TFIN US Equity☆

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;

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

•credit risk associated with our loan portfolio;

•lack of seasoning in our loan portfolio;

•deteriorating asset quality and higher loan charge-offs;

•time and effort necessary to resolve nonperforming assets;

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

•risks related to the integration of acquired businesses, including our acquisition of HubTran Inc. and developments related to our acquisition of Transport Financial Solutions and the related over-formula advances, and any future acquisitions;

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

•lack of liquidity;

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

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

•our risk management strategies;

•environmental liability associated with our lending activities;

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

•the accuracy of our financial statements and related disclosures;

•material weaknesses in our internal control over financial reporting;

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

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

•changes in carry-forwards of net operating losses;

•changes in federal tax law or policy;

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

•governmental monetary and fiscal policies;

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

•failure to receive regulatory approval for future acquisitions; and

•increases in our capital requirements.

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

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

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis 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, offering a diversified line of payments, factoring and banking services. As of December 31, 2021, we had consolidated total assets of $5.956 billion, total loans held for investment of $4.868 billion, total deposits of $4.647 billion and total stockholders’ equity of $858.9 million.

Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services, commercial lending product lines focused on businesses that require specialized financial solutions and national lending product lines that further diversify our lending operations. Our banking operations commenced in 2010 and include a branch network developed through organic growth and acquisition, including concentrations the front range of Colorado, the Quad Cities market in Iowa and Illinois and a full service branch in Dallas, Texas. Our traditional banking offerings include a full suite of lending and deposit products and services. These activities are focused on our local market areas and some products are offered on a nationwide basis. They generate a stable source of core deposits and a diverse asset base to support our overall operations. Our asset-based lending and equipment lending products are offered on a nationwide basis and generate attractive returns. Additionally, we offer mortgage warehouse and liquid credit lending products on a nationwide basis to provide further asset base diversification and stable deposits. Our Banking products and services share basic processes and have similar economic characteristics.

In addition to our traditional banking operations, we also operate a factoring business focused primarily on serving the the over-the-road trucking industry. This business involves the provision of working capital to the trucking industry through the purchase of invoices generated by small to medium sized trucking fleets ("Carriers") at a discount to provide immediate working capital to such Carriers. We commenced these operations in 2012 through the acquisition of our factoring subsidiary, Triumph Business Capital. 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 described above. Given its acquisition, this business has a legacy and structure as a standalone company.

Our payments business, TriumphPay, is a division of our wholly owned bank subsidiary, TBK Bank, and is a payments network for the over-the-road trucking industry. TriumphPay was originally designed as a platform to manage Carrier payments for third party logistics companies, or 3PLs ("Brokers") and the manufacturers and other businesses that contract directly for the shipment of goods (“Shippers”), with a focus on increasing on-balance sheet factored receivable transactions through the offering of QuickPay transactions for Carriers receiving such payments through the TriumphPay platform. During 2021, TriumphPay acquired HubTran, Inc., a software platform that offers workflow solutions for the processing and approval of Carrier Invoices for approval by Brokers or purchase by the factoring businesses providing working capital to Carriers ("Factors"). Following such acquisition, the TriumphPay strategy shifted from a capital-intensive on-balance sheet product with a greater focus on interest income to a payments network for the trucking industry with a focus on fee revenue. TriumphPay connects Brokers, Shippers, Factors and Carriers through forward-thinking solutions that help each party successfully manage the life cycle of invoice presentment for services provided by Carrier through the processing and audit of such invoice to its ultimate payment to the Carrier or the Factor providing working capital to such Carrier. TriumphPay offers supply chain finance to Brokers, allowing them to pay their Carriers faster and drive Carrier loyalty. TriumphPay provides tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. TriumphPay also operates in a highly specialized niche with unique processes and key performance indicators.

At December 31, 2021, our business is primarily focused on providing financial services to participants in the for-hire trucking ecosystem in the United States, including Brokers, Shippers, Factors and Carriers. Within such ecosystem, we operate our TriumphPay payments platform, which connects such parties to streamline and optimize the presentment, audit and payment of transportation invoices. We also act as capital provider to the Carrier industry through our factoring subsidiary, Triumph Business Capital. Our traditional banking operations provide stable, low cost deposits to support our operations, a diversified lending portfolio to add stability to our balance sheet, and a suite of traditional banking products and services to participants in the for-hire trucking ecosystem to deepen our relationship with such clients.

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We have determined our reportable segments are Banking, Factoring, Payments and Corporate. For the year ended December 31, 2021, our Banking segment generated 50% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 45% of our total revenue, our Payments segment generated 4% of our total revenue, and our Corporate segment generated less than 1% of our total revenue.

2021 Overview

Net income available to common stockholders for the year ended December 31, 2021 was $109.8 million, or $4.35 per diluted share, compared to net income available to common stockholders for the year ended December 31, 2020 of $62.3 million, or $2.53 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $112.0 million, or $4.44 per diluted share, for the year ended December 31, 2021 compared to adjusted net income to common stockholders of $55.6 million, or $2.26 per diluted share, for the year ended December 31, 2020. For the year ended December 31, 2021, our return on average common equity was 14.52% and our return on average assets was 1.87%.

At December 31, 2021, we had total assets of $5.956 billion, including gross loans of $4.868 billion, compared to $5.936 billion of total assets and $4.997 billion of gross loans at December 31, 2020. Total loans decreased $129.2 million during the year ended December 31, 2021. Our Banking loans, which constitute 65% of our total loan portfolio at December 31, 2021, decreased from $3.876 billion in aggregate as of December 31, 2020 to $3.168 billion as of December 31, 2021, a decrease of 18.3% reflecting our strategy to moderate growth in our banking markets. Our Factoring factored receivables, which constitute 32% of our total loan portfolio at December 31, 2021, increased from $1.037 billion in aggregate as of December 31, 2020 to $1.546 billion as of December 31, 2021, an increase of 49.2%. Our Payments factored receivables, which constitute 3% of our total loan portfolio at December 31, 2021, increased from $84.2 million in aggregate as of December 31, 2020 to $153.2 million as of December 31, 2021, an increase of 81.9%.

At December 31, 2021, we had total liabilities of $5.097 billion, including total deposits of $4.647 billion, compared to $5.209 billion of total liabilities and $4.717 billion of total deposits at December 31, 2020. Deposits decreased $69.9 million during the year ended December 31, 2021.

At December 31, 2021, we had total stockholders' equity of $858.9 million. During the year ended December 31, 2021, total stockholders’ equity increased $132.1 million, primarily due to our net income during the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 11.51% and 14.10%, respectively, at December 31, 2021.

The total dollar value of invoices purchased by Triumph Business Capital during the year ended December 31, 2021 was $13.125 billion with an average invoice size of $2,265. The transportation average invoice size for the year was $2,152. This compares to invoice purchase volume of $7.135 billion with an average invoice size of $1,825 and average transportation invoice size of $1,682 during the same period a year ago.

TriumphPay processed 13.5 million invoices paying Carriers a total of $15.162 billion during the year ended December 31, 2021. This compares to processed volume of 4.4 million invoices for a total of $4.235 billion during the same period a year ago.

2021 Items of Note

HubTran, Inc.

On June 1, 2021, we, through TriumphPay, a division of our wholly-owned subsidiary TBK Bank, SSB, entered into a definitive agreement to acquire HubTran, Inc., a cloud-based provider of automation software for the trucking industry's back-office, for $97 million in cash subject to customary purchase price adjustments.

The acquisition of HubTran enables us to create a payments network that will allow Brokers and Factors to lower costs, remove inefficiencies, reduce fraud and add value for their stakeholders. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for Shippers, Brokers and their Carriers, and Factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to a payments network for the trucking industry with a focus on fee revenue.

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.

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Misdirected Payments

As of December 31, 2021 we carry a separate $19.4 million receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest over-formula advance carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. We have commenced litigation in the United States Court of Federal Claims against the USPS 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 continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of December 31, 2021. The full amount of such receivable is reflected in non-performing and past due factored receivables as of December 31, 2021 in accordance with our policy. As of December 31, 2021, the entire $19.4 million Misdirected Payments amount was greater than 90 days past due.

2020 Items of Note

Transport Financial Solutions

On July 8, 2020, 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

•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. During the year ended December 31, 2021, Covenant drew on the line of credit to fund its only $35.6 million indemnification payment thus far, but has since paid down that amount in its entirety. At December 31, 2021, Covenant had remaining availability of $9.4 million left on its TBK line of credit available to cover our indemnification balance of up to $5.0 million.

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

Pursuant to the Agreement, the Company and Covenant have provided mutual releases to each other related to any and all claims related to the transactions contemplated by the ARPA or the Over-Formula Advance Portfolio. Also in connection with the Agreement, Covenant agreed to dismiss, with prejudice, the declaratory judgment action filed in the 95th Judicial District Court of Dallas County, Texas (removed to the United States District Court, Northern District of Texas), related to the ARPA and the transactions contemplated.

Further discussion regarding activity related to the TFS Acquisition can be found throughout this filing.

Triumph Premium Finance

On April 20, 2020, we entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Premium Finance (“TPF”) and exit our premium finance line of business. The transaction closed on June 30, 2020, and the assets of the Disposal Group, consisting primarily of $84.5 million of premium finance loans, were sold for a gain on sale of $9.8 million.

For further information on the above transactions, see Note 2 – Business Combinations and Divestitures in the accompanying 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.

Trucking Transportation

The fourth quarter continued to see demand exceed capacity in all areas of the transportation industry. Spot rates continued to outpace contract rates in all sectors. While elevated dry van rates maintained in a typical peak season quarter, reefer and flatbed rates reached new all-time highs during the fourth quarter. With the resumption of a strong oil and gas market, many drivers and Carriers in flat bed returned to the energy space causing capacity issues as shipping for steel, lumber and manufacturing items attempted to catch up from prior delays. The demand for reefers, particularly those with newer compliant trailers, sent spot rates to new highs.

Recent Developments: COVID-19 and the CARES Act

Significant progress has been made to combat the outbreak of COVID-19; however, the global pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and could still impair their ability to fulfill their financial obligations to the Company. While employee availability has had no material impact on operations to date, a resurgence of COVID-19 has the potential to create widespread business continuity issues for the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020. The goal of the CARES Act was 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. During December 2020, many provisions of the CARES Act were extended through the end of 2021. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s 2020 and 2021 operations and could continue to impact operations going forward.

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The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. In spite of the resurgence of the virus via the Omicron variant, it appears that epidemiological and macroeconomic conditions are trending in a positive direction as of December 31, 2021; however, if there is a prolonged resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company’s future operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

Pertaining to our December 31, 2021 financial condition and year to date results of operations, improving conditions around COVID-19 had a material impact on our allowance for credit losses (“ACL”). We have not yet experienced material 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 significantly improved since December 31, 2020, our required ACL decreased during the twelve months ended December 31, 2021. Refer to our discussion of the ACL in Note 1 and Note 4 of our audited financial statements as well as further discussion later on in MD&A. Should economic conditions worsen as a result of a resurgence in the virus and resulting measures to curtail its spread, we could experience 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 as other asset quality ratios at December 31, 2021. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company’s interest income could be reduced due to COVID-19 should a high volume of loans require a nonaccrual designation. 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. 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, 2021, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand a double-dip economic recession brought about by a resurgence in COVID-19, our reported and regulatory capital ratios could be adversely impacted by high levels of 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. Wholesale funding markets have remained open to us, but rates for short term funding can be volatile. 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.

Our processes, controls and business continuity plan

The Company’s preparedness efforts, coupled with quick and decisive plan implementation, have resulted in minimal impacts to operations as a result of COVID-19. At December 31, 2021, many of our employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.

As of December 31, 2021, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

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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 a stated period of time. The loans carried under this payment deferral program have decreased substantially since December 31, 2020, and as of December 31, 2021, the Company’s balance sheet reflected 5 of these deferrals on outstanding loan balances of $31.9 million. In accordance with the CARES Act and March 2020 interagency guidance, these short term deferrals are not considered troubled debt restructurings. It is possible that these deferrals could be extended further; however, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown. At December 31, 2021, 95% of the $31.9 million COVID-19 deferral balance was made up of one relationship. As of December 31, 2021, the Company carried $0.1 million of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers in accordance with the CARES Act. This is down from $0.7 million of accrued interest income and fees on outstanding deferrals at December 31, 2020.

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 these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2021, the Company carried 118 PPP loans representing a book value of $27.2 million. The Company recognized $2.7 million and $7.3 million in fees from the SBA on PPP loans during the three and twelve months ended December 31, 2021, respectively, and carries $0.8 million of deferred fees on PPP loans at year end. The remaining fees will be amortized and recognized over the life of the associated loans or as the associated loans are forgiven. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.

Credit

While all industries have and will continue to experience adverse impacts as a result of the COVID-19 virus, we had no material exposure (on balance sheet loans plus commitments to lend greater than 5% of the loan portfolio) to loan categories that management considered to be “at-risk” of significant impact as of December 31, 2021.

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

Climate Change

Refer to Item 1. Business for background as it relates to the Company and climate change.

There have been significant completed and pending developments in federal and state legislation and regulation and international accords regarding climate change in recent years. Given our size and the nature of our business, the incurred direct impact and expected future direct impact of climate-related regulation is not material, nor expected to be material, to our business, financial condition, or results of operations. Further, we have not experienced any physical effects of climate change on our operations and results.

We recognize that, while not material to our operations to-date, indirect consequences of climate-related regulation exist that are associated with our lending to certain types of customers who engage in activity that could be deemed potentially harmful to the environment. The Company notes that the climate change landscape is constantly evolving and at this time, it is not possible for us to know or predict the full universe or extent that these indirect effects will have on the Company's future operations.

While programs and initiatives focused on sustainability and resource conservation have been put in place by the Company, there have been no material past capital expenditures for climate-related projects. We do not plan to have material future capital expenditures for climate-related projects at this time. Additionally, we have not incurred material compliance costs related to climate change nor have we engaged in the purchase or sale of carbon credits or offsets.

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Results of Operations

For discussion of the results of operations for the year ended December 31, 2020 compared with the year ended December 31, 2019, see Triumph’s 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 12, 2021.

Fiscal year ended December 31, 2021 compared with year ended December 31, 2020

Net Income

We earned net income of $113.0 million for the year ended December 31, 2021 compared to $64.0 million for the year ended December 31, 2020, an increase of $49.0 million.

The results for the year ended December 31, 2021 were impacted by $3.0 million of transaction costs associated with the HubTran acquisition reported as noninterest expense. 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. Excluding the gain on sale, net of taxes, we earned adjusted net income to common stockholders of $112.0 million for the year ended December 31, 2021 compared to $55.6 million for the year ended December 30, 2020, an increase of $56.4 million. The adjusted increase was primarily the result of an $84.4 million increase in net interest income, a $47.2 million decrease in credit loss expense, and a $3.9 million increase in adjusted noninterest income offset in part by a $63.2 million increase in adjusted noninterest expense, a $14.4 million increase in adjusted income tax expense, and a $1.5 million increase in dividends on preferred stock.

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

Net Interest Income

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

For the Years Ended December 31,

We earned net interest income of $369.1 million for the year ended December 31, 2021 compared to $284.7 million for the year ended December 31, 2020, an increase of $84.4 million, or 29.6%, primarily driven by the following factors.

Interest income increased $65.4 million, or 20.3%, reflecting an increase in total average interest earning assets of $504.6 million, or 10.1%, and an increase in average total loans of $356.7 million, or 8.0%. The average balance of our higher yielding Factoring factored receivables increased $569.0 million, or 77.6%, driving the majority of the increase in interest income along with an increase in average Payments factored receivables. This was partially offset by a decrease in average Banking loans of $280.0 million, or 7.6%. Interest income from our Banking loans is impacted by our lower yielding mortgage warehouse lending product. The average mortgage warehouse lending balance was $792.2 million for the year ended December 31, 2021 compared to $729.8 million for the year ended December 31, 2020. A component of interest income consists of discount accretion on acquired loan portfolios; primarily our liquid credit portfolio made up of broadly syndicated national credits. We recognized discount accretion on purchased loans of $9.3 million and $10.7 million for the years ended December 31, 2021 and 2020, respectively.

Interest expense decreased $19.0 million, or 50.7%, and average interest bearing liabilities decreased $213.2 million, or 6.0%. While average total interest bearing deposits increased $104.6 million, or 3.5%, the increase in average balance was offset by lower average rates discussed below. The decrease in interest expense was partially offset by $0.8 million of remaining deferred fees that were recognized during the year ended December 31, 2021 as a result of paying off our 2016 Subordinated Notes as discussed in Note 12 – Borrowings and Borrowing Capacity in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Net interest margin increased to 6.72% for the year ended December 31, 2021 from 5.71% for the year ended December 31, 2020, an increase of 101 basis points, or 17.7%.

Our net interest margin was impacted by an increase in yield on our interest earning assets of 59 basis points to 7.05% for the year ended December 31, 2021. This increase was primarily driven by higher yields on loans which increased 91 basis points to 7.91% for the same period. While Factoring yield decreased period over period, its average factored receivables as a percentage of the total loan portfolio increased significantly, having a meaningful upward impact on total loan yield. Our transportation factoring balances, which generate a higher yield than our non-transportation factoring balances, increased as a percentage of the overall factoring portfolio to 91% at December 31, 2021 compared to 90% at December 31, 2020. Banking yields were relatively flat period over period, Payments yields increased period over period, and non-loan yields created a drag on our yield on interest earning assets.

The increase in our net interest margin was also impacted by a decrease in our average cost of interest bearing liabilities of 50 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

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:

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 (benefit):

(Dollars in thousands) 2021 2020 2019 $ Change % Change $ Change % Change

Credit loss expense (benefit) on:

Available for sale securities — — — — — % — — %

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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 December 31, 2021 and 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 years ended December 31, 2021 and 2020.

The ACL on held to maturity securities is estimated at each measurement date on a collective basis by major security type. At December 31, 2021 and December 31, 2020, the Company’s held to maturity securities consisted of three investments in the subordinated notes of collateralized loan obligation (“CLO”) funds. Expected credit losses for these securities are estimated using a discounted cash flow methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At December 31, 2021 and December 31, 2020, the Company carried $7.0 million and $7.9 million of these HTM securities at amortized cost, respectively. The ACL on these balances was $2.1 million at December 31, 2021 and $2.0 million at December 31, 2020 and we recognized credit loss expense of $0.1 million during the year ended December 31, 2021. None of the overcollateralization triggers tied to the CLO securities were tripped as of December 31, 2021. Ultimately, the realized cash flows on CLO securities such as these will be driven by a variety of factors, including credit performance of the underlying loan portfolio, adjustments to the portfolio by the asset manager, and the timing of a potential call.

Our ACL on loans was $42.2 million as of December 31, 2021, compared to $95.7 million as of December 31, 2020, representing an ACL to total loans ratio of 0.87% and 1.92% respectively.

Our credit loss expense on loans decreased $41.9 million, or 123.4%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The Over-Formula Advances classified as factored receivables and deemed to be purchased credit deteriorated ("PCD") from Covenant during 2020 had an impact on credit loss expense during the year ended December 31, 2020. 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 during the year ended December 31, 2020.

The Over-Formula Advances classified as factored receivables and deemed to be purchased credit deteriorated ("PCD") from Covenant during 2020 also had an impact on credit loss expense during the year ended December 31, 2021. During that time, new adverse developments with the largest of the three Over-Formula Advance clients caused us to charge-off the entire Over-Formula Advance amount due from that client. This resulted in a net charge-off of $41.3 million; however, this net charge-off had no impact on credit loss expense for the year ended December 31, 2021 as the entire amount had been reserved in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed us for $35.6 million of this charge-off by drawing on its secured line of credit. As of December 31, 2021 the balance of Covenant's credit facility had been fully repaid. Given separate developments with the other two Over-Formula Advance clients, we reserved an additional $2.8 million reflected in credit loss expense during the year ended December 31, 2021. At December 31, 2021, our entire remaining over formula advance position was down from $62.1 million at December 31, 2020 to $10.1 million at December 31, 2021 and that $10.1 million balance at December 31, 2021 was fully reserved. The $2.8 million increase in required ACL as well as accretion of most of the fair value discount on the indemnification asset held at December 31, 2020 resulted in a $4.2 million gain on the indemnification asset which was recorded through non-interest income during the year ended December 31, 2021.

The decreased credit loss expense was primarily the result of projected improvement of the loss drivers that the Company forecasted over the reasonable and supportable forecast period to calculate expected losses at December 31, 2021 which resulted in a benefit to credit loss expense of $10.4 million for the year ended December 31, 2021. During the year ended December 31, 2020 the Company forecasted deterioration in the loss factors driven by the projected economic impact of COVID-19 which resulted in credit loss expense of $16.7 million. See further discussion in the allowance for credit loss section below.

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The decrease in credit loss expense was further driven by changes in net new specific reserves on non PCD assets. Including the aforementioned $2.8 million additional specific reserve on PCD assets, we recorded a reversal of net new specific reserves of $2.1 million during the year ended December 31, 2021 compared to net new specific reserves of $16.7 million during the year ended December 31, 2020 which includes the aforementioned $11.5 million additional specific reserve on PCD assets. Including the aforementioned PCD charge-off, net charge-offs were $45.6 million for the year ended December 31, 2021 and approximately $41.5 million of the gross charge-offs had been reserved in a prior period. Net charge-offs were $4.6 million for the year ended December 31, 2020 and approximately $1.0 million of that balance had been reserved in a prior period.

Changes in loan volume and mix partially offset the decrease in credit loss expense period over period. Changes in volume and mix resulted in credit loss expense of $0.4 million during the year ended December 31, 2021 compared to a benefit of $3.0 million during the year ended December 31, 2020.

Credit loss expense for off balance sheet credit exposures decreased $3.4 million, primarily due to the changes in the assumptions used to project the loss rates previously discussed as well as changes in the underlying exposures.

Noninterest Income

The following table presents the major categories of noninterest income:

(Dollars in thousands) 2021 2020 2019 $ Change % Change $ Change % Change

Noninterest income decreased $5.9 million, or 9.7%. 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 $3.9 million, or 7.7%, 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, increased $2.5 million, or 46.5% consistent with increased average deposit balances subject to such fees period over period. Further, in keeping with guidance from regulators, we actively worked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020.

•Card income. Card income increased $1.0 million, or 13.2% primarily due to increased debit card activity during the year ended December 31, 2021.

•Fee income. Fee income increased $11.6 million, or 193.5% primarily due to $1.2 million of early termination fees charged to two factoring customers during the year ended December 31, 2021. We also recognized $7.0 million in Payments fees related to the acquired operations of HubTran during the same period. There were no other significant changes within the components of fee income.

•Insurance commissions. Insurance commissions increased $0.9 million, or 21.1%, due to higher policy volumes processed by Triumph Insurance Group.

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•Other. Other noninterest income, decreased $9.2 million, or 37.1%.

Significant drivers of other noninterest income during the year ended December 31, 2021:

•We recognized a $4.2 million gain on the Company's indemnification asset.

•We recognized a $1.5 million recovery during the period on an acquired loan that was charged off prior to our acquisition of the originating bank.

•We recognized a $1.0 million increase in revenue from bank owned life insurance ("BOLI"), primarily related to death benefits payments.

•We recognized a gain on sale of liquid credit and mortgage loans during the period of $3.1 million.

Significant drivers of other noninterest income during the year ended December 31, 2020:

•We recognized $10.9 million of non-interest income during the period 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.

•The value of our indemnification asset related to the Over-Formula Advances acquired from Covenant increased $5.3 million during the period resulting in $5.3 million of other noninterest income.

•We recognized $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the year. This revenue was recognized at the time of closing as all required services had been completed.

•We recognized a gain on sale of liquid credit and mortgage loans during the period of $2.8 million.

Noninterest Expense

The following table presents the major categories of noninterest expense:

(Dollars in thousands) 2021 2020 2019 $ Change % Change $ Change % Change

Noninterest expense increased $65.4 million, or 29.5%. Noninterest expense for the year ended December 31, 2021 was impacted by $3.0 million of transaction costs associated with the HubTran Acquisition. 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 acquisition transactions costs, we incurred adjusted noninterest expense of $284.5 and $221.3 million for the years ended December 31, 2021 and 2020, respectively, resulting in an adjusted net increase in noninterest expense of $63.2 million, or 28.6%. Details of the more significant changes in the various components of noninterest expense are further discussed below.

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•Salaries and Employee Benefits. Salaries and employee benefits expenses increased $47.0 million, or 37.0%, which is primarily due to increase in the size of our workforce, merit and retention increases for existing employees, higher health insurance benefit costs, incentive compensation, and 401(k) expense. Further, the Company experienced macro trends related to labor market conditions that drove wage increases for some existing employees and employees hired during the year. The size of our workforce increased period over period in part due to the acquisition of HubTran as well as organic growth within the Company. Our average full-time equivalent employees were 1,198.3 and 1,124.0 for the years ended December 31, 2021 and 2020, respectively. Given improved 2021 performance compared to 2020, our annual bonus expense increased $8.8 million period over period. Further, sales commissions, primarily related to our operations at Triumph Business Capital and TriumphPay, increased $4.3 million and compensation paid to temporary contract labor increased $3.0 million period over period. Additionally, stock based compensation expense increased $15.7 million period over period. The increase in stock based compensation expense reflects a $7.4 million accrual for our Performance Based Performance Stock Units which represents a cumulative catch-up to cover two-thirds of the three year vesting period. Further, we experienced a $7.0 million increase in stock based compensation expense period over period related to Restricted Stock Awards that were granted at a higher grant date fair value given the appreciation in our stock price.

•Occupancy, Furniture and Equipment. Occupancy, furniture and equipment expenses increased $1.7 million, or 7.5%, 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.

•Professional Fees. Professional fees, which are primarily comprised of external audit, tax, consulting, and legal fees, increased $3.2 million, or 34.7%, primarily due to $3.0 million of transaction costs associated with the HubTran acquisition slightly offset by $0.8 million of transaction costs associated with the TFS acquisition.

•Amortization of intangible assets. Amortization of intangible assets increased $2.5 million, or 30.6%, primarily due to the additional intangibles recorded through the HubTran acquisition during the current year.

•Communications and Technology. Communications and technology expenses increased $4.7 million, or 21.3%, primarily as a result of increased spending on IT consulting to develop efficiency in our operations and improve the functionality of the TriumphPay platform period over period.

•Travel and entertainment. Travel and entertainment expenses increased $1.7 million, or 72.9%, primarily due to the impact of the COVID-19 pandemic on such activities during the prior year.

•Other. Other noninterest expense, which includes loan-related expenses, software amortization, training and recruiting, postage, insurance, and subscription services, increased $3.5 million or 14.5%. This was primarily driven by a $1.1 million increase in recruiting and placement expense as we continue to grow our operations. Remaining fluctuations in other noninterest expense were immaterial.

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 $11.3 million, or 54.6%, from $20.7 million for the year ended December 31, 2020 to $32.0 million for the year ended December 31, 2021. The increase in income tax expense period over period is directionally consistent with the increase in pre-tax income for the same periods. The effective tax rate was 22% and 24% for the years ended December 31, 2021 and 2020, respectively. The decrease in the effective tax rate period over period was primarily driven by Restricted Stock Award, Restricted Stock Unit, and Stock Option windfalls that occurred during 2021 as several of those instruments were exercised during that period.

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Operating Segment Results

Our reportable segments are Banking, Factoring, Payments, and Corporate, which have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines. The Banking segment includes the operations of TBK Bank. Our Banking segment derives its revenue principally from investments in interest earning assets as well as noninterest income typical for the banking industry. The Factoring segment includes the operations of Triumph Business Capital with revenue derived from factoring services. The Payments segment includes the operations of the TBK Bank's TriumphPay division, which provides a presentment, audit, and payment solution to Shipper, Broker, and Factor clients in the trucking industry. The Payments segment derives its revenue from transaction fees and interest income on factored receivables related to invoice payments. These factored receivables consist of both invoices where we offer a Carrier a QuickPay opportunity to receive payment at a discount in advance of the standard payment term for such invoice in exchange for the assignment of such invoice to us and from offering Brokers the ability to settle their invoices with us on an extended term following our payment to their Carriers as an additional liquidity option for such Brokers.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are substantially the same as those described in 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. Intersegment interest expense is allocated to the Factoring and Payments segments based on Federal Home Loan Bank advance rates. Credit loss expense is allocated based on the segment’s ACL determination. Noninterest income and expense directly attributable to a segment are assigned to it and the majority of salaries and benefits expense for our executive leadership team is allocated to the Banking segment. Taxes are paid on a consolidated basis and are not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC.

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

(Dollars in thousands)

Year Ended December 31, 2021 Banking Factoring Payments Corporate Consolidated

(Dollars in thousands)

Year Ended December 31, 2020 Banking Factoring Payments Corporate Consolidated

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

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(Dollars in thousands)

Year Ended December 31, 2019 Banking Factoring Payments Corporate Consolidated

(Dollars in thousands)

December 31, 2021 Banking Factoring Payments Corporate Eliminations Consolidated

(Dollars in thousands)

December 31, 2020 Banking Factoring Payments Corporate Eliminations Consolidated

Banking

Our Banking segment’s operating income increased $14.5 million, or 24.6%. 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 $48.9 million for the year, resulting in an adjusted increase in operating income of $24.3 million, or 49.7%, period over period.

Interest income decreased $18.4 million, or 8.8% primarily as a result of decreases in the balances of our interest earning assets, primarily loans. Average loans in our Banking segment decreased 7.6% from $3.691 billion for the year ended December 31, 2020 to $3.411 billion for the year ended December 31, 2021. The decrease in average loans at our Banking segment is consistent with our strategy to moderate growth in our banking markets..

Interest expense decreased in spite of growth in average interest-bearing liabilities at our Banking segment. More specifically, average total interest-bearing deposits increased $104.6 million, or 3.5%. 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.

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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 a benefit to credit loss expense of $18.1 million for the year ended December 31, 2021 compared to credit loss expense of $17.8 million for the year ended December 31, 2020. The decreased credit loss expense was primarily the result of projected improvement of the loss drivers that the Company forecasted over the reasonable and supportable forecast period to calculate expected losses at our Banking segment as of December 31, 2021 which resulted in a benefit to credit loss expense of $10.4 million for the year. During the year ended December 31, 2020 the Company forecasted deterioration in the loss factors driven by the projected economic impact of COVID-19 which resulted in credit loss expense of $16.7 million at our Banking segment. The decrease in credit loss expense was further driven by the impact of specific reserve releases on our Banking segment loans. These releases created a $4.8 million benefit to credit loss expense for the year ended December 31, 2021 compared to $5.2 million of credit loss expense on net new specific reserves during the year ended December 31, 2020. Net charge-offs at our Banking segment were insignificant during the year ended December 31, 2021 compared to net charge-offs of $1.6 million during the same period a year ago. Said charge-offs carried a reserve balance of $0.3 million established during a prior period. Changes in loan volume and mix at our Banking segment partially offset the decrease in credit loss expense as these factors created a $2.7 million benefit to credit loss expense during the year ended December 31, 2021 compared to a $5.3 million benefit during the same period of the prior year.

Credit loss expense for off balance sheet credit exposures decreased $3.3 million from $2.4 million for the year ended December 31, 2020 to a benefit of $0.9 million for the year ended December 31, 2021. The decrease was primarily due to the changes in the assumptions used to project the loss rates previously discussed as well as changes in the underlying exposures.

Noninterest income at our Banking segment increased due to a $2.5 million increase in service charges on deposits consistent with increased average deposit balances subject to such fees period over period. Further, in keeping with guidance from regulators, we actively worked with COVID-19 affected customers during the second quarter of 2020 to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees were temporary and expired on June 1, 2020. Additionally, card income at our Banking segment increased $1.0 million primarily due to increased debit card activity during the year ended December 31, 2021. Further, insurance commissions at our Banking segment increased $0.9 million due to higher policy volumes processed by Triumph Insurance group. The Banking segment also recognized a $1.5 million recovery during the year ended December 31, 2021 on an acquired loan that was charged off prior to our acquisition of the originating bank. Additionally, during the current period, we recognized a $1.0 million increase in revenue from BOLI primarily related to death benefits payments. We also recognized a gain on sale of liquid credit and mortgage loans during the year ended December 31, 2021 of $3.1 million compared to a gain of $2.8 million during the same period a year ago. These increases were partially offset by the recognition of $1.9 million of loan syndication fees related to the syndication and placement of one large relationship that closed during the year ended December 31, 2020 and did not repeat during the year ended December 31, 2021. There were no other significant changes within the components of other noninterest income.

Noninterest expense increased primarily due to an increase in salaries and employee benefits expense due to merit and retention increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Remaining fluctuations in the individual components of noninterest expense at our Banking segment were insignificant period over period. It should be noted that the majority of our executive leadership team's salary and employee benefits expense is allocated to our Banking segment.

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Year to date, our aggregate outstanding balances for our banking products, excluding intercompany loans, has decreased $708.0 million, or 18.3%, to $3.168 billion as of December 31, 2021. The following table sets forth our banking loans:

(Dollars in thousands) December 31,2021 December 31,2020 $ Change % Change

Banking

Factoring

Total interest expense — — — — — — —

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Year Ended December 31,

Year to date charge-off rate(1) 3.49 % 0.42 % 0.40 %

Factored receivables - transportation concentration 90 % 89 % 81 %

Average invoice size - transportation $ 2,152 $ 1,682 $ 1,508

Average invoice size - non-transportation $ 5,041 $ 4,671 $ 3,404

(1) Net charge-offs for the year ended December 31, 2021 includes a $41.3 million charge-off related to the TFS acquisition, which contributed approximately 3.17% to the net charge-off rate for the period. In accordance with the Agreement reached with Covenant, Covenant reimbursed the Company for $35.6 million of the $41.3 million charge-off.

(2) Non-interest income for the year ended December 31, 2021 excludes $4.2 million of income recognized on our indemnification asset resulting from the amended TFS acquisition agreement. 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 $56.4 million, or 117.6%. Our Factoring segment's operating income 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, our Factoring segment's adjusted operating income was $48.8 million for the year ended December 31, 2020. When comparing operating income for the year ended December 31, 2021 to adjusted operating income for the year ended December 31, 2020, adjusted operating income increased $55.6 million, or 113.9%.

Our average invoice size increased 24.1% from $1,825 for the year ended December 31, 2020 to $2,265 for the year ended December 31, 2021 and the number of invoices purchased increased 48.3% period over period.

Net interest income at our Factoring segment increased $78.8 million, or 81.3%. Overall average net funds employed (“NFE”) increased 78.0% during the year ended December 31, 2021 compared to the same period in 2020. The increase in average NFE was the result of increased invoice purchase volume as well as increased average invoice size. Those, in turn, resulted from historically high freight volume in a reduced capacity market. See further discussion under the Overview: Trucking Transportation section. The increase in net interest income was partially offset by decreased purchase discount rates driven by greater focus on larger lower priced fleets and competitive pricing pressure; however, those negative factors were somewhat mitigated by increased concentration in transportation factoring balances, which typically generate a higher yield than our non-transportation factoring balances. This concentration was up 1% period over period from 89% at December 31, 2020 to 90% at December 31, 2021.

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The decrease in credit loss expense was primarily due to decreased new specific reserves required during the year ended December 31, 2021. Net new specific reserves required on the factored receivables portfolio were $2.7 million for the year ended December 31, 2021 compared to $11.5 million for the same period a year ago. The December 31, 2021 specific reserve balance at our Factoring segment reflects the $2.8 million increase in required reserves on acquired Over-Formula advances as previously explained in the Credit Loss Expense discussion. The prior year required specific reserves were driven by 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 during the years ended December 31, 2021 and 2020. Growth in the underlying factored receivable portfolio at our Factoring segment resulted in $2.8 million and $2.3 million of credit loss expense during the years ended December 31, 2021 and 2020, respectively. Net charge-offs at our factoring segment were $45.4 million consisting mostly of the aforementioned $41.3 million charge-off of the Over-Formula Advance balance associated with the largest over-advanced client which contributed 3.17% to the current period charge-off rate in the table above. A reserve of $41.5 million on the gross charge-offs was established in a prior period. In accordance with the Agreement reached with Covenant, Covenant reimbursed the Company for $35.6 million of the $41.3 million charge-off. During the year ended December 31, 2020, net charge-offs at our factoring segment were $3.0 million of which $0.7 million was reserved in a prior period. Changes in loss assumptions did not have a meaningful impact on credit loss expense during the year ended December 31, 2021 or 2020.

The decrease in noninterest income at our Factoring segment was primarily due to 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 during the year ended December 31, 2020 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 and did not recur during 2021. Additionally, the gains recognized on the increase in value of our indemnification asset were $4.2 million and $5.3 million during the years ended December 31, 2021 and 2020, respectively. Partially offsetting these decreases was the recognition of a $1.2 million of early termination fees during the year ended December 31, 2021 with no material equivalent during the prior year. There were no other material fluctuations in noninterest income at our Factoring segment.

Noninterest expense at our Factoring segment increased primarily due to an increase in salaries and employee benefits expense due to merit and retention increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. We also generally experienced increases in occupancy expense and communications and technology expense consistent with the increased volume of our operations and headcount. Remaining fluctuations in the individual components of noninterest expense at our Factoring segment were insignificant period over period.

Payments

Total interest expense — — — — — % — — %

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Year Ended December 31,

Intangible amortization expense 3,476,000 — —

Transaction costs $ 2,992,000 $ — $ —

(1)Adjusted earnings (losses) before interest, taxes, depreciation, and amortization excludes material gains and expenses related to merger and acquisition-related activities and is a non-GAAP financial measure used to provide meaningful supplemental information regarding the segment's operational performance and to enhance investors' overall understanding of such financial performance by removing the volatility associated with certain acquisition-related items that are unrelated to our core business.

Our Payments segment's operating loss increased $12.3 million, or 138.0%.

The number of invoices processed by our Payments segment increased 203.8% from 4,438,527 for the year ended December 31, 2020 to 13,483,420 for the year ended December 31, 2021, and the amount of payments processed increased 258.0% from $4.235 billion for the year ended December 31, 2020 to $15.162 billion for the year ended December 31, 2021.

Interest income increased due to increased average factored receivable balances at our Payments segment and increased yields period over period. Noninterest income increased primarily due to $7.0 million in Payments fees related to the acquired HubTran operations during the year ended December 31, 2021.

Noninterest expense increased primarily due to $3.0 million of transaction costs related to the acquisition of HubTran and an increase in salaries and employee benefits expense driven by merit and retention increases for existing employees, higher health insurance benefit costs, incentive compensation, stock based compensation and 401(k) expense. Our average full-time equivalent employees at our Payments segment were 93.3 and 45.7 for the years ended December 31, 2021 and 2020, respectively. Noninterest expense also increased due to $3.5 million of intangible asset amortization recognized during the year ended December 31, 2021. We continue to invest heavily in the operations of TriumphPay.

The acquisition of HubTran during the year ended December 31, 2021 allows TriumphPay to create a fully integrated payments network for transportation; servicing Brokers and Factors. TriumphPay already offered tools and services to increase automation, mitigate fraud, create back-office efficiency and improve the payment experience. Through the acquisition of HubTran, TriumphPay created additional value through the enhancement of its presentment, audit, and payment capabilities for Shippers, third party logistics companies (i.e., Brokers) and their Carriers, and Factors. The acquisition of HubTran was a meaningful inflection point in the operations of TriumphPay as the TriumphPay strategy has shifted from a capital-intensive on-balance sheet product with a focus on interest income to an open-loop payments network for the trucking industry with a focus on fee revenue. It is for this reason that management believes that earnings before interest, taxes, depreciation, and amortization and the adjustment to that metric enhance investors' overall understanding of the financial performance of the Payments segment. Further, as a result of the HubTran acquisition, management recorded $27.3 million of intangible assets that will lead to meaningful amounts of amortization going forward.

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Corporate

Intersegment interest allocations — — — — — — —

The Corporate segment reported an operating loss of $11.4 million for the year ended December 31, 2021 compared to an operating loss of $13.1 million for the year ended December 31, 2020. This was primarily due to decreased credit loss expense on our HTM CLOs previously discussed in the Credit Loss Expense section. During the year ended December 31, 2021, management issued a new subordinated debt facility and used the majority of the proceeds to redeem the 2016 subordinated debt facility in whole. The 2016 subordinated debt facility carried deferred fees of $0.8 million at the time of payoff that was written off through interest expense during the year ended December 31, 2021. There were no other significant fluctuations in accounts in our Corporate segment period over period.

Financial Condition

Assets

Total assets were $5.956 billion at December 31, 2021, compared to $5.936 billion at December 31, 2020, an increase of $20.5 million, the components of which are discussed below.

Loan Portfolio

Loans held for investment were $4.868 billion at December 31, 2021, compared with $4.997 billion at December 31, 2020.

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

Commercial Real Estate Loans. Our commercial real estate loans decreased $146.4 million, or 18.8%, due to paydowns for the period that outpaced new loan origination activity.

Construction and Development Loans. Our construction and development loans decreased $96.2 million, or 43.8%, due primarily to paydowns and conversions to term loans that were partially offset by modest origination and draw activity.

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Residential Real Estate Loans. Our one-to-four family residential loans decreased $34.0 million, or 21.7%, due primarily to paydowns that were offset by modest origination and draw activity.

Farmland Loans. Our farmland loans decreased $26.3 million, or 25.4%, due to paydowns for the period that outpaced new loan origination activity.

Commercial Loans. Our commercial loans held for investment decreased $132.5 million, or 8.5%, due to decreases in liquid credit, PPP, agriculture and other commercial loans. The decline in commercial loans was offset by increases in equipment finance and asset-based lending. Our other commercial lending products, comprised primarily of general commercial loans originated in our community banking markets, decreased $45.2 million, or 13.3%.

The following table shows our commercial loans:

(Dollars in thousands) December 31, 2021 December 31, 2020 $ Change % Change

Commercial

Factored Receivables. Our factored receivables increased $578.8 million, or 51.6%. At December 31, 2021, the balance of the Over-Formula Advance Portfolio included in factored receivables was $10.1 million, and the balance of Misdirected Payments included in factored receivables was $19.4 million. See discussion of our factoring subsidiary in the Operating Segment Results for analysis of the key drivers impacting the change in the ending factored receivables balance during the period.

Consumer Loans. Our consumer loans decreased $5.0 million, or 31.3%, due to paydowns in excess of new loan origination activity during the period.

Mortgage Warehouse. Our mortgage warehouse facilitiesdecreased$267.6 million, or25.8%, due to decreased utilization.Client utilization of mortgage warehouse facilities may experience significant fluctuation on a day-to-day basis given mortgage origination market conditions.Our average mortgage warehouse lending balance was $792.2 million for the year ended December 31, 2021 compared to $729.8 million for the year ended December 31, 2020.

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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, 2021, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Texas (21%), Colorado (15%), Illinois (15%), 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, 2020, the states of Colorado (17%), Texas (22%), Illinois (12%) and Iowa (6%) made up 57% of the Company’s gross loans, excluding factored receivables.

Further, a majority (91%) of our factored receivables, representing approximately 32% of our total loan portfolio as of December 31, 2021, 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, 2020, 90% of our factored receivables, representing approximately 20% 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 964 2,294

Mortgage warehouse — —

Other real estate owned, net 524 1,432

Nonperforming assets to total assets 0.92 % 1.15 %

Nonperforming loans to total loans held for investment 0.95 % 1.16 %

Total past due loans to total loans held for investment 2.86 % 3.22 %

Nonperforming loans decreased $11.7 million, or 20.2%, primarily due to the payoff of a $5.7 million nonperforming commercial real estate loan, the payoff of $5.0 million nonperforming general commercial loan, the payoff of a $2.3 million nonperforming commercial relationship, and the payoff of a $1.0 million nonperforming construction loan during the year. Additionally, the portion of the Over-Formula Advances not covered by Covenant's indemnification decreased by $8.6 million from $10.0 million at December 31, 2020 to $1.4 million at December 31, 2021 primarily as a result of the aforementioned charge-off activity. These decreases were partially offset by $13.3 million of the total $19.4 million of Misdirected Payments amount at December 31, 2021 moving to greater than 90 days past due during the year. The entire $19.4 million amount is now included in nonperforming loans (specifically, factored receivables) in accordance with our policy. Additionally, a $1.6 million commercial loan secured by equipment was moved to nonperforming during the year. The remaining activity in nonperforming loans was also impacted by additions and removals of smaller credits to and from nonperforming loans.

OREO decreased $0.9 million, or 63.4%, 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, the ratio of nonperforming loans to total loans held for investment decreased to 0.95% at December 31, 2021 from 1.16% December 31, 2020.

Our ratio of nonperforming assets to total assets decreased to 0.92% at December 31, 2021 from 1.15% December 31, 2020. This is due to the aforementioned loan activity. Additionally, the amortized cost basis of our HTM CLO securities considered to be nonaccrual decreased $2.3 million during the year. Combined other real estate owned and other repossessed assets increased $0.4 million during the year.

Past due loans to total loans held for investment decreased to 2.86% at December 31, 2021 from 3.22% at December 31, 2020 as a result of above activity. Additionally, past due loans associated with the acquired Over-Formula Advances decreased $52.1 million during the year primarily as a result of the aforementioned charge-off activity. The remaining $10.1 million acquired Over-Formula Advance balance is considered greater than 90 days past due at December 31, 2021. Aging of the Over-Formula Advances is based upon the service month on which the advances were made by TFS prior to acquisition.

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Allowance for Credit Losses on Loans

The ACL is a valuation allowance estimated at each balance sheet date in accordance with 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.

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

The ACL decreased $53.5 million, or 55.9%. This decrease was primarily driven by net charge-offs of $45.6 million which includes the aforementioned $41.3 million charge-off of PCD Over-Formula Advances classified as factored receivables that had been reserved in a prior period. At year end, our entire remaining Over-Formula Advance position was down from $62.1 million at December 31, 2020 to $10.1 million at December 31, 2021 and the entire balance at December 31, 2021 was fully reserved.

Another driver of the decrease in required ACL is projected improvement of the loss drivers that the Company forecasted to calculate expected losses at December 31, 2021 as compared to December 31, 2020. This improvement was brought on by a quicker projected economic recovery post-COVID-19 than was anticipated at December 31, 2020. It had a positive impact on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period and resulted in a release of $10.4 million of ACL period over period.

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

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For all DCF models at December 31, 2021, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At December 31, 2021 as compared to December 31, 2020, the Company forecasted lower national unemployment, lower one-year percentage change increase in national retail sales, higher one-year percentage change increase in the national home price index, and relatively flat one-year percentage change in national gross domestic product. For percentage changes in national retail sales, national home price index and national gross domestic product, the Company projected growth in the first projected quarter followed by some pullback the last three projected quarters resembling something closer to pre-COVID-19 levels, albeit slightly more modest. Projected unemployment rates used by the Company are relatively stable over the four projected quarters at levels somewhat higher than pre-COVID-19 conditions.

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

The decrease in required ACL was also driven by a net reversal of specific reserves of $2.1 million during the year ended December 31, 2021 which is inclusive of the additional $2.8 million reserve required on remaining PCD Over-Formula Advances as discussed previously in the Credit Loss Expense section of Management's Discussion and Analysis. Changes in loan volume and mix during the year ended December 31, 2021 increased the required ACL by $0.4 million during the period.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively participated in assisting its customers with applications for resources through the program. At December 31, 2021, the Company carried $27.2 million of PPP loans classified as commercial loans for reporting purposes. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. Credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, are required to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans. Given that the loans are fully guaranteed by the U.S. government and absent any specific loss information about any of our PPP loans, the Company does not carry an ACL on its PPP loans at December 31, 2021.

The following tables show our credit ratios and an analysis of our credit loss expense:

December 31,

Allowance for credit losses on loans $ 42,213 $ 95,739

Allowance to total loans held for investment 0.87 % 1.92 %

Nonaccrual loans to total loans held for investment 0.31 % 0.68 %

Allowance for credit losses on loans $ 42,213 $ 95,739

Allowance for credit losses to nonaccrual loans 280.78 % 280.98 %

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Year Ended December 31,

Net loans charged off increased $41.0 million, or 897.2%, due to the aforementioned charge-off of $41.3 million of PCD Over-Formula Advances classified as factored receivables. Remaining charge-off and recovery activity during the periods was insignificant individually and in the aggregate.

Securities

As of December 31, 2021, we held equity securities with a fair value of $5.5 million, a decrease of $0.3 million from $5.8 million at December 31, 2020. 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, 2021, we held securities classified as available for sale with a fair value of $182.4 million, a decrease of $41.9 million from $224.3 million at December 31, 2020. The following table illustrates the changes in our available for sale debt securities:

Available For Sale Debt Securities:

(Dollars in thousands) December 31, 2021 December 31, 2020 $ Change % Change

Our available for sale CLO portfolio consists of investment grade positions in high ranking tranches within their respective securitization structures. As of December 31, 2021, the Company determined that all impaired available for sale securities experienced a decline in fair value below their amortized cost basis due to noncredit-related factors. Therefore, the Company carried no ACL at December 31, 2021. Our available for sale securities can be used for pledging to secure FHLB borrowings and public deposits, or can be sold to meet liquidity needs.

As of December 31, 2021, we held securities classified as held to maturity with an amortized cost, net of ACL, of $4.9 million, a decrease of $1.0 million from $5.9 million at December 31, 2020. The decrease in amortized cost, net of ACL, was primarily driven by paydowns throughout the year. 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, 2021.

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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, 2021

Liabilities

Total liabilities were $5.097 billion as of December 31, 2021, compared to $5.209 billion at December 31, 2020, a decrease of $111.6 million, the components of which are discussed below.

Deposits

The following table summarizes our deposits:

(Dollars in thousands) December 31, 2021 December 31, 2020 $ Change % Change

Our total deposits decreased $69.9 million, or 1.5%, primarily due to decreases in brokered time deposits, certificates of deposit, 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 decline in these products was partially offset by increases in noninterest bearing demand deposits, interest bearing demand deposits and money market balances during the year. As of December 31, 2021, interest bearing demand deposits, noninterest bearing deposits, money market deposits, other brokered deposits, and savings deposits accounted for 86% of our total deposits, while individual retirement accounts, certificates of deposit, and brokered time deposits made up 14% of total deposits.

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

At December 31, 2021, we held $117.0 million of time deposits that meet or exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limit. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit as of December 31, 2021:

(Dollars in thousands) Over$250,000

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, 2021, 2020, and 2019:

Weighted average interest rate at end of period 0.03 % 0.03 % 0.03 %

Average daily balance during the period $ 5,985 $ 6,716 $ 7,823

Weighted average interest rate during the period 0.03 % 0.03 % 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.

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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, 2021, 2020, and 2019:

Weighted average interest rate at end of the year 0.15 % 0.17 % 1.58 %

Weighted average interest rate during the year 0.24 % 0.58 % 2.32 %

Our FHLB advances are collateralized by assets, including a blanket pledge of certain loans. Of the FHLB borrowings outstanding as of December 31, 2021, $150.0 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, 2021 and 2020, we had $798.8 million and $1.247 billion, respectively, in unused and available advances from the FHLB. The decrease in our total borrowing capacity from December 31, 2020 to December 31, 2021 was primarily the result of decreased outstanding loan balances at the end of 2021 including a decrease in outstanding mortgage warehouse 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.

Information concerning borrowings under the PPPLF is summarized as follows for the year ended December 31, 2021, 2020, and 2019:

Amount outstanding at end of period $ 27,144 $ 191,860 $ —

Weighted average interest rate at end of period 0.35 % 0.35 % — %

Average amount outstanding during the period 118,880 143,608 —

Weighted average interest rate during the period 0.35 % 0.35 % — %

Highest month end balance during the period 181,635 223,809 —

At December 31, 2021, scheduled maturities of PPPLF borrowings are as follows:

(Dollars in thousands) December 31,2021

Within one year $ 2,872

After one but within two years —

After two but within three years —

After three but within four years —

After four but within five years 24,272

After five years —

At December 31, 2021, the PPPLF borrowings are secured by PPP Loans totaling $27.1 million and bear interest at a fixed rate of 0.35% annually.

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Subordinated Notes

The following provides a summary of our subordinated notes as of December 31, 2021:

(1) Secured Overnight Financing Rate

The Subordinated Notes bear interest payable semi-annually in arrears to, but excluding the first repricing date, and thereafter payable quarterly in arrears at an annual floating rate. We may, at our option, beginning on the respective first repricing date and on any scheduled interest payment date thereafter, redeem the Subordinated Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the Subordinated Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.

The Subordinated Notes are included on the consolidated balance sheets as liabilities at their carrying values; however, for regulatory purposes, the carrying value of these obligations were eligible for inclusion in Tier 2 regulatory capital. Issuance costs related to the Subordinated Notes have been netted against the subordinated notes liability on the balance sheet. The debt issuance costs are being amortized using the effective interest method through maturity and recognized as a component of interest expense.

The Subordinated Notes are subordinated in right of payment to the Company’s existing and future senior indebtedness and are structurally subordinated to the Company’s subsidiaries’ existing and future indebtedness and other obligations.

On September 30, 2016, the Company issued $50,000,000 of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2016 Notes”). The 2016 Notes initially bear interest at 6.50% per annum, payable semi-annually in arrears, to, but excluding, September 30, 2021, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus 5.345%. The Company redeemed the 2016 Notes in whole on September 30, 2021 at which time $0.8 million in remaining deferred costs were recognized through interest expense.

Junior Subordinated Debentures

The following provides a summary of our junior subordinated debentures as of December 31, 2021:

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.

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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 $40.6 million was allowed in the calculation of Tier I capital as of December 31, 2021.

Liquidity and Capital Resources

Capital Resources

Our stockholders’ equity totaled $858.9 million as of December 31, 2021, compared to $726.8 million as of December 31, 2020, an increase of $132.1 million. Stockholders’ equity increased during this period primarily due to our net income of $113.0 million.

Liquidity Management

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

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

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

In addition to the liquidity provided by the sources described above, our subsidiary bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of December 31, 2021, TBK Bank had $501.3 million of unused borrowing capacity from the Federal Reserve Bank discount window and unsecured federal funds lines of credit with seven unaffiliated banks totaling $227.5 million, with no amounts advanced against those lines.

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2021. 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, 2021

Customer repurchase agreements $ 2,103 $ 2,103 $ — $ — $ —

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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.

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.

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 credit losses on loans is a 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 to be 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 continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. We employ a disciplined process and methodology to establish our allowance for credit losses that has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of specific expected credit losses for such individual loans; and second, a general pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

Generally, when a loan moves to nonaccrual status, it is removed from the collective pooled evaluation allowance methodology and is subject to individual evaluation. A specific reserve analysis is prepared for each loan and the net realizable value of the loan is determined. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected amount and timing of 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.

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

For all DCF models at December 31, 2021, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At December 31, 2021, projected unemployment rates used by the Company were relatively stable over the four projected quarters at levels somewhat higher than pre-COVID-19 conditions. For percentage changes in national retail sales, national home price index and national gross domestic product, the Company projected growth in the first projected quarter followed by some pullback the last three projected quarters resembling something closer to pre-COVID-19 levels, albeit slightly more modest.

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.

Estimating the timing and amounts of future losses through projected cash flows is subject to significant management judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions. These estimates as well as estimates used under the loss-rate method, in turn, depend on the duration of current overall economic conditions, industry, borrower, or portfolio specific conditions. All of these estimates require significant management judgment and certain assumptions that are highly subjective. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected.

The provision for (reversal of) credit losses recorded through earnings, and reduced by the charge-off of loan amounts, net of recoveries, is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

Refer to “Allowance for Credit Losses” above, Note 1 – Summary of Significant Accounting Policies, and Note 4 - Loans in the accompanying notes to the consolidated financial statements elsewhere in this report for further discussion of our estimation process and methodology related to the allowance for credit 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.

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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.

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 %

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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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 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, 2021, 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 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. 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.

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. During the year ended December 31, 2021, the Company acquired HubTran, Inc (“HubTran”), which is described in Note 2 of the financial statements. As permitted, the Company has excluded the operations of HubTran from the scope of management’s report on internal control over financial reporting. As such, the operations of HubTran have also been excluded from the scope of our audit of internal control over financial reporting. 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 Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses (“ACL”) – Reasonable and Supportable Forecasts

The ACL (as described in Note 1 and presented in Note 4) is 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. As of December 31, 2021, the ACL of $42 million attributable to loans held for investment consists of 1) an allowance of $15 million on collateral dependent loans and 2) an allowance of $27 million 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 a discounted cash flow (“DCF”) method or a loss-rate method to estimate expected credit losses. Pools analyzed in the DCF method require more judgment in the forecast assumptions than those used in the loss-rate pools as they are generally of longer duration.

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 forecast assumptions applied in the DCF methods, the forecast assumptions sensitivity to change, and completeness and accuracy of data used.

•Evaluated the reasonableness and appropriateness of management’s forecasting methodology for suitability under the standard.

•Performed substantive procedures over the relevance and reliability of forecast assumptions applied within the DCF models.

•Substantively tested the completeness and accuracy of the data used.

/s/ Crowe LLP

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

Dallas, Texas

February 14, 2022

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2021 and 2020

(Dollar amounts in thousands)

ASSETS

Securities - equity investments 5,504 5,826

Federal Home Loan Bank and other restricted stock, at cost 10,146 6,751

Other real estate owned, net 524 1,432

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

Deposits

Customer repurchase agreements 2,103 3,099

Paycheck Protection Program Liquidity Facility 27,144 191,860

Commitments and contingencies - See Notes 15 and 16

Stockholders' equity - See Note 20

Accumulated other comprehensive income 8,034 5,819

See accompanying notes to consolidated financial statements.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2021, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

Interest and dividend income:

Interest expense:

Noninterest income:

Net OREO gains (losses) and valuation adjustments (347) (616) 351

Net gains (losses) on sale or call of securities 5 3,226 61

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

Noninterest expense:

FDIC insurance and other regulatory assessments 2,118 1,520 298

Dividends on preferred stock (3,206) (1,701) —

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, 2021, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

Other comprehensive income:

Unrealized gains (losses) on securities:

Unrealized holding gains (losses) arising during the period (2,424) 8,578 3,065

Unrealized gains (losses) on derivative financial instruments:

Unrealized holding gains (losses) arising during the period 5,255 782 —

Reclassification of amount of (gains) losses recognized into income 93 34 —

Tax effect (22) (8) —

See accompanying notes to consolidated financial statements.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2021, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

Issuance of restricted stock awards — 104,413 1 (1) — — — — —

Stock based compensation — — — 3,654 — — — — 3,654

Forfeiture of restricted stock awards — (8,602) — 257 8,602 (257) — — —

Stock option exercises, net — 5,230 — — — — — — —

Other comprehensive income (loss) — — — — — — — 2,309 2,309

Issuance of restricted stock awards — 138,417 1 (1) — — — — —

Stock based compensation — — — 4,618 — — — — 4,618

Forfeiture of restricted stock awards — (6,067) — 211 6,067 (211) — — —

Stock option exercises, net — 19,394 — (227) — — — — (227)

Preferred stock dividends — — — — — — (1,701) — (1,701)

Other comprehensive income (loss) — — — — — — — 4,713 4,713

Issuance of restricted stock awards — 241,014 2 (2) — — — — —

Stock based compensation — — — 20,315 — — — — 20,315

Forfeiture of restricted stock awards — (5,129) — 450 5,129 (450) — — —

Preferred stock dividends — — — — — — (3,206) — (3,206)

Other comprehensive income (loss) — — — — — — — 2,215 2,215

See accompanying notes to consolidated financial statements.

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TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2021, 2020 and 2019

(Dollar amounts in thousands, except per share amounts)

Cash flows from operating activities:

Amortization of subordinated notes issuance costs 1,224 182 116

Amortization of junior subordinated debentures 530 506 483

Net amortization on securities (992) (129) 205

Net (gains) losses on sale or call of securities (5) (3,226) (61)

Net (gains) losses on equity securities 322 (389) (393)

Net OREO (gains) losses and valuation adjustments 347 616 (351)

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

Contingent consideration paid — (22,000) —

Cash flows from investing activities: