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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Cautionary Note Regarding 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 not limited to, the following:

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

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

•our ability to mitigate our risk exposures;

•our ability to maintain our historical earnings trends;

•changes in management personnel;

•interest rate risk;

•concentration of our products and services in the transportation industry;

•risks related to TriumphPay and the associated growth in such product line;

•credit risk associated with our loan portfolio;

•lack of seasoning in our loan portfolio;

•deteriorating asset quality and higher loan charge-offs;

•time and effort necessary to resolve nonperforming assets;

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

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

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

•lack of liquidity;

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

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

•our risk management strategies;

•environmental liability associated with our lending activities;

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

•the accuracy of our financial statements and related disclosures;

•material weaknesses in our internal control over financial reporting;

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

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

•changes in carry-forwards of net operating losses;

•changes in federal tax law or policy;

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

•governmental monetary and fiscal policies;

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

•failure to receive regulatory approval for future acquisitions; and

•increases in our capital requirements.

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

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 consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. 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 “Cautionary Note Regarding Forward-Looking Statements” section above.

Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act. Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services, commercial finance product lines focused on businesses that require specialized financial solutions and national lending product lines that further diversify our lending operations. Our traditional banking offerings include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines generate attractive returns and include factoring, asset-based lending, and equipment lending products offered on a nationwide basis. Our national lending product lines provide further asset base diversification and include mortgage warehouse and liquid credit offered on a nationwide basis. As of December 31, 2020, we had consolidated total assets of $5.936 billion, gross loans held for investment of $4.997 billion, total deposits of $4.717 billion and total stockholders’ equity of $726.8 million

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A key element of our strategy is to supplement the asset generation capacity in our community banking markets with commercial finance product lines which are offered on a nationwide basis and which serve to enhance the overall yield of our portfolio. These products include our factoring services and equipment finance products, provided principally in the transportation sector, and our asset-based lending products. Year to date, our aggregate outstanding balances for these products has increased $623.9 million, or 49.9%, to $1.874 billion as of December 31, 2020, due to increases in our equipment lending and factored receivables products. The increase in factored receivables reflects the acquired transportation factoring assets of Transport Financial Solutions detailed in a later discussion. Excluding the acquired transportation factoring assets our aggregate outstanding balances for these products has increased $516.4 million or 41.3%. The following table sets forth our commercial finance product lines:

Commercial finance

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

National lending

Commercial - Premium finance — 101,015

On April 20, 2020, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit our premium finance line of business. The transaction closed on June 30, 2020, and the assets of the Disposal Group, consisting primarily of $84.5 million of premium finance loans, was sold for a gain on sale of $9.8 million. For further information regarding this transaction, see Note 2 – Business Combinations and Divestitures in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary, Triumph Business Capital, operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products. This business also has a legacy and structure as a standalone company. We have determined our reportable segments are Banking, Factoring, and Corporate. For the year ended December 31, 2020, our Banking segment generated 65% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 34% of our total revenue, and our Corporate segment generated 1% of our total revenue.

2020 Overview

Net income available to common stockholders for the year ended December 31, 2020 was $62.3 million, or $2.53 per diluted share, compared to net income available to common stockholders for the year ended December 31, 2019 of $58.5 million, or $2.25 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $55.6 million, or $2.26 per diluted share, for the year ended December 31, 2020. There were no merger and acquisition related activities during the year ended December 31, 2019. For the year ended December 31, 2020, our return on average common equity was 9.77% and our return on average assets was 1.18%.

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At December 31, 2020, we had total assets of $5.936 billion, including gross loans held for investment of $4.997 billion, compared to $5.060 billion of total assets and $4.195 billion of gross loans held for investment at December 31, 2019. Gross loan growth totaled $802.3 million during the year ended December 31, 2020. Excluding the sale of premium finance loans and acquired transportation factoring assets, organic loan growth totaled $795.8 million, or 19.4%, $189.9 million of which consisted of PPP loans. Our commercial finance loans increased from $1.250 billion in aggregate as of December 31, 2019 to $1.874 billion as of December 31, 2020, an increase of 49.9%, and constitute 38% of our total loan portfolio at December 31, 2020. Excluding the acquired transportation factoring assets, our commercial finance product lines increased $516.4 million, or 41.3%. Our national lending lines increased from $850.4 million in aggregate as of December 31, 2019 to $1.222 billion as of December 31, 2020, an increase of 43.7%, and constitute 24% of our total loan portfolio at December 31, 2020. Excluding premium finance loans, our national lending lines increased $472.3 million, or 63.0%. Our community bank lending lines decreased from $2.094 billion in aggregate as of December 31, 2019 to $1.901 billion as of December 31, 2020, a decrease of 9.2%, and constitute 38% of our total loan portfolio at December 31, 2020.

At December 31, 2020, we had total liabilities of $5.209 billion, including total deposits of $4.717 billion, compared to $4.424 billion of total liabilities and $3.790 billion of total deposits at December 31, 2019. Deposits increased $926.7 million during the year ended December 31, 2020.

At December 31, 2020, we had total stockholders' equity of $726.8 million, compared to total stockholders' equity of $636.6 million at December 31, 2019. The increase in total equity was primarily due to preferred stock issued during the year and our net income, offset in part by common stock repurchased during the year. Holding company Tier 1 capital and total capital to risk weighted assets ratios were 10.60% and 13.03%, respectively, at December 31, 2020.

For the year ended December 31, 2020, Triumph Business Capital and TriumphPay processed a combined $10.436 billion in transportation invoice payments.

For the year ended December 31, 2020, the total dollar value of invoices purchased by Triumph Business Capital was $7.135 billion with an average invoice size of $1,825. The transportation average invoice size for the quarter was $1,682.

For the year ended December 31, 2020, TriumphPay processed 4,394,901 invoices paying 93,648 distinct carriers a total of $4.175 billion.

2020 Items of Note

Transport Financial Solutions

On July 8, 2020, Triumph Bancorp, Inc., through our wholly-owned subsidiary Advance Business Capital LLC (“ABC”), acquired the transportation factoring assets (the “TFS Acquisition”) of Transport Financial Solutions (“TFS”), a wholly owned subsidiary of Covenant Logistics Group, Inc. ("CVLG"), in exchange for cash consideration of $108.4 million, 630,268 shares of the Company’s common stock valued at approximately $13.9 million, and contingent consideration of up to approximately $9.9 million to be paid in cash following the twelve-month period ending July 31, 2021.

Subsequent to the closing of the TFS Acquisition, the Company identified that approximately $62.2 million of the assets acquired at closing were advances against future payments to be made to three large clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements between the obligor on such contracts and such clients (and their affiliated entities) for services that had not yet been performed.

On September 23, 2020, the Company and ABC entered into an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (the “Agreement”) with CVLG and Covenant Transport Solutions, LLC a wholly owned subsidiary of CVLG (“CTS” and, together with CVLG, "Covenant"). Pursuant to the Agreement, the parties agreed to certain amendments to that certain Accounts Receivable Purchase Agreement (the “ARPA”), dated as of July 8, 2020, by and among ABC, as buyer, CTS, as seller, and the Company, as buyer indirect parent. Such amendments include:

•Return of the portion of the purchase price paid under the ARPA consisting of 630,268 shares of Company common stock, which was accomplished through the sale of such shares by CVLG pursuant to the terms of the Agreement and the surrender of the cash proceeds of such sale (net of brokerage or underwriting fees and commissions) to the Company;

•Elimination of the earn-out consideration potentially payable to CTS under the ARPA; and

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•Modification of the indemnity provisions under the ARPA that eliminated the existing indemnifications for breaches of representations and warranties and replaced such with a newly established indemnification by Covenant in the event ABC incurs losses related to the $62.2 million in over-formula advances made to specified clients identified in the Agreement (the “Over-Formula Advance Portfolio”). Under the terms of the new indemnification arrangement, Covenant is responsible for and will indemnify ABC for 100% of the first $30 million of any losses incurred by ABC related to the Over-Formula Advance Portfolio, and for 50% of the next $30 million of any losses incurred by ABC, for total indemnification by Covenant of $45 million.

Covenant’s indemnification obligations under the Agreement are secured by a pledge of equipment collateral by Covenant with an estimated net orderly liquidation value of $60 million (the “Equipment Collateral”). The Company’s wholly-owned bank subsidiary, TBK Bank, SSB, has provided Covenant with a $45 million line of credit, also secured by the Equipment Collateral, the proceeds of which may be drawn to satisfy Covenant’s indemnification obligations under the Agreement.

Pursuant to the Agreement, Triumph and Covenant agreed to certain terms related to the management of the Over-Formula Advance Portfolio, and the terms by which Covenant may provide assistance to maximize recovery on the Over-Formula Advance Portfolio.

Pursuant to the Agreement, the Company and Covenant provided mutual releases to each other related to any and all claims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio.

Misdirected Payments

As of December 31, 2020 we carry a separate $19.6 million receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest over-formula advance carrier. This amount is separate from the aforementioned over-formula advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. In addition to commencing litigation against such customer, we have also filed a declaratory judgment action in United States Federal District Court for the Southern District of Florida seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. Based on our legal analysis and discussions with our counsel advising us on this matter, we believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of December 31, 2020. The full amount of such receivable is reflected as past due factored receivables as of December 31, 2020, and $6.0 million of such receivable, reflecting the portion of such receivable that was greater than 90 days past due, is included in our non-performing asset calculation as of December 31, 2020 in accordance with our policy. As of the issuance date of this report, the entire $19.6 million Misdirected Payments amount was greater than 90 days past due.

Triumph Premium Finance

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

Preferred Stock Offering

On June 19, 2020, we issued 45,000 shares of 7.125% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, with a liquidation preference of $1,000 per share through an underwritten public offering of 1,800,000 depository shares, each representing a 1/40th ownership interest in a share of the Series C Preferred Stock. Total gross proceeds from the preferred stock offering were $45.0 million. Net proceeds after underwriting discounts and offering expenses were $42.4 million. The net proceeds will be used for general corporate purposes.

Stock Repurchase Program

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

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2019 Items of Note

Warehouse Solutions Inc. Investment

On October 17, 2019, we made a minority equity investment of $8 million in Warehouse Solutions Inc. (“WSI”), purchasing 8% of the common stock of WSI and receiving warrants to purchase an additional 10% of the common stock of WSI upon exercise of the warrants at a later date. WSI provides technology solutions to help reduce supply chain costs for a global client base across multiple industries.

Stock Repurchase Program

On October 29, 2018, we announced that our board of directors had authorized us to repurchase up to $25.0 million of our outstanding common stock. On July 17, 2019, our board of directors authorized the repurchase of up to an additional $25.0 million of our outstanding common stock. On October 16, 2019 our board of directors authorized us to repurchase up to an additional $50.0 million of our outstanding common stock. We may repurchase these shares from time to time in open market transactions or through privately negotiated transactions at our discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of our common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. This repurchase program is authorized for a period of up to one year and does not require us to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time, at our discretion.

During the year ended December 31, 2019, we repurchased into treasury stock 2,080,791 shares at an average price of $30.90 for a total of $64.4 million.

Recent Developments: COVID-19 and the CARES Act

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

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program ("PPP") and Main Street Lending Program (“MSLP”). The package also included extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s operations and could continue to impact operations going forward.

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

Financial position and results of operations

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

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The Company’s fee income has been reduced due to COVID-19. In keeping with guidance from regulators, the Company actively worked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020 and were the primary contributor to the $1.9 million reduction in service charges on deposits fee income for the twelve months ended December 31, 2020 compared to the same period during 2019. Should the pandemic and the global response escalate further, it is possible that the Company could reduce such fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of December 31, 2020, the Company carried $0.7 million of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

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

We maintain access to multiple sources of liquidity. During the twelve months ended December 31, 2020, we were able to issue preferred equity as previously discussed. Wholesale funding markets have remained open to us, but rates for short-term funding have been volatile throughout 2020. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

Asset valuation

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

As of December 31, 2020, our goodwill was not impaired. Management performed a quantitative goodwill impairment test on our reporting units as of October 1, 2020. The goodwill impairment test did not identify any goodwill impairment and neither of our reporting units, Banking or Factoring, were at risk of failing the quantitative test. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020 we had goodwill of $163.2 million, representing approximately 22% of equity.

As of December 31, 2020 we did not have any impairment with respect to our intangible assets or other long-lived assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020 we had intangible assets of $26.7 million, representing approximately 4% of equity.

During the year ended December 31, 2020 we recorded $1.4 million of impairment on a right of use asset and related leasehold improvements. This impairment was the result of our decision to consolidate part of our El Paso, TX factoring operations to our Triumph Business Capital headquarters in Coppell, TX. The impairment was not a result of the COVID-19 pandemic.

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Our processes, controls and business continuity plan

The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the WHO’s pandemic declaration, the Company’s Enterprise Risk Management team invoked its Board approved Pandemic Preparedness Plan. Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts – including customer relief efforts. The Company’s preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19. At December 31, 2020, the majority of our employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.

As of December 31, 2020, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for stated period of time. As of December 31, 2020, the Company’s balance sheet reflected 59 of these deferrals on outstanding loan balances of $104,600,000. In accordance with the CARES Act and March 2020 interagency guidance, these deferrals are not considered troubled debt restructurings. It is possible that these deferrals could be extended further under the CARES Act; however, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively participated in assisting its customers with applications for resources through the program. PPP loans generally have a two-year or five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2020, the Company carried 1,913 PPP loans representing a book value of $189,900,000. The Company has received approximately $7,700,000 in total fees from the SBA, $4,600,000 of which were recognized in interest income and fees during the year ended December 31, 2020. The remaining fees will be amortized and recognized over the life of the associated loans. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.

Credit

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

Retail Lending:

The Company’s exposure to retail at December 31, 2020 equated to approximately $213.1 million, or 4.3% of total loans, summarized as follows:

•30% new and used vehicle lending; mostly dealer floorplan

•24% retail real estate

•14% grocery stores, pet stores, pharmacies, gas stations and convenience stores

•14% factoring

•18% other types of retail lending

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At December 31, 2020, there were no retail loans in deferral through our CARES Act deferral program.

Energy Lending:

The Company’s exposure to energy at December 31, 2020 equated to approximately $86.8 million, or 1.7% of total loans, summarized as follows:

•55% equipment finance; this portfolio consisted primarily of fully amortizing fixed rate loans on multi-use assets like trucks, trailers and cranes.

•27% factoring consisting of purchased invoices from energy-related loads in our factoring operations. The Company typically collects out of these exposures in 30 - 90 days and continuously evaluates the credit worthiness of the ultimate account debtor, TBK’s source of repayment.

•6% asset-based lending

•12% other types of energy lending

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

At December 31, 2020, there were $13.3 million of energy lending loans in deferral through our CARES Act deferral program.

Hospitality Lending:

The Company’s exposure to hospitality at December 31, 2020 equated to approximately $125.8 million, or 2.5% of total loans. These were mostly smaller loans purchased through our bank acquisitions and secured by hotels. At December 31, 2020, there were $41.8 million of hospitality lending loans in deferral through our CARES Act deferral program.

Restaurants:

The Company’s exposure to restaurants at December 31, 2020 equated to approximately $36.8 million, or less than 1% of total loans. At December 31, 2020, there were $6.6 million of restaurant lending loans in deferral through our CARES Act deferral program.

Health Care and Senior Care Lending:

The Company’s exposure to health care and senior care at December 31, 2020, equated to $44.8 million, or less than 1% of total loans. At December 31, 2020, there were no healthcare and senior care lending loans in deferral through our CARES Act deferral program.

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

Held to Maturity Securities

At December 31, 2020, we held $7.9 million in subordinated notes of three CLO securities managed by our former subsidiary. These securities are the junior-most in securitization capital structures, and are subject to suspension of distributions if the credit of the underlying loan portfolios deteriorates materially. During the year ended December 31, 2020, pandemic-related downgrades and default activity caused overcollateralization triggers to be tripped on two of the three CLO investments which had a material impact on expected cash flows used to calculate the ACL. At year end, the overcollateralization triggers were not tripped; however, the required ACL on these balances was $2.0 million resulting in $1.9 million of credit loss expense recognized during the year. Our held to maturity securities were nonaccrual assets at December 31, 2020. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call. Thus, we may not receive the full amount of cash distributions we expect to receive, which would cause us to record additional allowance for credit losses with a corresponding charge to credit loss expense through earnings.

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Retail operations

The Company is committed to assisting our customers and communities in this time of need. Most branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members. The branches with lobbies open have been retrofitted with sneeze guard protective screens and our branches have been supplied with gloves and disinfectant materials for lobby, drive through and ATM equipment. We have introduced temporary changes to help with the financial hardship caused by COVID-19 for both our customers and non-customers. This included waiving select deposit account fees including overdraft fees, ATM fees and excessive withdrawal fees for savings and money market accounts. These fee waivers expired on June 1, 2020. Daily deposit limits for ATMs and Mobile were increased. We have also provided check-cashing services for government issued stimulus checks for both customers and non-customers. We continue to support the communities we serve as demonstrated by local teams making donations to those in need and buying meals for first responders.

We continue to serve our customers that need emergency branch access for account issues, safe deposit access and similar items by appointment. The Company has been able to open and close accounts effectively, through its drive through facility, and our Customer Care 800 access is successfully managing the volume of incoming calls. Additionally, the Company temporarily waived account service charges during the three months ended June 30, 2020 in an effort to assist all of our customers that may be in need including our small business and commercial customers.

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

Transportation

During the first half of 2020, the Company's transportation business was affected by COVID-19 and low oil prices. During this time, the most significant transportation-related impact of COVID-19 on operating results was a decrease year-over-year in exports from China to the U.S. The impact of this dynamic was offset during the first quarter by strength in other sectors of Triumph Business Capital’s (“TBC”) business in the first quarter of 2020, as freight volumes remained on par with seasonal expectations. However, the aforementioned global supply disruption from China, in combination with the U.S. supply chain challenges due to business closures, shelter in place orders and an overall decrease in consumer demand was felt heavily in April and May of 2020 with a significant reduction in freight movement. During these months, the over-capacity market drove spot rates to decade-low numbers. In June, freight volumes resumed to 2019 levels or higher, and spot rates moved up accordingly. Many carriers who were inactive during April and May resumed to nearly full utilization. Small owner operators also returned to the market.

During the second half of 2020, the Company’s transportation businesses benefited from high freight volume in a reduced capacity market. Spot rates returned to mid-2018 highs in all trailer categories. This resulted in a significant rise in the average invoice price. This was unusual as diesel prices held steady or dropped slightly, indicating a majority of the increase related to capacity shortage in many markets. A portion of the increased freight was catch-up, as U.S ports reached capacity on incoming imports. Loads from Mexico rose to record high levels. The third quarter of 2020 saw many idle carriers respond to the higher spot rates and return to market, despite continued increases in insurance costs that threaten breakeven at lower freight rates. Purchases at TBC rose during the third quarter and rose again the following quarter. This reflected the capacity shortage and the beneficial pricing for those firms active in the market. It also reflected an increase in TBC clients. Driver pay has been increasing, insurance rates are up and diesel has been edging higher. Although there have been record Class 8 and tractor orders, delivery dates are being pushed further into 2021. This leaves capacity strained and costs high, so most project that rates will stay at current levels or slightly lower. If the economy is impacted by further stimulus and mass-scale vaccinations, 2021 could be a strong year for transportation. However, if the measures to curtail the economic impact of COVID-19 prove to be unsuccessful, we could experience an impact on our transportation business similar to that experienced during the first half of 2020.

For the year ended December 31, 2020, gross transportation revenue, consisting of factoring revenue from transportation clients, interest and fees from commercial loans to borrowers in transportation industries, transportation related insurance commissions, and revenue from TriumphPay, made up 40% of total gross revenue consisting of total interest income and noninterest income. This compares to average transportation assets, consisting of transportation related factored receivables and commercial loans to borrowers in transportation industries, making up 24% of total assets for the year.

Results of Operations

For discussion of the results of operations for the year ended December 31, 2019 compared with the year ended December 31, 2018, see Triumph’s 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 11, 2020.

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Fiscal year ended December 31, 2020 compared with year ended December 31, 2019

Net Income

We earned net income of $64.0 million for the year ended December 31, 2020 compared to $58.5 million for the year ended December 31, 2019, an increase of $5.5 million.

The results for the year ended December 31, 2020 were impacted by the gain on sale of TPF of $9.8 million reported as noninterest income and transaction costs of $0.8 million associated with the TFS Acquisition reported as noninterest expense. There were no merger and acquisition related activities during the year ended December 31, 2019. Excluding the gain on sale, net of taxes, we earned adjusted net income to common stockholders of $55.6 million for the year ended December 30, 2020 compared to $58.5 million for the year ended December 31, 2019, a decrease of $2.9 million. The adjusted decrease was primarily the result of a $30.4 million increase in credit loss expense, a $17.2 million increase in adjusted noninterest expense, a $1.5 million increase in adjusted income tax expense, and a $1.7 million increase in dividends on preferred stock offset in part by an $28.8 million increase in net interest income and a $19.1 million increase in adjusted noninterest income.

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

Net Interest Income

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

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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 years ended December 31,

Interest-earning assets:

Noninterest-earning assets:

Interest-bearing liabilities:

Deposits:

Noninterest-bearing liabilities and equity:

1.Balance totals include respective nonaccrual assets.

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

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

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

For the years ended December 31,

We earned net interest income of $284.7 million for the year ended December 31, 2020 compared to $255.9 million for the year ended December 31, 2019, an increase of $28.8 million, or 11.3%, primarily driven by the following factors.

Interest income increased $11.0 million, or 3.5%, as a result of an increase in total average interest-earning assets of $665.9 million, or 15.4%. The average balance of our higher yielding commercial finance loans increased $268.2 million, or 22.5%, from $1.191 billion for the year ended December 31, 2019 to $1.459 billion for the year ended December 31, 2020. The impact of increased average commercial finance balances was offset by decreased yields on factored receivables and increased average balances in our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $729.8 million for the year ended December 31, 2020 compared to $370.4 million for the year ended December 31, 2019. Further, we began originating PPP loans during the second quarter and carried $189.9 million of PPP loans at December 31, 2020. PPP loans carry a coupon rate of 1% which has a meaningful downward impact on our loan yield. A component of interest income consists of discount accretion on acquired loan portfolios. We recognized discount accretion on purchased loans of $10.7 million and $5.6 million for the years ended December 31, 2020 and 2019, respectively.

Interest expense decreased $17.9 million, or 32.3%, in spite of growth in average interest-bearing liabilities. More specifically, average total interest-bearing deposits increased $88.5 million, or 3.1%. The decrease in interest expense was the result of lower average rates discussed below.

Net interest margin decreased to 5.71% for the year ended December 31, 2020 from 5.92% for the year ended December 31, 2019, a decrease of 21 basis points or 3.5%.

Our net interest margin was impacted by a decrease in yield on our interest-earning assets of 74 basis points to 6.46% for the year ended December 31, 2020. This decrease was driven by lower yields and a change in the overall mix within our loan portfolio period over period which drove a 75 basis point reduction in our loan yield to 7.00% for the same period. As previously discussed, we carried $189.9 million of PPP loans with a coupon rate of 1% at December 31, 2020. Our higher yielding average commercial finance products as a percentage of the total loan portfolio increased from 31.1% for the year ended December 31, 2019 to 32.7% for the year ended December 31, 2020 somewhat offsetting the overall decrease in yield on our loan portfolio. Average factored receivables as a percentage of the total commercial finance portfolio increased from 49.0% for the year ended December 31, 2019 to 53.1% for the year ended December 31, 2020. However, we experienced pricing pressure that decreased yields on our factored receivables during the year ended December 31, 2020 leading to decreased yields from our commercial finance portfolio. Our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, increased as a percentage of the overall factoring portfolio to 90.0% at December 31, 2020 compared to 77.0% at December 31, 2019. Yields on our non-loan interest-earning assets were generally flat or down period over period as well; however, these products do not impact the yield on interest-earning assets to the same extent as our loan portfolio.

The decrease in our net interest margin was partially offset by a decrease in our average cost of interest-bearing liabilities of 61 basis points. This decrease was caused by lower interest rates paid on our interest-bearing liabilities driven by changes in interest rates in the macro economy.

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Changes in net interest income due to changes in rates and volume. 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 periods indicated.For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to volume.

Years ended December 31,

Increase (Decrease) Due to: Increase (Decrease) Due to:

(Dollars in thousands) Rate Volume Net Change Rate Volume Net Change

Interest-earning assets:

Interest-bearing liabilities:

Brokered time deposits (2,387) (1,158) — —

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Credit Loss Expense

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

The following table presents the major categories of credit loss expense:

(Dollars in thousands) 2020 2019 2018 $ Change % Change $ Change % Change

Credit loss expense on held to maturity securities 1,900 — — 1,900 100.0 % — — %

Credit loss expense on available for sale securities — — — — — % — — %

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

Upon and subsequent to adoption of ASC 326, the ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At December 31, 2020 and December 31, 2019, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At January 1, 2020 and December 31, 2020, the Company carried $8.4 million and $7.9 million of these HTM securities at amortized cost, respectively. The ACL on these balances was $0.1 million at January 1, 2020. During the year ended December 31, 2020, pandemic-related downgrades and default activity caused overcollateralization triggers to be tripped on two of the three CLO investments which had a material impact on expected cash flows used to calculate the ACL. These overcollateralization triggers were not tripped at the end of the year. At December 31, 2020, our held to maturity securities were nonaccrual assets. The ACL on these balances was $2.0 million at December 31, 2020 resulting in $1.9 million of credit loss expense recognized during the year ended December 31, 2020. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.

Our ACL on loans was $95.7 million as of December 31, 2020, compared to $29.1 million as of December 31, 2019, representing an ACL to total loans ratio of 1.92% and 0.69% respectively. Upon adoption of ASC 326, management booked an increase of $0.3 million to the ACL and a decrease to retained earnings net of the deferred tax impact. The Day 1 adjustment upon adoption raised the ACL balance to $29.4 million on January 1, 2020.

Our credit loss expense on loans increased $26.0 million, or 327.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

One driver of the increased credit loss expense was significant year-to-date projected deterioration of the loss drivers that the Company forecasts to calculate expected losses. This deterioration was brought on by the projected economic impact of COVID-19 on the Company’s loss drivers over the reasonable and supportable forecast period. See further discussion in the allowance for credit loss section below. The deterioration of forecasted loss assumptions and minimal changes to qualitative loss factors resulted in approximately $16.7 million of credit loss expense for the year ended December 31, 2020. For the year ended December 31, 2019, changes to loss factors under the incurred loss allowance methodology resulted in a benefit to credit loss expense of $0.5 million.

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Another driver of the increased credit loss expense was an increase in required ACL on the Over-Formula Advances deemed to be purchased credit deteriorated ("PCD"). Management determined that the $62.2 million in Over-Formula Advances and some smaller immaterial factored receivables obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus deemed those Over-Formula Advances to be purchased credit deteriorated ("PCD"). This resulted in recording a $37.4 million ACL on the PCD assets through purchase accounting during the year ended December 31, 2020. There was no initial impact to credit loss expense resulting from the PCD determination. At December 31, 2020, the ACL on the Over-Formula Advance PCD assets increased by $11.5 million and the total ACL on all acquired PCD assets was $49.0 million. The change in ACL on PCD assets subsequent to acquisition was charged to credit loss expense. This increase in required PCD ACL caused us to increase the value of our Covenant indemnification asset by $5.3 million which was recorded through non-interest income.

The increase in credit loss expense was further driven by net new specific reserves on non-PCD assets. We recorded net new specific reserves on non-PCD assets of $5.1 million during the year ended December 31, 2020 compared to $2.2 million during the year ended December 31, 2019.

The increased credit loss expense was partially offset by net charge-off activity during the year. We experienced lower net charge-offs of $4.6 million in year ended December 31, 2020 compared to $6.4 million for the same period in 2019. Additionally, approximately $1.0 million and $1.7 million of the charge-offs for the years ended December 31, 2020 and 2019, respectively, had specific reserves previously recorded.

Change in loan growth and change in mix partially offset the increase in credit loss expense period over period. During the year ended December 31, 2020, outstanding loans increased $802.3 million. When this increase is adjusted for PPP loan growth of $189.9 million, loans increased $612.4 million during the year and much of this growth was in factored receivables and mortgage warehouse lending which require lower reserve rates due to their nature. Refer to discussion of the allowance for credit losses below for ACL considerations regarding our PPP loans. During the year ended December 31, 2019, outstanding loans increased $585.9 million; however, this growth was in lending products that required higher levels of reserves. For the year ended December 31, 2020, changes in loan growth and changes in mix decreased credit loss expense by $3.0 million. Changes in loan growth and mix resulted in $1.6 million of credit loss expense for the same period one year ago.

Credit loss expense for off balance sheet credit exposures increased $2.4 million, primarily due to increased assumed loss rates on estimated funding as a result of the COVID-19 virus. The Company also experienced an increase in commitments to fund during the period. Prior to January 1, 2020, credit loss expense for off balance sheet credit exposures was recorded in other noninterest expense. Credit loss expense for off balance sheet credit exposures for the year ended December 31, 2019 was insignificant.

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Noninterest Income

The following table presents the major categories of noninterest income:

(Dollars in thousands) 2020 2019 2018 $ Change % Change $ Change % Change

Noninterest income increased $28.8 million, or 91.3%. Noninterest income for the year ended December 31, 2020 was impacted by the realization of the $9.8 million gain associated with the sale of TPF. Excluding the gain on sale of TPF, we earned adjusted noninterest income of $50.6 million for the year ended December 31, 2020, resulting in an adjusted increase in noninterest income of $19.0 million, or 60.1%, period over period. Changes in selected components of noninterest income in the above table are discussed below.

•Service Charges on Deposits. Service charges on deposit accounts, including overdraft and non-sufficient fund fees, decreased $1.9 million, or 26.1%. In keeping with guidance from regulators, we actively worked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020.

•Net OREO gains (losses) and valuation adjustments. Net OREO gains (losses) and valuation adjustments, which represents gains and losses on loans transferred to OREO, gains and losses on the sale of OREO, and valuation adjustments recorded due to the subsequent change in fair value less costs to sell of OREO, reflect increased losses of $1.0 million. OREO activity on individual repossessed assets during the years ended December 31, 2020 and 2019 was not significant.

•Net gains (losses) on sale or call of securities. Net gains (losses) on sale or call of securities increased $3.2 million due to increased sales of available for sale CLOs during the year ended December 31, 2020.

•Other. Other noninterest income, increased $19.2 million, or 350.2%. We recognized $10.9 million of non-interest income during the year ended December 31, 2020 related to CVLG's delivery of proceeds to us resulting from CVLG's liquidation of its acquired TBK stock in connection with the September 23, 2020 Account Management Agreement, Amendment to Purchase Agreement and Mutual Release. This was measured as the difference between the initial purchase accounting measurement and the amount of net proceeds delivered to the Company upon liquidation. Additionally, the value of our indemnification asset related to the Over-Formula Advances acquired from Covenant increased $5.3 million during the year resulting in $5.3 million of other noninterest income. Further, we recognized $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the current year. This revenue was recognized at the time of closing as all required services had been completed. Gain on sale of loans was $2.8 million and $2.3 million for the years ended December 31, 2020 and 2019, respectively. The increase in other noninterest income was partially offset by a $0.7 million loss recognized on the donation of a branch to a local municipality during the year ended December 31, 2020. The remaining increase was driven by organic growth in our operations. There were no other significant items within in the components of other noninterest income during the year ended December 31, 2019.

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Noninterest Expense

The following table presents the major categories of noninterest expense:

(Dollars in thousands) 2020 2019 2018 $ Change % Change $ Change % Change

Noninterest expense increased $18.0 million, or 8.8%. Noninterest expense for the year ended December 31, 2020 was impacted by $0.8 million of transaction costs associated with the TFS Acquisition. Excluding the TFS Acquisition transaction costs, we incurred adjusted noninterest expense of $221.3 million for the year ended December 31, 2020, resulting in an adjusted net increase in noninterest expense of $17.2 million, or 8.4%. Details of the more significant changes in the various components of noninterest expense are further discussed below.

•Salaries and Employee Benefits. Salaries and employee benefits expenses increased $14.1 million, or 12.5%,which is primarily due to temporary increased second quarter pay to branch employees during the COVID-19 pandemic, merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. The size of our workforce was relatively flat. Our average full-time equivalent employees were 1,124.0 and 1,118.8 for the years ended December 31, 2020 and 2019, respectively.

•Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $4.6 million, or 25.1%, primarily due to growth in our operations. We recorded right of use asset and leasehold improvement impairment expense of $1.4 million during the year ended December 31, 2020 related to our decision to consolidate part of our El Paso, TX factoring operations to our Triumph Business Capital headquarters in Coppell, TX.

•FDIC Insurance and Other Regulatory Assessments. FDIC insurance and other regulatory assessments increased $1.2 million, or 410.1%, primarily due to the application of a small bank credit by the FDIC during the year ended December 31, 2019 that did not repeat during the year ended December 31, 2020.

•Professional Fees. Professional fees, which are primarily comprised of external audit, tax, consulting, and legal fees, increased $2.1 million, or 28.3%, primarily due to professional fees incurred in connection with the TFS Acquisition.

•Amortization of intangible assets. Amortization of intangible assets decreased $0.8 million, or 8.8%, due to lower amortizable intangible asset balances during the year ended December 31, 2020 compared to the same period during 2019.

•Advertising and promotion. Advertising and promotion expenses decreased $1.4 million, or 23.0%, primarily due to pull back in this type of spending as a result of the COVID-19 pandemic.

•Communications and Technology. Communications and technology expenses increased $1.2 million, or 5.6%, primarily as a result as a result of increased information technology license and software maintenance expense as well as continued spend on technology designed to improve efficiency in our operations.

•Travel and entertainment. Travel and entertainment expenses decreased $3.0 million, or 55.9%, primarily due to the impact of the COVID-19 pandemic on such activities.

•Other. Other noninterest expense includes loan-related expenses, software amortization, training and recruiting, postage, insurance, and subscription services. There were no significant increases or decreases in the components of other noninterest expense period over period.

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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, changes in the statutory rate and the effect of changes in valuation allowances maintained against deferred tax benefits.

Income tax expense increased $3.8 million, or 22.4%, from $16.9 million for the year ended December 31, 2019 to $20.7 million for the year ended December 31, 2020. The increase in income tax expense period over period is consistent with the increase in pre-tax income for the same periods. The effective tax rate was 24% and 22% for the years ended December 31, 2020 and 2019, respectively. The increase in the effective tax rate period over period is principally due to additional state tax filings from significant revenue growth in new states.

Operating Segment Results

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

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are the same as those described in Note 1 – Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report. Transactions between segments consist primarily of borrowed funds. Beginning in 2019, intersegment interest expense is allocated to the Factoring segment based on Federal Home Loan Bank advance rates. Prior to 2019, intersegment interest was calculated based on the Company’s prime rate. Credit loss expense is allocated based on the segment’s ACL determination. Noninterest income and expense directly attributable to a segment are assigned accordingly. Taxes are paid on a consolidated basis and are not allocated for segment purposes.

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

(Dollars in thousands)

Year Ended December 31, 2020 Banking Factoring Corporate Consolidated

Intersegment interest allocations 12,371 (12,371) — —

Gain on sale of subsidiary or division 9,758 — — 9,758

(Dollars in thousands)

Year Ended December 31, 2019 Banking Factoring Corporate Consolidated

Intersegment interest allocations 11,294 (11,294) — —

(Dollars in thousands)

Year Ended December 31, 2018 Banking Factoring Corporate Consolidated

Intersegment interest allocations 20,191 (20,191) — —

Gain on sale of subsidiary or division 1,071 — — 1,071

(Dollars in thousands)

December 31, 2020 Banking Factoring Corporate Eliminations Consolidated

(Dollars in thousands)

December 31, 2019 Banking Factoring Corporate Eliminations Consolidated

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Banking

Our Banking segment’s operating income increased $2.8 million, or 6.0%. Our Banking segment’s operating income for the year ended December 31, 2020 was impacted by the realization of the $9.8 million gain associated with the sale of TPF in the second quarter of 2020. Excluding the gain on sale of TPF, our Banking segment’s adjusted operating income was $40.0 million for the year, resulting in an adjusted decrease in operating income of $6.9 million, or 14.9%, period over period.

Interest income increased primarily as a result of increases in the balances of our interest-earning assets, primarily loans, due to the continued growth of our commercial finance products, including equipment loans, and growth in our general C&I lending resulting from our origination of PPP loans. Average loans in our Banking segment increased 15.8% from $3.753 billion for the year ended December 31, 2019 to $4.347 billion for the year ended December 31, 2020. The increase in interest income due to increased average balances of our interest-earning assets was partially offset by lower yields across almost all of our interest-earning asset groups.

Interest expense decreased in spite of growth in average interest-bearing liabilities at our Banking segment. More specifically, average total interest-bearing deposits increased $88.5 million, or 3.1%. The decrease in interest expense was the result of a decrease in our average cost of interest-bearing liabilities driven by changes in interest rates in the macro economy.

Credit loss expense at our banking segment is made up of credit loss expense related to loans and credit loss expense related to off balance sheet commitments to lend. Credit loss expense related to loans was $17.9 million for the year ended December 31, 2020 compared to $5.5 million for the year ended December 31, 2019. The increased credit loss expense related to loans for our Banking segment was primarily the result of significant year-to-date deterioration in the loss drivers that the Company forecasts to calculate expected losses and minimal changes in qualitative loss factors. The deterioration in forecasted loss assumptions resulted in approximately $16.7 million of credit loss expense for the year ended December 31, 2020. For the year ended December 31, 2019, changes to loss factors under the incurred loss allowance methodology resulted in approximately $0.2 million of credit loss expense at our Banking segment. The increase in the credit loss expense at our Banking segment was further driven by net new specific reserves. We recorded net new specific reserves at our Banking segment of $5.2 million during the year ended December 31, 2020 compared to $1.0 million during the prior year. We experienced lower total net charge-offs at our Banking segment of $1.6 million during the year ended December 31, 2020 compared to $4.5 million for the same period in 2019. Charge-offs during the year ended December 31, 2020 had $0.3 million of reserves established in a prior period while charge-offs during the year ended December 31, 2019 had previously established reserves of $1.7 million. Excluding PPP loans that require no ACL, loan growth at our banking segment was flat year-over-year; however, there was a shift of loan mix during the current year away from loan segments that require higher ACL factors to loan segments that require lower ACL factors such as mortgage warehouse lending. This change in mix at our Banking segment offset the increase in credit loss expense period over period. For the year ended December 31, 2020, changes in loan volume and mix reduced credit loss expense by $5.3 million during the period. Changes in loan volume and mix resulted in an increase in credit loss expense of $1.7 million for the year ended December 31, 2019.

Credit loss expense for off balance sheet credit exposures at our Banking segment increased $2.4 million, primarily due to increased assumed loss rates on estimated funding as a result of the COVID-19 virus. The Company also experienced an increase in commitments to fund during the period. Prior to January 1, 2020, credit loss expense for off balance sheet credit exposures at our Banking segment was recorded in other noninterest expense. Credit loss expense for off balance sheet credit exposures at our Banking segment for the nine months ended September 30, 2019 was insignificant.

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Noninterest income at our Banking segment increased primarily due to a $3.2 million gain on sale of securities related to the liquidation of available for sale CLOs during the year ended December 31, 2020. Additionally, we recognized $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the nine months ended September 30, 2020. The increase in other noninterest income at our Banking segment was also driven by gain on sale of loans of $2.8 million for the year ended December 31, 2020 compared to $2.3 million for the same period a year ago. The increase in noninterest income at our Banking segment was partially offset by a $1.9 million decrease in service charges on deposits primarily driven by by our willingness to actively work with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. The increase was also partially offset by a $0.7 million loss recognized on the donation of a branch to a local municipality during the year ended December 31, 2020.

Noninterest expense increased due to incremental costs associated with the growth in our Banking segment infrastructure. In addition, increases due to temporary increased pay to branch employees during the COVID-19 pandemic, merit increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense contributed to the increase. Further, FDIC insurance and other regulatory assessments increased $1.2 million due to the application of a small bank credit by the FDIC during the year ended December 31, 2019 that did not repeat during the year ended December 31, 2020.

Factoring

Total interest expense — — — — — — —

As of and for the Year Ended December 31,

Rolling twelve quarter annual charge-off rate 0.37 % 0.39 % 0.37 %

Factored receivables - transportation concentration 89 % 81 % 83 %

Average invoice size - transportation $ 1,682 $ 1,508 $ 1,662

Average invoice size - non-transportation $ 4,671 $ 3,404 $ 2,906

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(1) December 31, 2020 noninterest income excludes the $10.9 million gain related to CVLG’s delivery of proceeds resulting from the liquidation of its acquired TBK stock and a $5.3 million increase in the value of the indemnification asset resulting from the amended TFS acquisition agreement

Our Factoring segment’s operating income increased $10.6 million, or 28.2%. Our Factoring segment's operating income was impacted by $0.8 million of transaction costs associated with the TFS Acquisition. Excluding the TFS Acquisition transaction costs, our Factoring segment's adjusted operating income was $48.8 million for the year ended December 31, 2020, resulting in an adjusted net increase in operating income of $11.4 million, or 30.5%.

Our average invoice size increased 11.0% from $1,644 for the year ended December 31, 2019 to $1,825 for the year ended December 31, 2020 and the number of invoices purchased increased 13.2% period over period.

Net interest income at our Factoring segment increased $10.1 million, or 11.6%, period over period. Overall average net funds employed (“NFE”) was up 32.4% during the year ended December 31, 2020 compared to the same period in 2019. The increase in average NFE was the result of increased invoice purchase volume as well as increased average invoice size due to the impact of the COVID-19 pandemic on over-the-road transportation. See further discussion under the Recent Developments: COVID-19 and the CARES Act section. After record transportation invoice prices in 2018, 2019 trended toward the longer term levels. The increase in net interest income was partially offset by decreased purchase discount rates driven by greater focus on larger lower priced fleets, competitive pricing pressure, and the aforementioned impact of COVID-19; however, this downward impact was offset by increased concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration increased 8% period over period from 81% at December 31, 2019 to 89% at December 31, 2020.

The increase in credit loss expense was primarily due to an $11.5 million increase in required reserves on acquired over-formula advances as previously explained in the Credit Loss Expense discussion. Outside the additional specific reserves attributable to the acquired over-formula advances, net new specific reserves at our Factoring segment were flat. Additional net new specific reserves during the same period a year ago resulted in credit loss expense of $1.2 million. Additionally, the period end balance of factored receivables at our Factoring segment increased at a higher rate for the year ended December 31, 2020 as compared to the same period one year ago when balances contracted year-over-year. Growth in the factored receivables balance contributed $2.3 million of credit loss expense for the year ended December 31, 2020 whereas contraction of the portfolio during the prior year created a reduction to credit loss expense of $0.1 million during that time. We experienced higher total net charge-offs at our Factoring segment of $3.0 million during the year ended December 31, 2020 compared to $2.0 million for the same period in 2019. Charge-offs during the year ended December 31, 2020 had $0.7 million of reserves established in a prior period while charge-offs during the year ended December 31, 2019 had no previously established reserves. Change in reserve rates had an insignificant impact on credit loss expense during the year ended December 31, 2020 while changes in such rates decreased credit loss expense at our Factoring segment by $0.7 million during the year ended December 31, 2019.

The increase in noninterest income at our Factoring segment was primarily driven by the recognition of $10.9 million gain resulting from Covenant's delivery of proceeds to us resulting from the liquidation of its acquired TBK stock previously discussed. The $10.9 million gain was measured as the difference between the initial purchase accounting measurement and the amount of net proceeds delivered to the Company upon liquidation. Additionally, the value of our indemnification asset increased $5.3 million during the year resulting in $5.3 million of other noninterest income. There were no other material fluctuations in noninterest income at our Factoring segment. The increase in noninterest expense at our Factoring segment was primarily due to $0.8 million in transaction costs incurred in connection with the TFS Acquisition. There were no other material fluctuations in noninterest expense at our Factoring segment.

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Corporate

Intersegment interest allocations — — — — — — —

The Corporate segment reported an operating loss of $13.1 million for the year ended December 31, 2020 compared to an operating loss of $8.9 million for the year ended December 31, 2019. The increase in operating loss was primarily driven by activity related to our three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds designated as held to maturity. These securities are required to carry an ACL in accordance with ASC 326. The ACL on these balances was $2.0 million at December 31, 2020 resulting in $1.9 million of credit loss expense recognized during the year. Given increased uncertainty related to projected future cash flows, these securities were designated as nonaccrual during the year ended December 31, 2020 resulting in a reversal of interest income during the period. There were no other significant fluctuations in accounts in our Corporate segment period over period.

Financial Condition

Assets

Total assets were $5.936 billion at December 31, 2020, compared to $5.060 billion at December 31, 2019, an increase of $875.5 million, the components of which are discussed below.

Loan Portfolio

Loans held for investment were $4.997 billion at December 31, 2020, compared with $4.195 billion at December 31, 2019.

The following table shows the recorded investment of our loans by portfolio categories as of the dates indicated:

(Dollars in thousands) % of Total % of Total $ Change % Change

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(Dollars in thousands) % of Total % of Total % of Total

Commercial Real Estate Loans. Our commercial real estate loans decreased $267.8 million, or 25.6%, due to paydowns slightly offset by new loan origination activity for the period.

Construction and Development Loans. Our construction and development loans increased $59.1 million, or 36.8%,primarily due to new loan originations and increased draws on existing construction lines slightly offset by paydown activity for the period.

Residential Real Estate Loans. Our one-to-four family residential loans decreased $22.3 million, or 12.4%, due to paydowns that were offset by modest origination and draw activity.

Farmland Loans. Our farmland loans decreased $51.3 million, or 33.1%, due to paydowns for the year that outpaced new loan origination activity.

Commercial Loans. Our commercial loans held for investment increased $220.3 million, or 16.4%, primarily due to growth in PPP loans, liquid credit, and equipment finance. Growth in commercial loans was offset by a reduction of premium finance loans due to the sale of the assets of TPF. Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, decreased by $63.0 million, or 15.6%.

The following table shows our commercial loans:

(Dollars in thousands) December 31, 2020 December 31, 2019 $ Change % Change

Commercial

Factored Receivables. Our factored receivables increased $500.8 million, or 80.8%. A portion of this increase is driven by $107.5 million of factored receivables obtained through the TFS Acquisition. At December 31, 2020, the balance of the Over-Formula Advance Portfolio included in factored receivables was $62.1 million. At December 31, 2020 the balance of Misdirected Payments included in factored receivables was $19.6 million. Also, see discussion of our factoring subsidiary in the Operating Segment Results for analysis of the key drivers impacting the change in the ending factored receivables balance during the year.

Consumer Loans. Our consumer loans decreased $6.1 million, or 27.8%, due to paydowns in excess of new loan origination activity during the year.

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Mortgage Warehouse. Our mortgage warehouse facilities increased $369.6 million, or 55.3%, due tohigher utilization by our clients driven by higher rates of mortgage refinance activity due to the low interest rate environment. Client utilization of mortgage warehouse facilities can experience significant fluctuation on a day-to-day basis given mortgage origination market conditions. Our average mortgage warehouse lending balance was $729.8 million for the year ended December 31, 2020 compared to $370.4 million for the year ended December 31, 2019.

The following table sets forth the contractual maturities, including scheduled principal repayments, of our loan portfolio and the distribution between fixed and floating interest rate loans:

Sensitivity of loans to changes in interest rates:

As of December 31, 2020, most of the Company’s non-factoring lending activity is with customers located within certain states. The states of Texas (22%), Colorado (17%), Illinois (12%), and Iowa (6%) make up 57% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2019, the states of Texas (27%), Colorado (23%), Illinois (13%) and Iowa (7%) made up 70% of the Company’s gross loans, excluding factored receivables.

Further, a majority (90%) of our factored receivables, representing approximately 20% of our total loan portfolio as of December 31, 2020, are transportation receivables. Although such concentration may cause our future 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 the credit risk with respect to our outstanding portfolio is appropriately mitigated as we limit the amount of receivables acquired from individual debtors and creditors thereby achieving diversification across a number of companies and industries. At December 31, 2019, 77% of our factored receivables, representing approximately 11% of our total loan portfolio, were transportation receivables.

Nonperforming Assets

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

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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 and securities, loans modified under restructurings as a result of the borrower experiencing financial difficulties (“TDR”), factored receivables greater than 90 days past due, OREO, and other repossessed assets. Additionally, we consider the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification to be nonperforming (reflected in nonperforming loans - factored receivables). The balances of nonperforming loans reflect the recorded investment in these assets, including deductions for purchase discounts.

Nonperforming loans:

Construction, land development, land 2,294 3,922

Mortgage Warehouse — —

Held to maturity securities 7,945 —

Nonperforming assets to total assets 1.15 % 0.87 %

Nonperforming loans to total loans held for investment 1.16 % 0.97 %

Total past due loans to total loans held for investment 3.22 % 1.74 %

Nonperforming loans increased $17.4 million, or 42.9%, primarily due to the addition of $10.0 million of over-formula advances not covered by Covenant's indemnification, a $5.7 million commercial real estate loan secured by a hotel property, a $5.0 million general commercial loan primarily secured by accounts receivable, and a $2.3 million general commercial loan secured by real estate and equipment. Additionally, $6.0 million of $19.6 million Misdirected Payments amount was greater than 90 days past due and this portion of the Misdirected Payments is included in non performing loans (specifically, factored receivables) in accordance with our policy. As of the issuance date of this report, the entire $19.6 million Misdirected Payments amount was greater than 90 days past due. These increase were offset by a $3.9 million payoff of an agriculture and farmland relationship and the payoff of a $3.0 million construction, land development, land relationship during the year. We also sold a $1.2 million commercial real estate loan that was considered nonperforming at December 31, 2019. The remaining activity in nonperforming loans was also impacted by additions and removals of smaller credits to and from nonperforming loans.

OREO decreased $1.6 million, or 52.4%, due to the removal of individually insignificant OREO properties as well as insignificant valuation adjustments made throughout the period.

As a result of the above activity and growth in our total assets and total loans held for investment, the ratio of nonperforming loans to total loans held for investment increased to 1.16% at December 31, 2020 compared to 0.97% at December 31, 2019.

Our ratio of nonperforming assets to total assets increased to 1.15% at December 31, 2020 compared to 0.87% at December 31, 2019. This is due to the aforementioned loan activity. Additionally, during the year ended December 31, 2020, pandemic-related downgrades and default activity caused us to place $7.9 million of held to maturity investments in the subordinated notes of CLO funds on nonaccrual. Additionally, combined other real estate owned and other repossessed assets decreased $1.0 million during the year.

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Past due loans to total loans held for investment increased to 3.2% at December 31, 2020 compared to 1.7% at December 31, 2019 primarily due to $62.1 million of acquired over-formula advances; substantially all of which was past due over 90 days at year end. Aging of the Over-Formula Advances is based upon the service month on which the advances were made by TFS prior to acquisition. Additionally, the entire $19.6 million of Misdirected Payments was past due at December 31, 2020. Of this balance, $13.6 million was past due 60-89 Days and $6.0 million was past due over 90 days.

The following table presents nonperforming and past due loans for the periods indicated:

December 31,

Other nonperforming factored receivables(1) 10,029 — — — —

(1) Other nonperforming factored receivables represent the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification.

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 December 31, 2020, we had $33.8 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 December 31, 2020 were graded as “classified”.

Allowance for Credit Losses on Loans

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

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

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

The ACL increased $66.6 million, or 229%. Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on January 1, 2020, the Company recorded an increase of $0.3 million to the ACL. Management determined that the $62.2 million in over-formula advances and some smaller immaterial factored receivables obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus, deemed those assets to be purchased credit deteriorated ("PCD"). At December 31, 2020 the ACL on these PCD assets was $49.0 million accounting for a large share of the increase in total required ACL at year end.

The primary reason for the non-PCD related increase in required ACL is significant projected deterioration of the loss drivers that the Company forecasts to calculate expected losses and, to a much lesser extent, changes in qualitative loss factors over the year ended December 31, 2020. This deterioration was brought on by the projected economic impact of COVID-19 on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period and created the need for $16.7 million of additional ACL.

The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments.

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For all DCF models at December 31, 2020, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At December 31, 2020 as compared to January 1, 2020, the Company forecasted a significantly higher national unemployment rate, a lower one-year percentage change in national retail sales, a lower one-year percentage change in the national home price index, and a somewhat higher one-year percentage change in national gross domestic product over the reasonable and supportable forecast period. Specifically regarding the forecasts used to calculate the December 31, 2020 ACL, management expects unemployment to remain persistently above pre-pandemic levels over the forecast period. Percentage change in retail sales is assumed to return to pre-pandemic levels given additional federal stimulus and the expected broad distribution of a COVID-19 vaccine. A gradual decline in the percentage change in national home price index is expected over the forecasted period as the effects of the pandemic on home prices are expected to lag behind other loss drivers. Percentage change in GDP growth is forecasted to increase over the projected period as the national economy comes back on line over the next four quarters.

The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.

The increase in required ACL was also driven by net charge-offs of $4.6 million (which carried reserves of $1.0 million established during the prior period) and net new specific allowances recorded on individual non-PCD loans of $5.1 million. The increase was partially offset by the changes in mix in the underlying portfolio eligible to receive an ACL.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively participated in assisting its customers with applications for resources through the program. At December 31, 2020, the Company carried $189.9 of PPP loans classified as Commercial loans for reporting purposes. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans. Given that the loans are fully guaranteed by the U.S. government and absent any specific loss information on any of our PPP loans, the Company does not carry an ACL on its PPP loans at December 31, 2020.

The following table presents the unpaid principal and recorded investment for loans at December 31, 2020. The difference between the unpaid principal balance and recorded investment is principally (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans totaling $18.5 million and (2) net deferred origination and factoring fees totaling $4.9 million. The net difference can provide protection from credit loss in addition to the ACL as future potential charge-offs for an individual loan are limited to the recorded investment plus unpaid accrued interest.

(Dollars in thousands)

December 31, 2020 RecordedInvestment UnpaidPrincipal Difference

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At December 31, 2020 and 2019, we had $145.9 million and $66.8 million, respectively, of customer reserves associated with factored receivables which 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 credit loss expense, net charge-offs and recoveries, and the effects of those items on our ACL:

Years Ended December 31,

Loans charged-off:

Construction, land development, land (23) (78) (59) (582) —

Mortgage warehouse — — — — —

Recoveries of loans charged-off:

Farmland 80 — — — —

Mortgage warehouse — — — — —

Credit loss expense:

Initial allowance on loans purchased with credit deterioration 37,415 — — — —

Allowance transferred to assets held for sale (449) — — (2,103) —

Allowance to total loans held for investment 1.92 % 0.69 % 0.76 % 0.67 % 0.76 %

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Net loans charged off decreased 1.9 million, or 28.8%. There were no individually significant loan charge-offs or recoveries during the years ended December 31, 2020 or 2019.

Securities

The following table sets forth the composition of our securities portfolio by type:

Available for sale securities:

Held to maturity securities:

Allowance for credit losses (2,026) — —

Held to maturity securities, net of ACL $ 5,919 $ 8,417 $ 8,487

Equity securities:

As of December 31, 2020, we held equity securities with a fair value of $5.8 million, an increase of $0.4 million from $5.4 million at December 31, 2019. These securities represent investments in a publicly traded Community Reinvestment Act mutual fund and are subject to market pricing volatility, with changes in fair value recorded in earnings.

As of December 31, 2020, we held securities classified as available for sale with a fair value of $224.3 million, a decrease of $24.5 million from $248.8 million at December 31, 2019. The decrease is primarily attributable to decreases of $40.0 million, $24.7 million, and $10.3 million of corporate bonds, U.S. Government Agency obligations, and mortgage-backed securities, respectively. These decreases were partially offset by $46.9 million and $5.3 million increases in CLO securities and state and municipal securities, respectively. Our available for sale CLO portfolio consists of investment grade positions in high ranking tranches within their respective securitization structures. As of December 31, 2020, the Company determined that all impaired available for sale securities experienced a decline in fair value below their amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at December 31, 2020. Our available for sale securities can be used for pledging to secure FHLB borrowings and public deposits, or can be sold to meet liquidity needs.

As of December 31, 2020, we held securities classified as held to maturity with an amortized cost, net of ACL, of $5.9 million, a decrease of $2.5 million from $8.4 million at December 31, 2019. The decrease in amortized cost, net of ACL, was primarily driven by a $2.0 million increase in the required ACL during the year ended December 31, 2020. See previous discussion of Credit Loss Expense related to our held to maturity securities for further details regarding the nature of these securities and the required ACL at December 31, 2020.

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

Maturity as of December 31, 2019

1 Year or Less 1 to 5 Years 5 to 10 Years Over 10 Years Total

Securities held-to-maturity $ — — $ — — $ 7,945 — % $ — — $ 7,945 — %

Liabilities

Total liabilities were $5.209 billion as of December 31, 2020, compared to $4.424 billion at December 31, 2019, an increase of $785.3 million, the components of which are discussed below.

Deposits

Our total deposits were $4.717 billion as of December 31, 2020, compared to $3.790 billion as of December 31, 2019, an increase of $926.7 million, primarily due to growth in noninterest-bearing demand deposits, brokered time deposits, and other brokered deposits. Other brokered deposits, first utilized as part of our overall funding strategy in the second quarter of 2020, are non-maturity deposits obtained from wholesale sources. The growth in these products was partially offset by a decrease in certificates of deposit and money market deposit products during the year. As of December 31, 2020, interest-bearing demand deposits, noninterest-bearing deposits, money market deposits, other brokered deposits, and savings deposits accounted for 70% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered time deposits made up 30% of total deposits. See Note 11 – Deposits in the accompanying notes to consolidated financial statements included elsewhere in this report for details of our deposit balances as of December 31, 2020 and 2019.

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

Other brokered deposits 205,398 0.21 % 5 % — — % — % — — % — %

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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 December 31, 2020:

Maturity

Other Borrowings

Customer Repurchase Agreements

The following table provides a summary of our customer repurchase agreements as of and for the years ended December 31, 2020, 2019, and 2018:

Amount outstanding at end of the year $ 3,099 $ 2,033 $ 4,485

Weighted average interest rate at end of the year 0.03 % 0.03 % 0.01 %

Average daily balance during the year $ 6,716 $ 7,823 $ 8,648

Weighted average interest rate during the year 0.03 % 0.02 % 0.02 %

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

FHLB Advances

As part of our overall funding and liquidity management program, from time to time we borrow from the Federal Home Loan Bank. The following table provides a summary of our FHLB borrowings as of and for the years ended December 31, 2020, 2019, and 2018:

Weighted average interest rate at end of the year 0.17 % 1.58 % 2.52 %

Weighted average interest rate during the year 0.58 % 2.32 % 1.96 %

Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. Of the FHLB borrowings outstanding as of December 31, 2020, $75.0 million were short-term borrowings maturing within one year and $30.0 million were long term borrowings maturing after five years. As of December 31, 2020 and 2019, we had $1.247 billion and $871.0 million, respectively, in unused and available advances from the FHLB. The increase in our total borrowing capacity from December 31, 2019 to December 31, 2020 was primarily the result of our growth in assets and loans held for investment.

Paycheck Protection Program Liquidity Facility (“PPPLF”)

The PPPLF is a lending facility offered by the Federal Reserve Banks to facilitate lending to small businesses under the Paycheck Protection Program. Borrowings under the PPPLF are secured by Paycheck Protection Program Loans (“PPP loans”) guaranteed by the Small Business Administration (“SBA”) and mature at the same time as the PPP Loan pledged to secure the extension of credit. The maturity dates of the borrowings will be accelerated if the underlying PPP Loan goes into default and Company sells the PPP Loan to the SBA to realize on the SBA guarantee or if the Company receives any loan forgiveness reimbursement from the SBA for the underlying PPP Loan.

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Information concerning borrowings under the PPPLF is summarized as follows for the year ended December 31, 2020:

(Dollars in thousands) December 31,2020

Amount outstanding at end of period $ 191,860

Weighted average interest rate at end of period 0.35 %

Average amount outstanding during the period 143,608

Weighted average interest rate during the period 0.35 %

Highest month end balance during the period 223,809

At December 31, 2020, scheduled maturities of PPPLF borrowings are as follows:

(Dollars in thousands) December 31,2020

Within one year $ —

After one but within two years 191,860

At December 31, 2020, the PPPLF borrowings are secured by PPP Loans totaling $191.9 million and bear interest at a fixed rate of 0.35% annually. There were no borrowings under the PPPLF during the year ended December 31, 2019.

Subordinated Notes

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

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

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

Issuance costs related to the 2016 Notes and the 2019 Notes totaled $1.3 million and $1.2 million, respectively, and have been netted against the subordinated notes liability on the consolidated balance sheets. The debt issuance costs are being amortized using the effective interest method over the life of the 2016 Notes and the 2019 Notes as a component of interest expense. The carrying value of the 2016 Notes and the 2019 Notes totaled $87.5 million at December 31, 2020.

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Junior Subordinated Debentures

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

These debentures are unsecured obligations and were issued to trusts that are unconsolidated subsidiaries. The trusts in turn issued trust preferred securities with identical payment terms to unrelated investors. The debentures may be called by the Company at par plus any accrued but unpaid interest; however, we have no current plans to redeem them prior to maturity. Interest on the debentures is calculated quarterly, based on a rate equal to three month LIBOR plus a weighted average spread of 2.24%. As part of the purchase accounting adjustments made with the National Bancshares, Inc. acquisition on October 15, 2013, the ColoEast acquisition on August 1, 2016, and the Valley acquisition on December 9, 2017, we adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition dates. The 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 $40.1 million was allowed in the calculation of Tier I capital as of December 31, 2020.

Capital Resources and Liquidity Management

Capital Resources

Our stockholders’ equity totaled $726.8 million and $636.6 million as of December 31, 2020 and 2019, respectively. The increase in total equity was primarily due to $42.4 million of preferred stock issued during the year and our $64.0 million of net income, offset in part by $35.8 million of common stock repurchased during the year.

Liquidity Management

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

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

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

In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of December 31, 2020, TBK Bank had $523.9 million of unused borrowing capacity from the Federal Reserve Bank discount window and unsecured federal funds lines of credit with seven unaffiliated banks totaling $227.5 million, with no amounts advanced against those lines.

Regulatory Capital Requirements

Our capital management consists of providing equity to support our current and future operations. We are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. For further information regarding our regulatory capital requirements, see Note 19 – Regulatory Matters in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Contractual Obligations

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

Payments Due by Period - December 31, 2019

Customer repurchase agreements $ 3,099 $ 3,099 $ — $ — $ —

Paycheck Protection Program Liquidity Facility 191,860 — 191,860 — —

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. For further information, see Note 16 – Off-Balance Sheet Loan Commitments in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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Critical Accounting Policies and Estimates

Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for loan and lease losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 – Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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

Adoption of New Accounting Standards

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

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

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

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

The following table summarizes simulated change in net interest income versus unchanged rates:

Following 12 Months Months13-24 Following 12 Months Months13-24

The following table presents the change in our economic value of equity, assuming immediate parallel shifts in interest rates:

Economic Value of Equity at Risk (%)

Flat rates 0.0 % 0.0 %

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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Triumph Bancorp, Inc.

Dallas, Texas

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Triumph Bancorp, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments – Credit Losses (“Topic 326”). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses – CECL Adoption and Reasonable and Supportable Forecasts

As described in Note 1 and presented in Note 4 to the financial statements, the Company adopted Topic 326 as of January 1, 2020. The current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions (see change in accounting principle explanatory paragraph above). As of December 31, 2020, the allowance for credit losses (“ACL”) of $95.7 million attributable to loans held for investment consisted of 1) an allocation for collateral dependent loans totaling $58.2 million of loss allocations on loans individually evaluated for impairment and 2) an allocation totaling $37.5 million of loss allocations on loans collectively evaluated (“pool basis”) for impairment.

The Company measures expected credit losses of loans on a pool basis when the loans share similar risk characteristics. Depending on the nature of the pool of loans with similar risk characteristics, the Company uses the discounted cash flow (“DCF”) method or a loss-rate method to estimate expected credit losses. Management has applied the loss-rate method to pools such as mortgage warehouse and factored receivables due to their short-term nature. The loans that are analyzed in the DCF method are greater in dollar amount, require more judgment, and have longer durations than those used in the loss-rate pools.

For loan pools utilizing the DCF approach, the Company performed a loss driver analysis to determine the economic factors, individually or in combination, which correlated to the historical loss experience used as a basis for the estimate. For all loan pools utilizing the DCF method, the Company utilizes national unemployment as the loss driver in addition to either the one-year percentage change in national retail sales, one-year percentage change in the national home price index, or the one-year percentage change in national gross domestic product depending on the nature of the underlying loan pool and the correlation of the index to the applicable pool. The development of the loss driver analysis and the application of the economic forecast is significant to the calculation as changes in the forecasts used in the DCF method could have a material effect on the Company’s financial statements.

Estimating reasonable and supportable forecasts requires significant judgment. Management leverages economic projections from a third party to inform its forecasts over the forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecasts. We identified auditing the reasonableness of forecasts in the ACL for loans using the DCF method as a critical audit matter as it involves especially subjective auditor judgment.

The primary audit procedures we performed in response to this critical audit matter included:

•Tested the operating effectiveness of controls over the Company’s ACL, including controls over the relevance and reliability of data used in assessing the forecasts in the DCF method and the reasonableness of the forecasts applied in the DCF method.

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•Utilized the assistance of specialists in evaluating the appropriateness and mathematical accuracy of the loss driver analyses in the DCF method, and the relevance and reliability of data used in the development of the loss rate forecasts in the DCF method.

•Evaluated the reasonableness and appropriateness of the forecasting methodologies employed for suitability under the standard including, but not limited to, evaluating their conceptual soundness and inspecting and testing key assumptions and judgments.

Accounting for Transport Financial Solutions Business Combination

As described in Note 2 to the financial statements, Advance Business Capital LLC (“ABC”), a subsidiary of the Company, through a business combination acquired the factored receivables portfolio of Transport Financial Solutions (“TFS”), with a contractual balance of $108.7 million as of the acquisition date, July 7th, 2020. The purchase consideration included cash consideration of $108.4 million, 630,268 shares of the Company’s common stock valued at $13.9 million as of the acquisition date, and contingent consideration up to $9.9 million to be paid in cash following the twelve months period ending July 31, 2021. Subsequent to the closing of the acquisition, the Company determined that $62.2 million of the assets acquired at closing were advances to three large factoring clients (and their affiliated entities) of TFS pursuant to long-term contractual arrangements for services that had not yet been performed by the factoring clients. The Company subsequently entered into an amended purchase agreement where the shares previously distributed were liquidated and cash proceeds were returned to ABC, the contingent consideration was eliminated, and an indemnification agreement was entered into where the seller would cover up to $45.0 million of losses incurred related to the portfolio.

Business combinations are accounted for under Topic 805 – Business Combinations. Significant judgment must be applied when accounting for amended purchase agreements to determine if the amendment should be accounted for as part of the business combination or separately from the business combination. Due to the unusual nature of the transaction, it’s significance to the financial statements, and the challenging judgments associated with the accounting treatment, we classified the transaction as a critical audit matter.

The primary audit procedures we performed in response to this critical audit matter included:

•Tested the operating effectiveness of controls over management’s review of the accounting treatment of the transaction.

•Evaluated the significant terms of the original purchase agreement and the facts and circumstances around the reasons for the amended purchase agreement and the significant terms of the amended purchase agreement including management’s judgments as to whether the amended agreement should be accounted for as part of the business combination or separately from the business combination.

•Utilized the assistance of specialists to evaluate the accounting for the amended purchase agreement.

/s/ Crowe LLP

We have served as the Company's auditor since 2012.

Dallas, Texas

February 12, 2021

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2020 and 2019

(Dollar amounts in thousands)

ASSETS

Securities - equity investments 5,826 5,437

Federal Home Loan Bank and other restricted stock, at cost 6,751 19,860

Indemnification asset 36,225 —

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

Deposits

Customer repurchase agreements 3,099 2,033

Paycheck Protection Program Liquidity Facility 191,860 —

Commitments and contingencies - See Notes 14 and 15

Stockholders' equity - See Note 19

Accumulated other comprehensive income 5,819 1,106

See accompanying notes to consolidated financial statements.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2020, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

Interest and dividend income:

Interest expense:

Noninterest income:

Net OREO gains (losses) and valuation adjustments (616) 351 (514)

Net gains (losses) on sale of securities 3,226 61 (272)

Gain on sale of subsidiary or division 9,758 — 1,071

Noninterest expense:

FDIC insurance and other regulatory assessments 1,520 298 1,129

Dividends on preferred stock (1,701) — (578)

Earnings per common share

See accompanying notes to consolidated financial statements.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2020, 2019 and 2018

(Dollar amounts in thousands, except per share amounts)

Other comprehensive income:

Unrealized gains (losses) on securities:

Unrealized holding gains (losses) arising during the period 8,578 3,065 (1,059)

Change in unrealized gains (losses) on securities, net of tax 4,090 2,309 (607)

Unrealized gains (losses) on derivative financial instruments:

Unrealized holding gains (losses) arising during the period 782 — —

Tax effect (185) — —

Reclassification of amount of (gains) losses recognized into income 34 — —

Tax effect (8) — —

Change in unrealized gains (losses) on derivative financial instruments 623 — —

Total other comprehensive income (loss) 4,713 2,309 (607)

See accompanying notes to consolidated financial statements.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

TFIN US Equity

TFIN · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

TFIN US Equity☆

TFIN · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

TFIN US Equity