TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans at September 30, 2014 and December 31, 2013 consisted of the following:

	September 30,			December 31,
	2014			2013
Real estate:
Commercial	$	261,836		$	331,462
Construction, land development, land		45,996			37,626
1-4 family residential properties		80,419			91,301
Farmland		20,059			20,294
Total real estate		408,310			480,683
Commercial		340,316			255,655
Factored receivables		169,112			117,370
Consumer		12,527			13,878
Mortgage warehouse		46,874			13,513
Total		977,139			881,099
Allowance for loan and lease losses		(7,320	)		(3,645	)
	$	969,819		$	877,454

Total loans include net deferred origination fees and costs totaling $1,173 and $997 at September 30, 2014 and December 31, 2013, respectively.

Loans with carrying amounts of $143,971 and $166,688 at September 30, 2014 and December 31, 2013, respectively, were pledged to secure Federal Home Loan Bank advance capacity.

Allowance for Loan and Lease Losses: The activity in the allowance for loan and lease losses (ALLL) during the three and nine months ended September 30, 2014 and 2013 is as follows:

	Beginning										Ending
Three months ended September 30, 2014	Balance		Provision			Charge-offs			Recoveries		Balance
Real estate:
Commercial	$	463	$	(78	)	$	—		$	1	$	386
Construction, land development, land		242		198			(100	)		—		340
1-4 family residential properties		197		56			(74	)		3		182
Farmland		11		2			—			—		13
Total real estate		913		178			(174	)		4		921
Commercial		2,332		722			-			3		3,057
Factored receivables		2,838		397			(119	)		21		3,137
Consumer		96		34			(100	)		57		87
Mortgage warehouse		74		44			—			—		118
	$	6,253	$	1,375		$	(393	)	$	85	$	7,320

	Beginning										Ending
Three months ended September 30, 2013	Balance		Provision			Charge-offs			Recoveries		Balance
Real estate:
Commercial	$	252	$	(154	)	$	—		$	129	$	227
Construction, land development, land		46		(7	)		—			—		39
1-4 family residential properties		98		(34	)		(19	)		25		70
Farmland		5		(1	)		—			—		4
Total real estate		401		(196	)		(19	)		154		340
Commercial		502		1,538			(1,473	)		—		567
Factored receivables		1,532		370			(121	)		3		1,784
Consumer		—		—			—			—		—
Mortgage warehouse		15		23			—			—		38
	$	2,450	$	1,735		$	(1,613	)	$	157	$	2,729

	Beginning										Ending
Nine months ended September 30, 2014	Balance		Provision			Charge-offs			Recoveries		Balance
Real estate:
Commercial	$	348	$	35		$	—		$	3	$	386
Construction, land development, land		110		330			(100	)		—		340
1-4 family residential properties		100		240			(264	)		106		182
Farmland		7		6			—			—		13
Total real estate		565		611			(364	)		109		921
Commercial		1,145		1,707			(12	)		217		3,057
Factored receivables		1,842		1,533			(294	)		56		3,137
Consumer		49		122			(314	)		230		87
Mortgage warehouse		44		74			—			—		118
	$	3,645	$	4,047		$	(984	)	$	612	$	7,320

	Beginning										Ending
Nine months ended September 30, 2013	Balance		Provision			Charge-offs			Recoveries		Balance
Real estate:
Commercial	$	261	$	(122	)	$	(41	)	$	129	$	227
Construction, land development, land		40		(1	)		—			—		39
1-4 family residential properties		227		(111	)		(88	)		42		70
Farmland		5		(1	)		—			—		4
Total real estate		533		(235	)		(129	)		171		340
Commercial		172		1,861			(1,473	)		7		567
Factored receivables		1,221		691			(183	)		55		1,784
Consumer		—		—			—			—		—
Mortgage warehouse		—		38			—			—		38
	$	1,926	$	2,355		$	(1,785	)	$	233	$	2,729

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

September 30, 2014	Loan Evaluation								ALLL Allocations
	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Real estate:
Commercial	$	3,671	$	243,632	$	14,533	$	261,836	$	—	$	386	$	—	$	386
Construction, land development, land		12		44,512		1,472		45,996		—		340		—		340
1-4 family residential properties		885		77,311		2,223		80,419		—		176		6		182
Farmland		—		20,059		—		20,059		—		13		—		13
Total real estate		4,568		385,514		18,228		408,310		—		915		6		921
Commercial		7,092		328,507		4,717		340,316		297		2,760		—		3,057
Factored receivables		990		168,122		—		169,112		849		2,288		—		3,137
Consumer		—		12,527		—		12,527		—		87		—		87
Mortgage warehouse		—		46,874		—		46,874		—		118		—		118
	$	12,650	$	941,544	$	22,945	$	977,139	$	1,146	$	6,168	$	6	$	7,320

December 31, 2013	Loan Evaluation								ALLL Allocations
	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Real estate:
Commercial	$	4,489	$	308,326	$	18,647	$	331,462	$	—	$	348	$	—	$	348
Construction, land development, land		—		35,585		2,041		37,626		—		110		—		110
1-4 family residential properties		842		87,987		2,472		91,301		14		79		7		100
Farmland		—		20,294		—		20,294		—		7		—		7
Total real estate		5,331		452,192		23,160		480,683		14		544		7		565
Commercial		5,495		248,129		2,031		255,655		15		1,130		—		1,145
Factored receivables		763		116,607		—		117,370		417		1,425		—		1,842
Consumer		—		13,878		—		13,878		—		49		—		49
Mortgage warehouse		—		13,513		—		13,513		—		44		—		44
	$	11,589	$	844,319	$	25,191	$	881,099	$	446	$	3,192	$	7	$	3,645

The following is a summary of information pertaining to impaired loans at September 30, 2014 and December 31, 2013:

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
	Recorded		Unpaid		Related		Recorded		Unpaid
September 30, 2014	Investment		Principal		Allowance		Investment		Principal
Real estate:
Commercial	$	—	$	—	$	—	$	1,938	$	1,957
Construction, land development, land		—		—		—		12		24
1-4 family residential properties		327		505		6		730		1,055
Farmland		—		—		—		—		—
Total real estate		327		505		6		2,680		3,036
Commercial		1,029		1,058		297		6,064		6,293
Factored receivables		990		990		849		—		—
Consumer		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—
	$	2,346	$	2,553	$	1,152	$	8,744	$	9,329

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
	Recorded		Unpaid		Related		Recorded		Unpaid
December 31, 2013	Investment		Principal		Allowance		Investment		Principal
Real estate:
Commercial	$	—	$	—	$	—	$	114	$	131
Construction, land development, land		—		—		—		—		—
1-4 family residential properties		127		169		21		157		166
Farmland		—		—		—		—		—
Total real estate		127		169		21		271		297
Commercial		215		215		15		5,224		5,454
Factored receivables		762		762		417		1		—
Consumer		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—
	$	1,104	$	1,146	$	453	$	5,496	$	5,751

	Three Months Ended				Three Months Ended
	September 30, 2014				September 30, 2013
	Average		Interest		Average		Interest
	Impaired Loans		Recognized		Impaired Loans		Recognized
Real estate:
Commercial	$	2,201	$	17	$	3,432	$	156
Construction, land development, land		1		1		—		—
1-4 family residential properties		1,035		18		301		8
Farmland		—		—		—		—
Total real estate		3,237		36		3,733		164
Commercial		5,952		3		2,642		—
Factored receivables		381		—		690		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
	$	9,570	$	39	$	7,065	$	164

	Nine Months Ended				Nine Months Ended
	September 30, 2014				September 30, 2013
	Average		Interest		Average		Interest
	Impaired Loans		Recognized		Impaired Loans		Recognized
Real estate:
Commercial	$	2,375	$	206	$	3,427	$	470
Construction, land development, land		2		1		—		—
1-4 family residential properties		1,068		164		326		25
Farmland		—		—		—		—
Total real estate		3,445		371		3,753		495
Commercial		6,549		44		2,642		—
Factored receivables		381		—		830		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
	$	10,375	$	415	$	7,225	$	495

Loans included in the above tables are non-PCI impaired loans and PCI loans that have deteriorated subsequent to acquisition and as a result have been deemed impaired and an allowance recorded. PCI loans that have not deteriorated subsequent to acquisition are not considered impaired and therefore do not require an allowance and are excluded from the tables above.

The following table presents the unpaid principal and recorded investment for loans at September 30, 2014 and December 31, 2013. The difference between the unpaid principal balance and recorded investment is principally associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI), (2) net deferred origination costs and fees, and (3) previous charge-offs.

	Recorded		Unpaid
September 30, 2014	Investment		Principal		Difference
Real estate:
Commercial	$	261,836	$	277,087	$	(15,251	)
Construction, land development, land		45,996		47,925		(1,929	)
1-4 family residential properties		80,419		84,220		(3,801	)
Farmland		20,059		19,973		86
Total real estate		408,310		429,205		(20,895	)
Commercial		340,316		344,115		(3,799	)
Factored receivables		169,112		170,281		(1,169	)
Consumer		12,527		12,604		(77	)
Mortgage warehouse		46,874		46,874		—
	$	977,139	$	1,003,079	$	(25,940	)

	Recorded		Unpaid
December 31, 2013	Investment		Principal		Difference
Real estate:
Commercial	$	331,462	$	351,521	$	(20,059	)
Construction, land development, land		37,626		41,034		(3,408	)
1-4 family residential properties		91,301		96,742		(5,441	)
Farmland		20,294		20,145		149
Total real estate		480,683		509,442		(28,759	)
Commercial		255,655		260,384		(4,729	)
Factored receivables		117,370		118,057		(687	)
Consumer		13,878		14,006		(128	)
Mortgage warehouse		13,513		13,513		—
	$	881,099	$	915,402	$	(34,303	)

At September 30, 2014 and December 31, 2013, the Company had on deposit $16,435 and $10,653, respectively, of customer reserves associated with factored receivables. These deposits represent customer reserves held to settle any payment disputes or collection shortfalls and are reported as deposits in the consolidated balance sheets.

Past Due and Nonaccrual Loans: The following is a summary of contractually past due and nonaccrual loans at September 30, 2014 and December 31, 2013:

			Past Due 90
	30-89 Days		Days or More
September 30, 2014	Past Due		Still Accruing		Nonaccrual		Total

Real estate:
Commercial	$	855	$	—	$	5,094	$	5,949
Construction, land development, land		75		—		12		87
1-4 family residential properties		779		2		1,469		2,250
Farmland		—		—		—		—
Total real estate		1,709		2		6,575		8,286
Commercial		110		—		10,176		10,286
Factored receivables		5,664		813		—		6,477
Consumer		407		2		—		409
Mortgage warehouse		—		—		—		—
	$	7,890	$	817	$	16,751	$	25,458

			Past Due 90
	30-89 Days		Days or More
December 31, 2013	Past Due		Still Accruing		Nonaccrual		Total
Real estate:
Commercial	$	2,959	$	47	$	5,417	$	8,423
Construction, land development, land		690		—		—		690
1-4 family residential properties		1,803		19		1,392		3,214
Farmland		—		—		—		—
Total real estate		5,452		66		6,809		12,327
Commercial		2,155		11		5,494		7,660
Factored receivables		3,836		—		89		3,925
Consumer		591		2		—		593
Mortgage warehouse		—		—		—		—
	$	12,034	$	79	$	12,392	$	24,505

Credit Quality Information: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes every loan and is performed on a semi-annual basis at TSB and every eighteen months for loans greater than $500 at TCB. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:

Pass:

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

Special Mention:

Loans classified as special mention have low to acceptable risks. Liquidity, asset quality, and debt service coverage are as a whole satisfactory and performance is generally as agreed.

Substandard:

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

Doubtful:

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

PCI:

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

As of September 30, 2014 and December 31, 2013 based on the most recent analysis performed, the risk category of loans is as follows:

			Special
September 30, 2014	Pass		Mention		Substandard		Doubtful		PCI		Total
Real estate:
Commercial	$	238,251	$	2,963	$	6,089	$	—	$	14,533	$	261,836
Construction, land development, land		44,512		—		12		—		1,472		45,996
1-4 family residential		77,120		231		845		—		2,223		80,419
Farmland		20,059		—		—		—		—		20,059
Total real estate		379,942		3,194		6,946		—		18,228		408,310
Commercial		322,647		2,490		10,462		—		4,717		340,316
Factored receivables		168,121		—		344		647		—		169,112
Consumer		12,527		—		—		—		—		12,527
Mortgage warehouse		46,874		—		—		—		—		46,874
	$	930,111	$	5,684	$	17,752	$	647	$	22,945	$	977,139

			Special
December 31, 2013	Pass		Mention		Substandard		Doubtful		PCI		Total
Real estate:
Commercial	$	308,077	$	557	$	4,180	$	—	$	18,648	$	331,462
Construction, land development, land		35,585		—		—		—		2,041		37,626
1-4 family residential		88,379		—		450		—		2,472		91,301
Farmland		20,294		—		—		—		—		20,294
Total real estate		452,335		557		4,630		—		23,161		480,683
Commercial		247,941		—		5,684		—		2,030		255,655
Factored receivables		116,607		—		336		427		—		117,370
Consumer		13,878		—		—		—		—		13,878
Mortgage warehouse		13,513		—		—		—		—		13,513
	$	844,274	$	557	$	10,650	$	427	$	25,191	$	881,099

Troubled Debt Restructurings

Troubled debt restructurings and their effects were immaterial as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013.