,518,708 | | |
Interest bearing liabilities: | Interest bearing liabilities: | | | | | Interest bearing liabilities: | | | | |
Deposits: | Deposits: | | | | | | | | Deposits: | |
Interest bearing demand | Interest bearing demand | 635,287 | | | 207 | | | 0.13 | % | | 585,706 | | | 355 | | | 0.24 | % | Interest bearing demand | 779,625 | | | 435 | | | 0.22 | % | | 635,287 | | | 207 | | | 0.13 | % |
Individual retirement accounts | Individual retirement accounts | 95,962 | | | 300 | | | 1.24 | % | | 110,049 | | | 454 | | | 1.64 | % | Individual retirement accounts | 86,571 | | | 126 | | | 0.58 | % | | 95,962 | | | 300 | | | 1.24 | % |
Money market | Money market | 385,620 | | | 263 | | | 0.27 | % | | 416,526 | | | 1,406 | | | 1.34 | % | Money market | 417,435 | | | 225 | | | 0.21 | % | | 385,620 | | | 263 | | | 0.27 | % |
Savings | Savings | 400,102 | | | 152 | | | 0.15 | % | | 359,169 | | | 117 | | | 0.13 | % | Savings | 479,915 | | | 185 | | | 0.15 | % | | 400,102 | | | 152 | | | 0.15 | % |
Certificates of deposit | Certificates of deposit | 905,075 | | | 3,782 | | | 1.66 | % | | 1,113,006 | | | 6,588 | | | 2.35 | % | Certificates of deposit | 595,001 | | | 725 | | | 0.48 | % | | 905,075 | | | 3,782 | | | 1.66 | % |
Brokered time deposits | Brokered time deposits | 247,928 | | | 941 | | | 1.51 | % | | 352,430 | | | 2,116 | | | 2.38 | % | Brokered time deposits | 99,116 | | | 29 | | | 0.12 | % | | 247,928 | | | 941 | | | 1.51 | % |
Other brokered deposits | Other brokered deposits | 251,701 | | | 189 | | | 0.30 | % | | — | | | — | | | — | % | Other brokered deposits | 441,446 | | | 223 | | | 0.20 | % | | 251,701 | | | 189 | | | 0.30 | % |
Total interest bearing deposits | Total interest bearing deposits | 2,921,675 | | | 5,834 | | | 0.79 | % | | 2,936,886 | | | 11,036 | | | 1.49 | % | Total interest bearing deposits | 2,899,109 | | | 1,948 | | | 0.27 | % | | 2,921,675 | | | 5,834 | | | 0.79 | % |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | 255,163 | | | 143 | | | 0.22 | % | | 351,196 | | | 2,055 | | | 2.32 | % | Federal Home Loan Bank advances | 36,522 | | | 22 | | | 0.24 | % | | 255,163 | | | 143 | | | 0.22 | % |
Subordinated notes | Subordinated notes | 87,425 | | | 1,348 | | | 6.13 | % | | 48,994 | | | 840 | | | 6.80 | % | Subordinated notes | 114,071 | | | 2,449 | | | 8.52 | % | | 87,425 | | | 1,348 | | | 6.13 | % |
Junior subordinated debentures | Junior subordinated debentures | 39,874 | | | 462 | | | 4.61 | % | | 39,364 | | | 719 | | | 7.25 | % | Junior subordinated debentures | 40,390 | | | 443 | | | 4.35 | % | | 39,874 | | | 462 | | | 4.61 | % |
Other borrowings | Other borrowings | 236,297 | | | 198 | | | 0.33 | % | | 13,754 | | | — | | | — | % | Other borrowings | 127,946 | | | 102 | | | 0.32 | % | | 236,297 | | | 198 | | | 0.33 | % |
Total interest bearing liabilities | Total interest bearing liabilities | 3,540,434 | | | 7,985 | | | 0.90 | % | | 3,390,194 | | | 14,650 | | | 1.71 | % | Total interest bearing liabilities | 3,218,038 | | | 4,964 | | | 0.61 | % | | 3,540,434 | | | 7,985 | | | 0.90 | % |
Noninterest bearing liabilities and equity: | Noninterest bearing liabilities and equity: | | | | | | | | | | | | Noninterest bearing liabilities and equity: | | | | | | | | | | | |
Noninterest bearing demand deposits | Noninterest bearing demand deposits | 1,213,494 | | | 735,527 | | | Noninterest bearing demand deposits | 1,912,398 | | | 1,213,494 | | |
Other liabilities | Other liabilities | 76,453 | | | | | | 68,778 | | | | | Other liabilities | 72,173 | | | 76,453 | | |
Total equity | Total equity | 688,327 | | | 646,041 | | | Total equity | 818,022 | | | 688,327 | | |
Total liabilities and equity | Total liabilities and equity | 5,518,708 | | | | | | | 4,840,540 | | | | | | Total liabilities and equity | 6,020,631 | | | 5,518,708 | | |
Net interest income | Net interest income | | | 74,379 | | | | | 64,765 | | | Net interest income | | | 91,771 | | | | | 74,379 | | |
Interest spread (2) | Interest spread (2) | | | | 5.56 | % | | | | | 5.46 | % | Interest spread (2) | | | | 6.44 | % | | | | 5.56 | % |
Net interest margin (3) | Net interest margin (3) | | 5.83 | % | | 5.85 | % | Net interest margin (3) | | 6.69 | % | | 5.83 | % |
(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, commercial finance, and national lending loan portfolios:
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
(Dollars in thousands) | 2020 | | 2019 |
Average community banking | $ | 2,047,059 | | | $ | 2,193,533 | |
Average commercial finance | 1,480,593 | | | 1,208,823 | |
Average national lending | 998,411 | | | 541,367 | |
Average total loans | $ | 4,526,063 | | | $ | 3,943,723 | |
Community banking yield | 5.05 | % | | 5.79 | % |
Commercial finance yield | 11.23 | % | | 12.31 | % |
National lending yield | 4.98 | % | | 4.63 | % |
Total loan yield | 7.05 | % | | 7.63 | % |
| | | | | | | | | | | |
| Three Months Ended September 30, |
(Dollars in thousands) | 2021 | | 2020 |
Average Banking loans | $ | 3,299,152 | | | $ | 3,707,293 | |
Average Factoring receivables | 1,362,856 | | | 768,087 | |
Average Payments receivables | 115,401 | | | 50,683 | |
Average total loans | $ | 4,777,409 | | | $ | 4,526,063 | |
Banking yield | 5.40 | % | | 5.23 | % |
Factoring yield | 13.75 | % | | 15.59 | % |
Payments Yield | 11.33 | % | | 10.68 | % |
Total loan yield | 7.92 | % | | 7.05 | % |
We earned net interest income of $91.8 million for the three months ended September 30, 2021 compared to $74.4 million for the three months ended September 30, 2020, compared to $64.8 million for the three months ended September 30, 2019, an increase of $9.6$17.4 million, or 14.8%23.4%, primarily driven by the following factors.
Interest income increased $2.9$14.4 million, or 3.7%17.4%, reflecting an increase in average interest earning assets of $676.9$368.9 million, or 15.4%7.3%, and an increase in average total loans of $251.3 million, or 5.6%. The average balance of our higher yielding commercial finance loansFactoring factored receivables increased $271.8$594.8 million, or 22.5%77.4%, from $1.209 billion fordriving the three months ended September 30, 2019 to $1.481 billion formajority of the three months ended September 30, 2020. The impact of increasedincrease in interest income along with a slight increase in average commercial finance balancesPayments factored receivables. This was partially offset by increaseda decrease in average balances inBanking loans of $408.1 million, or 11.0%. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $772.3 million for the three months ended September 30, 2021 compared to $786.3 million for the three months ended September 30, 2020 compared to $417.22020. Further, included in our Banking loans were PPP loans with a carrying amounts of $87.4 million for the three months ended September 30, 2019. Further, we carriedand $223.2 million of PPP loans at September 30, 2020. PPP loans carry coupon rate of 1% which has a meaningful downward impact on our loan yield.2021 and September 30, 2020, respectively. A component of interest income consists of discount accretion on acquired loan portfolios and acquired liquid credit. We recognized discount accretion on purchased loans of $4.1$2.0 million and $1.2$4.1 million for the three months ended September 30, 20202021 and 2019,2020, respectively.
Interest expense decreased $6.7$3.0 million, or 45.5%37.8%, asconsistent with a result of significant decreasesdecrease in average rates. Averageinterest-bearing liabilities. More specifically, average total interest bearing deposits decreased $15.2$22.6 million, or 0.5%, while average0.8%. Average noninterest bearing demand deposits grew $478.0$698.9 million. We experienced declines in our higher cost deposit products as these were no longer needed to fund our growth. With the exception of increased average balances of subordinated notes and other borrowings, we generally decreased our use of other interest bearing borrowings period over period and theThe decrease in interest expense on thesewas the result of lower average balancesrates discussed below. The decrease in interest expense was further aidedpartially offset by general decreases$0.8 million of remaining discount and deferred fees that were recognized during the three months ended September 30, 2021 as a result of paying off our 2016 Subordinated Notes as discussed in average rates.Note 8 of the Condensed Notes to the Consolidated Financial Statements.
Net interest margin decreasedincreased to 6.69% for the three months ended September 30, 2021 from 5.83% for the three months ended September 30, 2020, from 5.85% for the three months ended September 30, 2019, a decreasean increase of 286 basis points or 0.3%14.8%.
OurThe increase in our net interest margin was impacted by a decreasean increase in our yield on interest earning assets of 7159 basis points to 6.46%7.05% for the three months ended September 30, 2020.2021. This decreaseincrease was primarily driven by lowerhigher yields and a change in the overall mix within our loan portfolio period over periodon loans which drove a 58increased 87 basis point reduction in our loan yieldpoints to 7.05%7.92% for the same period. As previously discussed, our balance sheet reflects $223.2 million of PPP loans with a coupon rate of 1%. Our higher yieldingWhile Factoring yield decreased period over period, its average commercial finance productsfactored receivables as a percentage of the total loan portfolio increased from 30.7% for the three months ended September 30, 2019 to 32.7% for the three months ended September 30, 2020 offsetting some of the overall decrease in yieldsignificantly having a meaningful upward impact on ourtotal loan portfolio. Average factored receivables as a percentage of the total commercial finance portfolio increased from 47.9% at September 30, 2019 to 55.3% at September 30, 2020. However, we experienced decreased yields on our factored receivables during the three months ended September 30, 2020 leading to decreased yields from our commercial finance portfolio.yield. Our transportation factoring balances, which generally generate a higher yield than our non-transportation factoring balances, increased as a percentage of the overall factoring portfolio to 91% at September 30, 2021 compared to 88% at September 30, 2020 compared to 79% at September 30, 2019 Yields on our non-loan interest earning assets generally decreased2020. Banking and Payments yields were relatively flat period over period as well.and non-loan yields had little impact on our yield on interest earning assets.
The decreaseincrease in our net interest margin was partially offsetalso impacted by a decrease in our average cost of interest bearing liabilities of 8129 basis points. This decrease in average cost was caused by a decreased use ofgenerally lower interest bearing deposits to fundrates paid on our growth period over period as well as lowerinterest-bearing liabilities driven by changes in interest rates in the macro economy.
The following table shows the effects that changes in average balances (volume) and average interest rates (rate) had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities:bearing:
| | | Three Months Ended | | | Three Months Ended |
| | September 30, 2020 vs. 2019 | | | September 30, 2021 vs. 2020 |
| | Increase (Decrease) Due to: | | | | Increase (Decrease) Due to: | |
(Dollars in thousands) | (Dollars in thousands) | Rate | | Volume | | Net Increase | (Dollars in thousands) | Rate | | Volume | | Net Increase |
Interest earning assets: | Interest earning assets: | | | | | | Interest earning assets: | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | (569) | | | $ | 39 | | | $ | (530) | | Cash and cash equivalents | $ | 14 | | | $ | 96 | | | $ | 110 | |
Taxable securities | Taxable securities | (696) | | | (125) | | | (821) | | Taxable securities | (77) | | | (649) | | | (726) | |
Tax-exempt securities | Tax-exempt securities | 20 | | | (56) | | | (36) | | Tax-exempt securities | 2 | | | (77) | | | (75) | |
FHLB and other restricted stock | FHLB and other restricted stock | (100) | | | 13 | | | (87) | | FHLB and other restricted stock | (45) | | | (49) | | | (94) | |
Loans | Loans | (5,901) | | | 10,324 | | | 4,423 | | Loans | 10,137 | | | 5,019 | | | 15,156 | |
Total interest income | Total interest income | (7,246) | | | 10,195 | | | 2,949 | | Total interest income | 10,031 | | | 4,340 | | | 14,371 | |
Interest bearing liabilities: | Interest bearing liabilities: | | Interest bearing liabilities: | |
Interest bearing demand | Interest bearing demand | (164) | | | 16 | | | (148) | | Interest bearing demand | 147 | | | 81 | | | 228 | |
Individual retirement accounts | Individual retirement accounts | (110) | | | (44) | | | (154) | | Individual retirement accounts | (160) | | | (14) | | | (174) | |
Money market | Money market | (1,122) | | | (21) | | | (1,143) | | Money market | (55) | | | 17 | | | (38) | |
Savings | Savings | 19 | | | 16 | | | 35 | | Savings | 2 | | | 31 | | | 33 | |
Certificates of deposit | Certificates of deposit | (1,937) | | | (869) | | | (2,806) | | Certificates of deposit | (2,679) | | | (378) | | | (3,057) | |
Brokered time deposits | Brokered time deposits | (778) | | | (397) | | | (1,175) | | Brokered time deposits | (868) | | | (44) | | | (912) | |
Other brokered deposits | Other brokered deposits | — | | | 189 | | | 189 | | Other brokered deposits | (62) | | | 96 | | | 34 | |
Total interest bearing deposits | Total interest bearing deposits | (4,092) | | | (1,110) | | | (5,202) | | Total interest bearing deposits | (3,675) | | | (211) | | | (3,886) | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | (1,858) | | | (54) | | | (1,912) | | Federal Home Loan Bank advances | 11 | | | (132) | | | (121) | |
Subordinated notes | Subordinated notes | (85) | | | 593 | | | 508 | | Subordinated notes | 529 | | | 572 | | | 1,101 | |
Junior subordinated debentures | Junior subordinated debentures | (263) | | | 6 | | | (257) | | Junior subordinated debentures | (25) | | | 6 | | | (19) | |
Other borrowings | Other borrowings | 12 | | | 186 | | | 198 | | Other borrowings | (10) | | | (86) | | | (96) | |
Total interest expense | Total interest expense | (6,286) | | | (379) | | | (6,665) | | Total interest expense | (3,170) | | | 149 | | | (3,021) | |
Change in net interest income | Change in net interest income | $ | (960) | | | $ | 10,574 | | | $ | 9,614 | | Change in net interest income | $ | 13,201 | | | $ | 4,191 | | | $ | 17,392 | |
Credit Loss Expense
Credit loss expense is the amount of expense that, based on our judgment, is required to maintain the allowances for credit losses (“ACL”) at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to the financial statementsCompany’s 2020 Form 10-K for detailed discussion regarding ACL methodologies for available for sale debt securities, held to maturity securities and loans held for investment.
The following table presents the major categories of credit loss expense:
| | | Three Months Ended September 30, | | | Three Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change | (Dollars in thousands) | 2021 | | 2020 | | $ Change | | % Change |
Credit loss expense (benefit) on loans | Credit loss expense (benefit) on loans | $ | (356) | | | $ | 2,865 | | | $ | (3,221) | | | (112.4) | % | Credit loss expense (benefit) on loans | $ | (959) | | | $ | (356) | | | $ | (603) | | | (169.4) | % |
Credit loss expense (benefit) on off balance sheet credit exposures | Credit loss expense (benefit) on off balance sheet credit exposures | (8) | | | — | | | (8) | | | 100.0 | % | Credit loss expense (benefit) on off balance sheet credit exposures | (238) | | | (8) | | | (230) | | | (2,875.0) | % |
Credit loss expense on held to maturity securities | 106 | | | — | | | 106 | | | 100.0 | % | |
Credit loss expense (benefit) on held to maturity securities | | Credit loss expense (benefit) on held to maturity securities | 10 | | | 106 | | | (96) | | | (90.6) | % |
Credit loss expense on available for sale securities | Credit loss expense on available for sale securities | — | | | — | | | — | | | — | | Credit loss expense on available for sale securities | — | | | — | | | — | | | — | |
Total credit loss expense (benefit) | Total credit loss expense (benefit) | $ | (258) | | | $ | 2,865 | | | $ | (3,123) | | | (109.0) | % | Total credit loss expense (benefit) | $ | (1,187) | | | $ | (258) | | | $ | (929) | | | 360.1 | % |
Upon and subsequent to adoption of ASC 326, forFor available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. At September 30, 2020,2021 and June 30, 2021, the Company determined that all impaired available for sale securities experienced a decline in fair value below the amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at those respective dates and there was no credit loss expense recognized by the Company during the three months ended September 30, 2020.2021. The same was true for the same period in the prior year.
Upon and subsequent to adoption of ASC 326, theThe ACL on held to maturity ("HTM") securities is estimated at each measurement date on a collective basis by major security type. At September 30, 20202021 and December 31, 2019,June 30, 2021, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At January 1, 2020,September 30, 2021 and June 30, 2020, and September 30, 2020,2021, the Company carried $8.4 million, $8.1$7.2 million and $8.1$7.4 million of these HTM securities at amortized cost, respectively. The required ACL on these balances was $0.1 million at January 1, 2020, $1.9 million at June 30, 2020, and $2.0$1.7 million at September 30, 2020. During the current year, pandemic-related downgrades2021 and default activity caused overcollateralization triggersJune 30, 2021, respectively. The impact to be tripped on two of the three CLO investments which had a material impact on expected cash flows used to calculate the ACL. The ACL on these balances was $2.0 million at September 30, 2020 resulting in $0.1 million of credit loss expense recognizedwas not material during the three months ended September 30, 2020.2021. None of the overcollateralization triggers tied to the CLO securities were tripped as of September 30, 2021. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.
At June 30, 2020 and September 30, 2020, the Company carried $8.1 million of these HTM securities at amortized cost, respectively. The ACL on these balances was $1.9 million and $2.0 million at June 30, 2020 and September 30, 2020, respectively resulting in $0.1 million of credit loss expense recognized during the three months ended September 30, 2020.
Our ACL on loans was $91.0$41.0 million as of September 30, 2020,2021, compared to $29.1$95.7 million as of December 31, 2019,2020, representing an ACL to total loans ratio of 1.88%0.86% and 0.69%1.92% respectively. Upon adoption of ASC 326, management booked an increase of $0.3 million to the ACL and a decrease to retained earnings net of the deferred tax impact. The Day 1 adjustment upon adoption raised the ACL balance to $29.4 million on January 1, 2020. Management determined that the $62.2 million in over-formula advances obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those over-formula advances to be purchased credit deteriorated ("PCD"). This resulted in recording a $37.4 million ACL on the over-formula advances through purchase accounting. There was no impact to credit loss expense resulting from the PCD determination.
Our credit loss expense on loans decreased $3.2$0.6 million, or 112.4%169.4%, for the three months ended September 30, 20202021 compared to the three months ended September 30, 2019.2020.
The decreased credit loss expense was driven by relatively little change to the loss drivers that the Company forecasts to calculate expected losses. Prior to the three months ended September 30, 2020, significant deterioration in these forecasted loss drivers was brought on by the projected economic impact of COVID-19 on the reasonable and supportable forecast period. At September 30, 2020, changes to the forecasted loss drivers were little changed as management's expectations for these loss drivers did not change materially from June 30, 2020. Changes in forecasted loss drivers resulted in credit loss expense of approximately $0.6 million for the three months ended September 30, 2020. For the three months ended September 30, 2019, changes to loss factors under the incurred loss allowance methodology had an insignificant impact on credit loss expense.
Change in loan growth and change in mix also led to a decrease in credit loss expense period over period. During the three months ended September 30, 2020, outstanding loans increased $459.6 million from June 30, 2020. This growth is made up of $454.8 million of growth in factored receivables which includes $107.5 million of factoring assets resulting from the TFS Acquisition. Mortgage warehouse lending increased $123.0 million during the period. Given the nature of factored receivables and mortgage warehouse lending, these products are reserved at a lower rate than some of our other lines of lending. During the three months ended September 30, 2019, outstanding loans increased $373.5 million and this growth was in higher reserve rate lines of lending. For the three months ended September 30, 2020, changes in loan volume and mix resulted in a decrease of $1.7 million of credit loss expense. Changes in loan volume and mix resulted in an increase of $1.7 million credit loss expense for the three months ended September 30, 2019.
The decrease in credit loss expense was furtherprimarily driven by net new specific reserves on non-PCD assets. We recorded net new specific reserves of $0.8 million during the three months ended September 30, 2020 compared to $1.2a release of net specific reserves of $1.4 million during the same period of the current year. The decreased credit loss expense was also due to projected improvement of the loss drivers that the Company forecasted over the reasonable and supportable forecast period to calculate expected losses at September 30, 2021 which resulted in a benefit to credit loss expense of $0.2 million for the three months ended September 30, 2021. During the three months ended September 30, 2020 the Company forecasted deterioration in the loss factors driven by the projected economic impact of COVID-19 which resulted in credit loss expense of $0.6 million. See further discussion in the allowance for credit loss section below.
Net charge-offs were $3.7 million for the three months ended September 30, 2021 and approximately $3.2 million of the gross charge-off balance had been reserved in a prior period. Net charge-offs were $0.7 million for the three months ended September 30, 2020 and approximately $0.8 million of the gross charge-off balance had been reserved in a prior period.
Changes in loan volume and mix partially offset the decrease in credit loss expense period over period. Changes in volume and mix resulted in credit loss expense of $0.1 million during the three months ended September 30, 2019. We experienced higher net2021 compared to a benefit of $1.7 million during the three months ended September 30, 2020.
The Over-Formula Advances classified as factored receivables and deemed to be purchased credit deteriorated ("PCD") from Covenant did not have an impact on credit loss expense during the three months ended September 30, 2021. During the period, there were no material changes in the underlying credit quality of the remaining two Over-Formula Advance clients. As such, there were no charge-offs of $0.7related to these balances and no adjustments were made to the corresponding ACL balances that would impact credit loss expense. At quarter end, our entire remaining over formula advance position was down from $62.1 million inat December 31, 2020 to $10.1 million at September 30, 2021 and the $10.1 million balance at September 30, 2021 was fully reserved. During the three months ended September 30, 2020, comparedthe ACL on PCD assets was established through purchase accounting with no impact to $0.4 million for the same period in 2019. Net charge-offs for the three months ended September 30, 2020 were fully reserved. Approximately $0.3 million of the charge-offs for the three months ended September 30, 2019, had specific reserves previously recorded.
Credit loss expense for off balance sheet credit exposures decreased $8 thousand,$0.2 million, primarily due to the relatively flat assumedchanges in the assumptions used to project the loss rates previously discussed. The Company also experienced relatively little change indiscussed partially offset by increased outstanding commitments to fund during theperiod over period. Prior to January 1, 2020, credit loss expense for off balance sheet credit exposures was recorded in other noninterest expense. Credit loss expense for off balance sheet credit exposures was immaterial to operations for the three months ended September 30, 2019.
Noninterest Income
The following table presents our major categories of noninterest income:
| | | Three Months Ended September 30, | | | Three Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change | (Dollars in thousands) | 2021 | | 2020 | | $ Change | | % Change |
Service charges on deposits | Service charges on deposits | $ | 1,470 | | | $ | 1,937 | | | $ | (467) | | | (24.1) | % | Service charges on deposits | $ | 2,030 | | | $ | 1,470 | | | $ | 560 | | | 38.1 | % |
Card income | Card income | 2,091 | | | 2,015 | | | 76 | | | 3.8 | % | Card income | 2,144 | | | 2,091 | | | 53 | | | 2.5 | % |
Net OREO gains (losses) and valuation adjustments | Net OREO gains (losses) and valuation adjustments | (41) | | | (56) | | | 15 | | | 26.8 | % | Net OREO gains (losses) and valuation adjustments | (9) | | | (41) | | | 32 | | | 78.0 | % |
Net gains (losses) on sale or call of securities | Net gains (losses) on sale or call of securities | 3,109 | | | 19 | | | 3,090 | | | NM | Net gains (losses) on sale or call of securities | 4 | | | 3,109 | | | (3,105) | | | (99.9) | % |
Fee income | Fee income | 1,402 | | | 1,624 | | | (222) | | | (13.7) | % | Fee income | 5,198 | | | 1,402 | | | 3,796 | | | 270.8 | % |
Insurance commissions | Insurance commissions | 990 | | | 1,247 | | | (257) | | | (20.6) | % | Insurance commissions | 1,231 | | | 990 | | | 241 | | | 24.3 | % |
Other | Other | 1,472 | | | 956 | | | 516 | | | 54.0 | % | Other | 1,457 | | | 1,472 | | | (15) | | | (1.0) | % |
Total noninterest income | Total noninterest income | $ | 10,493 | | | $ | 7,742 | | | $ | 2,751 | | | 35.5 | % | Total noninterest income | $ | 12,055 | | | $ | 10,493 | | | $ | 1,562 | | | 14.9 | % |
Noninterest income increased $2.8$1.6 million, or 35.5%14.9%. Changes in selected components of noninterest income in the above table are discussed below.
•Service charges on deposits.deposits. Service charges on deposits increased $0.6 million consistent with increased average deposit accounts, including overdraft and non-sufficient fundsbalances subject to such fees decreased $0.5 million, or 24.1% primarily due to decreased activity driven by the impact of COVID-19.period over period.
•Net gains (losses) on sale or call of securities. Net gains (losses) on sale or call of securities increaseddecreased $3.1 million due to increaseddecreased sales of available for sale CLOsactivity during the current period.
•Other.Fee income Other noninterest. Fee income consisting of income associated with bank-owned life insurance and other miscellaneous activities, increased $0.5$3.8 million primarily due to the recognition of $2.0$2.9 million of incomepayment fees earned by TriumphPay during the three months ended September 30, 2020 driven by an increase in the value2021. The fees were a result of the receivable due from Covenant resulting from the Agreement previously discussed. This increase was partially offset by a $0.7 million loss recognized on the donationacquired operations of a branch to a local municipalityHubTran during the three months ended September 30, 2020.year. There were no other significant itemschanges within in the components of other noninterest income during the three months ended September 30, 2019.fee income.
Noninterest Expense
The following table presents our major categories of noninterest expense:
| | | Three Months Ended September 30, | | | Three Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change | (Dollars in thousands) | 2021 | | 2020 | | $ Change | | % Change |
Salaries and employee benefits | Salaries and employee benefits | $ | 31,651 | | | $ | 28,717 | | | $ | 2,934 | | | 10.2 | % | Salaries and employee benefits | $ | 43,769 | | | $ | 31,651 | | | $ | 12,118 | | | 38.3 | % |
Occupancy, furniture and equipment | Occupancy, furniture and equipment | 5,574 | | | 4,505 | | | 1,069 | | | 23.7 | % | Occupancy, furniture and equipment | 6,388 | | | 5,574 | | | 814 | | | 14.6 | % |
FDIC insurance and other regulatory assessments | FDIC insurance and other regulatory assessments | 360 | | | (2) | | | 362 | | | NM | FDIC insurance and other regulatory assessments | 353 | | | 360 | | | (7) | | | (1.9) | % |
Professional fees | Professional fees | 3,265 | | | 1,969 | | | 1,296 | | | 65.8 | % | Professional fees | 2,362 | | | 3,265 | | | (903) | | | (27.7) | % |
Amortization of intangible assets | Amortization of intangible assets | 2,141 | | | 2,228 | | | (87) | | | (3.9) | % | Amortization of intangible assets | 3,274 | | | 2,141 | | | 1,133 | | | 52.9 | % |
Advertising and promotion | Advertising and promotion | 1,105 | | | 1,379 | | | (274) | | | (19.9) | % | Advertising and promotion | 1,403 | | | 1,105 | | | 298 | | | 27.0 | % |
Communications and technology | Communications and technology | 5,569 | | | 5,382 | | | 187 | | | 3.5 | % | Communications and technology | 7,090 | | | 5,569 | | | 1,521 | | | 27.3 | % |
Travel and entertainment | Travel and entertainment | 314 | | | 1,350 | | | (1,036) | | | (76.7) | % | Travel and entertainment | 1,352 | | | 314 | | | 1,038 | | | 330.6 | % |
Other | Other | 5,318 | | | 6,625 | | | (1,307) | | | (19.7) | % | Other | 6,822 | | | 5,318 | | | 1,504 | | | 28.3 | % |
Total noninterest expense | Total noninterest expense | $ | 55,297 | | | $ | 52,153 | | | $ | 3,144 | | | 6.0 | % | Total noninterest expense | $ | 72,813 | | | $ | 55,297 | | | $ | 17,516 | | | 31.7 | % |
Noninterest expense increased $3.1$17.5 million, or 6.0%31.7%. Noninterest expense for the three months ended September 30, 2020 was impacted by $0.8 million of transaction costs associated with the TFS Acquisition.acquisition. Excluding the TFS Acquisitionacquisition transaction costs, we incurred adjusted noninterest expense of $54.5 million for the three months ended September 30, 2020, resulting in an adjusted net increase in noninterest expense of $2.3$18.3 million, or 4.4%.33.6%, 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 $2.9$12.1 million, or 10.2%38.3%, which is primarily due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. The size of our workforce increased slightly.period over period due in part due to the acquisition of HubTran, but also organic growth within the Company. Our average full-time equivalent employees were 1,123.51,215.7 and 1,104.71,123.5 for the three months ended September 30, 2021 and 2020, respectively. Given improved 2021 performance compared to 2020, our bonus expense increased $2.6 million period over period. Further, sales commissions, primarily related to our operations at Triumph Business Capital and 2019, respectively.TriumphPay, increased $1.1 million and compensation paid to temporary contract labor increased $0.9 million period over period. Additionally, stock based compensation expense increased $3.1 million period over period.
•Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $1.1$0.8 million, or 23.7%14.6%, primarily due to growth in our operations period over period.
•Professional Fees. Professional fees increased $1.3decreased $0.9 million, or 65.8%27.7%, primarily due to professional fees incurred in connectionthe $0.8 million of transaction costs associated with the TFS Acquisition.acquisition recognized in the prior period.
•Amortization of Intangible Assets. Amortization of intangible assets increased $1.1 million, or 52.9%, primarily due to the additional intangibles recorded through the HubTran acquisition during the current year.
•Communication and Technology. Communication and technology increased $1.5 million, or 27.3%, primarily as a result as a result of increased spending on IT consulting to develop efficiency in our operations and improve the functionality of the TriumphPay platform period over period.
•Travel and Entertainment. Travel and entertainment expense decreasedincreased $1.0 million, or 76.7%330.6%, primarily due to the impact of the COVID-19 pandemic on such activities.activities during the prior year.
•Other. Other noninterest expense includes loan-related expenses, software amortization, training and recruiting, postage, insurance, and subscription services. Other noninterest expense decreased $1.3increased $1.5 million, or 19.7%28.3%. There were no significant increases or decreases in the individual 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 increased $3.7$0.9 million, or 115.6%, from $3.2 million for the three months ended September 30, 2019 to $6.9 million for the three months ended September 30, 2020.2020 to $7.8 million for the three months ended September 30, 2021. The effective tax rate was 24% for the three months ended September 30, 2021, compared to 23% for the three months ended September 30, 2020, compared to 18% for the three months ended September 30, 2019. The increase in the effective tax rate period over period is principally due to an income tax benefit of approximately $0.8 million related to changes in the sourcing location of income and other items during the three months ended September 30, 2019.2020.
Operating Segment Results
Our reportable segments are Banking, Factoring, Payments, 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. CorporateThe Payments segment includes holding company financing and investment activities and management and administrative expenses to support the overall operations of the Company.TBK Bank's TriumphPay division, which provides a presentment, audit, and payment solution to shipper, freight broker, and factor clients in the trucking industry. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a carrier a QuickPay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering freight brokers the ability to settle their invoices with us on an extended term following our payment to their carriers as an additional liquidity option for such freight brokers.
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 the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 20192020 Form 10-K. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segmentand Payments segments based on Federal Home Loan Bank advance rates. Credit loss expense is allocated based on the segment’s ACL 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 Factoring segment includes only factoring originated by TBC. The following tables present our primary operating results for our operating segments:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Three Months Ended September 30, 2020 | | Banking | | Factoring | | Corporate | | Consolidated | |
Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 52,288 | | | $ | 30,068 | | | $ | 8 | | | $ | 82,364 | | Total interest income | | $ | 46,175 | | | $ | 47,222 | | | $ | 3,295 | | | $ | 43 | | | $ | 96,735 | |
Intersegment interest allocations | Intersegment interest allocations | | 3,312 | | | (3,312) | | | — | | | — | | Intersegment interest allocations | | 2,452 | | | (2,341) | | | (111) | | | — | | | — | |
Total interest expense | Total interest expense | | 6,176 | | | — | | | 1,809 | | | 7,985 | | Total interest expense | | 2,073 | | | — | | | — | | | 2,891 | | | 4,964 | |
Net interest income (expense) | Net interest income (expense) | | 49,424 | | | 26,756 | | | (1,801) | | | 74,379 | | Net interest income (expense) | | 46,554 | | | 44,881 | | | 3,184 | | | (2,848) | | | 91,771 | |
Credit loss expense (benefit) | Credit loss expense (benefit) | | (3,417) | | | 3,053 | | | 106 | | | (258) | | Credit loss expense (benefit) | | (2,399) | | | 1,164 | | | 38 | | | 10 | | | (1,187) | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 52,841 | | | 23,703 | | | (1,907) | | | 74,637 | | Net interest income after credit loss expense | | 48,953 | | | 43,717 | | | 3,146 | | | (2,858) | | | 92,958 | |
Noninterest income | Noninterest income | | 7,490 | | | 3,157 | | | (154) | | | 10,493 | | Noninterest income | | 7,371 | | | 1,557 | | | 3,086 | | | 41 | | | 12,055 | |
Noninterest expense | Noninterest expense | | 40,584 | | | 13,665 | | | 1,048 | | | 55,297 | | Noninterest expense | | 41,183 | | | 19,106 | | | 11,416 | | | 1,108 | | | 72,813 | |
Operating income (loss) | Operating income (loss) | | $ | 19,747 | | | $ | 13,195 | | | $ | (3,109) | | | $ | 29,833 | | Operating income (loss) | | $ | 15,141 | | | $ | 26,168 | | | $ | (5,184) | | | $ | (3,925) | | | $ | 32,200 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Three Months Ended September 30, 2019 | | Banking | | Factoring | | Corporate | | Consolidated | |
Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 54,266 | | | $ | 24,869 | | | $ | 280 | | | $ | 79,415 | | Total interest income | | $ | 50,927 | | | $ | 30,068 | | | $ | 1,361 | | | $ | 8 | | | $ | 82,364 | |
Intersegment interest allocations | Intersegment interest allocations | | 2,918 | | | (2,918) | | | — | | | — | | Intersegment interest allocations | | 3,459 | | | (3,312) | | | (147) | | | — | | | — | |
Total interest expense | Total interest expense | | 13,091 | | | — | | | 1,559 | | | 14,650 | | Total interest expense | | 6,176 | | | — | | | — | | | 1,809 | | | 7,985 | |
Net interest income (expense) | Net interest income (expense) | | 44,093 | | | 21,951 | | | (1,279) | | | 64,765 | | Net interest income (expense) | | 48,210 | | | 26,756 | | | 1,214 | | | (1,801) | | | 74,379 | |
Credit loss expense | | 2,019 | | | 846 | | | — | | | 2,865 | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | | (3,419) | | | 3,053 | | | 2 | | | 106 | | | (258) | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 42,074 | | | 21,105 | | | (1,279) | | | 61,900 | | Net interest income after credit loss expense | | 51,629 | | | 23,703 | | | 1,212 | | | (1,907) | | | 74,637 | |
Noninterest income | | 6,401 | | | 1,291 | | | 50 | | | 7,742 | | |
Other noninterest income | | Other noninterest income | | 7,443 | | | 3,157 | | | 47 | | | (154) | | | 10,493 | |
Noninterest expense | Noninterest expense | | 38,371 | | | 12,792 | | | 990 | | | 52,153 | | Noninterest expense | | 37,389 | | | 13,665 | | | 3,195 | | | 1,048 | | | 55,297 | |
Operating income (loss) | Operating income (loss) | | $ | 10,104 | | | $ | 9,604 | | | $ | (2,219) | | | $ | 17,489 | | Operating income (loss) | | $ | 21,683 | | | $ | 13,195 | | | $ | (1,936) | | | $ | (3,109) | | | $ | 29,833 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
September 30, 2020 | | Banking | | Factoring | | Corporate | | Eliminations | | Consolidated | |
September 30, 2021 | | September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Eliminations | | Consolidated |
Total assets | Total assets | | $ | 5,767,857 | | | $ | 1,042,571 | | | $ | 828,065 | | | $ | (1,801,706) | | | $ | 5,836,787 | | Total assets | | $ | 5,686,761 | | | $ | 1,559,378 | | | $ | 242,446 | | | $ | 975,939 | | | $ | (2,439,989) | | | $ | 6,024,535 | |
Gross loans | Gross loans | | $ | 4,759,135 | | | $ | 948,987 | | | $ | 800 | | | $ | (856,011) | | | $ | 4,852,911 | | Gross loans | | $ | 4,390,659 | | | $ | 1,479,989 | | | $ | 127,039 | | | $ | 700 | | | $ | (1,215,657) | | | $ | 4,782,730 | |
| (Dollars in thousands) | | (Dollars in thousands) | |
December 31, 2020 | | December 31, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Eliminations | | Consolidated |
Total assets | | Total assets | | $ | 5,791,537 | | | $ | 1,121,704 | | | $ | 115,836 | | | $ | 861,967 | | | $ | (1,955,253) | | | $ | 5,935,791 | |
Gross loans | | Gross loans | | $ | 4,788,093 | | | $ | 1,036,548 | | | $ | 84,222 | | | $ | 800 | | | $ | (912,887) | | | $ | 4,996,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | | |
December 31, 2019 | | Banking | | Factoring | | Corporate | | Eliminations | | Consolidated |
Total assets | | $ | 4,976,009 | | | $ | 662,002 | | | $ | 771,048 | | | $ | (1,348,762) | | | $ | 5,060,297 | |
Gross loans | | $ | 4,108,735 | | | $ | 573,372 | | | $ | 1,519 | | | $ | (489,114) | | | $ | 4,194,512 | |
Banking
| (Dollars in thousands) | (Dollars in thousands) | | Three Months Ended September 30, | | | (Dollars in thousands) | | Three Months Ended September 30, | |
Banking | Banking | | 2020 | | 2019 | | $ Change | | % Change | Banking | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | Total interest income | | $ | 52,288 | | | $ | 54,266 | | | $ | (1,978) | | | (3.6) | % | Total interest income | | $ | 46,175 | | | $ | 50,927 | | | $ | (4,752) | | | (9.3) | % |
Intersegment interest allocations | Intersegment interest allocations | | 3,312 | | | 2,918 | | | 394 | | | 13.5 | % | Intersegment interest allocations | | 2,452 | | | 3,459 | | | (1,007) | | | (29.1) | % |
Total interest expense | Total interest expense | | 6,176 | | | 13,091 | | | (6,915) | | | (52.8) | % | Total interest expense | | 2,073 | | | 6,176 | | | (4,103) | | | (66.4) | % |
Net interest income (expense) | Net interest income (expense) | | 49,424 | | | 44,093 | | | 5,331 | | | 12.1 | % | Net interest income (expense) | | 46,554 | | | 48,210 | | | (1,656) | | | (3.4) | % |
Credit loss expense (benefit) | Credit loss expense (benefit) | | (3,417) | | | 2,019 | | | (5,436) | | | (269.2) | % | Credit loss expense (benefit) | | (2,399) | | | (3,419) | | | 1,020 | | | 29.8 | % |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 52,841 | | | 42,074 | | | 10,767 | | | 25.6 | % | Net interest income after credit loss expense | | 48,953 | | | 51,629 | | | (2,676) | | | (5.2) | % |
Noninterest income | | 7,490 | | | 6,401 | | | 1,089 | | | 17.0 | % | |
Other noninterest income | | Other noninterest income | | 7,371 | | | 7,443 | | | (72) | | | (1.0) | % |
Noninterest expense | Noninterest expense | | 40,584 | | | 38,371 | | | 2,213 | | | 5.8 | % | Noninterest expense | | 41,183 | | | 37,389 | | | 3,794 | | | 10.1 | % |
Operating income (loss) | Operating income (loss) | | $ | 19,747 | | | $ | 10,104 | | | $ | 9,643 | | | 95.4 | % | Operating income (loss) | | $ | 15,141 | | | $ | 21,683 | | | $ | (6,542) | | | (30.2) | % |
Our Banking segment’s operating income increased $9.6decreased $6.5 million, or 95.4%30.2%.
InterestTotal interest income increaseddecreased $4.8 million, or 9.3%, at our Banking segment primarily as a result of increasesdecreases in the majority of the balances of our interest earning assets, primarily loans, due to the continued growth of our commercial finance and national lending products.loans. Average loans in our Banking segment, increased 14.3%excluding intersegment loans, decreased 11.0% from $3.869$3.707 billion for the three months ended September 30, 20192020 to $4.422$3.299 billion for the three months ended September 30, 2020.2021. The increasedecrease in interest income due to increased average balances of our interest earning assets was partially offset by lowera slight increase in yields across almost all of ouron interest earning asset groups.assets at our Banking segment.
Interest expense decreased asconsistent with a result of significant decreasesdecrease in average rates. Averageinterest-bearing liabilities including a decrease in average total interest bearing deposits at our Banking segment decreased, while average noninterest bearing demand deposits at our Banking Segment grew. We experienced declines in our higher cost deposit products as these were no longer needed to fund our growth. Additionally, we generally decreased our use of other interest bearing borrowings at our Banking segment period over period and theperiod. This decrease was primarily caused by lower interest rates paid on our interest-bearing liabilities driven by changes in interest expense on these average balances was further aided by general decreasesrates in average rates.the macro economy.
Credit loss expense at our bankingBanking segment is made up of credit loss expense related to loans and credit loss expense related to off balance sheet commitments to lend. Credit loss expense related to loans was a benefit to credit loss expense of $2.2 million for the three months ended September 30, 2021 compared to a benefit to credit loss expense of $3.4 million for the three months ended September 30, 2020 compared2020. The decreased benefit to credit loss expense was primarily the result of changes in the volume and mix of our Banking loan portfolio which drove benefits to credit loss expense of $2.0$0.9 million and $3.7 million for the three months ended September 30, 2019. The decreased credit loss expense was driven by relatively little change to the loss drivers that the Company forecasts to calculate expected losses on the Banking segment loan portfolios. At September 30,2021 and 2020, changes to the forecasted loss drivers were little changed as management's expectations for these loss drivers did not change materially from June 30, 2020. Changes in forecasted loss drivers resulted in approximately $0.6 million of credit loss expense for our Banking segment for the three months ended September 30, 2020.respectively. For the three months ended September 30, 2019,2021, we released specific reserves of $1.4 million compared to no change in specific reserves for the same period during the prior year. Additionally, changes to projected loss factors underdrivers that the incurred loss allowance methodology had an insignificant impact on credit loss expense for our Banking segment. Change in loan growthCompany forecasted over the reasonable and change in mix at our Banking segment also contributedsupportable forecast period created a benefit to the decrease in credit loss expense period over period. For the three months ended September 30, 2020, changes in loan volume and mix resulted in an decrease in credit loss expense of approximately $3.7 million. Changes in loan volume and mix resulted in an increase in credit loss expense of $1.5$0.2 million for the three months ended September 30, 2019. The decrease in the credit loss expense at our Banking segment was further driven by net new specific reserves. Net new specific reserves at our Banking segment were insignificant during the three months ended September 30, 20202021 compared to credit loss expense of $0.6 million during the same period of the prior year. Net charge-offs at our Banking segment were $0.3 million during the three months ended September 30, 2019. We experienced insignificant2021 compared to no significant net charge-offs at our Banking segment during the three months ended September 30, 2020 compared to $0.4 million for the same period in 2019. Charge-offs at our Banking segment2020. Gross charge-off balances during the three months ended September 30, 2021 and 2020 carried no reserves and 2019 had previously established$0.2 reserves, of $0.2 million and $0.1 million, respectively.
Credit loss expense for off balance sheet credit exposures at our Banking segment was $8 thousanddecreased $0.2 million from no meaningful charge during the three months ended September 30, 2020 to $0.2 million for the three months ended September 30, 2020. Prior2021. This is primarily due to January 1, 2020, creditthe changes in the assumptions used to project the loss expense for off balance sheet credit exposures was recorded in other noninterest expense. Credit loss expense for off balance sheet credit exposures at our Banking segment was insignificant for the three months ended September 30, 2019.rates previously discussed partially offset by increased outstanding commitments to fund period over period.
Noninterest income at our Banking segment was relatively flat period over period with no significant fluctuations in any of its components. Noninterest expense increased primarily due to a $3.1 millionan increase in gain on sale of securities during the three months ended September 30, 2020. This was offset by a $0.5 million decrease in service charges on deposits over the same period. Remaining fluctuations in noninterest income at our Banking segment were insignificant period over period.
Noninterest expense increased due to incremental costs associated with the growth in our Banking segment infrastructure. In addition, salaries and employee benefits expense increased due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Remaining fluctuations in the individual components of noninterest expense at our Banking segment were insignificant period over period.
Factoring
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended September 30, | | | | | | |
Factoring | | 2020 | | 2019 | | $ Change | | % Change |
Total interest income | | $ | 30,068 | | | $ | 24,869 | | | $ | 5,199 | | | 20.9 | % |
Intersegment interest allocations | | (3,312) | | | (2,918) | | | (394) | | | (13.5) | % |
Total interest expense | | — | | | — | | | — | | | — | |
Net interest income (expense) | | 26,756 | | | 21,951 | | | 4,805 | | | 21.9 | % |
Credit loss expense | | 3,053 | | | 846 | | | 2,207 | | | 260.9 | % |
Net interest income after credit loss expense | | 23,703 | | | 21,105 | | | 2,598 | | | 12.3 | % |
Noninterest income | | 3,157 | | | 1,291 | | | 1,866 | | | 144.5 | % |
Noninterest expense | | 13,665 | | | 12,792 | | | 873 | | | 6.8 | % |
Operating income (loss) | | $ | 13,195 | | | $ | 9,604 | | | $ | 3,591 | | | 37.4 | % |
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2020 | | 2019 |
Factored receivable period end balance | $ | 948,987,000 | | | $ | 562,009,000 | |
Yield on average receivable balance | 15.65 | % | | 18.23 | % |
Rolling twelve quarter annual charge-off rate | 0.43 | % | | 0.36 | % |
Factored receivables - transportation concentration | 88 | % | | 83 | % |
| | | |
Interest income, including fees | $ | 30,068,000 | | | $ | 24,869,000 | |
Non-interest income(1) | 1,157,000 | | | 1,291,000 | |
Factored receivable total revenue | 31,225,000 | | | 26,160,000 | |
Average net funds employed | 694,170,000 | | | 494,198,000 | |
Yield on average net funds employed | 17.89 | % | | 21.00 | % |
| | | |
Accounts receivable purchased | $ | 1,984,490,000 | | | $ | 1,450,905,000 | |
Number of invoices purchased | 1,027,839 | | | 890,986 | |
Average invoice size | $ | 1,931 | | | $ | 1,628 | |
Average invoice size - transportation | $ | 1,787 | | | $ | 1,497 | |
Average invoice size - non-transportation | $ | 5,181 | | | $ | 3,467 | |
Factoring(1) Non-interest income for the three months ended September 30, 2020 excludes the $2.0 million gain recognized on the increased value of the receivable due from Covenant resulting from the amended TFS acquisition agreement | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended September 30, | | | | |
Factoring | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | | $ | 47,222 | | | $ | 30,068 | | | $ | 17,154 | | | 57.1 | % |
Intersegment interest allocations | | (2,341) | | | (3,312) | | | 971 | | | 29.3 | % |
Total interest expense | | — | | | — | | | — | | | — | |
Net interest income (expense) | | 44,881 | | | 26,756 | | | 18,125 | | | 67.7 | % |
Credit loss expense (benefit) | | 1,164 | | | 3,053 | | | (1,889) | | | (61.9) | % |
Net interest income (expense) after credit loss expense | | 43,717 | | | 23,703 | | | 20,014 | | | 84.4 | % |
Noninterest income | | 1,557 | | | 3,157 | | | (1,600) | | | (50.7) | % |
Noninterest expense | | 19,106 | | | 13,665 | | | 5,441 | | | 39.8 | % |
Operating income (loss) | | $ | 26,168 | | | $ | 13,195 | | | $ | 12,973 | | | 98.3 | % |
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2021 | | 2020 |
Factored receivable period end balance | $ | 1,479,989,000 | | | $ | 953,434,000 | |
Yield on average receivable balance | 13.75 | % | | 15.59 | % |
Current quarter charge-off rate | 0.24 | % | | 0.09 | % |
Factored receivables - transportation concentration | 90 | % | | 88 | % |
| | | |
Interest income, including fees | $ | 47,222,000 | | | $ | 30,068,000 | |
Non-interest income(1) | 1,557,000 | | | 1,157,000 | |
Factored receivable total revenue | 48,779,000 | | | 31,225,000 | |
Average net funds employed | 1,235,610,000 | | | 694,170,000 | |
Yield on average net funds employed | 15.66 | % | | 17.89 | % |
| | | |
Accounts receivable purchased | $ | 3,531,811,000 | | | $ | 1,984,490,000 | |
Number of invoices purchased | 1,535,321 | | | 1,027,839 | |
Average invoice size | $ | 2,300 | | | $ | 1,931 | |
Average invoice size - transportation | $ | 2,195 | | | $ | 1,787 | |
Average invoice size - non-transportation | $ | 4,944 | | | $ | 5,181 | |
Our Factoring segment’s operating income increased $3.6$13.0 million, or 37.4%. Our Factoring segment's operating income was impacted by $0.8 million of transaction costs associated with the TFS Acquisition. Excluding the TFS Acquisition transaction costs, our Factoring segment's adjusted operating income was $14.0 million for the three months ended September 30, 2020, resulting in an adjusted net increase in operating income of $4.4 million, or 45.8%98.3%.
Our average invoice size increased 18.6%19.1% from $1,628 for the three months ended September 30, 2019 to $1,931 for the three months ended September 30, 2020 to $2,300 for the three months ended September 30, 2021, and the number of invoices purchased increased 15.4%49.4% period over period.
Overall average net funds employed (“NFE”) was up 40.5%increased 78.0% during the three months ended September 30, 20202021 compared to the same period in 2019.2020. The increase in average NFE was the result of increased invoice purchase volume as well as increased average invoice size. Those, in turn, resulted from historically high freight volume in a surge in restocking that has occurred following COVID-19 related shutdowns.reduced capacity market. See further discussion under the Recent Developments: COVID-19 and the CARES Act section. After record transportation invoice prices in 2018, 2019 trended toward the longer term levels. The increase in net interest income was partially offset by decreased purchase discount rates driven by greater focus on larger lower priced fleets the addition of the lower yielding TFS portfolio, and competitive pricing pressure; however, those negative factors were partially offsetsomewhat mitigated by increased concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration was up 5%2% period over period from 83% at September 30, 2019 to 88% at September 30, 2020.2020 to 90% at September 30, 2021.
The increasedecrease in credit loss expense wasat our Factoring segment is primarily the result ofdue to decreased growth in the endingunderlying factored receivables. During the three months ended September 30, 2021, the outstanding factored receivable balance of factored receivables at our Factoring segment. The ending balancesegment grew $195.7 million compared to $425.1 million during the same period in the prior year. These changes in volume resulted in $1.0 million and $2.1 million of our factored receivables portfolio, including the factoring assets obtained through the TFS Acquisition, grew $420.6 millioncredit loss expense during the three months ended September 30, 2021 and 2020, comparedrespectively. The decrease in credit loss expense was also due to growth in the ending balance of factored receivables of $17.4 million during the three months ended September 30, 2019. Growth in the ending balance of factored receivablesnet new specific reserves at our Factoring segment contributed $2.1 million of credit loss expensewhich were insignificant for the three months ended September 30, 20202021 compared to $0.1net new specific reserves of $0.9 million for the same period of 2019. Change in reserve rates had insignificant impacts on credit loss expensea year ago. Net charge-offs at our Factoring segment were $3.3 million for the three months ended September 30, 20202021 and 2019. Netthe gross balance of said charge-offs at our Factoring segment werecarried $3.2 million of reserves established in a prior period. This compares to net charge-offs of $0.7 million for the three months ended September 30, 2020 compared to an insignificant amount of net charge-offs for the same period of 2019. Of these charge-offs approximatelythat carried $0.6 million and $0.2 million were reservedof reserves established in a prior period for the three months ended September 30, 2020 and 2019, respectively. The increase in credit loss expense at our Factoring segment was impacted by net new specific reserves on non-PCD at risk balances of $0.9 million for the three months ended September 30, 2020 and 2019.
The increasedecrease in noninterest income at our Factoring segment was primarily driven by the recognition of $2.0 million of income during the three months ended September 30, 2020 resulting from an increase in the value of the receivable due from Covenant resulting from the Agreement previously discussed. There were no other material fluctuations in noninterest income at our Factoring segment. The
Noninterest expense increased primarily due to an increase in salaries and employee benefits expense due to growth in the workforce, merit increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Remaining fluctuations in the individual components of noninterest expense at our Factoring segment waswere insignificant period over period.
Payments
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended September 30, | | | | |
Payments | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | | $ | 3,295 | | | $ | 1,361 | | | $ | 1,934 | | | 142.1 | % |
Intersegment interest allocations | | (111) | | | (147) | | | 36 | | | 24.5 | % |
Total interest expense | | — | | | — | | | — | | | — | % |
Net interest income (expense) | | 3,184 | | | 1,214 | | | 1,970 | | | 162.3 | % |
Credit loss expense (benefit) | | 38 | | | 2 | | | 36 | | | 1800.0 | % |
Net interest income after credit loss expense | | 3,146 | | | 1,212 | | | 1,934 | | | 159.6 | % |
Noninterest income | | 3,086 | | | 47 | | | 3,039 | | | 6466.0 | % |
Noninterest expense | | 11,416 | | | 3,195 | | | 8,221 | | | 257.3 | % |
Operating income (loss) | | $ | (5,184) | | | $ | (1,936) | | | $ | (3,248) | | | (167.8) | % |
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2021 | | 2020 |
Factored receivable period end balance | $ | 127,039,000 | | | $ | 62,903,000 | |
| | | |
Interest income | $ | 3,295,000 | | | $ | 1,361,000 | |
Noninterest income | 3,086,000 | | | 47,000 | |
Total revenue | $ | 6,381,000 | | | $ | 1,408,000 | |
| | | |
Operating income (loss) | $ | (5,184,000) | | | $ | (1,936,000) | |
Interest expense | 111,000 | | | 147,000 | |
Depreciation and software amortization expense | 77,000 | | | 63,000 | |
Intangible amortization expense | 1,490,000 | | | — | |
Earnings (losses) before interest, taxes, depreciation, and amortization | $ | (3,506,000) | | | $ | (1,726,000) | |
Transaction costs | $ | — | | | $ | — | |
Adjusted earnings (losses) before interest, taxes, depreciation, and amortization(1) | $ | (3,506,000) | | | $ | (1,726,000) | |
| | | |
Number of invoices processed | 3,760,948 | | | 1,408,232 | |
Amount of payments processed | $ | 4,191,424,000 | | | $ | 1,221,305,000 | |
(1)Adjusted earnings (losses) before interest, taxes, depreciation, and amortization excludes material gains and expenses related to merger and acquisition-related activities and is a non-GAAP financial measure used to provide meaningful supplemental information regarding the segment's operational performance and to enhance investors' overall understanding of such financial performance by removing the volatility associated with certain acquisition-related items that are unrelated to our core business.
Our Payments segment's operating loss increased $3.2 million, or 167.8%.
The number of invoices processed by our Payments segment increased 167.1% from 1,408,232 for the three months ended September 30, 2020 to 3,760,948 for the three months ended September 30, 2021, and the amount of payments processed increased 243.2% from $1.221 billion for the three months ended September 30, 2020 to $4.191 billion for the three months ended September 30, 2021.
Interest income increased due to increased factoring activity at our Payments segment and increased yields period over period. Noninterest income increased almost entirely due to $2.9 million in Payments fees related to a full quarter of acquired HubTran operations during the three months ended September 30, 2021.
Noninterest expense increased primarily due to $0.8an increase in salaries and employee benefits expense driven by increased headcount, merit increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. We continue to invest heavily in the operations of TriumphPay.
The acquisition of HubTran during the three months ended June 30, 2021 allows TriumphPay to create a fully integrated payments network for trucking; servicing brokers and factors. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to an open-loop payments network for the trucking industry with a focus on fee revenue. It is for this reason that management believes that earnings before interest, taxes, depreciation, and amortization and the adjustment to that metric enhance investors' overall understanding of the financial performance of the Payments segment. Further, as a result of the HubTran acquisition, management recorded $27.3 million in transaction costs incurred in connection with the TFS Acquisition. There were no other material fluctuations in noninterest expense at our Factoring segment.of intangible assets that will lead to meaningful amounts of amortization going forward.
Corporate
| (Dollars in thousands) | (Dollars in thousands) | | Three Months Ended September 30, | | | (Dollars in thousands) | | Three Months Ended September 30, | |
Corporate | Corporate | | 2020 | | 2019 | | $ Change | | % Change | Corporate | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | Total interest income | | $ | 8 | | | $ | 280 | | | $ | (272) | | | (97.1) | % | Total interest income | | $ | 43 | | | $ | 8 | | | $ | 35 | | | 437.5 | % |
Intersegment interest allocations | Intersegment interest allocations | | — | | | — | | | — | | | — | | Intersegment interest allocations | | — | | | — | | | — | | | — | |
Total interest expense | Total interest expense | | 1,809 | | | 1,559 | | | 250 | | | 16.0 | % | Total interest expense | | 2,891 | | | 1,809 | | | 1,082 | | | 59.8 | % |
Net interest income (expense) | Net interest income (expense) | | (1,801) | | | (1,279) | | | (522) | | | (40.8) | % | Net interest income (expense) | | (2,848) | | | (1,801) | | | (1,047) | | | (58.1) | % |
Credit loss expense | | 106 | | | — | | | 106 | | | 100.0 | % | |
Net interest income after credit loss expense | | (1,907) | | | (1,279) | | | (628) | | | (49.1) | % | |
Noninterest income | | (154) | | | 50 | | | (204) | | | (408.0) | % | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | | 10 | | | 106 | | | (96) | | | (90.6) | % |
Net interest income (expense) after credit loss expense | | Net interest income (expense) after credit loss expense | | (2,858) | | | (1,907) | | | (951) | | | (49.9) | % |
Other noninterest income | | Other noninterest income | | 41 | | | (154) | | | 195 | | | 126.6 | % |
Noninterest expense | Noninterest expense | | 1,048 | | | 990 | | | 58 | | | 5.9 | % | Noninterest expense | | 1,108 | | | 1,048 | | | 60 | | | 5.7 | % |
Operating income (loss) | Operating income (loss) | | $ | (3,109) | | | $ | (2,219) | | | $ | (890) | | | (40.1) | % | Operating income (loss) | | $ | (3,925) | | | $ | (3,109) | | | $ | (816) | | | (26.2) | % |
The Corporate segment reported an operating loss of $3.9 million for the three months ended September 30, 2021 compared to an operating loss of $3.1 million for the three months ended September 30, 2020 compared2020. This was primarily due to an operating loss of $2.2 million forincreased interest expense. During the three months ended September 30, 2019.2021, management issued a new subordinated debt facility and used the majority of the proceeds to redeem the 2016 subordinated debt facility in whole. The 2016 subordinated debt facility carried a discount and fees of $0.8 million at the time of payoff that was written off through interest expense during the three months ended September 30, 2021. There were no other significant fluctuations in accounts in our Corporate segment period over period.
Results of Operations
Nine months ended September 30, 20202021 compared with nine months ended September 30, 20192020
Net Income
We earned net income of $86.3 million for the nine months ended September 30, 2021 compared to $31.9 million for the nine months ended September 30, 2020, compared to $41.8 millionan increase of $54.4 million.
The results for the nine months ended September 30, 2019, a decrease2021 were impacted by $3.0 million of $9.9 million.
transaction costs associated with the HubTran acquisition reported as noninterest expense. The results for the nine months ended September 30, 2020 were impacted by the gain on sale of TPF of $9.8 million reported as noninterest income and transaction costs of $0.8 million associated with the TFS Acquisition reported as noninterest expense. There were no merger and acquisition related activities during the nine months ended September 30, 2019. Excluding the gain on sale,transaction costs, net of taxes, we earned adjusted net income available to common stock holders of $86.2 million for the nine months ended September 30, 2021 compared to $24.3 million for the nine months ended September 30, 2020, compared to $41.8 million for the nine months ended September 30, 2019, a decreasean increase of $17.5$61.9 million. The adjusted decreaseincrease was primarily the result of a $26.1 million increase in credit loss expense, a $10.6 million increase in adjusted noninterest expense, and a $0.9 million increase in dividends on preferred stock offset in part by an $11.6$63.9 million increase in net interest income, a $5.3$44.5 million decrease in credit loss expense, and a $12.0 million increase in adjusted noninterest income andoffset by a $3.2$39.6 million decreaseincrease in adjusted noninterest expense, a $17.4 million increase in adjusted income tax expense.expense, and a $1.5 million increase in dividends on preferred stock.
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, | | | Nine Months Ended September 30, |
| | 2020 | | | 2019 | | | 2021 | | 2020 |
(Dollars in thousands) | (Dollars in thousands) | | Average Balance | | Interest | | Average Rate(4) | | Average Balance | | Interest | | Average Rate(4) | (Dollars in thousands) | | Average Balance | | Interest | | Average Rate(4) | | Average Balance | | Interest | | Average Rate(4) |
Interest earning assets: | Interest earning assets: | | | | | | | | | | | | | Interest earning assets: | | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 209,621 | | | $ | 640 | | | 0.41 | % | | $ | 132,376 | | | $ | 2,403 | | | 2.43 | % | Cash and cash equivalents | | $ | 508,279 | | | $ | 467 | | | 0.12 | % | | $ | 209,621 | | | $ | 640 | | | 0.41 | % |
Taxable securities | Taxable securities | | 263,978 | | | 6,029 | | | 3.05 | % | | 280,609 | | | 6,981 | | | 3.33 | % | Taxable securities | | 169,607 | | | 3,343 | | | 2.64 | % | | 263,978 | | | 6,029 | | | 3.05 | % |
Tax-exempt securities | Tax-exempt securities | | 36,535 | | | 681 | | | 2.49 | % | | 66,208 | | | 1,114 | | | 2.25 | % | Tax-exempt securities | | 31,977 | | | 620 | | | 2.59 | % | | 36,535 | | | 681 | | | 2.49 | % |
FHLB and other restricted stock | FHLB and other restricted stock | | 26,515 | | | 474 | | | 2.39 | % | | 19,810 | | | 547 | | | 3.69 | % | FHLB and other restricted stock | | 8,094 | | | 131 | | | 2.16 | % | | 26,515 | | | 474 | | | 2.39 | % |
Loans (1) | Loans (1) | | 4,327,919 | | | 224,352 | | | 6.92 | % | | 3,730,414 | | | 218,937 | | | 7.85 | % | Loans (1) | | 4,812,985 | | | 275,215 | | | 7.65 | % | | 4,327,919 | | | 224,352 | | | 6.92 | % |
Total interest earning assets | Total interest earning assets | | 4,864,568 | | | 232,176 | | | 6.38 | % | | 4,229,417 | | | 229,982 | | | 7.27 | % | Total interest earning assets | | 5,530,942 | | | 279,776 | | | 6.76 | % | | 4,864,568 | | | 232,176 | | | 6.38 | % |
Noninterest earning assets: | Noninterest earning assets: | | | | | | | | | | | | | Noninterest earning assets: | | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | 58,942 | | | 82,571 | | | Cash and cash equivalents | | 81,419 | | | 58,942 | | |
Other noninterest earning assets | Other noninterest earning assets | | 381,393 | | | 368,246 | | | Other noninterest earning assets | | 430,316 | | | 381,393 | | |
Total assets | Total assets | | $ | 5,304,903 | | | $ | 4,680,234 | | | Total assets | | $ | 6,042,677 | | | $ | 5,304,903 | | |
Interest bearing liabilities: | Interest bearing liabilities: | | | | | | Interest bearing liabilities: | | | | | |
Deposits: | Deposits: | | | Deposits: | |
Interest bearing demand | Interest bearing demand | | $ | 617,392 | | | $ | 838 | | | 0.18 | % | | $ | 594,724 | | | $ | 1,119 | | | 0.25 | % | Interest bearing demand | | $ | 746,590 | | | $ | 1,288 | | | 0.23 | % | | $ | 617,392 | | | $ | 838 | | | 0.18 | % |
Individual retirement accounts | Individual retirement accounts | | 99,827 | | | 1,061 | | | 1.42 | % | | 111,869 | | | 1,296 | | | 1.55 | % | Individual retirement accounts | | 88,579 | | | 455 | | | 0.69 | % | | 99,827 | | | 1,061 | | | 1.42 | % |
Money market | Money market | | 408,487 | | | 1,657 | | | 0.54 | % | | 414,876 | | | 4,210 | | | 1.36 | % | Money market | | 404,651 | | | 670 | | | 0.22 | % | | 408,487 | | | 1,657 | | | 0.54 | % |
Savings | Savings | | 382,236 | | | 419 | | | 0.15 | % | | 365,357 | | | 359 | | | 0.13 | % | Savings | | 465,041 | | | 530 | | | 0.15 | % | | 382,236 | | | 419 | | | 0.15 | % |
Certificates of deposit | Certificates of deposit | | 993,590 | | | 14,844 | | | 2.00 | % | | 985,844 | | | 16,123 | | | 2.19 | % | Certificates of deposit | | 674,284 | | | 3,838 | | | 0.76 | % | | 993,590 | | | 14,844 | | | 2.00 | % |
Brokered time deposits | Brokered time deposits | | 297,829 | | | 4,085 | | | 1.83 | % | | 347,777 | | | 6,157 | | | 2.37 | % | Brokered time deposits | | 134,781 | | | 259 | | | 0.26 | % | | 297,829 | | | 4,085 | | | 1.83 | % |
Other brokered deposits | Other brokered deposits | | 86,064 | | | 191 | | | 0.30 | % | | — | | | — | | | — | | Other brokered deposits | | 641,959 | | | 750 | | | 0.16 | % | | 86,064 | | | 191 | | | 0.30 | % |
Total interest bearing deposits | Total interest bearing deposits | | 2,885,425 | | | 23,095 | | | 1.07 | % | | 2,820,447 | | | 29,264 | | | 1.39 | % | Total interest bearing deposits | | 3,155,885 | | | 7,790 | | | 0.33 | % | | 2,885,425 | | | 23,095 | | | 1.07 | % |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 430,250 | | | 1,959 | | | 0.61 | % | | 348,535 | | | 6,479 | | | 2.49 | % | Federal Home Loan Bank advances | | 37,234 | | | 67 | | | 0.24 | % | | 430,250 | | | 1,959 | | | 0.61 | % |
Subordinated notes | Subordinated notes | | 87,372 | | | 4,016 | | | 6.14 | % | | 48,967 | | | 2,518 | | | 6.88 | % | Subordinated notes | | 96,495 | | | 5,148 | | | 7.13 | % | | 87,372 | | | 4,016 | | | 6.14 | % |
Junior subordinated debentures | Junior subordinated debentures | | 39,743 | | | 1,662 | | | 5.59 | % | | 39,244 | | | 2,223 | | | 7.57 | % | Junior subordinated debentures | | 40,256 | | | 1,331 | | | 4.42 | % | | 39,743 | | | 1,662 | | | 5.59 | % |
Other borrowings | Other borrowings | | 125,756 | | | 314 | | | 0.33 | % | | 8,259 | | | 3 | | | 0.05 | % | Other borrowings | | 146,005 | | | 367 | | | 0.34 | % | | 125,756 | | | 314 | | | 0.33 | % |
Total interest bearing liabilities | Total interest bearing liabilities | | 3,568,546 | | | 31,046 | | | 1.16 | % | | 3,265,452 | | | 40,487 | | | 1.66 | % | Total interest bearing liabilities | | 3,475,875 | | | 14,703 | | | 0.57 | % | | 3,568,546 | | | 31,046 | | | 1.16 | % |
Noninterest bearing liabilities and equity: | Noninterest bearing liabilities and equity: | | | | | | | | | | | | | Noninterest bearing liabilities and equity: | | | | | | | | | | | | |
Noninterest bearing demand deposits | Noninterest bearing demand deposits | | 1,021,745 | | | 700,868 | | | Noninterest bearing demand deposits | | 1,720,213 | | | 1,021,745 | | |
Other liabilities | Other liabilities | | 72,461 | | | 66,127 | | | Other liabilities | | 62,570 | | | 72,461 | | |
Total equity | Total equity | | 642,151 | | | 647,787 | | | Total equity | | 784,019 | | | 642,151 | | |
Total liabilities and equity | Total liabilities and equity | | $ | 5,304,903 | | | $ | 4,680,234 | | | Total liabilities and equity | | $ | 6,042,677 | | | $ | 5,304,903 | | |
Net interest income | Net interest income | | | | $ | 201,130 | | | | | $ | 189,495 | | | Net interest income | | | | $ | 265,073 | | | | | $ | 201,130 | | |
Interest spread (2) | Interest spread (2) | | | | | 5.22 | % | | | | 5.61 | % | Interest spread (2) | | | | 6.19 | % | | | | 5.22 | % |
Net interest margin (3) | Net interest margin (3) | | 5.52 | % | | 5.99 | % | Net interest margin (3) | | 6.41 | % | | 5.52 | % |
(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) | | 2020 | | 2019 |
Average community banking | | $ | 2,066,572 | | | $ | 2,154,815 | |
Average commercial finance | | 1,344,806 | | | 1,167,285 | |
Average national lending | | 916,541 | | | 408,314 | |
Average total loans | | $ | 4,327,919 | | | $ | 3,730,414 | |
Community banking yield | | 5.31 | % | | 5.86 | % |
Commercial finance yield | | 10.84 | % | | 12.44 | % |
National lending yield | | 4.82 | % | | 5.20 | % |
Total loan yield | | 6.92 | % | | 7.85 | % |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(Dollars in thousands) | | 2021 | | 2020 |
Average Banking loans | | $ | 3,511,379 | | | $ | 3,661,573 | |
Average Factoring receivables | | 1,203,494 | | | 636,107 | |
Average Payments receivables | | 98,112 | | | 30,239 | |
Average total loans | | $ | 4,812,985 | | | $ | 4,327,919 | |
Banking yield | | 5.31 | % | | 5.38 | % |
Factoring yield | | 14.19 | % | | 15.63 | % |
Payments Yield | | 10.82 | % | | 10.78 | % |
Total loan yield | | 7.65 | % | | 6.92 | % |
We earned net interest income of $265.1 million for the nine months ended September 30, 2021 compared to $201.1 million for the nine months ended September 30, 2020, compared to $189.5 million for the nine months ended September 30, 2019, an increase of $11.6$64.0 million, or 6.1%31.8%, primarily driven by the following factors.
Interest income increased $2.2$47.6 million, or 1.0%20.5%, in spite ofreflecting an increase in total average interest earning assets of $635.2$666.4 million, or 15.0%13.7%, and an increase in average total loans of $485.1 million, or 11.2%. The average balance of our higher yielding commercial finance loansFactoring factored receivables increased $177.5$567.4 million, or 15.2%89.2%, from $1.167 billion fordriving the nine months ended September 30, 2019 to $1.345 billion formajority of the nine months ended September 30, 2020. The impact of increasedincrease in interest income along with an increase in average commercial finance balancesPayments factored receivables. This was partially offset by decreased yields on factored receivables and increaseda decrease in average balances inBanking loans of $150.2 million, or 4.1%. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $827.1 million for the nine months ended September 30, 2021 compared to $672.4 million for the nine months ended September 30, 2020 compared to $317.4 million for the nine months ended September 30, 2019. Further, we began originating PPP loans during the second quarter and carried $223.2 million of PPP loans at September 30, 2020. PPP loans carry a coupon rate of 1% which has a meaningful downward impact on our loan yield. A component of interest income consists of discount accretion on acquired loan portfolios. We recognized discount accretion on purchased loans of $8.4$7.6 million and $4.0$8.4 million for the nine months ended September 30, 20202021 and 2019,2020, respectively.
Interest expense decreased $9.4$16.3 million, or 23.3%52.6%, in spite of growth inand average interest bearing liabilities. More specifically,liabilities decreased $92.7 million, or 2.6%. While average total interest bearing deposits increased $65.0$270.5 million, or 2.3%.9.4%, the increase in average balance was offset by lower average rates discussed below. The decrease in interest expense was partially offset by $0.8 million of remaining discount and deferred fees that were recognized during the nine months ended September 30, 2021 as a result of lower average ratespaying off our 2016 Subordinated Notes as discussed below.in Note 8 of the Condensed Notes to the Consolidated Financial Statements.
Net interest margin decreasedincreased to 6.41% for the nine months ended September 30, 2021 from 5.52% for the nine months ended September 30, 2020, from 5.99% for the nine months ended September 30, 2019, a decreasean increase of 4789 basis points, or 7.8%16.1%.
Our net interest margin was impacted by a decreasean increase in yield on our interest earning assets of 8938 basis points to 6.38%6.76% for the nine months ended September 30, 2020.2021. This decreaseincrease was primarily driven by lowerhigher yields and a change in the overall mix within our loan portfolio period over periodon loans which drove a 93increased 73 basis point reduction in our loan yieldpoints to 6.92%7.65% for the same period. As previously discussed, we added $223.2 million of PPP loans with a coupon rate of 1% during the nine months ended September 30, 2020. Our higher yieldingWhile Factoring yield decreased period over period, its average commercial finance productsfactored receivables as a percentage of the total loan portfolio decreased from 31.3% for the nine months ended September 30, 2019 to 31.1% for the nine months ended September 30, 2020 contributing to the overall decrease in yieldincreased significantly having a meaningful upward impact on ourtotal loan portfolio. Average factored receivables as a percentage of the total commercial finance portfolio increased from 49.1% for the nine months ended September 30, 2019 to 49.5% for the nine months ended September 30, 2020. However, we experienced decreased yields on our factored receivables during the nine months ended September 30, 2020 leading to decreased yields from our commercial finance portfolio.yield. 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 91% at September 30, 2021 compared to 88% at September 30, 2020 compared to 79% at September 30, 2019. Yields on our non-loan interest earning assets generally decreased2020. Banking and Payments yields were relatively flat period over period as well.and non-loan yields had little impact on our yield on interest earning assets.
The decreaseincrease in our net interest margin was partially offsetalso impacted by a decrease in our average cost of interest bearing liabilities of 5059 basis points. This decrease was caused by lower interest rates paid on our interest bearing liabilities driven by changes in interest rates in the macro economy.
The following table shows the effects that changes in average balances (volume) and average interest rates (rate) had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities:
| | | Nine Months Ended | | | Nine Months Ended |
| | September 30, 2020 vs. 2019 vs. 2019 | | | September 30, 2021 vs. 2020 |
| | Increase (Decrease) Due to: | | | Net Increase | | Increase (Decrease) Due to: | | Net Increase |
(Dollars in thousands) | (Dollars in thousands) | | Rate | | Volume | | | Net Increase | | Rate | | Volume | | Net Increase |
Interest earning assets: | Interest earning assets: | | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | (1,999) | | | $ | 236 | | | $ | (1,763) | | Cash and cash equivalents | | $ | (447) | | | $ | 274 | | | $ | (173) | |
Taxable securities | Taxable securities | | (572) | | | (380) | | | (952) | | Taxable securities | | (826) | | | (1,860) | | | (2,686) | |
Tax-exempt securities | Tax-exempt securities | | 120 | | | (553) | | | (433) | | Tax-exempt securities | | 27 | | | (88) | | | (61) | |
FHLB and other restricted stock | FHLB and other restricted stock | | (193) | | | 120 | | | (73) | | FHLB and other restricted stock | | (45) | | | (298) | | | (343) | |
Loans | Loans | | (25,559) | | | 30,974 | | | 5,415 | | Loans | | 23,126 | | | 27,737 | | | 50,863 | |
Total interest income | Total interest income | | (28,203) | | | 30,397 | | | 2,194 | | Total interest income | | 21,835 | | | 25,765 | | | 47,600 | |
Interest bearing liabilities: | Interest bearing liabilities: | | | Interest bearing liabilities: | |
Interest bearing demand | Interest bearing demand | | (312) | | | 31 | | | (281) | | Interest bearing demand | | 227 | | | 223 | | | 450 | |
Individual retirement accounts | Individual retirement accounts | | (107) | | | (128) | | | (235) | | Individual retirement accounts | | (548) | | | (58) | | | (606) | |
Money market | Money market | | (2,527) | | | (26) | | | (2,553) | | Money market | | (981) | | | (6) | | | (987) | |
Savings | Savings | | 41 | | | 19 | | | 60 | | Savings | | 17 | | | 94 | | | 111 | |
Certificates of deposit | Certificates of deposit | | (1,395) | | | 116 | | | (1,279) | | Certificates of deposit | | (9,189) | | | (1,817) | | | (11,006) | |
Brokered time deposits | Brokered time deposits | | (1,387) | | | (685) | | | (2,072) | | Brokered time deposits | | (3,513) | | | (313) | | | (3,826) | |
Other brokered deposits | Other brokered deposits | | — | | | 191 | | | 191 | | Other brokered deposits | | (90) | | | 649 | | | 559 | |
Total interest bearing deposits | Total interest bearing deposits | | (5,687) | | | (482) | | | (6,169) | | Total interest bearing deposits | | (14,077) | | | (1,228) | | | (15,305) | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | (4,892) | | | 372 | | | (4,520) | | Federal Home Loan Bank advances | | (1,185) | | | (707) | | | (1,892) | |
Subordinated notes | Subordinated notes | | (267) | | | 1,765 | | | 1,498 | | Subordinated notes | | 645 | | | 487 | | | 1,132 | |
Junior subordinated debentures | Junior subordinated debentures | | (582) | | | 21 | | | (561) | | Junior subordinated debentures | | (348) | | | 17 | | | (331) | |
Other borrowings | Other borrowings | | 18 | | | 293 | | | 311 | | Other borrowings | | 2 | | | 51 | | | 53 | |
Total interest expense | Total interest expense | | (11,410) | | | 1,969 | | | (9,441) | | Total interest expense | | (14,963) | | | (1,380) | | | (16,343) | |
Change in net interest income | Change in net interest income | | $ | (16,793) | | | $ | 28,428 | | | $ | 11,635 | | Change in net interest income | | $ | 36,798 | | | $ | 27,145 | | | $ | 63,943 | |
Credit Loss Expense
Credit loss expense is the amount of expense that, based on our judgment, is required to maintain the allowances for credit losses (“ACL”) at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to the financial statementsCompany’s 2020 Form 10-K for detailed discussion regarding ACL methodologies for available for sale debt securities, held to maturity securities and loans held for investment.
The following table presents the major categories of credit loss expense:
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | $ Change | | % Change | (Dollars in thousands) | | 2021 | | 2020 | | $ Change | | % Change |
Credit loss expense on loans | Credit loss expense on loans | | $ | 27,974 | | | $ | 7,560 | | | $ | 20,414 | | | 270.0 | % | Credit loss expense on loans | | $ | (9,390) | | | $ | 27,974 | | | $ | (37,364) | | | (133.6) | % |
Credit loss expense on off balance sheet credit exposures | Credit loss expense on off balance sheet credit exposures | | 3,840 | | | — | | | 3,840 | | | 100.0 | % | Credit loss expense on off balance sheet credit exposures | | (1,159) | | | 3,840 | | | (4,999) | | | (130.2) | % |
Credit loss expense on held to maturity securities | Credit loss expense on held to maturity securities | | 1,835 | | | — | | | 1,835 | | | 100.0 | % | Credit loss expense on held to maturity securities | | (289) | | | 1,835 | | | (2,124) | | | (115.7) | % |
Credit loss expense on available for sale securities | Credit loss expense on available for sale securities | | — | | | — | | | — | | | — | | Credit loss expense on available for sale securities | | — | | | — | | | — | | | — | |
Total credit loss expense | Total credit loss expense | | $ | 33,649 | | | $ | 7,560 | | | $ | 26,089 | | | 345.1 | % | Total credit loss expense | | $ | (10,838) | | | $ | 33,649 | | | $ | (44,487) | | | (132.2) | % |
Upon and subsequent to adoption of ASC 326, for available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. At January 1,December 31, 2020 and September 30, 2020,2021, the Company determined that all impaired available for sale securities experienced a decline in fair value below the amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at those respective dates and there was no credit loss expense recognized by the Company during the nine months ended September 30, 2020.2021. The same was true for the same period in the prior year.
Upon and subsequent to adoption of ASC 326, the ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At September 30, 20202021 and December 31, 2019,2020, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At September 30, 2021 and December 31, 2020, the Company carried $7.2 million and $7.9 million of these HTM securities at amortized cost, respectively. The ACL on these balances was $1.7 million at September 30, 2021 and $2.0 million at December 31, 2020 and we recognized a benefit to credit loss expense of $0.3 million during the nine months ended September 30, 2021. None of the overcollateralization triggers tied to the CLO securities were tripped as of September 30, 2021. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.
At January 1, 2020 and September 30, 2020, the Company carried $8.4 million and $8.1 million of these HTM securities at amortized cost, respectively. The ACL on these balances was $0.1 million at January 1, 2020. During the nine months ended September 30, 2020, pandemic-related downgrades and default activity caused overcollateralization triggers to be tripped on two of the three CLO investments which had a material impact on expected cash flows used to calculate the ACL. The ACL on these balances was $2.0 million at September 30, 2020 resulting in $1.8 million of credit loss expense recognized during the nine months ended September 30, 2020. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.
Our ACL on loans was $91.0$41.0 million as of September 30, 2020,2021, compared to $29.1$95.7 million as of December 31, 2019,2020, representing an ACL to total loans ratio of 1.88%0.86% and 0.69%1.92% respectively. Upon adoption of ASC 326, management booked an increase of $0.3 million to the ACL and a decrease to retained earnings net of the deferred tax impact. The Day 1 adjustment upon adoption raised the ACL balance to $29.4 million on January 1, 2020. Management determined that the $62.2 million in Over-Formula Advances obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those over-formula advances to be purchased credit deteriorated ("PCD"). This resulted in recording a $37.4 million ACL on the over-formula advances through purchase accounting. There was no impact to credit loss expense resulting from the PCD determination.
Our credit loss expense on loans increased $20.4decreased $37.4 million, or 270.0%133.6%, for the nine months ended September 30, 20202021 compared to the nine months ended September 30, 2019.2020.
The increasedOver-Formula Advances classified as factored receivables and deemed to be purchased credit deteriorated ("PCD") from Covenant had an impact on credit loss expense during the nine months ended September 30, 2021. During that time, new adverse developments with the largest of the three Over-Formula Advance clients caused us to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $41.3 million; however, this net charge-off had no impact on credit loss expense for the nine months ended September 30, 2021 as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed us for $35.6 million of this charge-off by drawing on its secured line of credit. As of September 30, 2021 the balance of Covenant's credit facility had been fully repaid. Given separate developments with the other two Over-Formula Advance clients, we reserved an additional $2.8 million reflected in credit loss expense during the nine months ended September 30, 2021. At quarter end, our entire remaining over formula advance position was down from $62.1 million at December 31, 2020 to $10.1 million at September 30, 2021 and that $10.1 million balance at September 30, 2021 was fully reserved. The $2.8 million increase in required ACL as well as accretion of most of the fair value discount on the indemnification asset held at December 31, 2020 resulted in a $4.7 million gain on the indemnification asset which was recorded through non-interest income during the nine months ended September 30, 2021.
The decreased credit loss expense was primarily the result of significant year-to-date projected deteriorationimprovement of the loss drivers that the Company forecastsforecasted over the reasonable and supportable forecast period to calculate expected losses. Thislosses at September 30, 2021 which resulted in a benefit to credit loss expense of $10.3 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2020 the Company forecasted deterioration was brought onin the loss factors driven by the projected economic impact of COVID-19 on the Company’swhich resulted in credit loss drivers over the reasonable and supportable forecast period.expense of $23.3 million. See further discussion in the allowance for credit loss section below. The deterioration
The increasedecrease in credit loss expense was further driven by changes in net new specific reserves. Including the aforementioned $2.8 million additional specific reserve on PCD assets, we recorded net new specific reserves on non-PCD assets. We recordedof $1.1 million during the nine months ended September 30, 2021 compared to net new specific reserves of $5.7 million during the nine months ended September 30, 2020 compared to $3.52020. Including the aforementioned PCD charge-off, net charge-offs were $45.3 million duringfor the nine months ended September 30, 2019. We experienced higher net charge-offs of $3.3 million in the nine months ended September 30, 2020 compared to $3.2 million for the same period in 2019. However,2021 and approximately $1.6 million and $2.2$45.2 million of the gross charge-offs had been reserved in a prior period. Net charge-offs were $3.3 million for the nine months ended September 30, 2020 and 2019, respectively,approximately $1.6 million of that balance had specific reserves previously recorded.been reserved in a prior period.
Change
Changes in loan growthvolume and change in mix partially offset the increasedecrease in credit loss expense period over period. During the nine months ended September 30, 2020, outstanding loans increased $658.4 million from December 31, 2019. When this increase is adjusted for PPP loan growthChanges in volume and mix resulted in a benefit to credit loss expense of $223.2 million, loans increased $435.2$0.4 million during the nine months ended September 30, 2020 and much2021 compared to a benefit of this growth was in factored receivables and mortgage warehouse lending which require lower reserve rates due to their nature. Refer to discussion of the allowance for credit losses below for ACL considerations regarding our PPP loans. During$2.7 million during the nine months ended September 30, 2019, outstanding loans increased $600.8 million from December 31, 2018. For the nine months ended September 30, 2020, changes in loan growth and changes in mix decreased credit loss expense by $2.7 million. Changes in loan growth and mix resulted in $3.1 million of credit loss expense for the nine months ended September 30, 2019.
Credit loss expense for off balance sheet credit exposures increased $3.8decreased $5.0 million, primarily due to increased assumedthe changes in the assumptions used to project the loss rates on estimated funding as a result of the COVID-19 virus. The Company also experienced an increase in commitments to fund during the period. Prior to January 1, 2020, credit loss expense for off balance sheet credit exposures was recorded in other noninterest expense. Credit loss expense for off balance sheet credit exposures for the nine months ended September 30, 2019 was insignificant.previously discussed.
Noninterest Income
The following table presents our major categories of noninterest income:
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | $ Change | | % Change | (Dollars in thousands) | | 2021 | | 2020 | | $ Change | | % Change |
Service charges on deposits | Service charges on deposits | | $ | 3,631 | | | $ | 5,243 | | | $ | (1,612) | | | (30.7 | %) | Service charges on deposits | | $ | 5,674 | | | $ | 3,631 | | | $ | 2,043 | | | 56.3 | % |
Card income | Card income | | 5,832 | | | 5,930 | | | (98) | | | (1.7 | %) | Card income | | 6,341 | | | 5,832 | | | 509 | | | 8.7 | % |
Net OREO gains (losses) and valuation adjustments | Net OREO gains (losses) and valuation adjustments | | (399) | | | 301 | | | (700) | | | 232.6 | % | Net OREO gains (losses) and valuation adjustments | | (376) | | | (399) | | | 23 | | | 5.8 | % |
Net gains (losses) on sale or call of securities | Net gains (losses) on sale or call of securities | | 3,210 | | | 22 | | | 3,188 | | | NM | Net gains (losses) on sale or call of securities | | 5 | | | 3,210 | | | (3,205) | | | 99.8 | % |
Fee income | Fee income | | 4,392 | | | 4,755 | | | (363) | | | (7.6 | %) | Fee income | | 11,917 | | | 4,392 | | | 7,525 | | | 171.3 | % |
Insurance commissions | Insurance commissions | | 2,905 | | | 3,127 | | | (222) | | | (7.1 | %) | Insurance commissions | | 3,989 | | | 2,905 | | | 1,084 | | | 37.3 | % |
Gain on sale of subsidiary or division | Gain on sale of subsidiary or division | | 9,758 | | | — | | | 9,758 | | | 100.0 | % | Gain on sale of subsidiary or division | | — | | | 9,758 | | | (9,758) | | | (100.0 | %) |
Other | Other | | 8,670 | | | 3,525 | | | 5,145 | | | 146.0 | % | Other | | 12,692 | | | 8,670 | | | 4,022 | | | 46.4 | % |
Total noninterest income | Total noninterest income | | $ | 37,999 | | | $ | 22,903 | | | $ | 15,096 | | | 65.9 | % | Total noninterest income | | $ | 40,242 | | | $ | 37,999 | | | $ | 2,243 | | | 5.9 | % |
Noninterest income increased $15.1$2.2 million, or 65.9%5.9%. Noninterest income for the nine months ended September 30, 2020 was impacted by the realization of the $9.8 million gain associated with the sale of TPF in the second quarter of 2020. Excluding the gain on sale of TPF, we earned adjusted noninterest income of $28.2 million for the nine months ended September 30, 2020, resulting in an adjusted increase in noninterest income of $5.3$12.0 million, or 23.1%42.6%, period over period. 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, decreased $1.6increased $2.0 million, or 30.7%. In56.3% consistent with increased average deposit balances subject to such fees period over period. Further, in keeping with guidance from regulators, we actively worked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020.
•Net OREO gains (losses) and valuation adjustments.Card income. Net OREO gains (losses) and valuation adjustments, which represents gains and losses on loans transferred to OREO, gains and losses on the sale of OREO, and valuation adjustments recordedCard income increased $0.5 million, or 8.7% primarily due to the subsequent change in fair value less costs to sell of OREO, reflect increased losses of $0.7 million. OREOdebit card activity on any individual assets during the nine months ended September 30, 2020 and 2019 was not significant.2021.
•Net gains (losses) on sale or call of securities. Net gains (losses) on sale or call of securities increaseddecreased $3.2 million due to decreased sales activity during the current period.
•Fee income. Fee income increased sales$7.5 million, or 171.3% primarily due to $1.2 million of available for sale CLOsearly termination fees charged to two customers during the nine months ended September 30, 2020.2021. We also recognized $3.9 million in Payments fees related to the acquired operations of HubTran during the same period. There were no other significant changes within the components of fee income.
•Other.Insurance commissions. Insurance commissions increased $1.1 million, or 37.3%, due to higher policy volumes processed by Triumph Insurance Group.
•Other. Other noninterest income including income associated with bank-owned life insurance and other miscellaneous activities, increased $5.1$4.0 million, or 146.0%46.4% primarily due to a $4.2 million gain on the Company's indemnification asset during the nine months ended September 30, 2021. We also recognized a $1.5 million recovery during the nine months ended September 30, 2021 on an acquired loan that was charged off prior to our acquisition of the originating bank. Additionally, during the current period, we recognized a $0.4 million increase in revenue from BOLI primarily related to a benefit payment. We recognized a gain on sale of liquid credit and mortgage loans during the nine months ended September 30, 2021 of $3.0 million compared to $1.9 million during the same period a year ago. These increases were partially offset by the recognition of $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the nine months ended September 30, 2020. This revenue was recognized at the time of closing as all required services had been completed. The increase in other noninterest income was also driven by a $1.9 million gain on sale of liquid creditcompleted and mortgage loansdid not repeat during the nine months ended September 30, 2020. Gain on sale of loans was $0.6 million for the nine months ended September 30, 2019.2021. Additionally, we recognized $2.0 million of income during the nine months ended September 30, 2020 driven by an increase in the value of the receivable due from Covenant resulting from the Agreement previously discussed. The increase was partially offset by a $0.7 million loss recognized on the donation of a branch to a local municipality during the nine months ended September 30, 2020. The remaining increase was driven by organic growth in our operations. There were no other significant itemschanges within in the components of other noninterest income during the nine months ended September 30, 2019.income.
Noninterest Expense
The following table presents our major categories of noninterest expense:
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | $ Change | | % Change | (Dollars in thousands) | | 2021 | | 2020 | | $ Change | | % Change |
Salaries and employee benefits | Salaries and employee benefits | | $ | 93,177 | | | $ | 83,276 | | | $ | 9,901 | | | 11.9 | % | Salaries and employee benefits | | $ | 121,407 | | | $ | 93,177 | | | $ | 28,230 | | | 30.3 | % |
Occupancy, furniture and equipment | Occupancy, furniture and equipment | | 15,720 | | | 13,529 | | | 2,191 | | | 16.2 | % | Occupancy, furniture and equipment | | 18,279 | | | 15,720 | | | 2,559 | | | 16.3 | % |
FDIC insurance and other regulatory assessments | FDIC insurance and other regulatory assessments | | 1,170 | | | 600 | | | 570 | | | 95.0 | % | FDIC insurance and other regulatory assessments | | 1,830 | | | 1,170 | | | 660 | | | 56.4 | % |
Professional fees | Professional fees | | 7,023 | | | 5,384 | | | 1,639 | | | 30.4 | % | Professional fees | | 9,959 | | | 7,023 | | | 2,936 | | | 41.8 | % |
Amortization of intangible assets | Amortization of intangible assets | | 6,265 | | | 6,977 | | | (712) | | | (10.2 | %) | Amortization of intangible assets | | 7,677 | | | 6,265 | | | 1,412 | | | 22.5 | % |
Advertising and promotion | Advertising and promotion | | 3,548 | | | 4,779 | | | (1,231) | | | (25.8 | %) | Advertising and promotion | | 3,534 | | | 3,548 | | | (14) | | | (0.4 | %) |
Communications and technology | Communications and technology | | 16,514 | | | 15,244 | | | 1,270 | | | 8.3 | % | Communications and technology | | 19,018 | | | 16,514 | | | 2,504 | | | 15.2 | % |
Travel and entertainment | Travel and entertainment | | 1,504 | | | 3,789 | | | (2,285) | | | (60.3 | %) | Travel and entertainment | | 2,725 | | | 1,504 | | | 1,221 | | | 81.2 | % |
Other | Other | | 17,855 | | | 17,845 | | | 10 | | | 0.1 | % | Other | | 20,074 | | | 17,855 | | | 2,219 | | | 12.4 | % |
Total noninterest expense | Total noninterest expense | | $ | 162,776 | | | $ | 151,423 | | | $ | 11,353 | | | 7.5 | % | Total noninterest expense | | $ | 204,503 | | | $ | 162,776 | | | $ | 41,727 | | | 25.6 | % |
Noninterest expense increased $11.4$41.7 million, or 7.5%25.6%. Noninterest expense for the nine months ended September 30, 2021 was impacted by $3.0 million of transaction costs associated with the HubTran acquisition. Noninterest expense for the nine months ended September 30, 2020 was impacted by $0.8 million of transaction costs associated with the TFS Acquisition. Excluding the HubTran and TFS Acquisition transactionacquisition costs, we incurred adjusted noninterest expense of $162.0$201.5 million and $161.9 million for the nine months ended September 30, 2021 and 2020, respectively, resulting in an adjusted net increase in noninterest expense of $10.6$39.6 million, or 7.0%.24.5%, 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$28.2 million, or 11.9%30.3%, which is primarily due to temporary increased second quarter pay to branch employees during the COVID-19 pandemic, merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. The size of our workforce was relatively flat.increased period over period in part due to the acquisition of HubTran as well as organic growth within the Company. Our average full-time equivalent employees were 1,122.61,181.8 and 1,124.91,122.6 for the nine months ended September 30, 2021 and 2020, respectively. Given improved 2021 performance compared to 2020, our annual bonus accrual increased $6.5 million period over period. Further, sales commissions, primarily related to our operations at Triumph Business Capital and 2019, respectively.TriumphPay, increased $3.5 million and compensation paid to temporary contract labor increased $2.5 million period over period. Additionally, stock based compensation expense increased $5.7 million period over period.
•Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $2.2$2.6 million, or 16.2%16.3%, primarily due to growth in our operations period over period.
•FDIC Insurance and Other Regulatory Assessments. FDIC insurance and other regulatory assessments increased $0.6$0.7 million, or 95.0%56.4%, primarily due to a small bank credit by the FDIC during the nine months ended September 30, 2019.increased assessments period over period.
•Professional Fees. Professional fees increased $1.6$2.9 million, or 30.4%41.8%, primarily due to professional fees incurred in connection$3.0 million of transaction costs associated with the HubTran acquisition slightly offset by $0.8 million of transaction costs associated with the TFS Acquisition.acquisition.
•Amortization of intangible assets. Amortization of intangible assets decreased $0.7increased $1.4 million, or 10.2%, due to lower amortizable intangible asset balances during the nine months ended September 30, 2020 compared to the same period during 2019.
•Advertising and promotion. Advertising and promotion expenses decreased $1.2 million, or 25.8%22.5%, primarily due to pull back in this type of spending as a result of the COVID-19 pandemic.additional intangibles recorded through the HubTran acquisition during the current year.
•Communications and Technology. Communications and technology expenses increased $1.3$2.5 million, or 8.3%15.2%, primarily as a result as a result of increased information technology license and software maintenance expense as well as continued spendspending on technology designedIT consulting to improvedevelop efficiency in our operations.operations and improve the functionality of the TriumphPay platform period over period.
•Travel and entertainment. Travel and entertainment expenses decreased $2.3increased $1.2 million, or 60.3%81.2%, primarily due to the impact of the COVID-19 pandemic on such activities.activities during the prior year.
•Other. Other noninterest expense includes loan-related expenses, software amortization, training and recruiting, postage, insurance, and subscription services.increased $2.2 million or 12.4%. There were no significant increases or decreases in the individual 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 $0.8increased $14.5 million, or 6.6%134.2%, from $11.6 million for the nine months ended September 30, 2019 to $10.8 million for the nine months ended September 30, 2020.2020 to $25.3 million for the nine months ended September 30, 2021. The effective tax rate was 23% for the nine months ended September 30, 2021 and 25% for the nine months ended September 30,
2020 and 22% for the nine months ended September 30, 2019. 2020. The increasedecrease in the effective tax rate period over period is principally due to an income tax benefit of approximately $0.8 million relatedadjustment to changes in the sourcing location of income and other itemsstate taxes during the three months ended September 30, 2019.prior year.
Operating Segment Results
Our reportable segments are Banking, Factoring, Payments, 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. CorporateThe Payments segment includes holding company financing and investment activities and management and administrative expenses to support the overall operations of the Company.TBK Bank's TriumphPay division, which provides a presentment, audit, and payment solution to shipper, freight broker, and factor clients in the trucking industry. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a carrier a QuickPay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering freight brokers the ability to settle their invoices with us on an extended term following our payment to their carriers as an additional liquidity option for such freight brokers.
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 the same as those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 20192020 Form 10-K. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segmentand Payments segments based on Federal Home Loan Bank advance rates. Credit loss expense is allocated based on the segment’s ACL 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 Factoring segment includes only factoring originated by TBC.
The following tables present our primary operating results for our operating segments:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Nine Months Ended September 30, 2020 | | Banking | | Factoring | | Corporate | | Consolidated | |
Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 157,957 | | | $ | 73,952 | | | $ | 267 | | | $ | 232,176 | | Total interest income | | $ | 144,087 | | | $ | 127,699 | | | $ | 7,939 | | | $ | 51 | | | $ | 279,776 | |
Intersegment interest allocations | Intersegment interest allocations | | 8,873 | | | (8,873) | | | — | | | — | | Intersegment interest allocations | | 8,117 | | | (7,700) | | | (417) | | | — | | | — | |
Total interest expense | Total interest expense | | 25,368 | | | — | | | 5,678 | | | 31,046 | | Total interest expense | | 8,225 | | | — | | | — | | | 6,478 | | | 14,703 | |
Net interest income (expense) | Net interest income (expense) | | 141,462 | | | 65,079 | | | (5,411) | | | 201,130 | | Net interest income (expense) | | 143,979 | | | 119,999 | | | 7,522 | | | (6,427) | | | 265,073 | |
Credit loss expense | | 27,378 | | | 4,437 | | | 1,834 | | | 33,649 | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | | (19,187) | | | 8,091 | | | 548 | | | (290) | | | (10,838) | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 114,084 | | | 60,642 | | | (7,245) | | | 167,481 | | Net interest income after credit loss expense | | 163,166 | | | 111,908 | | | 6,974 | | | (6,137) | | | 275,911 | |
Gain on sale of subsidiary or division | | 9,758 | | | — | | | — | | | 9,758 | | |
Other noninterest income | | 22,586 | | | 5,524 | | | 131 | | | 28,241 | | |
Noninterest income | | Noninterest income | | 25,139 | | | 10,710 | | | 4,242 | | | 151 | | | 40,242 | |
Noninterest expense | Noninterest expense | | 122,001 | | | 37,695 | | | 3,080 | | | 162,776 | | Noninterest expense | | 122,497 | | | 52,433 | | | 26,393 | | | 3,180 | | | 204,503 | |
Operating income (loss) | Operating income (loss) | | $ | 24,427 | | | $ | 28,471 | | | $ | (10,194) | | | $ | 42,704 | | Operating income (loss) | | $ | 65,808 | | | $ | 70,185 | | | $ | (15,177) | | | $ | (9,166) | | | $ | 111,650 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Nine Months Ended September 30, 2019 | | Banking | | Factoring | | Corporate | | Consolidated | |
Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Consolidated |
Total interest income | Total interest income | | $ | 155,645 | | | $ | 73,435 | | | $ | 902 | | | $ | 229,982 | | Total interest income | | $ | 155,517 | | | $ | 73,952 | | | $ | 2,440 | | | $ | 267 | | | $ | 232,176 | |
Intersegment interest allocations | Intersegment interest allocations | | 8,188 | | | (8,188) | | | — | | | — | | Intersegment interest allocations | | 9,139 | | | (8,873) | | | (266) | | | — | | | — | |
Total interest expense | Total interest expense | | 35,746 | | | — | | | 4,741 | | | 40,487 | | Total interest expense | | 25,368 | | | — | | | — | | | 5,678 | | | 31,046 | |
Net interest income (expense) | Net interest income (expense) | | 128,087 | | | 65,247 | | | (3,839) | | | 189,495 | | Net interest income (expense) | | 139,288 | | | 65,079 | | | 2,174 | | | (5,411) | | | 201,130 | |
Credit loss expense (benefit) | Credit loss expense (benefit) | | 5,847 | | | 1,789 | | | (76) | | | 7,560 | | Credit loss expense (benefit) | | 27,211 | | | 4,437 | | | 167 | | | 1,834 | | | 33,649 | |
Net interest income after credit loss expense | Net interest income after credit loss expense | | 122,240 | | | 63,458 | | | (3,763) | | | 181,935 | | Net interest income after credit loss expense | | 112,077 | | | 60,642 | | | 2,007 | | | (7,245) | | | 167,481 | |
Noninterest income | | 19,150 | | | 3,572 | | | 181 | | | 22,903 | | |
Gain on sale of subsidiary or division | | Gain on sale of subsidiary or division | | 9,758 | | | — | | | — | | | — | | | 9,758 | |
Other noninterest income | | Other noninterest income | | 22,512 | | | 5,524 | | | 74 | | | 131 | | | 28,241 | |
Noninterest expense | Noninterest expense | | 109,406 | | | 39,340 | | | 2,677 | | | 151,423 | | Noninterest expense | | 113,047 | | | 37,695 | | | 8,954 | | | 3,080 | | | 162,776 | |
Operating income (loss) | Operating income (loss) | | $ | 31,984 | | | $ | 27,690 | | | $ | (6,259) | | | $ | 53,415 | | Operating income (loss) | | $ | 31,300 | | | $ | 28,471 | | | $ | (6,873) | | | $ | (10,194) | | | $ | 42,704 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
September 30, 2020 | | Banking | | Factoring | | Corporate | | Eliminations | | Consolidated | |
September 30, 2021 | | September 30, 2021 | | Banking | | Factoring | | Payments | | Corporate | | Eliminations | | Consolidated |
Total assets | Total assets | | $ | 5,767,857 | | | $ | 1,042,571 | | | $ | 828,065 | | | $ | (1,801,706) | | | $ | 5,836,787 | | Total assets | | $ | 5,686,761 | | | $ | 1,559,378 | | | $ | 242,446 | | | $ | 975,939 | | | $ | (2,439,989) | | | $ | 6,024,535 | |
Gross loans | Gross loans | | $ | 4,759,135 | | | $ | 948,987 | | | $ | 800 | | | $ | (856,011) | | | $ | 4,852,911 | | Gross loans | | $ | 4,390,659 | | | $ | 1,479,989 | | | $ | 127,039 | | | $ | 700 | | | $ | (1,215,657) | | | $ | 4,782,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | | | | |
December 31, 2020 | | Banking | | Factoring | | Payments | | Corporate | | Eliminations | | Consolidated |
Total assets | | $ | 5,791,537 | | | $ | 1,121,704 | | | $ | 115,836 | | | $ | 861,967 | | | $ | (1,955,253) | | | $ | 5,935,791 | |
Gross loans | | $ | 4,788,093 | | | $ | 1,036,548 | | | $ | 84,222 | | | $ | 800 | | | $ | (912,887) | | | $ | 4,996,776 | |
Banking
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Nine Months Ended September 30, | | % Change |
Banking | | 2021 | | 2020 | | $ Change | |
Total interest income | | $ | 144,087 | | | $ | 155,517 | | | $ | (11,430) | | | (7.3 | %) |
Intersegment interest allocations | | 8,117 | | | 9,139 | | | (1,022) | | | (11.2 | %) |
Total interest expense | | 8,225 | | | 25,368 | | | (17,143) | | | (67.6 | %) |
Net interest income | | 143,979 | | | 139,288 | | | 4,691 | | | 3.4 | % |
Credit loss expense (benefit) | | (19,187) | | | 27,211 | | | (46,398) | | | (170.5 | %) |
Net interest income after credit loss expense | | 163,166 | | | 112,077 | | | 51,089 | | | 45.6 | % |
Gain on sale of subsidiary or division | | — | | | 9,758 | | | (9,758) | | | (100.0 | %) |
Other noninterest income | | 25,139 | | | 22,512 | | | 2,627 | | | 11.7 | % |
Noninterest expense | | 122,497 | | | 113,047 | | | 9,450 | | | 8.4 | % |
Operating income (loss) | | $ | 65,808 | | | $ | 31,300 | | | $ | 34,508 | | | 110.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | | |
December 31, 2019 | | Banking | | Factoring | | Corporate | | Eliminations | | Consolidated |
Total assets | | $ | 4,976,009 | | | $ | 662,002 | | | $ | 771,048 | | | $ | (1,348,762) | | | $ | 5,060,297 | |
Gross loans | | $ | 4,108,735 | | | $ | 573,372 | | | $ | 1,519 | | | $ | (489,114) | | | $ | 4,194,512 | |
Banking
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Nine Months Ended September 30, | | | | | | % Change |
Banking | | 2020 | | 2019 | | $ Change | | |
Total interest income | | $ | 157,957 | | | $ | 155,645 | | | $ | 2,312 | | | 1.5 | % |
Intersegment interest allocations | | 8,873 | | | 8,188 | | | 685 | | | 8.4 | % |
Total interest expense | | 25,368 | | | 35,746 | | | (10,378) | | | (29.0 | %) |
Net interest income (expense) | | 141,462 | | | 128,087 | | | 13,375 | | | 10.4 | % |
Credit loss expense | | 27,378 | | | 5,847 | | | 21,531 | | | 368.2 | % |
Net interest income (expense) after credit loss expense | | 114,084 | | | 122,240 | | | (8,156) | | | (6.7 | %) |
Gain on sale of subsidiary or division | | 9,758 | | | — | | | 9,758 | | | 100.0 | % |
Other noninterest income | | 22,586 | | | 19,150 | | | 3,436 | | | 17.9 | % |
Noninterest expense | | 122,001 | | | 109,406 | | | 12,595 | | | 11.5 | % |
Operating income (loss) | | $ | 24,427 | | | $ | 31,984 | | | $ | (7,557) | | | (23.6 | %) |
Our Banking segment’s operating income decreased $7.6increased $34.5 million, or 23.6%110.2%. Our Banking segment’s operating income for the nine months ended September 30, 2020 was impacted by the realization of the $9.8 million gain associated with the sale of TPF in the second quarter of 2020. Excluding the gain on sale of TPF, our Banking segment’s adjusted operating income was $14.6$24.8 million for the nine months ended September 30, 2020, resulting in an adjusted decreaseincrease in operating income of $17.4$41.0 million or (54.4%), period over period.
InterestTotal interest income increaseddecreased $11.4 million, or 7.3%, primarily as a result of increasesdecreases in the balances of our interest earning assets, primarily loans, due to the continued growth of our commercial finance products, including equipment loans and asset based loans. Average loans in our Banking segment, increased 15.7%excluding intersegment loans, decreased 4.1% from $3.653$3.662 billion for the nine months ended September 30, 20192020 to $4.226$3.511 billion for the nine months ended September 30, 2020.2021. The increasedecrease in interest income due to increased average balances of ourwas also driven by a decrease in yields on interest earning assets was partially offset by lower yields across almost all of our interest earning asset groups.assets.
Interest expense decreased in spiteperiod over period. While the average balance of growth in average interest bearing liabilities at our Banking segment. More specifically,segment decreased overall, average total interest bearing deposits increased $65.0$270.5 million, or 2.3%9.4%. The decrease in interest expense was the result of a decrease in our average cost of interest bearing liabilities driven by changes in interest rates in the macro economy.
Credit loss expense at our bankingBanking segment is made up of credit loss expense related to loans and credit loss expense related to off balance sheet commitments to lend. Credit loss expense related to loans was $23.5a benefit to credit loss expense of $18.0 million for the nine months ended September 30, 20202021 compared to $5.8credit loss expense of $23.4 million for the nine months ended September 30, 2019.2020. The increaseddecreased credit loss expense related to loans for our Banking segment was primarily the result of significant year-to-date deterioration inprojected improvement of the loss drivers that the Company forecastsforecasted over the reasonable and supportable forecast period to calculate expected losses and minimal changesat our Banking segment as of September 30, 2021 which resulted in qualitativea benefit to credit loss factors. Theexpense of $10.2 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2020 the Company forecasted deterioration in forecastedthe loss assumptionsfactors driven by the projected economic impact of COVID-19 which resulted in approximatelycredit loss expense of $23.2 million at our Banking segment. The decrease in credit loss expense was further driven by the impact of specific reserve releases on our Banking segment loans. These releases created a $4.3 million benefit to credit loss expense for the nine months ended September 30, 2020. For the nine months ended September 30, 2019, changes2021 compared to loss factors under the incurred loss allowance methodology resulted in approximately $0.4$4.8 million of credit loss expense at our Banking segment. The increase in the credit loss expense at our Banking segment was further driven byon net new specific reserves. We recorded net new specific reserves at our Banking segment of $4.8 million during the nine months ended September 30, 2020 compared to $0.8 million2020. Net charge-offs at our Banking segment were insignificant during the nine months ended September 30, 2019. We experienced lower total2021 compared to net charge-offs of $0.4 million during the same period a year ago. Said charge-offs carried a reserve balance of $0.2 million established during a prior period. Changes in loan volume and mix at our Banking segment of $0.4partially offset the decrease in credit loss expense as these factors created a $3.3 million benefit to credit loss expense during the nine months ended September 30, 20202021 compared to $1.8a $5.0 million forbenefit during the same period in 2019. Charge-offs duringof the nine months ended September 30, 2020 had $0.1 million of reserves established in a prior period while charge-offs during the nine months ended September 30, 2019 had previously established reserves of $0.6 million. Decreased loan growth and change in mix at our Banking segment offset the increase in credit loss expense period over period. For the nine months ended September 30, 2020, changes in loan volume and mix reduced credit loss expense by $4.9 million during the period. Changes in loan volume and mix resulted in an increase in credit loss expense of $3.2 million for the nine months ended September 30, 2019.year.
Credit loss expense for off balance sheet credit exposures at our Banking segment increaseddecreased $5.0 million from $3.8 million primarily due to increased assumed loss rates on estimated funding as a result of the COVID-19 virus. The Company also experienced an increase in commitments to fund during the period. Prior to January 1, 2020, credit loss expense for off balance sheet credit exposures at our
Banking segment was recorded in other noninterest expense. Credit loss expense for off balance sheet credit exposures at our Banking segment for the nine months ended September 30, 20192020 to a benefit of $1.2 million for the nine months ended September 30, 2021. The decrease was insignificant.primarily due to the changes in the assumptions used to project the loss rates previously discussed.
Noninterest income at our Banking segment increased primarily due to a $3.1$2.0 million gain on sale of securities related to the liquidation of available for sale CLOs during the nine months ended September 30, 2020. Additionally, we recognized $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the nine months ended September 30, 2020. The increase in other noninterest income at our Banking segment was also driven by a $1.9 million gain on sale of liquid credit and mortgage loans during the nine months ended September 30, 2020. Gain on sale of loans was $0.6 million for the nine months ended September 30, 2019. Smaller increases were driven by organic growth in our operations. The increase in noninterest income at our Banking segment was partially offset by a $1.1 million decrease in service charges on deposits caused by our willingnessconsistent with increased average deposit balances subject to such fees period over period. Further, in keeping with guidance from regulators, we actively workworked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020. Additionally card income at our Banking segment increased $0.5 million primarily due to increased debit card activity during the nine months ended September 30, 2021. Further, insurance commissions at our Banking segment increased $1.1 million due to higher policy volumes processed by Triumph Insurance group. The Banking segment also recognized a $1.5 million recovery during the nine months ended September 30, 2021 on an acquired loan that was charged off prior to our acquisition of the originating bank. Additionally, during the current period, we recognized a $0.4 million increase wasin revenue from BOLI primarily related to a benefit payment. We also recognized a gain on sale of liquid credit and mortgage loans during the nine months ended September 30, 2021 of $3.0 million compared to a gain of $1.9 million during the same period a year ago. These increases were partially offset by a decrease in net gains on sale or call of securities of $3.2 million period over period. Additionally offsetting the increase was the recognition of $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the nine months ended September 30, 2020 and did not repeat during the nine months ended September 30, 2021. We also recognized a $0.7 million loss recognized on the donation of a branch to a local municipality during the nine months ended September 30, 2020. There were no other significant changes within the components of other noninterest income.
Noninterest expense increased primarily due to incremental costs associated with the growthan increase in our Banking segment infrastructure. In addition, increasessalaries and employee benefits expense due to temporary increased pay to branch employees during the COVID-19 pandemic, merit increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Remaining fluctuations in the individual components of noninterest expense contributed to the increase.at our Banking segment were insignificant period over period.
Factoring
| (Dollars in thousands) | (Dollars in thousands) | | Nine Months Ended September 30, | | | % Change | (Dollars in thousands) | | Nine Months Ended September 30, | |
Factoring | Factoring | | 2020 | | 2019 | | $ Change | | | % Change | Factoring | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | Total interest income | | $ | 73,952 | | | $ | 73,435 | | | $ | 517 | | | 0.7 | % | | $ | 127,699 | | | $ | 73,952 | | | $ | 53,747 | | | 72.7 | % |
Intersegment interest allocations | Intersegment interest allocations | | (8,873) | | | (8,188) | | | (685) | | | (8.4 | %) | Intersegment interest allocations | | (7,700) | | | (8,873) | | | 1,173 | | | 13.2 | % |
Total interest expense | Total interest expense | | — | | | — | | | — | | | — | | Total interest expense | | — | | | — | | | — | | | — | |
Net interest income (expense) | | 65,079 | | | 65,247 | | | (168) | | | (0.3 | %) | |
Credit loss expense | | 4,437 | | | 1,789 | | | 2,648 | | | 148.0 | % | |
Net interest income (expense) after credit loss expense | | 60,642 | | | 63,458 | | | (2,816) | | | (4.4 | %) | |
Net interest income | | Net interest income | | 119,999 | | | 65,079 | | | 54,920 | | | 84.4 | % |
Credit loss expense (benefit) | | Credit loss expense (benefit) | | 8,091 | | | 4,437 | | | 3,654 | | | 82.4 | % |
Net interest income after credit loss expense | | Net interest income after credit loss expense | | 111,908 | | | 60,642 | | | 51,266 | | | 84.5 | % |
Noninterest income | Noninterest income | | 5,524 | | | 3,572 | | | 1,952 | | | 54.6 | % | Noninterest income | | 10,710 | | | 5,524 | | | 5,186 | | | 93.9 | % |
Noninterest expense | Noninterest expense | | 37,695 | | | 39,340 | | | (1,645) | | | (4.2 | %) | Noninterest expense | | 52,433 | | | 37,695 | | | 14,738 | | | 39.1 | % |
Operating income (loss) | Operating income (loss) | | $ | 28,471 | | | $ | 27,690 | | | $ | 781 | | | 2.8 | % | Operating income (loss) | | $ | 70,185 | | | $ | 28,471 | | | $ | 41,714 | | | 146.5 | % |
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Factored receivable period end balance | Factored receivable period end balance | $ | 948,987,000 | | | $ | 562,009,000 | | Factored receivable period end balance | $ | 1,479,989,000 | | | $ | 953,434,000 | |
Yield on average receivable balance | Yield on average receivable balance | 15.75 | % | | 18.31 | % | Yield on average receivable balance | 14.19 | % | | 15.63 | % |
Rolling twelve quarter annual charge-off rate | 0.43 | % | | 0.36 | % | |
Year to date charge-off rate(1) | | Year to date charge-off rate(1) | 3.76 | % | | 0.45 | % |
Factored receivables - transportation concentration | Factored receivables - transportation concentration | 88 | % | | 83 | % | Factored receivables - transportation concentration | 90 | % | | 88 | % |
| Interest income, including fees | Interest income, including fees | $ | 73,952,000 | | | $ | 73,435,000 | | Interest income, including fees | $ | 127,699,000 | | | $ | 73,952,000 | |
Non-interest income(1)(2) | Non-interest income(1)(2) | 3,524,000 | | | 3,572,000 | | Non-interest income(1)(2) | 6,056,000 | | | 3,524,000 | |
Factored receivable total revenue | Factored receivable total revenue | 79,476,000 | | | 77,007,000 | | Factored receivable total revenue | 133,755,000 | | | 77,476,000 | |
Average net funds employed | Average net funds employed | 569,928,000 | | | 488,876,000 | | Average net funds employed | 1,082,610,000 | | | 569,928,000 | |
Yield on average net funds employed | Yield on average net funds employed | 18.16 | % | | 21.06 | % | Yield on average net funds employed | 16.52 | % | | 18.16 | % |
| Accounts receivable purchased | Accounts receivable purchased | $ | 4,673,573,000 | | | $ | 4,185,027,000 | | Accounts receivable purchased | $ | 9,092,541,000 | | | $ | 4,673,573,000 | |
Number of invoices purchased | Number of invoices purchased | 2,719,508 | | | 2,555,072 | | Number of invoices purchased | 4,125,694 | | | 2,719,508 | |
Average invoice size | Average invoice size | $ | 1,719 | | | $ | 1,638 | | Average invoice size | $ | 2,204 | | | $ | 1,719 | |
Average invoice size - transportation | Average invoice size - transportation | $ | 1,567 | | | $ | 1,509 | | Average invoice size - transportation | $ | 2,096 | | | $ | 1,567 | |
Average invoice size - non-transportation | Average invoice size - non-transportation | $ | 4,527 | | | $ | 3,255 | | Average invoice size - non-transportation | $ | 4,812 | | | $ | 4,527 | |
(1) Net charge-offs for the nine months ended September 30, 2021 includes a $45.3 million charge-off related to the TFS acquisition, which contributed approximately 3.43% to the net charge-off rate for the period.
(2) Non-interest income for the nine months ended September 30, 20202021 excludes the $2.0$4.7 million gainof income recognized on the increased value of the receivable due from Covenantour indemnification asset resulting from the amended TFS acquisition agreementagreement.
Our Factoring segment’s operating income increased $0.8$41.7 million, or 2.8%. Our Factoring segment's operating income was impacted by $0.8 million of transaction costs associated with the TFS Acquisition. Excluding the TFS Acquisition transaction costs, our Factoring segment's adjusted operating income was $29.3 million for the three months ended September 30, 2020, resulting in an adjusted net increase in operating income of $1.6 million, or 5.8%146.5%.
Our average invoice size increased 4.9%28.2% from $1,638 for the nine months ended September 30, 2019 to $1,719 for the nine months ended September 30, 2020 to $2,204 for the nine months ended September 30, 2021 and the number of invoices purchased increased 6.4%51.7% period over period.
Net interest income at our Factoring segment was flatincreased period over period. Overall average net funds employed (“NFE”) was up 16.6%increased 90.0% during the nine months ended September 30, 20202021 compared to the same period in 2019.2020. The increase in average NFE was the result of increased invoice purchase volume as well as increased average invoice size due to the impact of the COVID-19 pandemic on over-the-road transportation.size. Those, in turn, resulted from historically high freight volume in a reduced capacity market. See further discussion under the Recent Developments: COVID-19 and the CARES Act section. After record transportation invoice prices in 2018, 2019 trended toward the longer term levels. The increase in net interest income was partially offset by decreased purchase discount rates driven by greater focus on larger lower priced fleets and competitive pricing pressure, and the aforementioned impact of COVID-19;pressure; however, this downward impact was slightly offsetthose negative factors were somewhat mitigated by increased concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration was up 5%2% period over period from 83% at September 30, 2019 to 88% at September 30, 2020.2020 to 90% at September 30, 2021.
The increase in credit loss expense was primarily due to the $2.8 million increase in required reserves on acquired Over-Formula advances as previously explained in the Credit Loss Expense discussion. Including the additional specific reserves attributable to the acquired Over-Formula Advances, net new specific reserves at our Factoring segment wasincreased $1.5 million period over period. Growth in the result in changes in ending periodunderlying factored receivable balances, changesportfolio at our Factoring segment resulted in reserve rate,$2.6 million and charge-off activity offset by a decrease in net new specific reserves on non-PCD at-risk balances. The ending balance$2.1 million of our factored receivables portfolio, including the factoring assets obtained through the TFS Acquisition, grew $375.6 millioncredit loss expense during the nine months ended September 30, 2021 and 2020, comparedrespectively. Net charge-offs at our factoring segment were $45.2 million consisting mostly of the aforementioned $41.3 million charge-off of the Over-Formula Advance balance associated with the largest over-advanced client which contributed 3.43% to contractionthe current period charge-off rate in the ending balancetable above. A reserve of factored receivables of $26.7$41.5 million duringon the nine months ended September 30, 2019. Growthgross charge-offs was established in the ending balance of factored receivables at our Factoring segment contributed $2.1 million of credit loss expense fora prior period. During the nine months ended September 30, 2020, compared tonet charge-offs at our factoring segment were $2.9 million of which $0.7 million was reserved in a decrease of creditprior period. Changes in loss expense of $0.2 million for the same period of 2019. Change in reserve rates had an insignificantassumptions did not have a meaningful impact on credit loss expense during the nine months ended September 30, 2020 while changes in such rates decreased credit loss expense at our Factoring segment by $0.4 million during the nine months ended September 30, 2019. We experienced higher net charge-offs of $2.9 million in the nine months ended September 30, 2020 compared to $1.4 million for the same period in 2019. Reserves of $1.4 million on current period charge-offs were established in a prior period compared to established reserves of $1.7 million on the 2019 charge-offs. The increase in credit loss expense at our Factoring segment was offset by a $0.9 million increase in net new specific reserves on non-PCD at-risk balances during the nine months ended September 30, 2020 as compared to an increase in net new specific reserves of $2.7 million during the nine months ended September 30, 2019.
2021 or 2020.
The increase in noninterest income at our Factoring segment was primarily drivendue to a $4.2 million gain on the Company's indemnification asset during the nine months ended September 30, 2021. Additionally, we recognized $1.2 million early termination fees during the nine months ended September 30, 2021. These increases were partially offset by the recognition of $2.0 million of income resulting fromduring the nine months ended September 30, 2021 driven by an increase in the value of the receivable due from Covenant resulting from the Agreement previously discussed. There were no other material fluctuations in noninterest income at our Factoring segment. The
Noninterest expense increased primarily due to an increase in salaries and employee benefits expense due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Remaining fluctuations in the individual components of noninterest expense at our Factoring segment waswere insignificant period over period.
Payments
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Nine Months Ended September 30, | | | | |
Payments | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | | $ | 7,939 | | | $ | 2,440 | | | $ | 5,499 | | | 225.4 | % |
Intersegment interest allocations | | (417) | | | (266) | | | (151) | | | (56.8) | % |
Total interest expense | | — | | | — | | | — | | | — | % |
Net interest income | | 7,522 | | | 2,174 | | | 5,348 | | | 246.0 | % |
Credit loss expense (benefit) | | 548 | | | 167 | | | 381 | | | 228.1 | % |
Net interest income after credit loss expense | | 6,974 | | | 2,007 | | | 4,967 | | | 247.5 | % |
Noninterest income | | 4,242 | | | 74 | | | 4,168 | | | 5632.4 | % |
Noninterest expense | | 26,393 | | | 8,954 | | | 17,439 | | | 194.8 | % |
Operating income (loss) | | $ | (15,177) | | | $ | (6,873) | | | $ | (8,304) | | | (120.8) | % |
| | | | | | | | | | | |
| Nine Months Ended |
| 2021 | | 2020 |
Factored receivable period end balance | $ | 127,039,000 | | | $ | 62,903,000 | |
| | | |
Interest income | $ | 7,939,000 | | | $ | 2,440,000 | |
Noninterest income | 4,242,000 | | | 74,000 | |
Total revenue | $ | 12,181,000 | | | $ | 2,514,000 | |
| | | |
Operating income (loss) | $ | (15,177,000) | | | $ | (6,873,000) | |
Interest expense | 417,000 | | | 266,000 | |
Depreciation and software amortization expense | 210,000 | | | 186,000 | |
Intangible amortization expense | 1,987,000 | | | — | |
Earnings (losses) before interest, taxes, depreciation, and amortization | $ | (12,563,000) | | | $ | (6,421,000) | |
Transaction costs | $ | 2,992,000 | | | $ | — | |
Adjusted earnings (losses) before interest, taxes, depreciation, and amortization(1) | $ | (9,571,000) | | | $ | (6,421,000) | |
| | | |
Number of invoices processed | 9,455,740 | | | 2,679,662 | |
Amount of payments processed | $ | 9,919,864,000 | | | $ | 2,419,500,000 | |
(1)Adjusted earnings (losses) before interest, taxes, depreciation, and amortization excludes material gains and expenses related to merger and acquisition-related activities and is a non-GAAP financial measure used to provide meaningful supplemental information regarding the segment's operational performance and to enhance investors' overall understanding of such financial performance by removing the volatility associated with certain acquisition-related items that are unrelated to our core business.
Our Payments segment's operating loss increased $8.3 million, or 120.8%.
The number of invoices processed by our Payments segment increased 252.9% from 2,679,662 for the nine months ended September 30, 2020 to 9,455,740 for the nine months ended September 30, 2021, and the amount of payments processed increased 310.0% from $2.420 billion for the nine months ended September 30, 2020 to $9.920 billion for the nine months ended September 30, 2021.
Interest income increased due to increased factoring activity at our Payments segment and increased yields period over period. Noninterest income increased primarily due to $0.8$3.9 million in Payments fees related to the acquired HubTran operations during the nine months ended September 30, 2021.
Noninterest expense increased primarily due to $3.0 million of transaction costs incurredrelated to the acquisition of HubTran and an increase in connection with the TFS Acquisition. There were no other material fluctuations in noninterestsalaries and employee benefits expense driven by merit increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Our average full-time equivalent employees at our FactoringPayments segment were 87.1 and 40.8 for the nine months ended September 30, 2021 and 2020, respectively. We continue to invest heavily in the operations of TriumphPay.
The acquisition of HubTran during the nine months ended September 30, 2021 allows TriumphPay to create a fully integrated payments network for transportation; servicing brokers and factors. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for shippers, third party logistics companies (i.e., freight brokers) and their carriers, and factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to an open-loop payments network for the trucking industry with a focus on fee revenue. It is for this reason that management believes that earnings before interest, taxes, depreciation, and amortization and the adjustment to that metric enhance investors' overall understanding of the financial performance of the Payments segment. Further, as a result of the HubTran acquisition, management recorded $27.3 million of intangible assets that will lead to meaningful amounts of amortization going forward.
Corporate
| (Dollars in thousands) | (Dollars in thousands) | | Nine Months Ended September 30, | | | % Change | (Dollars in thousands) | | Nine Months Ended September 30, | | % Change |
Corporate | Corporate | | 2020 | | 2019 | | $ Change | | | % Change | Corporate | | 2021 | | 2020 | | $ Change | | % Change |
Total interest income | Total interest income | | $ | 267 | | | $ | 902 | | | $ | (635) | | | (70.4 | %) | | $ | 51 | | | $ | 267 | | | $ | (216) | | | (80.9 | %) |
Intersegment interest allocations | Intersegment interest allocations | | — | | | — | | | — | | | — | | Intersegment interest allocations | | — | | | — | | | — | | | — | |
Total interest expense | Total interest expense | | 5,678 | | | 4,741 | | | 937 | | | 19.8 | % | Total interest expense | | 6,478 | | | 5,678 | | | 800 | | | 14.1 | % |
Net interest income (expense) | Net interest income (expense) | | (5,411) | | | (3,839) | | | (1,572) | | | (40.9 | %) | Net interest income (expense) | | (6,427) | | | (5,411) | | | (1,016) | | | (18.8 | %) |
Credit loss expense (benefit) | Credit loss expense (benefit) | | 1,834 | | | (76) | | | 1,910 | | | 2,513.2 | % | Credit loss expense (benefit) | | (290) | | | 1,834 | | | (2,124) | | | (115.8 | %) |
Net interest income (expense) after credit loss expense | Net interest income (expense) after credit loss expense | | (7,245) | | | (3,763) | | | (3,482) | | | (92.5 | %) | Net interest income (expense) after credit loss expense | | (6,137) | | | (7,245) | | | 1,108 | | | 15.3 | % |
Noninterest income | Noninterest income | | 131 | | | 181 | | | (50) | | | (27.6 | %) | Noninterest income | | 151 | | | 131 | | | 20 | | | 15.3 | % |
Noninterest expense | Noninterest expense | | 3,080 | | | 2,677 | | | 403 | | | 15.1 | % | Noninterest expense | | 3,180 | | | 3,080 | | | 100 | | | 3.2 | % |
Operating income (loss) | Operating income (loss) | | $ | (10,194) | | | $ | (6,259) | | | $ | (3,935) | | | (62.9 | %) | Operating income (loss) | | $ | (9,166) | | | $ | (10,194) | | | $ | 1,028 | | | 10.1 | % |
The Corporate segment reported an operating loss of $9.2 million for the nine months ended September 30, 2021 compared to an operating loss of $10.2 million for the nine months ended September 30, 2020 compared2020. This was primarily due to an operatingdecreased credit loss of $6.3 million forexpense on our HTM CLOs previously discussed in the Credit Loss Expense section. Operating income during the nine months ended September 30, 2019. The increase in operating2021 was also impacted by increased credit loss was primarily driven by activity related to our three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds designated as held to maturity. These securities are required to carry an ACL in accordance with ASC 326.expense. During the nine months ended September 30, 2020, pandemic-related downgrades2021, management issued a new subordinated debt facility and default activity caused overcollateralization triggers to be tripped on twoused the majority of the three CLO
investments which had a material impact on expected cash flows used to calculate the ACL. The ACL on these balances was $2.0$0.8 million at September 30, 2020 resulting in $1.8 millionthe time of credit losspayoff that was written off through interest expense recognized during the nine months ended September 30, 2020. Given increased uncertainty related to projected future cash flows, these securities were designated as nonaccrual during the nine months ended September 30, 2020 resulting in a reversal of interest income during the period.2021. There were no other significant fluctuations in accounts in our Corporate segment period over period.
Financial Condition
Assets
Total assets were $5.837$6.025 billion at September 30, 2020,2021, compared to $5.060$5.936 billion at December 31, 2019,2020, an increase of $776.5$88.7 million, the components of which are discussed below.
Loan Portfolio
Loans held for investment were $4.853$4.783 billion at September 30, 2020,2021, compared with $4.195$4.997 billion at December 31, 2019.2020.
The following table shows our total loan portfolio by portfolio segments:
| | | September 30, 2020 | | | December 31, 2019 | | | $ Change | | % Change | | September 30, 2021 | | December 31, 2020 | | $ Change | | % Change |
(Dollars in thousands) | (Dollars in thousands) | | | % of Total | | | % of Total | | | | | $ Change | (Dollars in thousands) | | | % of Total | | | % of Total | | $ Change | |
Commercial real estate | Commercial real estate | | $ | 762,531 | | | 16 | % | | $ | 1,046,961 | | | 25 | % | | $ | (284,430) | | | (27.2 | %) | | $ | 630,106 | | | 13 | % | | $ | 779,158 | | | 16 | % | | $ | (149,052) | | |
Construction, land development, land | Construction, land development, land | | 244,512 | | | 5 | % | | 160,569 | | | 4 | % | | 83,943 | | | 52.3 | % | Construction, land development, land | | 171,814 | | | 4 | % | | 219,647 | | | 4 | % | | (47,833) | | | (21.8 | %) |
1-4 family residential | 1-4 family residential | | 164,785 | | | 3 | % | | 179,425 | | | 4 | % | | (14,640) | | | (8.2 | %) | 1-4 family residential | | 127,073 | | | 3 | % | | 157,147 | | | 3 | % | | (30,074) | | | (19.1 | %) |
Farmland | Farmland | | 110,966 | | | 2 | % | | 154,975 | | | 4 | % | | (44,009) | | | (28.4 | %) | Farmland | | 82,990 | | | 2 | % | | 103,685 | | | 2 | % | | (20,695) | | | (20.0 | %) |
Commercial | Commercial | | 1,536,903 | | | 32 | % | | 1,342,683 | | | 31 | % | | 194,220 | | | 14.5 | % | Commercial | | 1,398,497 | | | 29 | % | | 1,562,957 | | | 32 | % | | (164,460) | | | (10.5 | %) |
Factored receivables | Factored receivables | | 1,016,337 | | | 21 | % | | 619,986 | | | 15 | % | | 396,351 | | | 63.9 | % | Factored receivables | | 1,607,028 | | | 33 | % | | 1,120,770 | | | 22 | % | | 486,258 | | | 43.4 | % |
Consumer | Consumer | | 17,106 | | | 0 | % | | 21,925 | | | 1 | % | | (4,819) | | | (22.0 | %) | Consumer | | 12,677 | | | — | % | | 15,838 | | | — | % | | (3,161) | | | (20.0 | %) |
Mortgage warehouse | Mortgage warehouse | | 999,771 | | | 21 | % | | 667,988 | | | 16 | % | | 331,783 | | | 49.7 | % | Mortgage warehouse | | 752,545 | | | 16 | % | | 1,037,574 | | | 21 | % | | (285,029) | | | (27.5 | %) |
Total Loans | Total Loans | | $ | 4,852,911 | | | 100 | % | | $ | 4,194,512 | | | 100 | % | | $ | 658,399 | | | 15.7 | % | Total Loans | | $ | 4,782,730 | | | 100 | % | | $ | 4,996,776 | | | 100 | % | | $ | (214,046) | | | (4.3 | %) |
Commercial Real Estate Loans. Our commercial real estate loans decreased $284.4$149.1 million, or 27.2%19.1%, due to paydowns slightly offset byfor the period that outpaced new loan origination activity for the period.activity.
Construction and Development Loans. Our construction and development loans increased $83.9decreased $47.8 million, or 52.3%21.8%, due primarily due to increased draws on existing construction lines slightlypaydowns and conversions to term loans that were offset by paydown activity for the period.modest origination and draw activity.
Residential Real Estate Loans. Our one-to-four family residential loans decreased $14.6$30.1 million, or 8.2%19.1%, due primarily to paydowns that were offset by modest origination and draw activity.
Farmland Loans. Our farmland loans decreased $44.0$20.7 million, or 28.4%20.0%, due to paydowns for the period that outpaced new loan origination activity.
Commercial Loans. Our commercial loans held for investment increased $194.2decreased $164.5 million, or 14.5%10.5%, due to growthdecreases in PPP loans, liquid credit, PPP, agriculture and equipment finance. Growthother commercial loans. The decline in commercial loans was offset by a reduction of premiumincreases in equipment finance loans due to the sale of the assets of TPF.and asset-based lending. Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, decreased $61.0$51.6 million, or 15.1%.
The following table shows our commercial loans:
| (Dollars in thousands) | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | | $ Change | | % Change | (Dollars in thousands) | | September 30, 2021 | | December 31, 2020 | | $ Change | | % Change |
Commercial | Commercial | | | | | | | | | Commercial | | | | | | | | |
Equipment | Equipment | | $ | 509,849 | | | $ | 461,555 | | | $ | 48,294 | | | 10.5 | % | Equipment | | $ | 588,105 | | | $ | 573,163 | | | $ | 14,942 | | | 2.6 | % |
Asset-based lending | Asset-based lending | | 160,711 | | | 168,955 | | | (8,244) | | | (4.9 | %) | Asset-based lending | | 213,927 | | | 180,488 | | | 33,439 | | | 18.5 | % |
Liquid credit | Liquid credit | | 188,034 | | | 81,353 | | | 106,681 | | | 131.1 | % | Liquid credit | | 142,547 | | | 184,027 | | | (41,480) | | | (22.5 | %) |
Premium finance | | — | | | 101,015 | | | (101,015) | | | (100.0 | %) | |
Paycheck Protection Program loans | Paycheck Protection Program loans | | 223,230 | | | — | | | 223,230 | | | 100.0 | % | Paycheck Protection Program loans | | 87,413 | | | 189,857 | | | (102,444) | | | (54.0 | %) |
Agriculture | Agriculture | | 112,221 | | | 125,912 | | | (13,691) | | | (10.9 | %) | Agriculture | | 77,263 | | | 94,572 | | | (17,309) | | | (18.3 | %) |
Other commercial lending | Other commercial lending | | 342,858 | | | 403,893 | | | (61,035) | | | (15.1 | %) | Other commercial lending | | 289,242 | | | 340,850 | | | (51,608) | | | (15.1 | %) |
Total commercial loans | Total commercial loans | | $ | 1,536,903 | | | $ | 1,342,683 | | | $ | 194,220 | | | 14.5 | % | Total commercial loans | | $ | 1,398,497 | | | $ | 1,562,957 | | | $ | (164,460) | | | (10.5 | %) |
Factored Receivables. Our factored receivables increased $396.4$486.3 million, or 63.9%43.4%. A portion of this increase is driven by $107.5 million of factored receivables obtained through the TFS Acquisition. At September 30, 2020,2021, the balance of the Over-Formula Advance Portfolio included in factored receivables was $62.2$10.1 million. Also, seeAt September 30, 2021, the balance of Misdirected Payments included in factored receivables was $19.4 million. See discussion of our factoring subsidiary in the Operating Segment Results for analysis of the key drivers impacting the change in the ending factored receivables balance during the period.
Consumer Loans. Our consumer loans decreased $4.8$3.2 million, or 22.0%20.0%, due to paydowns in excess of new loan origination activity during the period.
Mortgage Warehouse. Our mortgage warehouse facilities increaseddecreased $331.8285.0 million, or 49.7%27.5%,due tohigher utilization by our clients driven by typical seasonality associated with the mortgage business during the period and higher rates of mortgage refinance due to the low interest rate environment.decreased utilization. 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 $772.3 million for the three months ended September 30, 2021 compared to $786.3 million for the three months ended September 30, 2020 compared to $417.2and $827.1 million for the threenine months ended September 30, 2019 and2021 compared to $672.4 million for the nine months ended September 30, 2020 compared to $317.4 million for the nine months ended September 30, 2019.2020.
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, 2020 | | | September 30, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | One Year or Less | | After One but within Five Years | | After Five Years | | Total | (Dollars in thousands) | | One Year or Less | | After One but within Five Years | | After Five Years | | Total |
Commercial real estate | Commercial real estate | | $ | 138,110 | | | $ | 439,441 | | | $ | 184,980 | | | $ | 762,531 | | Commercial real estate | | $ | 131,874 | | | $ | 368,071 | | | $ | 130,161 | | | $ | 630,106 | |
Construction, land development, land | Construction, land development, land | | 116,119 | | | 114,793 | | | 13,600 | | | 244,512 | | Construction, land development, land | | 99,602 | | | 59,587 | | | 12,625 | | | 171,814 | |
1-4 family residential | 1-4 family residential | | 26,106 | | | 36,664 | | | 102,015 | | | 164,785 | | 1-4 family residential | | 9,988 | | | 37,034 | | | 80,051 | | | 127,073 | |
Farmland | Farmland | | 6,474 | | | 42,730 | | | 61,762 | | | 110,966 | | Farmland | | 10,578 | | | 26,778 | | | 45,634 | | | 82,990 | |
Commercial | Commercial | | 338,072 | | | 1,059,680 | | | 139,151 | | | 1,536,903 | | Commercial | | 311,838 | | | 997,252 | | | 89,407 | | | 1,398,497 | |
Factored receivables | Factored receivables | | 1,016,337 | | | — | | | — | | | 1,016,337 | | Factored receivables | | 1,607,028 | | | — | | | — | | | 1,607,028 | |
Consumer | Consumer | | 2,454 | | | 9,218 | | | 5,434 | | | 17,106 | | Consumer | | 2,605 | | | 7,137 | | | 2,935 | | | 12,677 | |
Mortgage warehouse | Mortgage warehouse | | 999,771 | | | — | | | — | | | 999,771 | | Mortgage warehouse | | 752,545 | | | — | | | — | | | 752,545 | |
| | $ | 2,643,443 | | | $ | 1,702,526 | | | $ | 506,942 | | | $ | 4,852,911 | | | $ | 2,926,058 | | | $ | 1,495,859 | | | $ | 360,813 | | | $ | 4,782,730 | |
| Sensitivity of loans to changes in interest rates: | Sensitivity of loans to changes in interest rates: | | Sensitivity of loans to changes in interest rates: | |
Predetermined (fixed) interest rates | Predetermined (fixed) interest rates | | $ | 1,250,362 | | | $ | 179,778 | | | Predetermined (fixed) interest rates | | $ | 1,034,447 | | | $ | 66,962 | | |
Floating interest rates | Floating interest rates | | 452,164 | | | 327,164 | | | Floating interest rates | | 461,412 | | | 293,851 | | |
Total | Total | | $ | 1,702,526 | | | $ | 506,942 | | | Total | | $ | 1,495,859 | | | $ | 360,813 | | |
As of September 30, 2020,2021, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Colorado (20%(16%), Texas (23%(20%), Illinois (11%(14%), and Iowa (6%) make up 60%56% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2019,2020, the states of Colorado (23%(17%), Texas (27%(22%), Illinois (13%(12%) and Iowa (7%(6%) made up 70%57% of the Company’s gross loans, excluding factored receivables.
Further, a majority (88%(91%) of our factored receivables, representing approximately 18%31% of our total loan portfolio as of September 30, 2020,2021, 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, 2019, 77%2020, 90% of our factored receivables, representing approximately 11%20% of our total loan portfolio, were receivables purchased from trucking fleets, owner-operators, and freight brokers in the transportation industry.
Nonperforming Assets
We have established procedures to assist us in maintaining the overall quality of our loan portfolio. In addition, we have adopted underwriting guidelines to be followed by our lending officers and require senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we monitor them for any negative or adverse trends. Our loan review procedures include approval of lending policies and underwriting guidelines by the board of directors of our bank subsidiary, independent loan review, approval of large credit relationships by our bank subsidiary’s Management Loan Committee and loan quality documentation procedures. We, like other financial institutions, are subject to the risk that our loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
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 and securities, 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. Additionally, we consider the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification to be nonperforming (reflected in nonperforming loans - factored receivables). The balances of nonperforming loans reflect the recorded investment in these assets, including deductions for purchase discounts.
| (Dollars in thousands) | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Nonperforming loans: | Nonperforming loans: | | | | | Nonperforming loans: | | | | |
Commercial real estate | Commercial real estate | | $ | 12,235 | | | $ | 7,501 | | Commercial real estate | | $ | 2,113 | | | $ | 9,945 | |
Construction, land development, land | Construction, land development, land | | 2,089 | | | 3,922 | | Construction, land development, land | | 986 | | | 2,294 | |
1-4 family residential | 1-4 family residential | | 1,764 | | | 1,804 | | 1-4 family residential | | 1,312 | | | 1,851 | |
Farmland | Farmland | | 2,452 | | | 6,715 | | Farmland | | 2,046 | | | 2,531 | |
Commercial | Commercial | | 19,462 | | | 16,118 | | Commercial | | 7,844 | | | 17,202 | |
Factored receivables | Factored receivables | | 18,667 | | | 4,226 | | Factored receivables | | 28,287 | | | 23,956 | |
Consumer | Consumer | | 322 | | | 327 | | Consumer | | 251 | | | 253 | |
Mortgage warehouse | Mortgage warehouse | | — | | | — | | Mortgage warehouse | | — | | | — | |
Total nonperforming loans | Total nonperforming loans | | 56,991 | | | 40,613 | | Total nonperforming loans | | 42,839 | | | 58,032 | |
Held to maturity securities | Held to maturity securities | | 8,057 | | | — | | Held to maturity securities | | 5,810 | | | 7,945 | |
Loans held for sale | | 19,919 | | | — | | |
Other real estate owned, net | Other real estate owned, net | | 1,704 | | | 3,009 | | Other real estate owned, net | | 893 | | | 1,432 | |
Other repossessed assets | Other repossessed assets | | 2,064 | | | 476 | | Other repossessed assets | | 2,444 | | | 1,069 | |
Total nonperforming assets | Total nonperforming assets | | $ | 88,735 | | | $ | 44,098 | | Total nonperforming assets | | $ | 51,986 | | | $ | 68,478 | |
| Nonperforming assets to total assets | Nonperforming assets to total assets | | 1.52 | % | | 0.87 | % | Nonperforming assets to total assets | | 0.86 | % | | 1.15 | % |
Nonperforming loans to total loans held for investment | Nonperforming loans to total loans held for investment | | 1.17 | % | | 0.97 | % | Nonperforming loans to total loans held for investment | | 0.90 | % | | 1.16 | % |
Total past due loans to total loans held for investment | Total past due loans to total loans held for investment | | 2.40 | % | | 1.74 | % | Total past due loans to total loans held for investment | | 2.31 | % | | 3.22 | % |
Nonperforming loans increased $16.4decreased $15.2 million, or 40.3%26.2%, primarily due to the additionpayoff of $10.0 million of uncovered over-formula advances, a $5.7 million nonperforming commercial real estate loan, secured by a hotel property, a $4.9the payoff of $5.0 million asset-based lendingnonperforming general commercial loan, primarily secured by accounts receivable,the payoff of a $2.3 million generalnonperforming commercial loan secured by real estate and equipment, and a $1.4 million equipment finance loan. These increase were offset by a $3.9 million payoff of an agriculture and farmland relationship, and the payoff of a $3.0$1.0 million nonperforming construction land development, land relationship.loan during the year. Additionally, the portion of the Over-Formula Advances not covered by Covenant's indemnification decreased by $8.6 million from $10.0 million at December 31, 2020 to $1.4 million at September 30, 2021 primarily as a result of the aforementioned charge-off activity. These decreases were partially offset by $13.3 million of the total $19.4 million of Misdirected Payments amount at September 30, 2021 moving to greater than 90 days past due during the year. The entire $19.4 million amount is now included in nonperforming loans (specifically, factored receivables) in accordance with our policy. The remaining activity in nonperforming loans was also impacted by additions and removals of smaller credits to and from nonperforming loans.
OREO decreased $1.3$0.5 million, or 43.4%37.6%, due to the removal of individually insignificant OREO properties as well as insignificant valuation adjustments made throughout the period.
As a result of the activity previously described and changes in our period end total loans held for investment, the ratio of nonperforming loans to total loans held for investment increaseddecreased to 1.17%0.90% at September 30, 20202021 from 0.97%1.16% December 31, 2019.2020.
Our ratio of nonperforming assets to total assets increaseddecreased to 1.52%0.86% at September 30, 2020 compared to 0.87% at2021 from 1.15% December 31, 2019.2020. This is due to the aforementioned loan activity. We also placed $8.1activity and changes in our period end total assets. Additionally, the amortized cost basis of our HTM CLO securities considered to be nonaccrual decreased $2.1 million of held to maturity investments in the subordinated notes of CLO funds on nonaccrual during the period. During the nine months ended September 30, 2020, pandemic-related downgrades and default activity caused overcollateralization triggers to be tripped on two of the three CLO investments which had a material impact on expected cash flows. Additionally, a $19.9 million commercial real estate loan secured by an assisted living facility was placed on nonaccrual and transferred to loans held for sale during the period.year.
Past due loans to total loans held for investment increaseddecreased to 2.40%2.31% at September 30, 2020 compared to 1.74%2021 from 3.22% at December 31, 2019,2020, as a result of above activity. Additionally, past due loans increasedassociated with the acquired Over-Formula Advances decreased $52.1 million during the period due to $38.5year primarily as a result of the aforementioned charge-off activity. The remaining $10.1 million of over-formula advances that wereacquired Over-Formula Advance balance is considered greater than 90 days past due at September 30, 2020. This balance was past due 30-59 Days.2021. Aging of the Over-Formula Advances is based upon the service month on which the advances were made by TFS prior to acquisition.
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, 2020,2021, we had $35.0$18.1 million in loans of this type which are not included in any of the nonperforming loan categories. Refer to previous discussion of loans currently in deferral in accordance with the CARES Act and March 2020 interagency guidance.
Allowance for Credit Losses on Loans
The ACL is a valuation allowance estimated at each balance sheet date in accordance with US GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See Note 1 – Summary of Significant Accounting Policies in the accompanying condensedCompany’s 2020 Form 10-K and notes to the consolidated financial statements included elsewhere in this report for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in the Company’s judgment, should be charged-off.
Loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of collateral dependent loans and factored invoices greater than 90 days past due with negative cash reserves.
The following table sets forth the ACL by category of loan:
| | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | | Allocated Allowance | | % of Loan Portfolio | | ACL to Loans | | Allocated Allowance | | % of Loan Portfolio | | ACL to Loans | (Dollars in thousands) | | Allocated Allowance | | % of Loan Portfolio | | ACL to Loans | | Allocated Allowance | | % of Loan Portfolio | | ACL to Loans |
Commercial real estate | Commercial real estate | | $ | 13,150 | | | 16 | % | | 1.72 | % | | $ | 5,353 | | | 25 | % | | 0.51 | % | Commercial real estate | | $ | 3,936 | | | 13 | % | | 0.62 | % | | $ | 10,182 | | | 16 | % | | 1.31 | % |
Construction, land development, land | Construction, land development, land | | 5,599 | | | 5 | % | | 2.29 | % | | 1,382 | | | 4 | % | | 0.86 | % | Construction, land development, land | | 1,057 | | | 4 | % | | 0.62 | % | | 3,418 | | | 4 | % | | 1.56 | % |
1-4 family residential | 1-4 family residential | | 1,972 | | | 3 | % | | 1.20 | % | | 308 | | | 4 | % | | 0.17 | % | 1-4 family residential | | 485 | | | 3 | % | | 0.38 | % | | 1,225 | | | 3 | % | | 0.78 | % |
Farmland | Farmland | | 863 | | | 2 | % | | 0.78 | % | | 670 | | | 4 | % | | 0.43 | % | Farmland | | 610 | | | 2 | % | | 0.74 | % | | 832 | | | 2 | % | | 0.80 | % |
Commercial | Commercial | | 22,716 | | | 32 | % | | 1.48 | % | | 12,566 | | | 31 | % | | 0.94 | % | Commercial | | 14,276 | | | 29 | % | | 1.02 | % | | 22,040 | | | 32 | % | | 1.41 | % |
Factored receivables | Factored receivables | | 44,985 | | | 21 | % | | 4.43 | % | | 7,657 | | | 15 | % | | 1.24 | % | Factored receivables | | 19,651 | | | 33 | % | | 1.22 | % | | 56,463 | | | 22 | % | | 5.04 | % |
Consumer | Consumer | | 710 | | | — | % | | 4.15 | % | | 488 | | | 1 | % | | 2.23 | % | Consumer | | 250 | | | — | % | | 1.97 | % | | 542 | | | — | % | | 3.42 | % |
Mortgage warehouse | Mortgage warehouse | | 1,000 | | | 21 | % | | 0.10 | % | | 668 | | | 16 | % | | 0.10 | % | Mortgage warehouse | | 752 | | | 16 | % | | 0.10 | % | | 1,037 | | | 21 | % | | 0.10 | % |
Total Loans | Total Loans | | $ | 90,995 | | | 100 | % | | 1.88 | % | | $ | 29,092 | | | 100 | % | | 0.69 | % | Total Loans | | $ | 41,017 | | | 100 | % | | 0.86 | % | | $ | 95,739 | | | 100 | % | | 1.92 | % |
The ACL increased $61.9decreased $54.7 million, or 212.8%. Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on January 1, 2020, the Company recorded an increase of $0.3 million to the ACL. Management determined that the $62.2 million in over-formula advances obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those over-formula advances to be purchased credit deteriorated ("PCD")57.2%. This resulteddecrease was primarily driven by the aforementioned charge-off of $41.3 million of PCD Over-Formula Advances classified as factored receivables. The charge-off was partially offset by an additional $2.8 million reserve required on remaining PCD Over-Formula Advances and discussed previously in recording a $37.4 million ACL on the Credit Loss Expense section of Management's Discussion and Analysis. At quarter end, our entire remaining Over-Formula Advance Portfolio through purchase accounting. Thereposition was no impactdown from $62.1 million at December 31, 2020 to credit loss expense resulting from the PCD determination. The Company's expectation of loss on the Over-Formula Advance Portfolio did not change between the acquisition date and September 30, 2020 and thus, the PCD ACL was held constant$10.1 million at September 30, 2020.2021 and the entire balance at September 30, 2021 was fully reserved.
The primary reason for the non-PCD related increasedecrease in required ACL is significant projected deteriorationimprovement of the loss drivers that the Company forecastsforecasted to calculate expected losses and, to a much lesser extent, changes in qualitative loss factors over the nine months endedat September 30, 2021 as compared to December 31, 2020. This deteriorationimprovement was brought on by thea quicker projected economic recovery post-COVID-19 than was anticipated at December 31, 2020. It had a positive impact of COVID-19 on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period and created the need for $23.3resulted in a release of $10.3 million of additional ACL.ACL period over period.
The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments.
For all DCF models at September 30, 2020,2021, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At September 30, 20202021 as compared to January 1,December 31, 2020, the Company forecasted a significant increasedecrease in national unemployment, significant decreasean increase in one-year percentage change in national retail sales, significant decreasean increase in one-year percentage change in the national home price index, and a significant decreasean increase in one-year percentage change in national gross domestic product. For percentage changes in national retail sales, national home price index and national gross domestic product, the Company projected significant growth in the first projected quarter followed by percentage change growth for the first forecasted quarter. Thelast three projected quarters resembling something closer to pre-COVID-19 levels albeit slightly more modest. Projected unemployment rates used by the Company projected little to no improvement in the loss driversare relatively stable over the first threefour projected quarters with these loss drivers remaining significantly worse compared to recent historical trends over the past several years. Some improvement is expected in the fourth projected quarter.at levels somewhat higher than pre-COVID-19 conditions.
The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.
The increasedecrease in required ACL was also driven by a net charge-offsreversal of $3.3 million (which carriedspecific reserves of $1.6 million at the time of charge-off) and net new specific allowances recorded on individual non-PCD loans of $5.7 million. The increase was partially offset$1.7 million during the nine months ended September 30, 2021. Excluding the aforementioned PCD charge-off, net charge-offs were $4.1 million for the nine months ended September 30, 2021. Changes in loan volume and mix during the nine months ended September 30, 2021 decreased the required ACL by contraction and changes in mix in$0.4 million during the underlying portfolio eligible to receive an ACL.period.
With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively participated in assisting its customers with applications for resources through the program. At September 30, 2020,2021, the Company carried $223,000,000$87.4 million of PPP loans classified as Commercial loans for reporting purposes. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. ASC 326 requires creditCredit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, are required to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans. Given that the loans are fully guaranteed by the U.S. government and absent any specific loss information onabout any of our PPP loans, the Company does not carry an ACL on its PPP loans at September 30, 2020.2021.
The following table presents the unpaid principal and recorded investment for loans at September 30, 2020.2021. 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 $20.1$12.1 million at September 30, 2020,2021, and (2) net deferred origination costs and fees totaling $5.2$7.8 million at September 30, 2020.2021. The net difference can provide protection from credit loss in addition to the ACL as future potential charge-offs for an individual loan is limited to the recorded investment plus unpaid accrued interest.
| (Dollars in thousands) | (Dollars in thousands) | | Recorded Investment | | Unpaid Principal | | Difference | (Dollars in thousands) | | Recorded Investment | | Unpaid Principal | | Difference |
September 30, 2020 | | | | | | | |
September 30, 2021 | | September 30, 2021 | | Recorded Investment | | Unpaid Principal | | Difference |
Commercial real estate | Commercial real estate | | $ | 762,531 | | | $ | 766,471 | | | $ | (3,940) | | Commercial real estate | |
Construction, land development, land | Construction, land development, land | | 244,512 | | | 244,966 | | | (454) | | Construction, land development, land | | 171,814 | | | 171,998 | | | (184) | |
1-4 family residential | 1-4 family residential | | 164,785 | | | 165,442 | | | (657) | | 1-4 family residential | | 127,073 | | | 127,446 | | | (373) | |
Farmland | Farmland | | 110,966 | | | 111,870 | | | (904) | | Farmland | | 82,990 | | | 83,549 | | | (559) | |
Commercial | Commercial | | 1,536,903 | | | 1,554,805 | | | (17,902) | | Commercial | | 1,398,497 | | | 1,410,739 | | | (12,242) | |
Factored receivables | Factored receivables | | 1,016,337 | | | 1,017,805 | | | (1,468) | | Factored receivables | | 1,607,028 | | | 1,611,525 | | | (4,497) | |
Consumer | Consumer | | 17,106 | | | 17,139 | | | (33) | | Consumer | | 12,677 | | | 12,689 | | | (12) | |
Mortgage warehouse | Mortgage warehouse | | 999,771 | | | 999,771 | | | — | | Mortgage warehouse | | 752,545 | | | 752,545 | | | — | |
| | $ | 4,852,911 | | | $ | 4,878,269 | | | $ | (25,358) | | | $ | 4,782,730 | | | $ | 4,802,673 | | | $ | (19,943) | |
At September 30, 20202021 and December 31, 2019,2020, we had on deposit $110.5$189.6 million and $66.8$145.9 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.
The following table provides an analysis of the provisions for loan losses, net charge-offs and recoveries, and the effects of those items on our ACL:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Balance at beginning of period | Balance at beginning of period | | $ | 54,613 | | | $ | 29,416 | | | $ | 29,092 | | | $ | 27,571 | | Balance at beginning of period | | $ | 45,694 | | | $ | 54,613 | | | $ | 95,739 | | | $ | 29,092 | |
Loans charged-off: | Loans charged-off: | | | Loans charged-off: | |
Commercial real estate | Commercial real estate | | — | | | (26) | | | — | | | (39) | | Commercial real estate | | (17) | | | — | | | (17) | | | — | |
Construction, land development, land | Construction, land development, land | | — | | | — | | | — | | | (78) | | Construction, land development, land | | — | | | — | | | (12) | | | — | |
1-4 family residential | 1-4 family residential | | (6) | | | — | | | (27) | | | (43) | | 1-4 family residential | | (1) | | | (6) | | | (26) | | | (27) | |
Farmland | Farmland | | — | | | — | | | — | | | — | | Farmland | | — | | | — | | | — | | | — | |
Commercial | Commercial | | (528) | | | (557) | | | (1,173) | | | (1,671) | | Commercial | | (211) | | | (528) | | | (426) | | | (1,173) | |
Factored receivables | Factored receivables | | (773) | | | (210) | | | (3,027) | | | (1,682) | | Factored receivables | | (3,597) | | | (773) | | | (45,683) | | | (3,027) | |
Consumer | Consumer | | (118) | | | (85) | | | (410) | | | (594) | | Consumer | | (139) | | | (118) | | | (285) | | | (410) | |
Mortgage warehouse | Mortgage warehouse | | — | | | — | | | — | | | — | | Mortgage warehouse | | — | | | — | | | — | | | — | |
Total loans charged-off | Total loans charged-off | | $ | (1,425) | | | $ | (878) | | | $ | (4,637) | | | $ | (4,107) | | Total loans charged-off | | $ | (3,965) | | | $ | (1,425) | | | $ | (46,449) | | | $ | (4,637) | |
Recoveries of loans charged-off: | Recoveries of loans charged-off: | | | Recoveries of loans charged-off: | |
Commercial real estate | Commercial real estate | | 53 | | | — | | | 61 | | | 1 | | Commercial real estate | | 2 | | | 53 | | | 10 | | | 61 | |
Construction, land development, land | Construction, land development, land | | 2 | | | 2 | | | 5 | | | 91 | | Construction, land development, land | | 1 | | | 2 | | | 3 | | | 5 | |
1-4 family residential | 1-4 family residential | | 7 | | | 4 | | | 40 | | | 57 | | 1-4 family residential | | 5 | | | 7 | | | 90 | | | 40 | |
Farmland | Farmland | | — | | | — | | | 80 | | | — | | Farmland | | — | | | — | | | — | | | 80 | |
Commercial | Commercial | | 615 | | | 234 | | | 949 | | | 325 | | Commercial | | — | | | 615 | | | 598 | | | 949 | |
Factored receivables | Factored receivables | | 40 | | | 215 | | | 95 | | | 261 | | Factored receivables | | 239 | | | 40 | | | 324 | | | 95 | |
Consumer | Consumer | | 31 | | | 37 | | | 101 | | | 136 | | Consumer | | — | | | 31 | | | 92 | | | 101 | |
Mortgage warehouse | Mortgage warehouse | | — | | | — | | | — | | | — | | Mortgage warehouse | | — | | | — | | | — | | | — | |
Total loans recoveries | Total loans recoveries | | $ | 748 | | | $ | 492 | | | $ | 1,331 | | | $ | 871 | | Total loans recoveries | | $ | 247 | | | $ | 748 | | | $ | 1,117 | | | $ | 1,331 | |
Net loans charged-off | Net loans charged-off | | $ | (677) | | | $ | (386) | | | $ | (3,306) | | | $ | (3,236) | | Net loans charged-off | | $ | (3,718) | | | $ | (677) | | | $ | (45,332) | | | $ | (3,306) | |
Credit loss expense on loans: | Credit loss expense on loans: | | | | | | | | | Credit loss expense on loans: | | | | | | | | |
Commercial real estate | Commercial real estate | | (2,440) | | | 147 | | | 6,366 | | | 1,343 | | Commercial real estate | | (453) | | | (2,440) | | | (6,239) | | | 6,366 | |
Construction, land development, land | Construction, land development, land | | (319) | | | 47 | | | 4,400 | | | (63) | | Construction, land development, land | | (434) | | | (319) | | | (2,352) | | | 4,400 | |
1-4 family residential | 1-4 family residential | | (56) | | | 4 | | | 1,138 | | | 86 | | 1-4 family residential | | (64) | | | (56) | | | (804) | | | 1,138 | |
Farmland | Farmland | | (95) | | | 349 | | | (324) | | | 404 | | Farmland | | (59) | | | (95) | | | (222) | | | (324) | |
Commercial | Commercial | | (657) | | | 1,195 | | | 11,004 | | | 3,252 | | Commercial | | (1,187) | | | (657) | | | (7,936) | | | 11,004 | |
Factored receivables | Factored receivables | | 3,059 | | | 851 | | | 4,475 | | | 1,839 | | Factored receivables | | 1,186 | | | 3,059 | | | 8,547 | | | 4,475 | |
Consumer | Consumer | | 29 | | | 66 | | | 583 | | | 424 | | Consumer | | 153 | | | 29 | | | (99) | | | 583 | |
Mortgage warehouse | Mortgage warehouse | | 123 | | | 206 | | | 332 | | | 275 | | Mortgage warehouse | | (101) | | | 123 | | | (285) | | | 332 | |
Total credit loss expense (benefit) on loans | Total credit loss expense (benefit) on loans | | $ | (356) | | | $ | 2,865 | | | $ | 27,974 | | | $ | 7,560 | | Total credit loss expense (benefit) on loans | | $ | (959) | | | $ | (356) | | | $ | (9,390) | | | $ | 27,974 | |
Impact of adopting ASU 2016-13 | Impact of adopting ASU 2016-13 | | — | | | — | | | 269 | | | — | | Impact of adopting ASU 2016-13 | | — | | | — | | | — | | | 269 | |
Initial allowance on loans purchased with credit deterioration | Initial allowance on loans purchased with credit deterioration | | 37,415 | | | — | | | 37,415 | | | — | | Initial allowance on loans purchased with credit deterioration | | — | | | 37,415 | | | — | | | 37,415 | |
Reclassification to held for sale | Reclassification to held for sale | | — | | | — | | | (449) | | | — | | Reclassification to held for sale | | — | | | — | | | — | | | (449) | |
Balance at end of period | Balance at end of period | | $ | 90,995 | | | $ | 31,895 | | | $ | 90,995 | | | $ | 31,895 | | Balance at end of period | | $ | 41,017 | | | $ | 90,995 | | | $ | 41,017 | | | $ | 90,995 | |
Average total loans held for investment | Average total loans held for investment | | $ | 4,499,058 | | | $ | 3,938,230 | | | $ | 4,307,006 | | | $ | 3,727,925 | | Average total loans held for investment | | $ | 4,770,850 | | | $ | 4,499,058 | | | $ | 4,801,059 | | | $ | 4,307,006 | |
Net charge-offs to average total loans held for investment | Net charge-offs to average total loans held for investment | | 0.02 | % | | 0.01 | % | | 0.08 | % | | 0.09 | % | Net charge-offs to average total loans held for investment | | 0.08 | % | | 0.02 | % | | 0.94 | % | | 0.08 | % |
Allowance to total loans held for investment | Allowance to total loans held for investment | | 1.88 | % | | 0.76 | % | | 1.88 | % | | 0.76 | % | Allowance to total loans held for investment | | 0.86 | % | | 1.88 | % | | 0.86 | % | | 1.88 | % |
Quarter to date net loans charged off increased $0.3$3.0 million primarily due to a $0.6increased charge-offs on factored receivables partially offset by decreased charge-offs on commercial loans.
Year to date net loans charged off increased $42.0 million increase in net charge-offs ondue to the aforementioned charge-off of $41.3 million of PCD Over-Formula Advances classified as factored receivables. Remaining charge-off and recovery activity during the periods was insignificant individually and in the aggregate.
Year to date net loans charged off increased $0.1 million, with no charge-off or recovery activity during the periods that was significant individually and in the aggregate.
Securities
As of September 30, 2021 and December 31, 2020, we held equity securities with a fair value of $6.0$5.6 million an increase of $0.6and $5.8 million, from $5.4 million at December 31, 2019.respectively. These securities represent investments in a publicly traded Community Reinvestment Act mutual fund and are subject to market pricing volatility, with changes in fair value reflected in earnings.
As of September 30, 2020,2021, we held debt securities classified as available for sale with a fair value of $242.8$164.8 million, a decrease of $6.0$59.5 million from $248.8$224.3 million at December 31, 2019. 2020. The decrease is primarily attributable to decreases of $28.7 million, $21.3 million, and $8.2 million of corporate bonds, U.S. Government Agency obligations, and mortgage-backed securities, respectively. These decreases were partially offset by $42.2 million and $11.3 million increasesfollowing table illustrates the changes in CLO securities and state and municipal securities, respectively. our available for sale debt securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Available For Sale Debt Securities: |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 | | $ Change | | % Change |
U.S. Government agency obligations | $ | 5,001 | | | $ | 15,088 | | | $ | (10,087) | | | (66.9) | % |
Mortgage-backed securities, residential | 18,167 | | | 27,684 | | | (9,517) | | | (34.4) | % |
Asset-backed securities | 6,864 | | | 7,039 | | | (175) | | | (2.5) | % |
State and municipal | 29,175 | | | 37,395 | | | (8,220) | | | (22.0) | % |
CLO Securities | 100,719 | | | 122,204 | | | (21,485) | | | (17.6) | % |
Corporate bonds | 2,061 | | | 11,573 | | | (9,512) | | | (82.2) | % |
SBA pooled securities | 2,829 | | | 3,327 | | | (498) | | | (15.0) | % |
| $ | 164,816 | | | $ | 224,310 | | | $ | (59,494) | | | (26.5) | % |
Our available for sale CLO portfolio consists of investment grade positions in high ranking tranches within their respective securitization structures. As of September 30, 2020,2021, the Company determined that all impaired available for sale securities experienced a decline in fair value below their amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at September 30, 2020.2021. 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.needs.
As of September 30, 2020,2021, we held investments classified as held to maturity with an amortized cost, net of ACL, of $6.1$5.5 million, a decrease of $2.3$0.4 million from $8.4$5.9 million at December 31, 2019. The decrease in amortized cost, net of ACL, was primarily driven by a $2.0 million increase in the required ACL during the nine months ended September 30, 2020. See previous discussion of Credit Loss Expense related to our held to maturity securities for further details regarding the nature of these securities and the required ACL at September 30, 2020.2021.
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, 2020 | | | Maturity as of September 30, 2021 |
| | One Year or Less | | | After One but within Five Years | | | After Five but within Ten Years | | | After Ten Years | | | Total | | | One Year or Less | | After One but within Five Years | | After Five but within Ten Years | | After Ten Years | | Total |
(Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | (Dollars in thousands) | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield |
U.S. Government agency obligations | U.S. Government agency obligations | | $ | 13,267 | | | 1.72 | % | | $ | 4,960 | | | 2.14 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 18,227 | | | 1.84 | % | U.S. Government agency obligations | | $ | 4,999 | | | 2.18 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 4,999 | | | 2.18 | % |
Mortgage-backed securities | Mortgage-backed securities | | — | | | — | % | | 2,605 | | | 1.97 | % | | 8,873 | | | 2.04 | % | | 17,126 | | | 2.66 | % | | 28,604 | | | 2.40 | % | Mortgage-backed securities | | 487 | | | 3 | % | | 2,022 | | | 1.84 | % | | 4,176 | | | 1.84 | % | | 10,623 | | | 3.07 | % | | 17,308 | | | 2.63 | % |
Asset-backed securities | Asset-backed securities | | — | | | — | % | | 150 | | | 0.53 | % | | 5,000 | | | 0.38 | % | | 2,023 | | | 1.41 | % | | 7,173 | | | 0.68 | % | Asset-backed securities | | — | | | — | % | | 61 | | | 0.27 | % | | 5,000 | | | 0.27 | % | | 1,799 | | | 1.28 | % | | 6,860 | | | 0.53 | % |
State and municipal | State and municipal | | 5,548 | | | 3.18 | % | | 12,130 | | | 2.77 | % | | 3,808 | | | 2.76 | % | | 20,548 | | | 2.60 | % | | 42,034 | | | 2.74 | % | State and municipal | | 9,267 | | | 2.63 | % | | 2,696 | | | 3.02 | % | | 2,414 | | | 2.80 | % | | 14,136 | | | 2.53 | % | | 28,513 | | | 2.63 | % |
CLO securities | CLO securities | | — | | | — | % | | — | | | — | % | | 21,070 | | | 3.20 | % | | 92,725 | | | 2.43 | % | | 113,795 | | | 2.58 | % | CLO securities | | — | | | — | % | | — | | | — | % | | 70,177 | | | 4.02 | % | | 26,751 | | | 2.61 | % | | 96,928 | | | 3.63 | % |
Corporate bonds | Corporate bonds | | 19,634 | | | 3.61 | % | | 2,709 | | | 2.75 | % | | — | | | — | % | | 272 | | | 5.09 | % | | 22,615 | | | 3.53 | % | Corporate bonds | | 718 | | | 3.17 | % | | 1,001 | | | 1.37 | % | | — | | | — | % | | 271 | | | 5.07 | % | | 1,990 | | | 2.50 | % |
SBA pooled securities | SBA pooled securities | | 1 | | | 2.38 | % | | 44 | | | 2.92 | % | | — | | | — | % | | 3,491 | | | 3.71 | % | | 3,536 | | | 3.70 | % | SBA pooled securities | | — | | | — | % | | 22 | | | 3.04 | % | | — | | | — | % | | 2,713 | | | 4.10 | % | | 2,735 | | | 4.09 | % |
Total available for sale securities | Total available for sale securities | | $ | 38,450 | | | 2.90 | % | | $ | 22,598 | | | 2.52 | % | | $ | 38,751 | | | 2.56 | % | | $ | 136,185 | | | 2.51 | % | | $ | 235,984 | | | 2.58 | % | Total available for sale securities | | $ | 15,471 | | | 2.52 | % | | $ | 5,802 | | | 2.30 | % | | $ | 81,767 | | | 3.66 | % | | $ | 56,293 | | | 2.71 | % | | $ | 159,333 | | | 3.17 | % |
Held to maturity securities: | Held to maturity securities: | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 8,057 | | | — | % | | $ | — | | | — | % | | $ | 8,057 | | | — | % | Held to maturity securities: | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 7,225 | | | — | % | | $ | — | | | — | % | | $ | 7,225 | | | — | % |
Liabilities
Total liabilities were $5.143$5.204 billion as of September 30, 2020,2021, compared to $4.424$5.209 billion at December 31, 2019, an increase2020, a decrease of $719.2$5.1 million, the components of which are discussed below.
Deposits
The following table summarizes our deposits:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | | $ Change | | % Change |
Noninterest bearing demand | | $ | 1,315,900 | | | $ | 809,696 | | | $ | 506,204 | | | 62.5 | % |
Interest bearing demand | | 634,272 | | | 580,323 | | | 53,949 | | | 9.3 | % |
Individual retirement accounts | | 94,933 | | | 104,472 | | | (9,539) | | | (9.1 | %) |
Money market | | 384,476 | | | 497,105 | | | (112,629) | | | (22.7 | %) |
Savings | | 405,954 | | | 363,270 | | | 42,684 | | | 11.7 | % |
Certificates of deposit | | 857,514 | | | 1,084,425 | | | (226,911) | | | (20.9 | %) |
Brokered time deposits | | 344,986 | | | 350,615 | | | (5,629) | | | (1.6 | %) |
Other brokered deposits | | 210,066 | | | — | | | 210,066 | | | 100.0 | % |
Total Deposits | | $ | 4,248,101 | | | $ | 3,789,906 | | | $ | 458,195 | | | 12.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2021 | | December 31, 2020 | | $ Change | | % Change |
Noninterest bearing demand | | $ | 2,020,984 | | | $ | 1,352,785 | | | $ | 668,199 | | | 49.4 | % |
Interest bearing demand | | 795,234 | | | 688,680 | | | 106,554 | | | 15.5 | % |
Individual retirement accounts | | 86,012 | | | 92,584 | | | (6,572) | | | (7.1 | %) |
Money market | | 472,242 | | | 393,325 | | | 78,917 | | | 20.1 | % |
Savings | | 483,946 | | | 421,488 | | | 62,458 | | | 14.8 | % |
Certificates of deposit | | 574,539 | | | 790,844 | | | (216,305) | | | (27.4 | %) |
Brokered time deposits | | 117,064 | | | 516,786 | | | (399,722) | | | (77.3 | %) |
Other brokered deposits | | 272,554 | | | 460,108 | | | (187,554) | | | (40.8 | %) |
Total Deposits | | $ | 4,822,575 | | | $ | 4,716,600 | | | $ | 105,975 | | | 2.2 | % |
Our total deposits increased $458.2$106.0 million, or 12.1%2.2%, primarily due to growth in noninterest and interest bearing demand deposits partially offset by decreases in certificates of deposit, brokered time deposits, and other brokered deposits. Other brokered deposits first utilized as part of our overall funding strategy in the second quarter of 2020, are non-maturity deposits obtained from wholesale sources. The growth in these products was partially offset by a decrease in certificates of deposit and several other deposit products during the period. As of September 30, 2020,2021, interest bearing demand deposits, noninterest bearing deposits, money market deposits, other brokered deposits, and savings deposits accounted for 69%84% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered time deposits made up 31%16% of total deposits.
The following table provides information on the maturity distribution of time deposits with individual balances of $100,000 to $250,000 and of time deposits with individual balances of $250,000 or more as of September 30, 2020:2021:
| (Dollars in thousands) | (Dollars in thousands) | | $100,000 to $250000 | | $250,000 and Over | | Total | (Dollars in thousands) | | $100,000 to $250000 | | $250,000 and Over | | Total |
Maturity | Maturity | | | | | | | Maturity | | | | | | |
3 months or less | 3 months or less | | $ | 195,336 | | | $ | 52,919 | | | $ | 248,255 | | 3 months or less | | $ | 92,070 | | | $ | 40,259 | | | $ | 132,329 | |
Over 3 through 6 months | Over 3 through 6 months | | 141,483 | | | 30,278 | | | 171,761 | | Over 3 through 6 months | | 97,148 | | | 19,042 | | | 116,190 | |
Over 6 through 12 months | Over 6 through 12 months | | 203,485 | | | 76,696 | | | 280,181 | | Over 6 through 12 months | | 126,159 | | | 49,354 | | | 175,513 | |
Over 12 months | Over 12 months | | 52,113 | | | 14,682 | | | 66,795 | | Over 12 months | | 33,113 | | | 15,949 | | | 49,062 | |
| | $ | 592,417 | | | $ | 174,575 | | | $ | 766,992 | | | $ | 348,490 | | | $ | 124,604 | | | $ | 473,094 | |
The following table summarizes our average deposit balances and weighted average rates:
| | | Three Months Ended September 30, 2020 | | | Three Months Ended September 30, 2019 | | | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 |
| | | | Average | | | | | Average | |
(Dollars in thousands) | (Dollars in thousands) | | Average Balance | | Weighted Avg Yields | | % of Total | | Average Balance | | Weighted Avg Yields | | % of Total | (Dollars in thousands) | | Average Balance | | Weighted Avg Yields | | % of Total | | Average Balance | | Weighted Avg Yields | | % of Total |
Interest bearing demand | Interest bearing demand | | $ | 635,287 | | | 0.13 | % | | 15 | % | | $ | 585,706 | | | 0.24 | % | | 16 | % | Interest bearing demand | | $ | 779,625 | | | 0.22 | % | | 16 | % | | $ | 635,287 | | | 0.13 | % | | 15 | % |
Individual retirement accounts | Individual retirement accounts | | 95,962 | | | 1.24 | % | | 2 | % | | 110,049 | | | 1.64 | % | | 3 | % | Individual retirement accounts | | 86,571 | | | 0.58 | % | | 2 | % | | 95,962 | | | 1.24 | % | | 2 | % |
Money market | Money market | | 385,620 | | | 0.27 | % | | 9 | % | | 416,526 | | | 1.34 | % | | 11 | % | Money market | | 417,435 | | | 0.21 | % | | 9 | % | | 385,620 | | | 0.27 | % | | 9 | % |
Savings | Savings | | 400,102 | | | 0.15 | % | | 10 | % | | 359,169 | | | 0.13 | % | | 10 | % | Savings | | 479,915 | | | 0.15 | % | | 10 | % | | 400,102 | | | 0.15 | % | | 10 | % |
Certificates of deposit | Certificates of deposit | | 905,075 | | | 1.66 | % | | 23 | % | | 1,113,006 | | | 2.35 | % | | 30 | % | Certificates of deposit | | 595,001 | | | 0.48 | % | | 12 | % | | 905,075 | | | 1.66 | % | | 23 | % |
Brokered time deposits | Brokered time deposits | | 247,928 | | | 1.51 | % | | 6 | % | | 352,430 | | | 2.38 | % | | 10 | % | Brokered time deposits | | 99,116 | | | 0.12 | % | | 2 | % | | 247,928 | | | 1.51 | % | | 6 | % |
Other brokered deposits | Other brokered deposits | | 251,701 | | | 0.30 | % | | 6 | | | — | | | — | | | — | | Other brokered deposits | | 441,446 | | | 0.20 | % | | 9 | % | | 251,701 | | | 0.30 | % | | 6 | % |
Total interest bearing deposits | Total interest bearing deposits | | 2,921,675 | | | 0.79 | % | | 71 | % | | 2,936,886 | | | 1.49 | % | | 80 | % | Total interest bearing deposits | | 2,899,109 | | | 0.27 | % | | 60 | % | | 2,921,675 | | | 0.79 | % | | 71 | % |
Noninterest bearing demand | Noninterest bearing demand | | 1,213,494 | | | — | | | 29 | % | | 735,527 | | | — | | | 20 | % | Noninterest bearing demand | | 1,912,398 | | | — | | | 40 | % | | 1,213,494 | | | — | | | 29 | % |
Total deposits | Total deposits | | $ | 4,135,169 | | | 0.56 | % | | 100 | % | | $ | 3,672,413 | | | 1.19 | % | | 100 | % | Total deposits | | $ | 4,811,507 | | | 0.16 | % | | 100 | % | | $ | 4,135,169 | | | 0.56 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | | | | | Nine Months Ended September 30, 2019 | | | | |
(Dollars in thousands) | | Average Balance | | Weighted Avg Yields | | % of Total | | Average Balance | | Weighted Avg Yields | | % of Total |
Interest bearing demand | | $ | 617,392 | | | 0.18 | % | | 16 | % | | $ | 594,724 | | | 0.25 | % | | 17 | % |
Individual retirement accounts | | 99,827 | | | 1.42 | % | | 3 | % | | 111,869 | | | 1.55 | % | | 3 | % |
Money market | | 408,487 | | | 0.54 | % | | 10 | % | | 414,876 | | | 1.36 | % | | 12 | % |
Savings | | 382,236 | | | 0.15 | % | | 10 | % | | 365,357 | | | 0.13 | % | | 10 | % |
Certificates of deposit | | 993,590 | | | 2.00 | % | | 25 | % | | 985,844 | | | 2.19 | % | | 28 | % |
Brokered time deposits | | 297,829 | | | 1.83 | % | | 8 | % | | 347,777 | | | 2.37 | % | | 10 | % |
Other brokered deposits | | 86,064 | | | 0.30 | % | | — | | | — | | | — | | | — | |
Total interest bearing deposits | | 2,885,425 | | | 1.07 | % | | 74 | % | | 2,820,447 | | | 1.39 | % | | 80 | % |
Noninterest bearing demand | | 1,021,745 | | | — | | | 26 | % | | 700,868 | | | — | | | 20 | % |
Total deposits | | $ | 3,907,170 | | | 0.79 | % | | 100 | % | | $ | 3,521,315 | | | 1.11 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
(Dollars in thousands) | | Average Balance | | Weighted Avg Yields | | % of Total | | Average Balance | | Weighted Avg Yields | | % of Total |
Interest bearing demand | | $ | 746,590 | | | 0.23 | % | | 15 | % | | $ | 617,392 | | | 0.18 | % | | 16 | % |
Individual retirement accounts | | 88,579 | | | 0.69 | % | | 2 | % | | 99,827 | | | 1.42 | % | | 3 | % |
Money market | | 404,651 | | | 0.22 | % | | 8 | % | | 408,487 | | | 0.54 | % | | 10 | % |
Savings | | 465,041 | | | 0.15 | % | | 10 | % | | 382,236 | | | 0.15 | % | | 10 | % |
Certificates of deposit | | 674,284 | | | 0.76 | % | | 14 | % | | 993,590 | | | 2.00 | % | | 25 | % |
Brokered time deposits | | 134,781 | | | 0.26 | % | | 3 | % | | 297,829 | | | 1.83 | % | | 8 | % |
Other brokered deposits | | 641,959 | | | 0.16 | % | | 13 | % | | 86,064 | | | 0.30 | % | | 2 | % |
Total interest bearing deposits | | 3,155,885 | | | 0.33 | % | | 65 | % | | 2,885,425 | | | 1.07 | % | | 74 | % |
Noninterest bearing demand | | 1,720,213 | | | — | | | 35 | % | | 1,021,745 | | | — | | | 26 | % |
Total deposits | | $ | 4,876,098 | | | 0.21 | % | | 100 | % | | $ | 3,907,170 | | | 0.79 | % | | 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, 20202021 and the year ended December 31, 2019:2020:
| (Dollars in thousands) | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Amount outstanding at end of period | Amount outstanding at end of period | | $ | 14,192 | | | $ | 2,033 | | Amount outstanding at end of period | | $ | 11,990 | | | $ | 3,099 | |
Weighted average interest rate at end of period | Weighted average interest rate at end of period | | 0.03 | % | | 0.03 | % | Weighted average interest rate at end of period | | 0.03 | % | | 0.03 | % |
Average daily balance during the period | Average daily balance during the period | | $ | 6,520 | | | $ | 7,823 | | Average daily balance during the period | | $ | 6,200 | | | $ | 6,716 | |
Weighted average interest rate during the period | Weighted average interest rate during the period | | 0.03 | % | | 0.02 | % | Weighted average interest rate during the period | | 0.03 | % | | 0.03 | % |
Maximum month-end balance during the period | Maximum month-end balance during the period | | $ | 14,192 | | | $ | 14,463 | | Maximum month-end balance during the period | | $ | 12,405 | | | $ | 14,192 | |
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, 20202021 and the year ended December 31, 2019:2020:
| (Dollars in thousands) | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Amount outstanding at end of period | Amount outstanding at end of period | | $ | 435,000 | | | $ | 430,000 | | Amount outstanding at end of period | | $ | 30,000 | | | $ | 105,000 | |
Weighted average interest rate at end of period | Weighted average interest rate at end of period | | 0.15 | % | | 1.58 | % | Weighted average interest rate at end of period | | 0.27 | % | | 0.17 | % |
Average amount outstanding during the period | Average amount outstanding during the period | | 430,250 | | | 369,548 | | Average amount outstanding during the period | | 37,234 | | | 342,264 | |
Weighted average interest rate during the period | Weighted average interest rate during the period | | 0.61 | % | | 2.32 | % | Weighted average interest rate during the period | | 0.24 | % | | 0.58 | % |
Highest month end balance during the period | Highest month end balance during the period | | 850,000 | | | 530,000 | | Highest month end balance during the period | | 180,000 | | | 850,000 | |
Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. At September 30, 20202021 and December 31, 2019,2020, we had $888.9$995.3 million and $871.0 million,$1.247 billion, respectively, in unused and available advances from the FHLB.
Paycheck Protection Program Liquidity Facility (“PPPLF”)
The PPPLF is a lending facility offered by the Federal Reserve Banks to facilitate lending to small businesses under the PPP. Borrowings under the PPPLF are secured by PPP loans guaranteed by the Small Business Administration (“SBA”) and mature at the same time as the PPP loan pledged to secure the extension of credit. The maturity dates of the borrowings will be accelerated if the underlying PPP loan goes into default and Company sells the PPP loan to the SBA to realize on the SBA guarantee or if the Company receives any loan forgiveness reimbursement from the SBA for the underlying PPP loan.
Information concerning borrowings under the PPPLF is summarized as follows for the nine months ended September 30, 2021and the year ended December 31, 2020:
| | | | | | | | |
(Dollars in thousands) | | September 30, 2020 |
Amount outstanding at end of period | | $ | 223,713 | |
Weighted average interest rate at end of period | | 0.35 | % |
Average amount outstanding during the period | | 119,236 | |
Weighted average interest rate during the period | | 0.35 | % |
Highest month end balance during the period | | 223,809 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Amount outstanding at end of period | | $ | 97,554 | | | $ | 191,860 | |
Weighted average interest rate at end of period | | 0.35 | % | | 0.35 | % |
Average amount outstanding during the period | | 116,134 | | | 143,608 | |
Weighted average interest rate during the period | | 0.35 | % | | 0.35 | % |
Highest month end balance during the period | | 181,635 | | | 223,809 | |
At September 30, 2020,2021, scheduled maturities of PPPLF borrowings are as follows:
| | | | | | | | |
(Dollars in thousands) | | September 30, 20202021 |
Within one year | | $ | —24,796 | |
After onefour but within twofive years | | 223,71372,758 | |
Total | | $ | 223,71397,554 | |
At September 30, 2021 and December 31, 2020, the PPPLF borrowings arewere secured by PPP Loans totaling $223,713,000$97.6 million and $191.9 million, respectively, and bear interest at a fixed rate of 0.35% annually. There were no borrowings under the PPPLF during the year ended December 31, 2019.
Subordinated Notes
On September 30, 2016, we issued $50.0 million of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2016 Notes”). The 2016 Notes initially bear interest at 6.50% per annum, are payable semi-annually in arrears, to, but excluding, September 30, 2021, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus 5.345%. We may, at our option, beginning on September 30, 2021 and on any scheduled interest payment date thereafter, redeemredeemed the 2016 Notes in whole or in part,
at a redemption price equal to 100% of the principal amount of the 2016 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.on September 30, 2021.
On November 27, 2019, we issued $39.5 million of Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2019 Notes”). The 2019 Notes initially bear interest at 4.875% per annum, payable semi-annually in arrears, to, but excluding, November 27, 2024, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to a benchmark rate, initially three-month LIBOR, as determined for the applicable quarterly period, plus 3.330%. We may, at our option, beginning on November 27, 2024 and on any scheduled interest payment date thereafter, redeem the 2019 Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the 2019 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.
On August 26, 2021, we issued $70.0 million of Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2021 Notes”). The 2021 Notes initially bear interest at 3.500% per annum, payable semi-annually in arrears, to, but excluding, September 1, 2026, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to a benchmark rate, initially the three-month term secured overnight financing rate ("SOFR"), as determined for the applicable quarterly period, plus 2.860%. We may, at our option, beginning on September 1, 2026 and on any scheduled interest payment date thereafter, redeem the 2021 Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.
The Subordinated 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 Subordinated 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 discountsheets and other debt issuance costs are being amortized using the effective interest method overthrough the life of the Notesearliest respective redemption date as a component of interest expense. The carrying value of the Subordinated Notes totaled $87.5$106.8 million at September 30, 2020.2021.
Junior Subordinated Debentures
The following provides a summary of our junior subordinated debentures as of September 30, 2020:2021:
| (Dollars in thousands) | (Dollars in thousands) | | Face Value | | Carrying Value | | Maturity Date | | Interest Rate | (Dollars in thousands) | | Face Value | | Carrying Value | | Maturity Date | | Interest Rate |
National Bancshares Capital Trust II | National Bancshares Capital Trust II | | $ | 15,464 | | | $ | 13,187 | | | September 2033 | | LIBOR + 3.00% | National Bancshares Capital Trust II | | $ | 15,464 | | | $ | 13,316 | | | September 2033 | | LIBOR + 3.00% |
National Bancshares Capital Trust III | National Bancshares Capital Trust III | | 17,526 | | | 12,924 | | | July 2036 | | LIBOR + 1.64% | National Bancshares Capital Trust III | | 17,526 | | | 13,134 | | | July 2036 | | LIBOR + 1.64% |
ColoEast Capital Trust I | ColoEast Capital Trust I | | 5,155 | | | 3,594 | | | September 2035 | | LIBOR + 1.60% | ColoEast Capital Trust I | | 5,155 | | | 3,665 | | | September 2035 | | LIBOR + 1.60% |
ColoEast Capital Trust II | ColoEast Capital Trust II | | 6,700 | | | 4,684 | | | March 2037 | | LIBOR + 1.79% | ColoEast Capital Trust II | | 6,700 | | | 4,763 | | | March 2037 | | LIBOR + 1.79% |
Valley Bancorp Statutory Trust I | Valley Bancorp Statutory Trust I | | 3,093 | | | 2,876 | | | September 2032 | | LIBOR + 3.40% | Valley Bancorp Statutory Trust I | | 3,093 | | | 2,889 | | | September 2032 | | LIBOR + 3.40% |
Valley Bancorp Statutory Trust II | Valley Bancorp Statutory Trust II | | 3,093 | | | 2,679 | | | July 2034 | | LIBOR + 2.75% | Valley Bancorp Statutory Trust II | | 3,093 | | | 2,700 | | | July 2034 | | LIBOR + 2.75% |
| | $ | 51,031 | | | $ | 39,944 | | | | $ | 51,031 | | | $ | 40,467 | | |
These debentures are unsecured obligations and were issued to trusts that are unconsolidated subsidiaries. The trusts in turn issued trust preferred securities with identical payment terms to unrelated investors. The debentures may be called by the Company at par plus any accrued but unpaid interest; however, we have no current plans to redeem them prior to maturity. Interest on the debentures is calculated quarterly, based on a contractual rate equal to three month LIBOR plus a weighted average spread of 2.24%. As part of the purchase accounting adjustments made with the National Bancshares, Inc. acquisition on October 15, 2013, the ColoEast acquisition on August 1, 2016, and the Valley acquisition on December 9, 2017, we adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition dates. The discounts on the debentures will continue to be amortized through maturity and recognized as a component of interest expense.
The debentures are included on our consolidated balance sheet as liabilities; however, for regulatory purposes, these obligations are eligible for inclusion in regulatory capital, subject to certain limitations. All of the carrying value of $39.9$40.5 million was allowed in the calculation of Tier I capital as of September 30, 2020.2021.
Capital Resources and Liquidity Management
Capital Resources
Our stockholders’ equity totaled $693.8$820.7 million as of September 30, 2020,2021, compared to $636.6$726.8 million as of December 31, 2019,2020, an increase of $57.2$93.9 million. Stockholders’ equity increased during this period primarily due to $42.4 million of net proceeds from preferred stock issued during the period, $13.9 million of common stock issued during the period as consideration for the TFS acquisition, and our net income of $22.9 million, offset in part by $35.6 million of common stock repurchased into treasury stock during the period under our stock repurchase program.$86.3 million.
Liquidity Management
We define liquidity as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, or other cash demands and disbursement needs, and otherwise to operate on an ongoing basis.
We manage liquidity at the holding company level as well as that of our bank subsidiary. The management of liquidity at both levels is critical, because the holding company and our bank subsidiary have different funding needs and sources, and each is 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 or borrowings from the Federal Reserve, the issuance of debt securities and the issuance of common securities. For additional information regarding our operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in our consolidated financial statements.
In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of September 30, 2020,2021, TBK Bank had $529.3 million of unused borrowing capacity from the Federal Reserve Bank discount window and unsecured federal funds lines of credit with seven unaffiliated banks totaling $227.5 million, with no amounts advanced against those lines at that time.lines.
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 12 – Regulatory Matters in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of September 30, 2020.2021. 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, 2020 | | | Payments Due by Period - September 30, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Total | | One Year or Less | | After One but within Three Years | | After Three but within Five Years | | After Five Years | (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 | Customer repurchase agreements | | $ | 14,192 | | | $ | 14,192 | | | $ | — | | | $ | — | | | $ | — | | Customer repurchase agreements | | $ | 11,990 | | | $ | 11,990 | | | $ | — | | | $ | — | | | $ | — | |
ICC Contingent consideration | | 22,000 | | | 22,000 | | | — | | | — | | | — | | |
Federal Home Loan Bank advances | Federal Home Loan Bank advances | | 435,000 | | | 405,000 | | | — | | | — | | | 30,000 | | Federal Home Loan Bank advances | | 30,000 | | | — | | | — | | | — | | | 30,000 | |
Paycheck Protection Program Liquidity Facility | Paycheck Protection Program Liquidity Facility | | 223,713 | | | — | | | 223,713 | | | — | | | — | | Paycheck Protection Program Liquidity Facility | | 97,554 | | | 24,796 | | | — | | | 72,758 | | | — | |
Subordinated notes | Subordinated notes | | 50,000 | | | — | | | — | | | — | | | 50,000 | | Subordinated notes | | 109,500 | | | — | | | — | | | — | | | 109,500 | |
Junior subordinated debentures | Junior subordinated debentures | | 51,031 | | | — | | | — | | | — | | | 51,031 | | Junior subordinated debentures | | 51,031 | | | — | | | — | | | — | | | 51,031 | |
Operating lease agreements | Operating lease agreements | | 22,234 | | | 3,959 | | | 7,250 | | | 6,118 | | | 4,907 | | Operating lease agreements | | 40,282 | | | 5,101 | | | 9,616 | | | 9,025 | | | 16,540 | |
Time deposits with stated maturity dates | Time deposits with stated maturity dates | | 1,297,433 | | | 1,177,194 | | | 111,188 | | | 9,051 | | | — | | Time deposits with stated maturity dates | | 777,615 | | | 675,332 | | | 94,049 | | | 8,234 | | | — | |
Total contractual obligations | Total contractual obligations | | $ | 2,115,603 | | | $ | 1,622,345 | | | $ | 342,151 | | | $ | 15,169 | | | $ | 135,938 | | Total contractual obligations | | $ | 1,117,972 | | | $ | 717,219 | | | $ | 103,665 | | | $ | 90,017 | | | $ | 207,071 | |
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 10 – Off-Balance Sheet Loan Commitments in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report.
Critical Accounting Policies and Estimates
Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related changes, and changes in the financial condition of borrowers.
Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified acertain significant accounting policypolicies which involvesinvolve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. At December 31, 2019, the significant accounting policy which we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for loan and lease losses. This is further described under “Critical Accounting Policies and Estimates” and in Note 1 to the Consolidated Financial Statements in our 2019 Form 10-K.
On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through March 31, 2020, theThe significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans.
Allowance for Credit Losses on Loans. Management considers thelosses. Since December 31, 2020, there have been no changes in critical accounting policies relatedas further described under “Critical Accounting Policies and Estimates” and in Note 1 to the allowance for credit losses on loans as the most critical to the financial statement presentation. The total allowance for credit losses on loans includes activity related to allowances calculatedConsolidated Financial Statements in accordance with Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses. The allowance for credit losses is established through credit loss expense charged to current earnings. The amount maintained in the allowance reflects management’s estimate of the net amount not expected to be collected on the loans held for investment portfolio at the balance sheet date. The allowance for credit losses is comprised of specific reserves assigned to certain loans that don’t share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of establishing the general reserve, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics andcalculate the net amount expected to be collected over the life of the loansto estimate the credit losses in the loan portfolio.The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.Refer to “Allowance forCreditLosses” above and Note 1 – Summary of Significant Accounting Policies in the accompanyingcondensednotes to the consolidated financial statements elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance forcredit losses.our 2020 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, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but are not limited to, the following:
•business and economic conditions generally and in the bank and non-bank financial services industries, nationally and within our local market areas;
•the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
•our ability to mitigate our risk exposures;
•our ability to maintain our historical earnings trends;
•changes in management personnel;
•interest rate risk;
•concentration of our products and services in the transportation industry;
•credit risk associated with our loan portfolio;
•lack of seasoning in our loan portfolio;
•deteriorating asset quality and higher loan charge-offs;
•time and effort necessary to resolve nonperforming assets;
•inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;
•risks related to the integration of acquired businesses, including our acquisition of HubTran Inc. and developments related to our acquisition of Transport Financial Solutions and the related over-formula advances, and any future acquisitions;
•our ability to successfully identify and address the risks associated with our possible future acquisitions, and the risks that our prior and possible future acquisitions make it more difficult for investors to evaluate our business, financial condition and results of operations, and impairs our ability to accurately forecast our future performance;
•lack of liquidity;
•fluctuations in the fair value and liquidity of the securities we hold for sale;
•impairment of investment securities, goodwill, other intangible assets or deferred tax assets;
•our risk management strategies;
•environmental liability associated with our lending activities;
•increased competition in the bank and non-bank financial services industries, nationally, regionally or locally, which may adversely affect pricing and terms;
•the accuracy of our financial statements and related disclosures;
•material weaknesses in our internal control over financial reporting;
•system failures or failures to prevent breaches of our network security;
•the institution and outcome of litigation and other legal proceedings against us or to which we become subject;
•changes in carry-forwards of net operating losses;
•changes in federal tax law or policy;
•the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, such as the Dodd-Frank Act and their application by our regulators;
•governmental monetary and fiscal policies;
•changes in the scope and cost of FDIC, insurance and other coverages;
•failure to receive regulatory approval for future acquisitions; and
•increases in our capital requirements.
The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Asset/Liability Management and Interest Rate Risk
The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The board of directors of our subsidiary bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.
As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so in the future. Based upon the nature of our operations, we are not subject to 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, 20202021 and December 31, 2019:2020:
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| | September 30, 2020 | | | | December 31, 2019 | | |
| | Following 12 Months | | Months 13-24 | | Following 12 Months | | Months 13-24 |
+400 basis points | | 14.3 | % | | 15.7 | % | | 12.5 | % | | 9.3 | % |
+300 basis points | | 10.1 | % | | 11.8 | % | | 9.4 | % | | 7.1 | % |
+200 basis points | | 6.0 | % | | 8.0 | % | | 6.3 | % | | 4.9 | % |
+100 basis points | | 2.2 | % | | 4.0 | % | | 3.1 | % | | 2.6 | % |
Flat rates | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
-100 basis points | | (3.2 | %) | | (2.4 | %) | | (3.3 | %) | | (2.9 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Following 12 Months | | Months 13-24 | | Following 12 Months | | Months 13-24 |
+400 basis points | | 23.2 | % | | 31.6 | % | | 18.4 | % | | 19.8 | % |
+300 basis points | | 15.5 | % | | 19.7 | % | | 13.6 | % | | 15.3 | % |
+200 basis points | | 10.4 | % | | 13.9 | % | | 8.7 | % | | 10.7 | % |
+100 basis points | | 5.4 | % | | 8.1 | % | | 3.9 | % | | 6.0 | % |
Flat rates | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
-100 basis points | | (2.8 | %) | | (2.0 | %) | | (3.6 | %) | | (2.6 | %) |
The following table presents the change in our economic value of equity as of September 30, 20202021 and December 31, 2019,2020, assuming immediate parallel shifts in interest rates:
| | | Economic Value of Equity at Risk (%) | | | Economic Value of Equity at Risk (%) |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
+400 basis points | +400 basis points | | 50.4 | % | | 22.4 | % | +400 basis points | | 35.0 | % | | 36.5 | % |
+300 basis points | +300 basis points | | 41.3 | % | | 18.1 | % | +300 basis points | | 27.5 | % | | 28.9 | % |
+200 basis points | +200 basis points | | 30.1 | % | | 13.4 | % | +200 basis points | | 19.3 | % | | 20.3 | % |
+100 basis points | +100 basis points | | 16.5 | % | | 7.5 | % | +100 basis points | | 10.1 | % | | 10.7 | % |
Flat rates | Flat rates | | 0.0 | % | | 0.0 | % | Flat rates | | 0.0 | % | | 0.0 | % |
-100 basis points | -100 basis points | | (20.0 | %) | | (9.9 | %) | -100 basis points | | (10.8 | %) | | (11.4 | %) |
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, 2020,2021, 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. WeExcept as set forth below, 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.
We are party to a lawsuit filed against the United States Postal Service (“USPS”) seeking damages related to invoices totaling approximately $19.4 million that it separately paid to our customer, a vendor to the USPS who hauls mail pursuant to contracts it has with such entity, in violation of notices provided to the USPS that such payments were to be made directly to us (the “Misdirected Payments”). Such action was initially filed in the United States District Court for the Southern District of Florida. During the third quarter of 2021 we, together with the USPS, entered into a stipulation of dismissal without prejudice dismissing our initial action with respect to this matter in United States District Court, and we filed a new action seeking relief from the USPS for the Misdirected Payments in the United States Court of Federal Claims. Although we believe we have valid claims that the USPS is obligated to make payment on such receivable to us and that the USPS will have the capacity to make such payment, the issues in this litigation are novel issues of law that have little to no precedent and there can be no assurances that a court will agree with our interpretation of the law on these matters. If a court were to rule against us in this litigation, our only recourse would be against our customer, who failed to remit the Misdirected Payments to us as required when received, and who may not have capacity to make such payment to us. Consequently, we could incur losses up to the full amount of the Misdirected Payments in such event, which could be material to our business, financial condition and results of operations..
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of:
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced
economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
•credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;
•increased bankruptcies being experienced by the carrier, freight broker and shipper clients serviced by our factoring and TriumphPay operations;
•declines in collateral values;
•third party disruptions, including outages at network providers and other suppliers;
•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
•operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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)
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4.1 | | Deposit Agreement,Third Supplemental Indenture, dated June 19, 2020, amongas of August 26, 2021, by and between Triumph Bancorp, Inc., Equiniti Trust Company,as Issuer, and the holders from time to time of the depositary receipts described therein,Wells Fargo Bank, National Association, as Trustee, incorporated by reference to Exhibit 4.14.2 to Form 8-K filed with the SEC on June 19, 2020.August 26, 2021. |
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101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
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* Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished. |
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.
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| | TRIUMPH BANCORP, INC. |
| | (Registrant) |
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Date: | October 20, 20202021 | /s/ Aaron P. Graft |
| | Aaron P. Graft President and Chief Executive Officer |
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Date: | October 20, 20202021 | /s/ R. Bryce FowlerW. Bradley Voss |
| | R. Bryce FowlerW. Bradley Voss Chief Financial Officer |