UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2016

OR

For the transition period from              to            

Commission File Number 001-36722

 

TRIUMPH BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(Address of principal executive offices)

(214) 365-6900

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

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

 

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

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

Common Stock — $0.01 par value, 18,104,543 shares, as of October 25, 2016

 

 

 

 

 

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TRIUMPH BANCORP, INC.

FORM 10-Q

September 30, 2016

TABLE OF CONTENTS

 

 

 

 

 

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PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

 

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2016 and December 31, 2015

(Dollar amounts in thousands, except per share amounts)

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2016 and 2015

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2016 and 2015

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

  

See accompanying condensed notes to consolidated financial statements.

 

 

 

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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 Capital Advisors, LLC (“TCA”), 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”).

TBK Bank also does business under the following names:  (i) Triumph Community Bank (“TCB”) and Triumph Savings Bank (“TSB”) with respect to its community banking business in respective markets; (ii) Triumph Commercial Finance (“TCF”) with respect to its asset-based lending, equipment lending and general factoring commercial finance products; (iii) Triumph Healthcare Finance (“THF”) with respect to its healthcare asset-based lending business; and (iv) Triumph Premium Finance (“TPF”) with respect to its insurance premium financing business.

Basis of Presentation

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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

Newly Issued, But Not Yet Effective Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard was originally effective for the Company on January 1, 2017.  However, in August 2015 the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date” which deferred the mandatory effective date the new standard would take effect to reporting periods beginning after December 15, 2017, with early adoption allowed as of the original effective date for public companies. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”).  The FASB issued this ASU to improve the accounting for share-based payments.  ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:  the presentation of income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and calculation of diluted earnings per share.  The amendments in this ASU are effective for fiscal years beginning after December 31, 2016, and interim periods within those years for public business entities.  Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. Adoption of ASU 2016-09 is not expected to have a material impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers.  Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018.  The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.

 

NOTE 2 – Business combinations

Southern Transportation Insurance Agency

On September 1, 2016, the Company acquired Southern Transportation Insurance Agency, Ltd. in an all-cash transaction for $2,150,000. The purpose of the acquisition was to expand the Company’s product offerings for clients in the transportation industry. The Company recognized an intangible asset of $1,580,000 and goodwill of $570,000, which were allocated to the Company’s Banking segment. Goodwill resulted from expected enhanced product offerings and will be amortized for tax purposes.

ColoEast Bankshares, Inc.

On August 1, 2016, the Company acquired 100% of the outstanding common stock of ColoEast Bankshares, Inc. (“ColoEast”) and its community banking subsidiary, Colorado East Bank & Trust, in an all-cash transaction for $70,000,000. The Company also assumed $10,500,000 of ColoEast preferred stock issued in conjunction with the U.S. Government’s Treasury Asset Relief Program (“TARP Preferred Stock”). Colorado East Bank & Trust, which was merged into TBK Bank upon closing, offers personal checking, savings, CD, money market, HSA, IRA, NOW and business accounts, as well as commercial and consumer loans from 18 branches and one loan production office located throughout Colorado and far western Kansas. The acquisition expands the Company’s market into Colorado and Kansas and further diversifies the Company’s loan, customer, and deposit base.

 

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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:

The consideration transferred was comprised of a combination of cash and the assumption of ColoEast’s TARP Preferred Stock. The Company has recognized goodwill of $12,059,000, which was calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in this acquisition resulted from expected synergies and expansion into the Colorado and Kansas markets. The goodwill will not be amortized for tax purposes. The initial accounting for the ColoEast acquisition has not been completed because the fair value of certain assets acquired and income taxes associated with the transaction have not yet been finalized.

The TARP Preferred Stock assumed in the acquisition was redeemed by the Company at par on August 31, 2016.

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

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following presents information at the acquisition date for non-purchase credit impaired loans acquired in the transaction:

Information about the acquired loan portfolio subject to purchase credit impaired accounting guidance as of August 1, 2016 is as follows

The following table presents pro forma information for the three and nine months ended September 30, 2016 and 2015 as if the ColoEast acquisition had occurred at the beginning of 2015. The pro forma information includes adjustments for interest income on loans acquired, interest expense on junior subordinated debentures assumed, depreciation expense on property acquired, amortization of intangibles arising from the transaction, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been completed on the assumed date.

The operations of ColoEast are included in the Company’s operating results beginning August 1, 2016.

Expenses related to the acquisition, including professional fees and integration costs, totaling $1,618,000 were recorded in noninterest expense in the consolidated statements of income during the three and nine months ended September 30, 2016.

Doral Money Acquisition

On February 27, 2015, the Company entered into a Purchase and Sale Agreement with the Federal Deposit Insurance Corporation (“FDIC”), in its capacity as receiver of Doral Bank, to acquire 100% of the equity of Doral Money, Inc. (“Doral Money”), a subsidiary of Doral Bank, and the management contracts associated with two active collateralized loan obligations (“CLOs”) with approximately $700,000,000 in assets under management. The consideration transferred in the acquisition consisted of cash paid of $135,864,000. The primary purpose of the acquisition was to expand the CLO assets under management at TCA.

On February 26, 2015, the Company entered into a $99,975,000 secured term loan credit facility payable to a third party, with an interest rate equal to LIBOR plus 3.5%, and a maturity date of March 31, 2015.  The proceeds from the loan were used by the Company to partially fund the Doral Money acquisition.

The acquisition was completed on March 3, 2015, at which time the Company also repaid the $99,975,000 third party secured term loan credit facility in full by delivering the securities issued by the CLOs that were acquired from Doral Money with an acquisition date fair value of $98,316,000 and cash representing payments received on the CLO securities in the amount of $1,659,000.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of the fair values of assets acquired, liabilities assumed, net consideration transferred, and the resulting bargain purchase gain is as follows:

 

The Company completed the acquisition via an FDIC bid process for Doral Money as part of the Doral Bank failure and the resulting nontaxable bargain purchase gain represents the excess of the fair value of the net assets acquired over the fair value of the net consideration transferred.  The Company subsequently recorded measurement period adjustments related to the finalization of income taxes associated with the transaction and the valuation of loans acquired in the transaction, which increased the bargain purchase gain by $1,708,000 and $900,000 during the three months ended September 30, 2015 and the three months ended December 31, 2015, respectively.  

 

 

NOTE 3 - SECURITIES

Securities have been classified in the financial statements as available for sale or held to maturity. The amortized cost of securities and their approximate fair values at September 30, 2016 and December 31, 2015 are as follows:

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

  

The amortized cost and estimated fair value of securities at September 30, 2016, 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.

 

  

For the three and nine months ended September 30, 2016, securities were sold resulting in proceeds of $19,982,000 and $24,327,000, respectively, gross gains of $5,000 and $10,000, respectively, and gross losses of $73,000 and $73,000, respectively. For the three and nine months ended September 30, 2015, securities were sold resulting in proceeds of $5,076,000 and $17,635,000, respectively, gross gains of $15,000 and $257,000, respectively, and no losses.

Securities with a carrying amount of approximately $191,801,000 and $100,034,000 at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Information pertaining to securities with gross unrealized losses at September 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are summarized as follows:

   

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

As of September 30, 2016, management does not have the intent to sell any of the securities classified as available for sale with unrealized losses in the table above 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 bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2016, management believes that the unrealized losses detailed in the previous table are temporary and no other than temporary impairment loss has been recognized in the Company’s consolidated statements of income.

 

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans at September 30, 2016 and December 31, 2015 consisted of the following:

 

  

Total loans include net deferred origination and factoring fees totaling $2,070,000 and $1,218,000 at September 30, 2016 and December 31, 2015, respectively.

 

Loans with carrying amounts of $470,565,000 and $280,289,000 at September 30, 2016 and December 31, 2015, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

 

During the three and nine months ended September 30, 2016, loans with a carrying amount of $14,394,000 and $18,513,000, respectively, were transferred to loans held for sale at their fair value of $14,642,000 and $18,680,000, respectively, as the Company made the decision to sell the loans. The gains on transfer of loans to loans held for sale of $248,000 and $167,000 for the three and nine months ended September 30, 2016, respectively, were recorded as other noninterest income in the consolidated statements of income. These loans were subsequently sold or are pending final settlement, resulting in proceeds equal to their fair values at the time of transfer. No loan transfers were recorded during the nine months ended September 30, 2015.

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Allowance for Loan and Lease Losses    

The activity in the allowance for loan and lease losses (“ALLL”) during the three and nine months ended September 30, 2016 and 2015 is as follows:

 

 

  

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

  

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a summary of information pertaining to impaired loans. Loans included in these tables are non-PCI impaired loans and PCI loans that have deteriorated subsequent to acquisition and as a result have been deemed impaired and an allowance recorded. PCI loans that have not deteriorated subsequent to acquisition are not considered impaired and therefore do not require an allowance and are excluded from these tables.

 

  

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents average impaired loans and interest recognized on impaired loans for the three and nine months ended September 30, 2016 and 2015:

 

  

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the unpaid principal and recorded investment for loans at September 30, 2016 and December 31, 2015. The difference between the unpaid principal balance and recorded investment is principally associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) and (2) net deferred origination costs and fees.

 

  

At September 30, 2016 and December 31, 2015, the Company had $22,629,000 and $21,188,000, 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.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Past Due and Nonaccrual Loans

The following is a summary of contractually past due and nonaccrual loans at September 30, 2016 and December 31, 2015:

 

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

  

 

Credit Quality Information

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

Pass:

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

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Substandard:

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

Doubtful:

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

PCI:

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

As of September 30, 2016 and December 31, 2015, based on the most recent analysis performed, the risk category of loans is as follows:

   

 

Troubled Debt Restructurings

The Company had a recorded investment in troubled debt restructurings of $16,055,000 and $1,383,000 as of September 30, 2016 and December 31, 2015, respectively.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents loans modified as troubled debt restructurings that occurred during the nine months ended September 30, 2016 and 2015:

 

As of September 30, 2016, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. Default is determined at 90 or more days past due. The modifications primarily related to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans.

Purchased Credit Impaired Loans

The Company has loans that were acquired, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding contractually required principal and interest and the carrying amount of these loans included in the balance sheet amounts of loans at September 30, 2016 and December 31, 2015, are as follows:

  

 

The changes in accretable yield during the three and nine months ended September 30, 2016 and 2015 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

 

  

 

NOTE 5 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

The changes in goodwill and intangible assets during the three and nine months ended September 30, 2016 and 2015 are as follows:

 

 

 

NOTE 6 – Variable Interest Entities

Collateralized Loan Obligation Funds – Closed

The Company, through its subsidiary TCA, acts as the asset manager or provides certain middle- and back-office services to the asset manager of various CLO funds. TCA earns asset management fees in accordance with the terms of its asset management or staff and services agreements associated with the CLO funds. TCA earned asset management fees totaling $1,553,000 and $4,787,000 for the three and nine months ended September 30, 2016, respectively, and $1,744,000 and $3,976,000 for the three and nine months ended September 30, 2015, respectively.

The following table summarizes the closed CLO offerings with assets managed by TCA:

The securities sold in the above CLO offerings were issued in a series of tranches ranging from an AAA rated debt tranche to an unrated tranche of subordinated notes. The Company does not hold any of the securities issued in these CLO offerings.  A related party of the Company holds insignificant interests in Trinitas II and Trinitas III.

The Company performed a consolidation analysis to determine whether the Company was required to consolidate the assets, liabilities, equity or operations of the above closed CLO funds in its financial statements. The Company concluded that the closed CLO funds are variable interest entities; however, the Company, through TCA, does not hold variable interests in the entities as the Company’s interest in the CLO funds is limited to the asset management fees payable to TCA under their asset management agreements and the interests of its related parties are insignificant.  The Company concluded that the asset management fees were not variable interests in the CLO funds as (a) the asset management fees are commensurate with the services provided, (b) the asset management agreements include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated on an arm’s-length basis, and (c) the Company does not hold other interests in the CLO funds (including interests held through related parties) that individually or in the aggregate absorb more than an insignificant amount of the CLO funds’ expected losses or receive more than an insignificant amount of the CLO funds’ expected residual returns. Consequently, the Company concluded that it was not required to consolidate the assets, liabilities, equity or operations of these CLO funds in its financial statements.

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the closed CLO offerings for which TCA is not the asset manager, but provides certain middle- and back-office services to the asset manager:

The securities sold in the above CLO offerings were issued in a series of tranches ranging from an AAA rated debt tranche to an unrated tranche of subordinated notes. The Company holds investments in the subordinated notes of Trinitas IV and Trinitas V with a carrying amount of $3,405,000, which are classified as held to maturity securities within the Company’s consolidated balance sheet at September 30, 2016.  

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

Collateralized Loan Obligation Funds – Warehouse Phase

On June 17, 2016, Trinitas CLO VI, Ltd. (“Trinitas VI”) was formed to be the issuer of a CLO offering.  Trinitas VI is capitalized with subordinated debt issued to the Company and third party investors.  The entity entered into a warehouse credit agreement in order to begin acquiring senior secured loan assets that will comprise the initial collateral pool of the CLOs once issued. When finalized, Trinitas VI will use the proceeds of the debt and equity interests sold in the offering for the final CLO securitization structure to repay the initial warehouse phase debt and equity holders. In the final CLO securitization structure, interest and principal repayment of the leveraged loans held by Trinitas VI will be used to repay debt holders with any excess cash flows used to provide a return on capital to equity investors. During its warehousing period, TCA provides middle- and back-office support as a staff and services provider for Trinitas VI. TCA does not earn management or other fees from Trinitas VI during the warehouse phase.  

At September 30, 2016, the Company’s loss exposure to Trinitas VI is limited to its $10,448,000 investment in the entity which is classified as other assets within the Company’s consolidated balance sheet.

The Company performed a consolidation analysis of Trinitas VI during the warehouse phase and concluded that Trinitas VI is a variable interest entity and that the Company holds a variable interest in the entity that could potentially be significant to the entity in the form of its investment in the subordinated notes of the entity. However, the Company also concluded that as the Company is not the portfolio manager for Trinitas VI, but only acts as staff and services provider, the Company does not have the power to direct the activities that most significantly impact the entity’s economic performance.  As a result, the Company is not the primary beneficiary and therefore is not required to consolidate the assets, liabilities, equity, or operations of the entity in the Company’s financial statements.

 

 

NOTE 7 - Deposits

Deposits at September 30, 2016 and December 31, 2015 are summarized as follows:

 

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

At September 30, 2016, scheduled maturities of certificates of deposits, individual retirement accounts and brokered deposits are as follows:

 

 

Time deposits, including individual retirement accounts, certificates of deposit, and brokered deposits, with individual balances of $250,000 and greater totaled $148,302,000 and $106,258,000 at September 30, 2016 and December 31, 2015, respectively.

 

 

NOTE 8 – BORROWINGS

Junior Subordinated Debentures

The following provides a summary of the Company’s junior subordinated debentures as of September 30, 2016:

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 at par plus any accrued but unpaid interest. Interest on the debentures is calculated quarterly. As part of the purchase accounting adjustments made with the Triumph Community Bank acquisition on October 15, 2013 and the ColoEast acquisition on August 1, 2016, 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.

The debentures are included on the 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 $32,640,000 and $24,687,000 was allowed in the calculation of Tier I capital as of September 30, 2016 and December 31, 2015, respectively.

Subordinated Notes

In September 2016, the Company issued $50,000,000 of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”). The Notes will 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, redeem the Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.

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

Issuance costs related to the Notes totaled $1,324,000, including an underwriting discount of 1.5%, or $750,000, and have been netted against the subordinated notes liability on the balance sheet. The underwriting discount and other debt issuance costs are being amortized using the effective interest method through maturity as a component of interest expense.

 

 

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 9 - Legal Contingencies

Various legal claims have arisen from time to time in the normal course of business which, in the opinion of management, 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:

  

 

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.

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 our methodologies disclosed in our annual financial statements.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets measured at fair value on a recurring basis are summarized in the table below. There were no liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015.

 

 

There were no transfers between levels during 2016 or 2015.  

Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015.

  

 

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

Impaired Loans with Specific Allocation of ALLL:    A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. Fair value of the impaired loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 of the underlying collateral.

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

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at September 30, 2016 and December 31, 2015 were as follows:

  

 

 

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 12 - Regulatory Matters

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

The Company is subject to the Basel III regulatory capital framework. Beginning in January 2016, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

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, 2016 and December 31, 2015, the Company and TBK Bank meet all capital adequacy requirements to which they are subject, including the capital conservation buffer requirement.

As of September 30, 2016 and December 31, 2015, 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, 2016 that management believes have changed TBK Bank’s category.

 

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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 as of September 30, 2016 and December 31, 2015.    

  

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

 

 

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 13 – STOCKHOLDERS’ EQUITY

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

 

 

 

 

NOTE 14 – STOCK BASED COMPENSATION

Stock based compensation expense that has been charged against income was $585,000 and $1,864,000 for the three and nine months ended September 30, 2016, respectively, and $846,000 and $2,394,000 for the three and nine months ended September 30, 2015, respectively.

2014 Omnibus Incentive Plan

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

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, 2016 were as follows:

RSAs granted to employees under the Omnibus Incentive Plan typically vest over two to three years. Compensation expense for RSAs granted under the Omnibus Incentive Program 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, 2016, there was $1,263,000 of unrecognized compensation cost related to nonvested RSAs granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 2.71 years.

 

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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, 2016 were as follows:

 

Stock options outstanding at September 30, 2016 had an intrinsic value of $652,000, a weighted-average remaining contractual term of 9.50 years, were all expected to vest, and were not exercisable. The weighted-average grant date fair value of options granted during the nine months ended September 30, 2016 was $5.85 per option.

 

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 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. 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:

 

 

As of September 30, 2016, there was $711,000 of unrecognized compensation cost related to nonvested stock options granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 3.50 years.

NOTE 15 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

 

 

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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:

 

 

 

 

NOTE 16 – BUSINESS SEGMENT INFORMATION

The following table presents the Company’s operating segments. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate. The provision for loan loss is allocated based on the segment’s allowance for loan loss determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis but not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC. General factoring services not originated through TBC are included in the Banking segment.

 

 

 

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

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item 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this discussion for further information on forward-looking statements.

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act. Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services as well as commercial finance product lines focused on businesses that require specialized financial solutions. Our banking operations include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines include factoring, asset-based lending, equipment lending, healthcare lending, and premium finance products offered on a nationwide basis. These product offerings supplement the asset generation capacity in our community banking markets and enhance the overall yield of our loan portfolio, enabling us to earn attractive risk-adjusted net interest margins. In addition, through our Triumph Capital Advisors asset management subsidiary, we provide investment management services currently focused on the management and provision of other services related to collateralized loan obligations. We believe our integrated business model distinguishes us from other banks and non-bank financial services companies in the markets in which we operate. As of September 30, 2016, we had consolidated total assets of $2.575 billion, total loans held for investment of $1.960 billion, total deposits of $1.951 billion and total stockholders’ equity of $284.5 million.

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products. This business also has a legacy and structure as a standalone company. In addition, through our Triumph Capital Advisors asset management subsidiary, we provide fee-based asset management services distinct from our traditional banking offerings and operations.  As a result, we have determined our reportable segments are Banking, Factoring, Asset Management, and Corporate. For the nine months ended September 30, 2016, our Banking segment generated 67% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 25% of our total revenue, our Asset Management segment generated 5% of our total revenue, and our Corporate segment generated 3% of our total revenue.

Recent Developments

ColoEast Bankshares, Inc.

On August 1, 2016, the Company acquired 100% of the outstanding common stock of ColoEast Bankshares, Inc. (“ColoEast”) and its community banking subsidiary, Colorado East Bank & Trust, in an all-cash transaction for $70 million. The Company also assumed $10.5 million of ColoEast preferred stock issued in conjunction with the U.S. Government’s Treasury Asset Relief Program (“TARP Preferred Stock”).  Colorado East Bank & Trust, which was merged into TBK Bank upon closing, offers personal checking, savings, CD, money market, HSA, IRA, NOW and business accounts, as well as commercial and consumer loans from 18 branches and one loan production office located throughout Colorado and far western Kansas. The acquisition expands the Company’s market into Colorado and Kansas and further diversifies the Company’s loan, customer, and deposit base.

As part of the ColoEast acquisition on August 1, 2016, the Company:

 

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See Note 2 – Business Combinations in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report for additional details of the ColoEast acquisition and its expected impact on our consolidated financial statements.

Southern Transportation Insurance Agency

On September 1, 2016, the Company acquired Southern Transportation Insurance Agency, Ltd. in an all-cash transaction for $2.2 million. The purpose of the acquisition was to expand the Company’s product offerings for clients in the transportation industry. The Company recognized a customer-related intangible asset of $1.6 million and goodwill of $0.6 million. Goodwill resulted from expected enhanced product offerings.

 

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Financial Highlights

The Company’s key financial highlights as of and for the three and nine months ended September 30, 2016, as compared to the prior period, are shown below:

 

  

 

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GAAP Reconciliation of Non-GAAP Financial Measures

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

 

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Results of Operations

Net Income

Three months ended September 30, 2016 compared with three months ended September 30, 2015. We earned net income of $4.8 million for the three months ended September 30, 2016 compared to $5.9 million for the three months ended September 30, 2015, a decrease of $1.1 million.

The results for the three months ended September 30, 2016 include the results of operations of ColoEast since the August 1, 2016 acquisition date and were impacted by $1.4 million of tax-effected transaction and restructuring costs associated with our acquisition of ColoEast and reported as noninterest expense.

The results for the three months ended September 30, 2015 were impacted by our acquisition of Doral Money, Inc. (“Doral Money”) which closed in March 2015. A measurement period adjustment was recorded in the three months ended September 30, 2015 which increased the bargain purchase gain by $1.7 million.

Excluding the impact of the ColoEast transaction costs and the Doral Money acquisition, we earned net income of $6.2 million for the three months ended September 30, 2016 compared to $4.2 million for the three months ended September 30, 2015, an increase of $2.0 million. The adjusted increase was primarily the result of a $7.2 million increase in net interest income and a $1.5 million increase in noninterest income, offset in part by a $3.6 million increase in noninterest expense, a $2.6 million increase in the provision for loan losses, and a $0.5 million increase in income tax expense.

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015. We earned net income of $14.4 million for the nine months ended September 30, 2016 compared to $24.6 million for the nine months ended September 30, 2015, a decrease of $10.2 million.

The results for the nine months ended September 30, 2016 include the results of operations of ColoEast since the August 1, 2016 acquisition date and were impacted by $1.4 million of tax-effected transaction and restructuring costs associated with our acquisition of ColoEast and reported as noninterest expense.

The results for the nine months ended September 30, 2015 were impacted by our acquisition of Doral Money.  The Doral Money acquisition resulted in a nontaxable bargain purchase gain in the amount of $14.2 million included in noninterest income for the nine months ended September 30, 2015, offset by an additional $1.8 million bonus accrual and approximately $0.3 million of transaction costs recorded in connection with the Doral Money acquisition and reported as noninterest expense.  

Excluding the impact of the ColoEast transaction costs and the Doral Money acquisition, we earned net income of $15.8 million for the nine months ended September 30, 2016 compared to $11.5 million for the nine months ended September 30, 2015, an increase of $4.3 million.  The adjusted increase was primarily the result of an $11.2 million increase in net interest income and a $1.5 million increase in noninterest income, offset in part by a $0.9 million increase in the provision for loan losses, a $5.6 million increase in noninterest expense and a $1.9 million increase in income tax expense.

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

 

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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.”

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015. The following table presents the distribution of average assets, liabilities and equity, as well as interest income and fees earned on average interest earning assets and interest expense paid on average interest bearing liabilities for the three months ended September 30, 2016 and 2015:

 

 

We earned net interest income of $30.4 million for the three months ended September 30, 2016 compared to $23.2 million for the three months ended September 30, 2015, an increase of $7.2 million, or 31.0%.

 

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This increase in net interest income was driven by increases in average interest earning assets, which increased to $2.088 billion for the three months ended September 30, 2016 from $1.428 billion for the three months ended September 30, 2015, an increase of $660 million, or 46.2%.  This increase was primarily attributable to $460.8 million of loans and $161.7 million of investment securities acquired in the ColoEast acquisition on August 1, 2016.  Additional interest income also resulted from organic growth in our loan portfolio.  Our commercial finance product lines, including our factored receivables, asset-based loans, equipment finance loans, and premium finance loans all increased on a period over period basis as a result of the continued execution of our growth strategy for such products.  Our outstanding commercial finance balances increased $140.1 million, or 28.1%, from $497.8 million at September 30, 2015 to $637.9 million at September 30, 2016.  We also experienced organic growth in our mortgage warehouse facilities and community banking lending products period over period, including commercial real estate and general commercial and industrial loans.

The increases in our net interest income resulting from changes in the interest income generated by our loan portfolio discussed above were offset in part by an increase in our interest expense associated with the growth in customer deposits and other borrowings.  Average total interest bearing deposits increased to $1.411 billion for the three months ended September 30, 2016 from $1.017 billion for the three months ended September 30, 2015, an increase of $394 million, or 38.7%.  This increase was primarily due to $653.0 million of customer deposits assumed in the ColoEast acquisition.  Excluding the ColoEast customer deposits, we also experienced growth in our certificates of deposit as these higher cost deposit products were used to fund our growth period over period.  In addition, our use of other interest bearing borrowings, consisting primarily of FHLB advances, was also increased to fund our growth.

Net interest margin decreased to 5.79% for the three months ended September 30, 2016 from 6.45% for the three months ended September 30, 2015, a decrease of 66 basis points.

The decline in our net interest margin primarily resulted from a decrease in yields on our interest earning assets.  Our average yield on earning assets decreased to 6.38% for the three months ended September 30, 2016 from 7.03% for the three months ended September 30, 2015, a decrease of 65 basis points. The decrease was primarily due to a change in the mix within our loan portfolio as a result of the ColoEast acquisition, by which our lower yielding community banking products as a percentage of the overall loan portfolio increased from 58% at September 30, 2015 to 67% at September 30, 2016.  In addition, our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, decreased as a percentage of the overall factoring portfolio to 78% at September 30, 2016 compared to 84% at September 30, 2015 as we continue to expand our non-transportation factoring product lines in 2016.  Finally, we have experienced a diminishing impact of discount accretion on the loan portfolio yield period over period, offset in part by the accretion of purchase discounts associated with the acquired ColoEast loan portfolio.

A component of the yield on our loan portfolio consists of discount accretion on the Triumph Savings Bank legacy portfolio acquired in connection with our original acquisition of Equity Bank in 2010 and the portfolio acquired in the Triumph Community Bank acquisition in 2013.  In addition, on August 1, 2016 we acquired loans in the ColoEast acquisition with a purchase discount of $12.0 million which will be accreted into income over the remaining lives of the acquired loans, including $0.7 million of accretion recorded in the three months ended September 30, 2016.  The aggregate increased yield on our loan portfolio attributable to the accretion of purchase discounts associated with these acquisitions was 32 basis points for the three months ended September 30, 2016 and 38 basis points for the three months ended September 30, 2015.  Excluding the impact of this discount accretion, the adjusted yield on our loan portfolio was 7.10% and 7.96% for the three months ended September 30, 2016 and 2015, respectively.  Subject to future acquisitions, we anticipate that the contribution of this discount accretion to our interest income will continue to decline over time, but we expect that any resulting decreases in aggregate yield on our loan portfolio will be offset in part by continued growth in our higher yielding specialized commercial finance product lines which include our factored receivables, asset-based loans, equipment finance loans, and premium finance loans.  As of September 30, 2016, there was approximately $18.0 million of purchase discount remaining that is expected to be accreted over the remaining lives of the acquired Triumph Savings Bank, Triumph Community Bank, and ColoEast loan portfolios.

Our adjusted net interest margin, which excludes the impact of the acquired loan discount accretion described above, was 5.53% and 6.14% for the three months ended September 30, 2016 and 2015, respectively.

Our average cost of interest bearing liabilities decreased to 0.72% for the three months ended September 30, 2016 from 0.74% for the three months ended September 30, 2015, a decrease of 2 basis points.  This decrease was primarily due to a change in the mix of our interest bearing deposits resulting from lower cost customer deposits assumed in the ColoEast acquisition on August 1, 2016.  This impact was offset in part by an increased usage of higher rate certificates of deposit period over period as these deposit products were used to fund our growth.  In addition, we increased the use of and extended the maturities of our advances with the FHLB due to the inclusion of mortgage warehouse facilities in our borrowing base with the FHLB, which began in late 2015.

 

 

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The following table shows the effects changes in average balances (volume) and average interest rates (rate) had on the interest earned in our interest earning assets and the interest incurred on our interest bearing liabilities for the three months ended September 30, 2016 and 2015:

 

  

 

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Nine months ended September 30, 2016 compared with nine months ended September 30, 2015. The following table presents the distribution of average assets, liabilities and equity, as well as interest income and fees earned on average interest earning assets and interest expense paid on average interest bearing liabilities for the nine months ended September 30, 2016 and 2015:

We earned net interest income of $78.8 million for the nine months ended September 30, 2016 compared to $67.6 million for the nine months ended September 30, 2015, an increase of $11.2 million, or 16.6%.

 

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This increase in net interest income was driven by increases in average interest earning assets, which increased to $1.740 billion for the nine months ended September 30, 2016 from $1.371 billion for the nine months ended September 30, 2015, an increase of $369 million, or 26.9%.  The increase primarily resulted from organic growth in our loan portfolio.  Our commercial finance product lines, including our factored receivables, asset-based loans, equipment finance loans, and premium finance loans all increased on a period over period basis as a result of the continued execution of our growth strategy for such products.  Our outstanding commercial finance balances increased $140.1 million, or 28.1%, from $497.8 million at September 30, 2015 to $637.9 million at September 30, 2016.  We also experienced organic growth in our mortgage warehouse facilities and community banking lending products period over period, including commercial real estate and general commercial and industrial loans. The increase in interest earning assets was also impacted by the $460.8 million of loans and $161.7 million investment securities acquired in the ColoEast acquisition on August 1, 2016.  

The change in net interest income for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was also impacted by interest income associated with certain loan payoff and restructuring activity.  Interest income for the nine months ended September 30, 2016 included approximately $1.2 million of loan discount accretion resulting from the payoff of an individual purchased credit impaired loan in excess of its carrying amount.  Interest income for the nine months ended September 30, 2015 included approximately $1.7 million of delinquent interest collected upon the resolution, for cash, of a nonperforming commercial loan and approximately $0.6 million of fees received in conjunction with the restructuring of an asset-based healthcare loan.  The combination of this loan payoff and restructuring activity contributed to a net period over period decrease in net interest income of $1.1 million.

The increases in our net interest income resulting from changes in the interest income generated by our loan portfolio discussed above were offset in part by an increase in our interest expense associated with the growth in customer deposits and other borrowings.  Average total interest bearing deposits increased to $1.410 billion for the nine months ended September 30, 2016 from $1.074 billion for the nine months ended September 30, 2015, an increase of $336 million, or 31.3%.  This increase was partially due to growth in our certificates of deposit as these higher cost deposit products were used to fund our growth period over period.  In addition, our use of other interest bearing borrowings, consisting primarily of FHLB advances, was also increased to fund our growth.  Finally, the customer deposits assumed in the ColoEast acquisition on August 1, 2016, which were outstanding for two months during the nine months ended September 30, 2016 contributed to the increase in interest bearing deposits during the period.

Net interest margin decreased to 6.05% for the nine months ended September 30, 2016 from 6.59% for the nine months ended September 30, 2015, a decrease of 54 basis points.

The decline in our net interest margin primarily resulted from a decrease in yields on our interest earning assets.  Our average yield on earning assets decreased to 6.66% for the nine months ended September 30, 2016 from 7.17% for the nine months ended September 30, 2015, a decrease of 51 basis points. The decrease was partially due to changes in loan portfolio interest income related to the discount accretion, delinquent interest, and restructuring fees collected on the specific loans discussed above.  In addition, a change in the mix within our loan portfolio period over period contributed to the decrease, as our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, decreased as a percentage of the overall factoring portfolio to 78% at September 30, 2016 compared to 84% at September 30, 2015 as we continue to expand our non-transportation factoring product lines in 2016.  The lower yielding community banking loans acquired in the ColoEast acquisition also contributed to the change in loan mix.  Overall, our higher yielding commercial finance products as a percentage of the total portfolio decreased from 42% at September 30, 2015 to 33% at September 30, 2016.  Finally, excluding the impact of the $1.2 million of discount accretion recorded on the payoff of the purchased credit impaired loan discussed above, we have experienced a diminishing impact of discount accretion on the loan portfolio yield period over period.

A component of the yield on our loan portfolio consists of discount accretion on the Triumph Savings Bank legacy portfolio acquired in connection with our original acquisition of Equity Bank in 2010 and the portfolio acquired in the Triumph Community Bank acquisition in 2013.  In addition, on August 1, 2016 we acquired loans in the ColoEast acquisition with a purchase discount of $12.0 million which will be accreted into income over the remaining lives of the acquired loans, including $0.7 million of accretion recorded for the nine months ended September 30, 2016.  The aggregate increased yield on our loan portfolio attributable to accretion of purchase discounts associated with these acquisitions was 45 basis points for the nine months ended September 30, 2016, including the $1.2 million of discount accretion recorded on the payoff of the purchased credit impaired loan discussed above, and 45 basis points for the nine months ended September 30, 2015.  Excluding the impact of this discount accretion, the adjusted yield on our loan portfolio was 7.42% and 8.32% for the nine months ended September 30, 2016 and 2015, respectively.  Subject to future acquisitions, we anticipate that the contribution of this discount accretion to our interest income will continue to decline over time, but we expect that any resulting decreases in aggregate yield on our loan portfolio will be offset in part by continued growth in our higher yielding specialized commercial finance product lines which include our factored receivables, asset-based loans, equipment finance loans, and premium finance loans.  As of September 30, 2016, there was approximately $18.0 million of purchase discount remaining that is

 

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expected to be accreted over the remaining lives of the acquired Triumph Savings Bank, Triumph Community Bank, and ColoEast loan portfolios.

Our adjusted net interest margin, which excludes the impact of the acquired loan discount accretion described above, was 5.69% and 6.23% for the nine months ended September 30, 2016 and 2015, respectively.

An increase in our average cost of funds also contributed to the decrease in our net interest margin.  Our average cost of interest bearing liabilities increased to 0.75% for the nine months ended September 30, 2016 from 0.73% for the nine months ended September 30, 2015, an increase of 2 basis points.  This increase was primarily due to a change in the mix of our interest bearing deposits toward higher rate certificates of deposit as these deposit products were used to fund our growth period over period. In addition, we increased the use of and extended the maturities of our advances with the FHLB due to the inclusion of mortgage warehouse facilities in our borrowing base with the FHLB, which began in late 2015.  The lower cost customer deposits assumed in the ColoEast acquisition on August 1, 2016 partially offset these increases.

 

The following table shows the effects changes in average balances (volume) and average interest rates (rate) had on the interest earned in our interest earning assets and the interest incurred on our interest bearing liabilities for the nine months ended September 30, 2016 and 2015:

 

Provision for Loan Losses

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

The provision for loan losses is primarily driven by the allowance allocation for incurred losses recorded on collectively evaluated loans outstanding for a period.  As outstanding loan balances fluctuate period over period, the associated provision for loan losses typically increases or decreases accordingly.  In addition, the product types associated with fluctuations within the loan portfolio also contribute to the allowance allocation, as different loan products require different levels of ALLL based upon their credit risk characteristics. Finally, loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of impaired loans and factored invoices greater than 90 days past due with negative cash reserves.

 

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

On August 1, 2016, we acquired loans with a fair value of $460.8 million in the ColoEast acquisition.  This fair value included a purchase discount of $12.0 million from the acquisition date unpaid principal balance of the ColoEast loans.  This purchase discount incorporated expected credit exposure associated with the acquired loans and as a result, the acquired ColoEast loan portfolio had minimal impact on the provision for loan losses for the three and nine months ended September 30, 2016 or the ending ALLL balance at September 30, 2016.

Three months ended September 30, 2016 compared with three months ended September 30, 2015.  Our provision for loan losses was $2.8 million for the three months ended September 30, 2016 compared to $0.2 million for the three months ended September 30, 2015.  

The increased provision for loan losses was the result of several factors.  We experienced higher net charge-offs of $1.7 million in the three months ended September 30, 2016 compared to net charge-offs of $0.1 million for the same period in 2015.  During the three months ended September 30, 2016 outstanding loans, excluding the $460.8 million acquired ColoEast portfolio, increased $88.6 million from June 30, 2016.  During the three months ended September 30, 2015, outstanding loans increased $32.6 million from June 30, 2015. The larger increase in outstanding loan balances within the three months ended September 30, 2016 results in a higher provision for loan losses compared to the three months ended September 30, 2015.  In addition, we recorded net specific reserves of $1.0 million during the three months ended September 30, 2016 compared to a net reduction in specific reserves of $0.7 million recorded during the three months ended September 30, 2015.  We were able to reverse a $0.5 million specific reserve in the three months ended September 30, 2015 due to the successful collection of an at-risk factored receivable balance.

Offsetting the increased provision in the three months ended September 30, 2016 due to the higher charge-offs, overall loan growth, and the recording of specific reserves discussed above, was a decrease due a lower loan portfolio growth rate period over period in our factored receivables, which generally require higher levels of ALLL.  Although the overall loan portfolio increased during the three months ended September 30, 2016, our factored receivable balances decreased by $23.6 million, compared to an increase of $2.1 million during the three months ended September 30, 2015.  

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015.  Our provision for loan losses was $4.2 million for the nine months ended September 30, 2016 compared to $3.4 million for the nine months ended September 30, 2015.

The increased provision for loan losses was the result of several factors.  We experienced higher net charge-offs of $1.9 million in the nine months ended September 30, 2016 compared to net charge-offs of $0.7 million for the same period in 2015.  During the nine months ended September 30, 2016, excluding the $460.8 million acquired ColoEast portfolio, outstanding loans increased $207.2 million from December 31, 2015.  During the nine months ended September 30, 2015, outstanding loans increased $179.4 million from December 31, 2014.  The larger increase in outstanding loan balances within the nine months ended September 30, 2016 results in a higher provision for loan losses compared to the nine months ended September 30, 2015.  In addition, we recorded net specific reserves of $2.0 million for the nine months ended September 30, 2016 compared to net specific reserves of $0.3 million for the nine months ended September 30, 2015.

Offsetting the increased provision in the nine months ended September 30, 2015 due to the overall loan growth, higher charge-offs, and the recording of specific reserves discussed above, was a decrease due a lower loan portfolio growth rate period over period in our factored receivables, which generally require higher levels of ALLL.  Our factored receivable balances decreased by $1.1 million during the nine months ended September 30, 2016 compared to an increase of $20.9 million during the nine months ended September 30, 2015.  

Our ALLL was $14.9 million as of September 30, 2016 versus $12.6 million as of December 31, 2015, representing an ALLL to total loans ratio of 0.76% and 0.97% respectively. The decrease in ALLL as a percentage of total loans as of September 30, 2016 was primarily due to acquired ColoEast loans recorded at a fair value of $460.8 million on August 1, 2016. This fair value incorporated expected credit exposure associated with the acquired loans and as a result, the acquired ColoEast loan portfolio did not require an ALLL on the date of acquisition.

 

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Noninterest Income

The following table presents the major categories of noninterest income for the three and nine months ended September 30, 2016 and 2015:

 

  

Three months ended September 30, 2016 compared with three months ended September 30, 2015. We earned noninterest income of $6.1 million for the three months ended September 30, 2016, compared to $6.3 million for the three months ended September 30, 2015, a decrease of $0.2 million. The decrease was impacted by prior period realization of a pre-tax bargain purchase gain in the amount of $1.7 million due to measurement period adjustments associated with the Doral Money acquisition in 2015.  Excluding the bargain purchase gain, we earned noninterest income of $4.6 million for the three months ended September 30, 2015, resulting in an adjusted net increase in noninterest income of $1.5 million period over period.

 

The adjusted increase was primarily due to an increase in service charges on deposits, card income, fees, and other noninterest income.  These increases in noninterest income were offset in part by the decrease in gains on the sale of securities and loans and a decrease in CLO asset management fees earned by Triumph Capital Advisors. Details of the more significant changes in the various components of noninterest income are further discussed below.

 

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Nine months ended September 30, 2016 compared with nine months ended September 30, 2015. We earned noninterest income of $14.7 million for the nine months ended September 30, 2016, compared to $27.7 million for the nine months ended September 30, 2015, a decrease of $13.0 million. This activity was significantly impacted by the realization of a pre-tax bargain purchase gain in the amount of $14.2 million associated with the acquisition of Doral Money in March 2015.  

Excluding the bargain purchase gain, we earned noninterest income of $13.5 million for the nine months ended September 30, 2015 compared to $14.7 million for the nine months ended September 30, 2016, resulting in an adjusted increase of $1.2 million, or 9%, period over period.  The increase was primarily due to the increase in CLO asset management fees earned by Triumph Capital Advisors and other noninterest income.  These increases in noninterest income were offset in part a decrease in OREO valuation adjustments and a decrease in gains on the sale of securities and loans.  Details of the more significant changes in the various components of noninterest income are further discussed below.

 

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Noninterest Expense

The following table presents the major categories of noninterest expense for the three and nine months ended September 30, 2016 and 2015:

 

  

Three months ended September 30, 2016 compared with three months ended September 30, 2015. Noninterest expense totaled $25.8 million for the three months ended September 30, 2016 compared to $20.5 million for the three months ended September 30, 2015, an increase of $5.3 million. This activity was impacted by the transaction costs incurred in the amount of $1.6 million associated with the acquisition of ColoEast in August 2016.  

 

Excluding the ColoEast transaction costs, we incurred noninterest expense of $24.2 million for the three months ended September 30, 2016, resulting in an adjusted net increase in noninterest expense of $3.7 million period over period.  Details of the more significant changes in the various components of noninterest expense are further discussed below.

 

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Nine months ended September 30, 2016 compared with nine months ended September 30, 2015. Noninterest expense totaled $66.2 million for the nine months ended September 30, 2016 compared to $61.0 million of noninterest expense for the nine months ended September 30, 2015.  The results for the nine months ended September 30, 2016 were impacted by the transaction costs incurred in the amount of $1.6 million associated with the acquisition of ColoEast in August 2016.  Noninterest expense was impacted by the accrual of an incremental $1.8 million bonus expense during the nine months ended September 30, 2015 for the anticipated amount expected to be paid to team members to recognize their contribution to the Doral Money acquisition and approximately $0.3 million of transactions costs associated with the Doral Money acquisition.

 

Excluding the ColoEast and Doral Money costs, noninterest expense totaled $64.6 million for the nine months ended September 30, 2016 and $59.0 million for the nine months ended September 30, 2015, an increase of $5.6 million.  This increase is primarily attributable to continuing investments made in personnel and infrastructure to support growth in organically generated product lines and other strategic initiatives.  Details of the more significant changes in the various components of noninterest expense are further discussed below.

 

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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.

Three months ended September 30, 2016 compared with three months ended September 30, 2015.  Income tax expense for the three months ended September 30, 2016 was $3.1 million compared to $2.9 million for the three months ended September 30, 2015. The effective tax rate for the three months ended September 30, 2016 was 39% compared to 33% for the three months ended September 30, 2015.   The effective tax rate for the three months ended September 30, 2016 reflects the increase in non-deductible direct transaction costs associated with the ColoEast acquisition.  Approximately $1.0 million of direct ColoEast transaction costs were deemed non-deductible for income tax purposes.  Excluding the impact of the ColoEast transaction costs, our effective tax rate for the three months ended September 30, 2016 was 36%.  The lower effective tax rate for the three months ended September 30, 2015 reflects the increase in nontaxable income attributed to the $1.7 million bargain purchase gain measurement period adjustment associated with the Doral Money acquisition. Excluding the impact of the bargain purchase gain, our effective tax rate for the three months ended September 30, 2015 was 36%.

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015.  Income tax expense was $8.7 million for the nine months ended September 30, 2016 compared to $6.4 million for the nine months ended September 30, 2015. The effective tax rate for the nine months ended September 30, 2016 was 38% compared to 21% for the nine months ended September 30, 2015.  The effective tax rate for the nine months ended September 30, 2016 reflects the increase in non-deductible direct transaction costs associated with the ColoEast acquisition.  Approximately $1.0 million of direct ColoEast transaction costs were deemed non-deductible for income tax purposes.  Excluding the impact of the ColoEast transaction costs, our effective tax rate for the nine months ended September 30, 2016 was 36%.  The lower effective tax rate for the nine months ended September 30, 2015 reflects the significant increase in nontaxable income attributed to the $14.2 million bargain purchase gain associated with the Doral Money acquisition. Excluding the impact of the bargain purchase gain, our effective tax rate for the nine months ended September 30, 2015 was 36%.

Operating Segment Results

Our reportable segments are Factoring, Banking, Asset Management, 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 Factoring segment includes the operations of Triumph Business Capital with revenue derived from factoring services. The Banking segment includes the operations of TBK Bank, including loans originated under our Triumph Commercial Finance, Triumph Healthcare Finance, and Triumph Premium Finance brands. 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 under its Triumph Commercial Finance brand as opposed to at Triumph Business Capital.  The Asset Management segment includes the operations of Triumph Capital Advisors with revenue derived from fees for managing or providing other services related to collateralized loan obligation funds. Corporate includes holding company financing and investment activities and management and administrative expenses to support the overall operations of the Company.

 

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Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Transactions between segments consist primarily of borrowed funds.  Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate. The provision for loan loss is allocated based on the segment’s ALLL determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and are not allocated for segment purposes.

Three months ended September 30, 2016 compared with three months ended September 30, 2015. The following tables present our primary operating results for our operating segments as of and for the three month periods ended September 30, 2016 and 2015, respectively.

   

 

 

Factoring

Our Factoring segment’s operating income for the three months ended September 30, 2016 was $2.9 million, compared with $3.0 million for the three months ended September 30, 2015, a decrease of $0.1 million. This decrease was primarily due to increases in in noninterest expenses offset by increases in noninterest income.  

 

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Factored receivables in our Factoring segment grew 8% from $175.7 million as of September 30, 2015 to $190.1 million as of September 30, 2016. Our average number of clients increased from 1,939 for the three months ended September 30, 2015 to 2,330 for the three months ended September 30, 2016 and the corresponding factored accounts receivable purchases increased from $417.8 million during the three months ended September 30, 2015 to $488.1 million during the three months ended September 30, 2016.  Our average invoice size decreased 10% from $1,431 for the three months ended September 30, 2015 to $1,291 for the three months ended September 30, 2016, however, the number of invoices purchased increased 29% period over period.

Net interest income was $7.2 million for the three months ended September 30, 2016 compared to $7.2 million for the three months ended September 30, 2015. Net interest income increased due to a 15% increase in overall average net funds employed from $157.4 million for the three months ended September 30, 2015 to $181.6 million for the three months ended September 30, 2016.  This increase in net interest income is offset by pricing pressure on factored receivable balances in the current period due to increased competition and market conditions, resulting in slightly lower yields on net funds employed at our Factoring segment.  In addition, a change in the mix within our factored receivables portfolio period over period contributed to the offsetting decrease, as our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, decreased as a percentage of the overall Factoring segment portfolio to 87% at September 30, 2016 compared to 96% at September 30, 2015 as we continue to expand our non-transportation factoring product lines in 2016.  

Our provision for loan losses was $0.03 million for the three months ended September 30, 2016 compared with $0.04 million for the three months ended September 30, 2015, a decrease of $0.01 million.  The provision for loan losses on factored receivables is primarily driven by the allowance allocation for incurred losses recorded on collectively evaluated factored receivables purchased and outstanding for a period.  As factored receivables purchased fluctuate period over period, the associated provision for loan losses typically increases or decreases accordingly.  In addition, loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of invoices greater than 90 days past due with negative cash reserves.  During the three months ended September 30, 2016 factored receivables decreased approximately $16 million from June 30, 2016.  During the three months ended September 30, 2015, factored receivables decreased approximately $1 million from June 30, 2015.  The larger decrease in factored receivable balances within the three month period ended September 30, 2016 resulted in a lower provision for loan losses compared to the three months ended September 30, 2015.

Noninterest income was $0.7 million for the three months ended September 30, 2016 compared to $0.4 million for the three months ended September 30, 2015.  The increase in noninterest income is consistent with the increase in factored receivable purchase volume period over period.

Noninterest expense was $5.0 million for the three months ended September 30, 2016 compared with $4.6 million for the three months ended September 30, 2015, driven primarily by increased personnel, operating, and technology costs incurred in connection with growth in our factoring portfolio, particularly the increase in the number of clients and number of invoices processed period over period.

Banking

Our Banking segment’s operating income totaled $4.7 million for the three months ended September 30, 2016 compared to operating income of $5.6 million for the three months ended September 30, 2015. We experienced increases in the provision for loan losses and noninterest expenses period over period. These increases were offset in part by an increase in net interest income and noninterest income for the three months ended September 30, 2016.  

The increase in net interest income was primarily the result of increases in the balances of our interest earning assets, primarily loans, due to the continued growth of our commercial finance products, including equipment loans, general asset-based loans, healthcare asset-based loans, and premium finance loans.  In addition, we acquired $460.8 million of loans in our Banking segment as part of the ColoEast acquisition on August 1, 2016.  Outstanding loans in our Banking segment grew 91% from $991 million as of September 30, 2015 to $1.895 billion as of September 30, 2016.

 

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On August 1, 2016, we acquired loans with a fair value of $460.8 million in the ColoEast acquisition, all of which are included in the Banking segment.  This fair value included a purchase discount of $12.0 million from the acquisition date unpaid principal balance of the ColoEast loans.  This purchase discount incorporated expected credit exposure associated with the acquired loans and as a result, the acquired ColoEast loan portfolio had minimal impact on the provision for loan losses for the three months ended September 30, 2016.  Our provision for loan losses was $2.9 million for the three months ended September 30, 2016 compared with $0.1 million for the three months ended September 30, 2015.  As outstanding loan balances fluctuate period over period, the associated provision for loan losses typically increases or decreases accordingly.  In addition, the product types associated with fluctuations within the loan portfolio also contribute to the allowance allocation, as different loan products require different levels of ALLL based upon their credit risk characteristics. Finally, loan loss valuation allowances and charge-offs are recorded on specific at-risk balances, typically consisting of impaired loans.  During the three months ended September 30, 2016 outstanding loans at our Banking segment, excluding the $460.8 million acquired ColoEast portfolio, increased $96.3 million from June 30, 2016.  During the three months ended September 30, 2015, outstanding loans at our Banking segment increased $33.1 million from June 30, 2015.  The larger increase in outstanding loan balances within the three months ended September 30, 2016 results in a higher provision for loan losses compared to the three months ended September 30, 2015.  In addition, we recorded net specific reserves of $0.8 million and net charge-offs of $1.4 million at our Banking segment during the three months ended September 30, 2016 compared to a net reduction in specific reserves of $0.7 million and net charge-offs of $0.03 million recorded during the three months ended September 30, 2015.

Noninterest income was $3.1 million for the three months ended September 30, 2016 compared to $2.3 million for the three months ended September 30, 2015. This increase was primarily due to additional service charges and card income associated with the increase in customer deposit and credit/debit card accounts acquired in the ColoEast acquisition on August 1, 2016.  In addition, other sources of noninterest income, such as check cashing fees, wire transfer fees, and trust activities increased due to incremental transaction volumes associated with the ColoEast acquisition.

Noninterest expense was $19.0 million for the three months ended September 30, 2016, compared with $12.7 million for the three months ended September 30, 2015, an increase of $6.3 million.  This increase is due to several factors.  We have increased operating expenses in personnel, facilities and infrastructure to support the continued growth in our asset-based lending and equipment lending, including communications and technology expense associated with the recent investments we have made in our communications and technology infrastructure to further our movement toward a single operating platform, which positions us for future acquisitions and greater operating efficiencies.  This includes incremental costs associated with the growth in Banking segment personnel and infrastructure in conjunction with our acquisition of ColoEast on August 1, 2016.  Noninterest expense for the three months ended September 30, 2016 also includes $1.6 million of acquisition-related costs incurred as part of ColoEast acquisition.  In addition, increases due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense contributed to the increase.  Finally, the increase in noninterest expense is partially related to the reassignment of certain personnel to the Banking segment in connection with the merger of our subsidiary banks in October 2015.  

Asset Management

Our Asset Management segment’s operating income totaled $0.3 million for the three months ended September 30, 2016 compared to $1.9 million for the three months ended September 30, 2015.  This decrease was significantly impacted by the recording of a pre-tax bargain purchase gain measurement period adjustment in the amount of $1.7 million associated with the acquisition of Doral Money in 2015.  Excluding the bargain purchase gain adjustment, the Asset Management segment reported operating income of $0.2 million for the three months ended September 30, 2015.  As of September 30, 2016, Triumph Capital Advisors managed $1.5 billion of CLO assets earning approximately 31 basis points on average in asset management fees and provides middle- and back-office services under staff and services agreements for $800 million of CLO assets earning approximately 26 basis points on average in fees.

Corporate

The Corporate segment’s operating loss totaled approximately $0.04 million for the three months ended September 30, 2016, compared with an operating loss of $1.6 million for the three months ended September 30, 2015.  The reduction in the operating loss is primarily due to an increase of $0.7 million in noninterest income and a decrease of $1.1 million in operating expenses for the three months ended September 30, 2016.  The increase in noninterest income is primarily due to earnings associated with the Corporate segment’s additional equity investments in CLO warehouse entities.  The decrease in operating expenses is primarily related to the reassignment of certain personnel to the Banking segment in connection with the merger of our subsidiary banks in October 2015.

 

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Nine months ended September 30, 2016 compared with nine months ended September 30, 2015. The following tables present our primary operating results for our operating segments as of and for the nine months ended September 30, 2016 and 2015, respectively.

 

 

Factoring

Our Factoring segment’s operating income for the nine months ended September 30, 2016 was $7.2 million, compared with $8.2 million for the nine months ended September 30, 2015, a decrease of $1.0 million. This decrease was primarily due to reductions in net interest income and increases in noninterest expenses.

Factored receivables in our Factoring segment grew 8% from $175.7 million as of September 30, 2015 to $190.1 million as of September 30, 2016. Our average number of clients increased from 1,784 for the nine months ended September 30, 2015 to 2,217 for the nine months ended September 30, 2016 and the corresponding factored accounts receivable purchases increased from $1.200 billion during the nine months ended September 30, 2015 to $1.304 billion during the nine months ended September 30, 2016.  Our average invoice size decreased 14% from $1,493 for the nine months ended September 30, 2015 to $1,282 for the nine months ended September 30, 2016, however, the number of invoices purchased increased 26% period over period.

 

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Net interest income was $20.2 million for the nine months ended September 30, 2016 compared to $20.8 million for the nine months ended September 30, 2015, a decrease of $0.6 million. The decrease in net interest income is partly due to pricing pressure on factored receivable balances in the current period due to increased competition and market conditions, resulting in slightly lower yields on net funds employed at our Factoring segment.  In addition, a change in the mix within our factored receivables portfolio period over period contributed to the decrease, as our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, decreased as a percentage of the overall Factoring segment portfolio to 87% at September 30, 2016 compared to 96% at September 30, 2015 as we continue to expand our non-transportation factoring product lines in 2016.  These decreases were offset by an 8% increase in overall average net funds employed from $151.5 million for the nine months ended September 30, 2015 to $163.9 million for the nine months ended September 30, 2016.

Our provision for loan losses was $0.1 million for the nine months ended September 30, 2016 compared with $0.4 million for the nine months ended September 30, 2015. The provision for loan losses on factored receivables is primarily driven by the allowance allocation for incurred losses recorded on collectively evaluated factored receivables purchased and outstanding for a period.  As factored receivables purchased fluctuate period over period, the associated provision for loan losses typically increases or decreases accordingly.  In addition, loan loss valuation allowances are recorded on specific at-risk balances, typically consisting of invoices greater than 90 days past due with negative cash reserves.  The lower provision in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was primarily due to larger reductions in specific reserves required on at-risk balances recorded during the nine months ended September 30, 2016 compared only slight decreases in such specific reserves during the nine months ended September 30, 2015.  These decreases were offset in part by higher net purchases recorded during the nine months ended September 30, 2016.  During the nine months ended September 30, 2016 factored receivables at our Factoring segment increased approximately $4 million from December 31, 2015.  During the nine months ended September 30, 2015, factored receivables at our Factoring segment increased approximately $5 million from December 31, 2014.  The lower increase in factored receivable balances within the nine months ended September 30, 2016 contributes to a lower provision for loan losses compared to the nine months ended September 30, 2015.

Noninterest income was $1.6 million for the nine months ended September 30, 2016 compared to $1.2 million for the nine months ended September 30, 2015.  The increase in noninterest income is consistent with the increase in factored receivable purchase volume period over period.

Noninterest expense was $14.5 million for the nine months ended September 30, 2016 compared with $13.4 million for the nine months ended September 30, 2015, driven primarily by increased personnel, operating, and technology costs incurred in connection with growth in our factoring portfolio, particularly the increase in the number of clients and  number of invoices processed period over period.

Banking

Our Banking segment’s operating income totaled $14.7 million for the nine months ended September 30, 2016 compared to operating income of $14.1 million for the nine months ended September 30, 2015, an increase of $0.6 million. We experienced an increase in net interest income for the nine months ended September 30, 2016.  This increase in operating income was partially offset by an increase in the provision for loan losses, decreases in noninterest income, and an increase in noninterest expense period over period.

The increase in net interest income was primarily the result of increases in the balances of our interest earning assets, primarily loans, due to the continued growth of our commercial finance products, including equipment loans, general asset-based loans, healthcare asset-based loans, and premium finance loans.  In addition, we acquired $460.8 million of loans in our Banking segment as part of the ColoEast acquisition on August 1, 2016.  Outstanding loans in our Banking segment grew 91% from $991 million as of September 30, 2015 to $1.895 billion as of September 30, 2016.

 

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On August 1, 2016, we acquired loans with a fair value of $460.8 million in the ColoEast acquisition, all of which are included in the Banking segment.  This fair value included a purchase discount of $12.0 million from the acquisition date unpaid principal balance of the ColoEast loans.  This purchase discount incorporated expected credit exposure associated with the acquired loans and as a result, the acquired ColoEast loan portfolio had minimal impact on the provision for loan losses for the nine months ended September 30, 2016.  Our provision for loan losses was $4.1 million for the nine months ended September 30, 2016 compared with $2.9 million for the nine months ended September 30, 2015.  As outstanding loan balances fluctuate period over period, the associated provision for loan losses typically increases or decreases accordingly.  In addition, the product types associated with fluctuations within the loan portfolio also contribute to the allowance allocation, as different loan products require different levels of ALLL based upon their credit risk characteristics.  Finally, loan loss valuation allowances and charge-offs are recorded on specific at-risk balances, typically consisting of impaired loans.  During the nine months ended September 30, 2016 outstanding loans in our Banking segment, excluding the $460.8 million acquired ColoEast portfolio, increased $211.6 million from December 31, 2015.  During the nine months ended September 30, 2015, outstanding loans in our Banking segment increased $155.6 million from December 31, 2014.  The larger increase in outstanding balances within the nine months ended September 30, 2016 contributes to a higher provision for loan losses compared to the nine months ended September 30, 2015. In addition, we recorded net specific reserves of $2.2 million and net charge-offs of $1.3 million at our Banking segment during the nine months ended September 30, 2016 compared to net specific reserves of $0.3 million and net charge-offs of $0.3 million recorded during the nine months ended September 30, 2015.  

Noninterest income was $6.0 million for the nine months ended September 30, 2016 compared to $7.6 million for the nine months ended September 30, 2015. This decrease was primarily due to a $1.2 million OREO write-down during the nine months ended September 30, 2016 related to a branch facility previously transferred to OREO that is no longer being actively operated as a depository branch.  The write-down was the result of obtaining an updated appraisal on the property.  In addition, net gains on sale of loans, comprised primarily of residential mortgage loans sold, decreased 99% due to decreased sales activity period over period.  Proceeds from loan sales decreased from $53.0 million for the nine months ended September 30, 2015 to $2.2 million for the nine months ended September 30, 2016.  We made the decision to exit the residential mortgage production business in the fourth quarter of 2015.  The decline in residential mortgage loan sale activity experienced during the nine months ended September 30, 2016 is indicative of the run off of the business.  Finally, we sold approximately $24.3 million of securities for a net loss of $0.1 million during the nine months ended September 30, 2016.  Net gains on sale of securities for the nine months ended September 30, 2015 were the result of the sale of approximately $17.6 million of securities for a gain of $0.3 million as part of our ongoing securities portfolio management.

Noninterest expense was $46.0 million for the nine months ended September 30, 2016, compared with $37.8 million for the nine months ended September 30, 2015, an increase of $8.2 million driven by increased operating expenses in personnel, facilities and infrastructure to support the continued growth in our asset-based lending and equipment lending, including communications and technology expense associated with the recent investments we have made in our communications and technology infrastructure to further our movement toward a single operating platform, which positions us for future acquisitions and greater operating efficiencies.  This includes incremental costs associated with the growth in Banking segment personnel and infrastructure in conjunction with our acquisition of ColoEast on August 1, 2016.  Noninterest expense for the nine months ended September 30, 2016 also includes $1.6 million of acquisition-related costs incurred as part of ColoEast acquisition.  In addition, increases due to merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense contributed to the increase.  Finally, the increase in noninterest expense is partially related to the reassignment of certain personnel to the Banking segment in connection with the merger of our subsidiary banks in October 2015.  

Asset Management

Our Asset Management segment’s operating income totaled $1.1 million for the nine months ended September 30, 2016 compared to $13.3 million for the nine months ended September 30, 2015. This decrease was significantly impacted by the recording of a pre-tax bargain purchase gain in the amount of $14.2 million associated with the acquisition of Doral Money in 2015, offset by direct transaction costs of $0.3 million and the accrual of a $1.8 million incremental bonus expense for the anticipated amount expected to be paid to team members to recognize their contribution to the transaction.  Excluding the bargain purchase gain net of transaction costs and the incremental bonus accrual, the Asset Management segment reported operating income of $1.2 million for the nine months ended September 30, 2015.  As of September 30, 2016, Triumph Capital Advisors managed $1.5 billion of CLO assets earning approximately 31 basis points on average in asset management fees and provides middle- and back-office services under staff and services agreements for $800 million of CLO assets earning approximately 26 basis points on average in fees.

Corporate

The Corporate segment’s operating income totaled $0.1 million for the nine months ended September 30, 2016, compared with an operating loss of $4.7 million for the nine months ended September 30, 2015.  The reduction in the operating loss is primarily due to an increase of $1.8 million in noninterest income and a decrease of $2.9 million in operating expenses for nine months ended September 30, 2016.  The increase in noninterest income is primarily due to earnings associated with the Corporate segment’s

 

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additional equity investments in CLO warehouse entities.  The decrease in operating expenses is primarily related to the reassignment of certain personnel to the Banking segment in connection with the merger of our subsidiary banks in October 2015.

Financial Condition

Assets

Total assets were $2.575 billion at September 30, 2016, compared to $1.691 billion at December 31, 2015, an increase of $884 million, the components of which are discussed below.  

Loan Portfolio

Loans held for investment were $1.960 billion at September 30, 2016, compared with $1.292 billion at December 31, 2015.

We offer a broad range of lending and credit products.  Within our TBK Bank subsidiary, we offer a full range of lending products, including commercial real estate, construction and development, residential real estate, production agriculture, general commercial, mortgage warehouse facilities, farmland and consumer loans, focused on our community banking markets in Iowa, Illinois, Colorado, and Kansas.  We also originate a variety of commercial finance products offered on a nationwide basis.  These products include our factored receivables, the asset-based loans and equipment loans originated under our Triumph Commercial Finance brand, the healthcare asset-based loans originated under our Triumph Healthcare Finance brand, and the premium finance loans originated under our Triumph Premium Finance brand.  

As part of the ColoEast acquisition on August 1, 2016, the Company acquired loans with an unpaid principal balance of $473 million and recorded a fair value purchase discount of $12 million, reflecting a fair value $461 million.  The following table provides the acquired ColoEast loans by loan portfolio segment as of the acquisition date:

 

The following table shows our total loan portfolio by portfolio segments, including the acquired ColoEast loans, as of September 30, 2016 and December 31, 2015:

 

  

Commercial Real Estate Loans. Our commercial real estate loans were $420.7 million at September 30, 2016, an increase of $128.9 million from $291.8 million at December 31, 2015, due primarily to the $97.5 million of ColoEast loans acquired and new loan origination activity during the nine months ended September 30, 2016.

 

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Construction and Development Loans. Our construction and development loans were $101.2 million at September 30, 2016, an increase of $57.3 million from $43.9 million at December 31, 2015, due primarily to the $61.7 million of ColoEast loans acquired.  This increase was partially offset by paydowns in excess of new loan activity for the period.

Residential Real Estate Loans. Our one-to-four family residential loans were $108.7 million at September 30, 2016, an increase of $30.5 million from $78.2 million at December 31, 2015, due primarily to the $36.5 million of ColoEast loans acquired.  This increase was partially offset by paydowns in excess of new loan activity for the period.  As previously discussed, we made the decision to exit the residential mortgage production business in the fourth quarter of 2015.  As a result, we expect our residential real estate loan balances, including the acquired ColoEast residential real estate loans, to continue to decline as existing loans payoff.

Farmland Loans. Our farmland loans were $139.1 million at September 30, 2016, an increase of $105.5 compared to $33.6 million at December 31, 2015, due primarily to the $101.2 million of ColoEast loans acquired and new loan origination activity during nine months ended September 30, 2016.

Commercial Loans. Our commercial loans held for investment were $777.8 million at September 30, 2016 an increase of $282.4 million from $495.4 million at December 31, 2015.  The increase in commercial loans was driven by growth in the asset-based and equipment finance loans originated under our Triumph Commercial Finance brand and asset-based healthcare loans originated under our Triumph Healthcare Finance brand as we continue to execute on our growth strategy for such products. In addition, premium finance loans originated under our Triumph Premium Finance brand continued to grow during the period.  The increase in commercial loans was also impacted by the $156.7 million of ColoEast loans acquired.  The ColoEast commercial loans acquired included $103.7 million of balances to support agricultural operations in the Colorado and Kansas markets, which increased our total commercial agriculture lending to $125.1 million at September 30, 2016.  Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets and purchased shared national credits, increased from $168.8 million at December 31, 2015 to $228.8 million at September 30, 2016.  This increase included $53.0 million of acquired ColoEast loans.  The remaining increase is a result of new originations in our community banking markets in excess of paydowns as we continue to focus on lending activities to support businesses within our local communities. A portion of this increase was offset by a decrease due to $18.7 million of shared national credits being transferred to the held for sale classification during nine months ended September 30, 2016 and subsequently being sold.  The following table shows our commercial loans as of September 30, 2016 and December 31, 2015:

Factored Receivables. Our factored receivables were $214.0 million at September 30, 2016, a decrease of $1.1 million from $215.1 million at December 31, 2015.  This decrease was primarily the result of the transition to a new lockbox provider that processes invoice payments from account debtors at Triumph Business Capital, our factoring subsidiary.  This initiative significantly reduced our payment collection cycle times and created a one-time acceleration of approximately $30 million in collection receipts.  We continue to execute on our growth strategy for this product at Triumph Business Capital as well as through growth in factored receivables purchased under our Triumph Commercial Finance brand.  Purchase volume at Triumph Business Capital was $1.304 billion during the nine months ended September 30, 2016 and Triumph Commercial Finance recorded purchase volume of $181 million for the nine months ended September 30, 2016.

Mortgage Warehouse. Our mortgage warehouse facilities maintained outstanding balances of $172.8 million at September 30, 2016, an increase of $51.9 million from $120.9 million at December 31, 2015. The increase was primarily due to higher utilization of our clients’ mortgage warehouse facilities during the period.  Client utilization of mortgage warehouse facilities may experience significant fluctuation on a day-to-day basis given mortgage origination market conditions.

Consumer Loans. Our consumer loans were $25.6 million at September 30, 2016, an increase of $12.5 compared to $13.1 million at December 31, 2015, due in part to the $6.5 million of ColoEast loans acquired and new loan origination activity during nine months ended September 30, 2016.

 

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The following tables set forth the contractual maturities, including scheduled principal repayments, of our loan portfolio and the distribution between fixed and floating interest rate loans as of September 30, 2016.

 

  

As of September 30, 2016, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Colorado (23%), Texas (22%), and Illinois (20%) make up 65% 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.

Further, a majority (78%) of our factored receivables, representing approximately 9% of our total loan portfolio as of September 30, 2016, 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.

Nonperforming Assets

We have established procedures to assist us in maintaining the overall quality of our loan portfolio. In addition, we have adopted underwriting guidelines to be followed by our lending officers and require significant senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we rigorously monitor them for any negative or adverse trends. Our loan review procedures include approval of lending policies and underwriting guidelines by the Board of Directors of our bank 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.

 

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

 

We had $44.1 million and $13.4 million in nonperforming loans, including nonaccrual PCI loans, as of September 30, 2016 and December 31, 2015, respectively. Nonperforming loans increased from December 31, 2015 to September 30, 2016, primarily due to the deterioration of certain commercial finance equipment and asset-based loans, including relationships restructured as TDRs.  We recorded an additional $2.1 million of specific loan loss reserves against these commercial finance balances during the nine months ended September 30, 2016.  We also acquired approximately $7.4 million of nonaccrual PCI loans in the ColoEast acquisition, which are included in the nonperforming loan balances in the table above as of September 30, 2016.  Acquired PCI loans for which we are accreting interest are not reported in the nonperforming loan classification.

As a result of the above activity, the ratio of nonperforming loans to total loans increased to 2.25% at September 30, 2016 compared to 1.03% at December 31, 2015, and, combined with the increase in our OREO balances, our ratio of nonperforming assets to total assets increased to 2.05% at September 30, 2016 compared to 1.10% at December 31, 2015.  

We experienced a reported increase in our total past due loans to total loans during the nine months ended September 30, 2016 to 3.86% from 2.41% at December 31, 2015.  This increase was partially attributable to the increase in contractually past due loans acquired in the ColoEast acquisition of approximately $19.2 million as well as the additional nonperforming commercial finance loans described above.

Our OREO as of September 30, 2016 totaled $8.1 million, an increase of $2.9 million from the $5.2 million as of December 31, 2015.  The increase was primarily due to OREO with a fair value of $3.1 million acquired in the ColoEast acquisition on August 1, 2016.

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, 2016 and December 31, 2015, we had $25.7 million and $13.9 million in loans of this type which are not included in any of the nonperforming loan categories.  All of the loans identified as potential problem loans at September 30, 2016 and December 31, 2015 were graded as “substandard”.

 

Allowance for Loan and Lease Losses

ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the ALLL when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL. Management

 

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estimates the ALLL balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the ALLL may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

On August 1, 2016, we acquired loans with a fair value of $460.8 million in the ColoEast acquisition.  This fair value included a purchase discount of $12.0 million from the acquisition date unpaid principal balance of the ColoEast loans.  This purchase discount incorporated expected credit exposure associated with the acquired loans and as a result, the acquired ColoEast loan portfolio had minimal impact on the ending ALLL balance at September 30, 2016.

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

 

 

From December 31, 2015 to September 30, 2016, the ALLL increased from $12.6 million or 0.97% of total loans to $14.9 million or 0.76% of total loans. The increase in ALLL was principally driven by the $2.0 million of specific allowances recorded on impaired loans during the nine months ended September 30, 2016.  In addition, our ALLL increased due to the $207.2 million increase in the loan portfolio during the nine months ended September 30, 2016, excluding the ColoEast acquired loans.

The following table presents the unpaid principal and recorded investment for loans at September 30, 2016. The difference between the unpaid principal balance and recorded investment is principally associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) of which approximately $15.4 million is expected to be accretable into income over the remaining lives of the acquired loans and (2) net deferred origination costs and fees. The net difference can provide protection from credit loss in addition to the ALLL as future potential charge-offs for an individual loan is limited to the recorded investment plus unpaid accrued interest.

 

 

At September 30, 2016 and December 31, 2015, we had on deposit $22.6 million and $21.2 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.

 

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The following table provides an analysis of the provisions for loan losses, net charge-offs and recoveries for the three and nine months ended September 30, 2016 and 2015, and the effects of those items on our ALLL:

 

 

Net loans charged off for the three and nine months ended September 30, 2016 were $1.7 million and $1.9 million, respectively, compared to net loans charged off of $0.1 million and $0.7 million, respectively, for the three and nine months ended September 30, 2015.

Loans Held for Sale

At September 30, 2016 we held no originated mortgage loans for sale.  The Company made the decision to exit the residential mortgage production business in the fourth quarter of 2015.  We chose to exit this business as the infrastructure investments necessary to appropriately address the operational and compliance risk associated with the business outweighed the amount of profitability generated.

 

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At December 31, 2015, originated mortgage loans held for sale were $1.3 million. Loan sales of $0.2 million and $2.2 million occurred during the three and nine months ended September 30, 2016, respectively, with negligible gains recorded.  Loan sales of $16.7 million and $36.4 million occurred during the three and nine months ended September 30, 2015, respectively, and resulted in recognized net gains on sale of $0.5 million and $1.0 million in the respective periods.

At September 30, 2016, other loans held for sale were $9.6 million and included shared national credits pending sale.  These loans were transferred to the held for sale classification during the three months ended September 30, 2016 and have subsequently been sold or are pending final settlement.

 

Securities

We held securities classified as available for sale with a fair value of $286.6 million as of September 30, 2016, an increase of $123.4 million from $163.2 million at December 31, 2015. The increase is primarily due to $161.7 million of available for sale investment securities acquired in the ColoEast acquisition on August 1, 2016, of which $20.0 million were subsequently sold during the three months ended September 30, 2016.  An offsetting decrease is also attributable to normal portfolio management activities, with the net reduction being attributed to normal sales, payment, and amortization activity. For the nine months ended September 30, 2016, securities, including the sale of $20.0 million of ColoEast acquired securities discussed above, were sold resulting in proceeds of $24.3 million and a loss on sale of $0.1 million. Our available for sale securities can be used for pledging to secure FHLB borrowings and public deposits, or can be sold to meet liquidity needs.

As of September 30, 2016, we have investments classified as held to maturity with an amortized cost of $29.3 million, all of which were purchased during the nine months ended September 30, 2016.  Approximately $25.9 million of these securities represent investments in “A” rated floating rate CLO securities.  Credit spreads on these products widened early this year due to market volatility, providing an opportunity to purchase these securities at attractive risk-adjusted yields.  We were able to leverage the expertise of our Triumph Capital Advisors team to underwrite and select the securities purchased.  These floating rate CLO securities provide an initial yield of approximately 4.7% with an estimated average expected life of approximately 6.5 years.  These are not CLO securities issued or managed by Triumph Capital Advisors, but by other CLO managers.  The remaining $3.4 million of held to maturity securities represent a minority investment in the unrated subordinated notes of recently issued CLOs managed by Trinitas Capital Management.  Triumph Capital Advisors provides certain middle- and back-office services to Trinitas Capital Management with respect to the CLO, but does not serve as asset manager.

The following tables set forth the amortized cost and average yield of our securities, by type and contractual maturity as of September 30, 2016:

 

 

Liabilities

Our total liabilities were $2.291 billion as of September 30, 2016, an increase of $868 million, from $1.423 billion at December 31, 2015. The net change was primarily due to a $702 million increase in customer deposits, a $6 million increase in customer repurchase agreements, a $100 million increase in Federal Home Loan Bank advances, an $8 million increase in junior subordinated debentures, a $49 million increase in subordinated notes, and a $3 million increase in other liabilities.

As part of the ColoEast acquisition on August 1, 2016, the Company assumed customer deposits with a balance of $653.0 million, junior subordinated debentures with a fair value of $7.7 million, and other liabilities with a balance of $6.8 million.

 

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Deposits

Deposits represent our primary source of funds. We intend to continue to focus on growth in transactional deposit accounts as part of our growth strategy, both in our existing branch networks and through targeted acquisitions.

Our total deposits were $1.951 billion as of September 30, 2016, compared to $1.249 billion as of December 31, 2015, an increase of $702 million, due primarily to the $653.0 million of deposits assumed in the ColoEast acquisition.  As of September 30, 2016, interest bearing demand deposits, noninterest bearing deposits, money market deposits and savings deposits accounted for 53% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered deposits made up 47% of total deposits. See Note 7 – Deposits in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of our deposit balances as of September 30, 2016 and December 31, 2015.

 

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, 2016:

 

 

The following table summarizes our average deposit balances and weighted average rates for the three and nine months ended September 30, 2016 and 2015:

 

 

 

 

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Other Borrowings

Customer Repurchase Agreements

Customer repurchase agreements outstanding totaled $15.3 million at September 30, 2016 and $9.3 million at December 31, 2015. Our customer repurchase agreements generally overnight maturities. Variances in these balances are attributable to normal customer behavior and seasonal factors affecting their liquidity positions. The following provides a summary of our customer repurchase agreements as of and for the nine months ended September 30, 2016 and the year ended December 31, 2015:

 

FHLB Advances

As part of our overall funding and liquidity management program, we borrow from the Federal Home Loan Bank. Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans.  Our FHLB borrowings totaled $230.0 million as of September 30, 2016 and $130.0 million as of December 31, 2015.  As of September 30, 2016 and December 31, 2015, we had $240.1 million and $150.3 million, respectively, in unused and available advances from the FHLB. The increase in our borrowing capacity from December 31, 2015 to September 30, 2016 was primarily the result of the addition of the ColoEast portfolio in August 2016.

The following provides a summary of our FHLB advances as of and for the nine months ended September 30, 2016 and the year ended December 31, 2015:

Junior Subordinated Debentures

The following provides a summary of our junior subordinated debentures as of September 30, 2016:

 

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 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. As part of the purchase accounting adjustments made with the Triumph Community Bank acquisition on October 15, 2013 and the ColoEast acquisition on August 1, 2016, we 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.

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 $32.6 million was allowed in the calculation of Tier I capital as of September 30, 2016.

 

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Subordinated Notes

In September 2016, we issued $50,000,000 of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”). The Notes, which will 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%. We may, at our option, beginning on September 30, 2021 and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.

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

Issuance costs related to the Notes totaled $1,324,000, including an underwriting discount of 1.5%, or $750,000, and have been netted against the subordinated notes liability on the consolidated balance sheets. The underwriting discount and other debt issuance costs are being amortized using the effective interest method over the life of the Notes as an adjustment to interest expense.  

Capital Resources and Liquidity Management

Capital Resources

Our stockholders’ equity totaled $284.5 million as of September 30, 2016, an increase of $16.5 million from $268.0 million as of December 31, 2015. Stockholders’ equity increased during this period primarily due to net income for the period of $14.4 million. Offsetting this increase were preferred dividends paid on our Series A and Series B preferred stock.

Liquidity Management

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

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

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

In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of September 30, 2016, TBK Bank had unsecured federal funds lines of credit with six unaffiliated banks totaling $112.5 million, with no amounts advanced against those lines at that time.

Regulatory Capital Requirements

Our capital management consists of providing equity to support our current and future operations. We are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and TBK Bank each 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.

 

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The Company is subject to the Basel III regulatory capital framework.  Beginning in January 2016, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019.  The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments.  Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

Quantitative measures established by regulations to ensure capital adequacy require the Company and TBK Bank to maintain minimum amounts and ratios (as set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Management believes, as of September 30, 2016, the Company and TBK Bank meet all capital adequacy requirements to which they are subject, including the capital conservation buffer requirement.

As of September 30, 2016, 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, 2016 that management believes would have changed TBK Bank’s category.

The actual capital amounts and ratios for the Company and TBK Bank are presented in the following table as of September 30, 2016.  

 

 

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Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of September 30, 2016 excluding purchase accounting adjustments for our junior subordinated debentures and deposits. 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.

 

 

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.

The following table details our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect actual future cash funding requirements.

 

 

Critical Accounting Policies and Estimates

Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to originated loans, purchased loans, factored receivables, ALLL, goodwill and intangibles, and fair values of financial instruments. Since December 31, 2015, there have been no changes in critical accounting policies as further described under “Critical Accounting Policies and Estimates” and in Note 1 to the Consolidated Financial Statements in our 2015 Form 10-K.

 

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Recently Issued Accounting Pronouncements

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

Forward-Looking Statements

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

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:

 

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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, 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.

 

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The following table summarizes simulated change in net interest income versus unchanged rates as of September 30, 2016 and December 31, 2015:

 

 

The following table presents the change in our economic value of equity as of September 30, 2016 and December 31, 2015, assuming immediate parallel shifts in interest rates:

 

 

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

Evaluation of disclosure controls and procedures. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. 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 upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms.

 

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Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

There have been no 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, 2015.

 

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.

 

 

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Item 6. Exhibits

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

 

 

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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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