2012
A foundation
for growth
Annual Report and Form 10-K
National Bank Holdings Corporation
(NYSE: NBHC)
National Bank Holdings Corporation is a bank holding company created
to build a leading community bank franchise delivering high quality client
service and strong shareholder results.
National Bank Holdings Corporation currently operates a network of 101
full-service banking centers, with the majority of those banking centers
located in Colorado and the greater Kansas City region. The Company’s
focus is on banking individuals, small and medium sized businesses.
Through its subsidiary, NBH Bank, N.A., the Company operates under
the following brand names: Bank Midwest in Kansas and Missouri,
Community Banks of Colorado in Colorado and California, and Hillcrest
Bank in Texas.
Our Family of Brands
Dear fellow shareholders:
2012 was a pivotal year for your company. Following our
formational acquisitions in our home markets of Kansas City
and Colorado in late 2010 and 2011, we entered 2012 with
a goal of creating a solid foundation to support our plan
of becoming a leading community bank through disciplined
acquisitions and relationship-driven organic growth.
Our 2012 objectives included completing the integration
of our acquisitions into a single, scalable operating plat-
form, recruiting experienced and proven talent throughout
our ranks, establishing a risk management and regulatory
framework capable of supporting a company well above our
current size, implementing the financial disciplines needed
to support a public company, and completing a public offering
of our stock. All of this was accomplished while remaining
highly focused on executing our organic growth play book,
staying true to our low-risk operating model and building
our acquisition pipeline. We finished 2012 having met our
objectives of building the foundation that will serve us well
into the future.
Having our foundation in place gave us the ability to transform
our legacy acquisitions through our new organic growth
capabilities. To that end, during 2012 we made valuable
investments in our revenue generating capabilities. In the
consumer segment, we invested in our brands, which are
built on our common sense banking philosophy of putting
clients first. We significantly improved our client experience
by refreshing our banking centers in the Kansas City metro
markets, offering our Colorado clients an integrated 50
banking center network, deploying state-of-the-art ATMs,
rolling out mobile banking, improving our online experience
and providing an attractive residential mortgage offering to
our clients. The commercial banking segment saw similar
investments. We focused on building local teams of experienced
commercial bankers to grow our small business and mid-
size commercial lines of business. Today we have over 50
bankers actively gaining share by focusing on local relationships
that benefit from our credit and treasury management offerings.
We also established agricultural and energy specialties to
better serve those segments, which are highly relevant in
our home markets.
These new capabilities began to gain traction following the
full roll out by mid-2012. Our loan fundings grew steadily
during the year to a total of $434 million, inclusive of a record
fourth quarter at $140 million. As important, our transaction
deposits grew at an annual rate of 7.4%, while cost of deposits
G. Timothy Laney
President and
Chief Executive Officer
declined from 0.84% in the fourth quarter of 2011 to 0.48%
in the fourth quarter of 2012.
Our commitment to a low-risk operating model continues to
be a very important part of our culture. This is evidenced by
a balance sheet that has one of the lowest risk weighted asset
to total assets in the industry at 34%. Our cash and high-
quality securities portfolio accounted for 57% of our assets at
year end. Our loan portfolio has several unique risk mitigants
including the benefits of acquisition discounts (66% of the
portfolio), FDIC loss share protection (33% of the portfolio)
and quarterly valuation updates for those loans accounted
under acquired loan pools (45% of the portfolio). As important,
98.5% of our liabilities are client deposits and repurchase
agreements. We adhere to conservative underwriting and
product standards to ensure that our growth is safe and our
clients can count on us for transparency and integrity.
As we look to 2013, we are intensely focused on further lever-
aging the foundation we’ve built. A key priority continues to
be the deployment of our $400 million of excess capital
through well-structured acquisitions. We selected our home
markets due in part to the attractive number of acquisition
targets and we remain excited by the opportunity to build
market share, as well as to selectively add complementary
specialty businesses to our company.
We are equally focused on safe and profitable organic growth
by leveraging the investments in our consumer, small business
and commercial teams. We believe that the diversity of our
home markets, coupled with our new organic capabilities,
will demonstrate continued momentum throughout 2013.
With the second largest banking center network in Kansas
City, and our third largest ranking among Colorado-based
banks, we will work hard to grow our share of these markets.
We are excited about our future, and I thank our associates,
our dedicated board of directors, our clients and our fellow
shareholders for their commitment to our company.
Tim Laney
President and Chief Executive Officer
History and Highlights
Locations and Market Share
October 2012
Initiated quarterly dividend;
authorized $25M share repurchase
September 2012
Initial public offering (NYSE: NBHC)
July 2012
Integration of Bank of Choice
May 2012
Integration of Community Banks of Colorado;
charter name change to NBH Bank, N.A.;
announced that National Bank Holdings
Corporation will relocate its holding company
headquarters to Greenwood Village, Colorado
November 2011
Integration of Hillcrest Bank
October 2011
Acquisition of Community Banks of Colorado
July 2011
Acquisition of Bank of Choice
May 2011
Integration of Bank Midwest;
opened Kansas City, MO operations
and technology facility
December 2010
Acquisition of Bank Midwest
October 2010
Acquisition of Hillcrest Bank
October 2009
Raised approximately $1 billion through the sale
of common stock, in a private placement
Bank Midwest
(cid:22) (cid:154)(cid:22)(cid:22)(cid:42)(cid:43)(cid:22)(cid:60)(cid:107)(cid:98)(cid:98)(cid:35)(cid:105)(cid:91)(cid:104)(cid:108)(cid:95)(cid:89)(cid:91)(cid:22)(cid:88)(cid:87)(cid:100)(cid:97)(cid:95)(cid:100)(cid:93)(cid:22)(cid:89)(cid:91)(cid:100)(cid:106)(cid:91)(cid:104)(cid:105)
(cid:22) (cid:154)(cid:22) (cid:40)(cid:38)(cid:22)(cid:72)(cid:91)(cid:106)(cid:95)(cid:104)(cid:91)(cid:99)(cid:91)(cid:100)(cid:106)(cid:22)(cid:89)(cid:101)(cid:99)(cid:99)(cid:107)(cid:100)(cid:95)(cid:106)(cid:111)(cid:22)
banking centers
(cid:22) (cid:154)(cid:22) (cid:42)(cid:36)(cid:43)(cid:27)(cid:22)(cid:58)(cid:91)(cid:102)(cid:101)(cid:105)(cid:95)(cid:106)(cid:22)(cid:99)(cid:87)(cid:104)(cid:97)(cid:91)(cid:106)(cid:22)(cid:105)(cid:94)(cid:87)(cid:104)(cid:91)(cid:22)(cid:95)(cid:100)(cid:22)
Kansas City MSA
(cid:22) (cid:154)(cid:22) (cid:72)(cid:87)(cid:100)(cid:97)(cid:105)(cid:22)(cid:40)(cid:100)(cid:90)(cid:22)(cid:95)(cid:100)(cid:22)(cid:88)(cid:87)(cid:100)(cid:97)(cid:95)(cid:100)(cid:93)(cid:22)(cid:89)(cid:91)(cid:100)(cid:106)(cid:91)(cid:104)(cid:105)(cid:22)(cid:95)(cid:100)(cid:22)
Kansas City MSA
Community Banks
of Colorado
(cid:22) (cid:154)(cid:22) (cid:43)(cid:42)(cid:22)(cid:60)(cid:107)(cid:98)(cid:98)(cid:35)(cid:105)(cid:91)(cid:104)(cid:108)(cid:95)(cid:89)(cid:91)(cid:22)(cid:88)(cid:87)(cid:100)(cid:97)(cid:95)(cid:100)(cid:93)(cid:22)(cid:89)(cid:91)(cid:100)(cid:106)(cid:91)(cid:104)(cid:105)
(cid:22) (cid:154)(cid:22) (cid:39)(cid:36)(cid:42)(cid:27)(cid:22)(cid:58)(cid:91)(cid:102)(cid:101)(cid:105)(cid:95)(cid:106)(cid:22)(cid:99)(cid:87)(cid:104)(cid:97)(cid:91)(cid:106)(cid:22)(cid:105)(cid:94)(cid:87)(cid:104)(cid:91)(cid:22)
across Colorado
(cid:22) (cid:154)(cid:22) (cid:72)(cid:87)(cid:100)(cid:97)(cid:105)(cid:22)(cid:41)(cid:104)(cid:90)(cid:22)(cid:95)(cid:100)(cid:22)(cid:99)(cid:87)(cid:104)(cid:97)(cid:91)(cid:106)(cid:22)(cid:105)(cid:94)(cid:87)(cid:104)(cid:91)(cid:22)(cid:101)(cid:92)(cid:22)
Colorado headquartered banks
Hillcrest Bank
(cid:22) (cid:154)(cid:22) (cid:40)(cid:22)(cid:60)(cid:107)(cid:98)(cid:98)(cid:35)(cid:105)(cid:91)(cid:104)(cid:108)(cid:95)(cid:89)(cid:91)(cid:22)(cid:88)(cid:87)(cid:100)(cid:97)(cid:95)(cid:100)(cid:93)(cid:22)(cid:89)(cid:91)(cid:100)(cid:106)(cid:91)(cid:104)(cid:105)(cid:22)(cid:22)
located in Austin and Dallas, TX
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banking centers
Strengths
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(cid:154)(cid:22)(cid:22) (cid:66)(cid:101)(cid:109)(cid:22)(cid:104)(cid:95)(cid:105)(cid:97)(cid:22)(cid:102)(cid:104)(cid:101)(cid:211)(cid:98)(cid:91)
(cid:154)(cid:22)(cid:22) (cid:57)(cid:87)(cid:102)(cid:95)(cid:106)(cid:87)(cid:98)(cid:22)(cid:106)(cid:101)(cid:22)(cid:105)(cid:107)(cid:102)(cid:102)(cid:101)(cid:104)(cid:106)(cid:22)(cid:93)(cid:104)(cid:101)(cid:109)(cid:106)(cid:94)(cid:22)
(cid:154)(cid:22)(cid:22) (cid:60)(cid:101)(cid:89)(cid:107)(cid:105)(cid:91)(cid:90)(cid:22)(cid:101)(cid:100)(cid:22)(cid:104)(cid:91)(cid:98)(cid:87)(cid:106)(cid:95)(cid:101)(cid:100)(cid:105)(cid:94)(cid:95)(cid:102)(cid:22)(cid:90)(cid:104)(cid:95)(cid:108)(cid:91)(cid:100)(cid:22)(cid:101)(cid:104)(cid:93)(cid:87)(cid:100)(cid:95)(cid:89)(cid:22)(cid:93)(cid:104)(cid:101)(cid:109)(cid:106)(cid:94)
(cid:154)(cid:22)(cid:22) (cid:59)(cid:110)(cid:102)(cid:91)(cid:104)(cid:106)(cid:95)(cid:105)(cid:91)(cid:22)(cid:95)(cid:100)(cid:22)(cid:87)(cid:105)(cid:105)(cid:95)(cid:105)(cid:106)(cid:91)(cid:90)(cid:22)(cid:87)(cid:100)(cid:90)(cid:22)(cid:107)(cid:100)(cid:87)(cid:105)(cid:105)(cid:95)(cid:105)(cid:106)(cid:91)(cid:90)(cid:22)(cid:88)(cid:87)(cid:100)(cid:97)(cid:22)(cid:106)(cid:104)(cid:87)(cid:100)(cid:105)(cid:87)(cid:89)(cid:106)(cid:95)(cid:101)(cid:100)(cid:105)
(cid:154)(cid:22)(cid:22) (cid:73)(cid:89)(cid:87)(cid:98)(cid:87)(cid:88)(cid:98)(cid:91)(cid:22)(cid:89)(cid:101)(cid:105)(cid:106)(cid:22)(cid:91)(cid:247)(cid:91)(cid:89)(cid:106)(cid:95)(cid:108)(cid:91)(cid:22)(cid:101)(cid:102)(cid:91)(cid:104)(cid:87)(cid:106)(cid:95)(cid:100)(cid:93)(cid:22)(cid:102)(cid:98)(cid:87)(cid:106)(cid:92)(cid:101)(cid:104)(cid:99)(cid:22)
Core Capabilities
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(cid:154)(cid:22)(cid:22) (cid:73)(cid:99)(cid:87)(cid:98)(cid:98)(cid:22)(cid:56)(cid:107)(cid:105)(cid:95)(cid:100)(cid:91)(cid:105)(cid:105)
(cid:154)(cid:22)(cid:22) (cid:57)(cid:101)(cid:99)(cid:99)(cid:91)(cid:104)(cid:89)(cid:95)(cid:87)(cid:98)(cid:22)(cid:56)(cid:87)(cid:100)(cid:97)(cid:95)(cid:100)(cid:93)
(cid:154)(cid:22)(cid:22) (cid:59)(cid:100)(cid:91)(cid:104)(cid:93)(cid:111)(cid:37)(cid:55)(cid:93)(cid:104)(cid:95)(cid:89)(cid:107)(cid:98)(cid:106)(cid:107)(cid:104)(cid:91)(cid:22)(cid:73)(cid:102)(cid:91)(cid:89)(cid:95)(cid:87)(cid:98)(cid:106)(cid:111)(cid:22)(cid:56)(cid:87)(cid:100)(cid:97)(cid:95)(cid:100)(cid:93)
(cid:154)(cid:22)(cid:22) (cid:74)(cid:104)(cid:91)(cid:87)(cid:105)(cid:107)(cid:104)(cid:111)(cid:22)(cid:67)(cid:87)(cid:100)(cid:87)(cid:93)(cid:91)(cid:99)(cid:91)(cid:100)(cid:106)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended December 31, 2012
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 001-35654
NATIONAL BANK HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27-0563799
(I.R.S. Employer Identification No.)
5570 DTC Parkway,
Greenwood Village, Colorado, 80111
(Address of principal executive offices) (Zip Code)
(720) 529-3336
Registrant’s telephone, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, Par Value $0.01
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “accelerated filer.” and “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ‘
Non-accelerated filer È (do not check if a smaller reporting company)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
As of June 30, 2012, the last business day of the Registrant’s most recently completed second fiscal quarter, there was no established public
market for the Registrant’s Class A or Class B common stock and, therefore, the Registrant cannot calculate the aggregate market value of its
Class A and Class B common stock held by non-affiliates as of such date.
‘
Accelerated filer
Smaller Reporting Company ‘
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of March 11, 2013, NBHC had outstanding 46,347,287 shares of Class A voting common stock, and 5,967,619 shares of Class B non-voting
common stock.
Portions of the Registrant’s definitive proxy statement for its 2013 Annual Meeting of Shareholders to be filed within 120 days of
December 31, 2012 will be incorporated by reference into Part III of this form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
INDEX
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
26
41
41
41
41
42
44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . .
107
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183
PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
184
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184
Item 12. Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . .
184
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184
PART IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185
Signatures
Index to Exhibits
Item 1.
BUSINESS.
Summary
PART I
National Bank Holdings Corporation is a bank holding company that was incorporated in the State of Delaware
in June 2009. In October 2009, we raised net proceeds of approximately $974 million, through a private offering
of our common stock. We are executing a strategy to create long-term stockholder value through the acquisition
and operation of community banking franchises and other complementary businesses in our targeted markets. We
believe these markets exhibit attractive demographic attributes, are home to a substantial number of financial
institutions, including troubled financial institutions, and present favorable competitive dynamics, thereby
offering long-term opportunities for growth. Our emphasis is on creating meaningful market share with strong
revenues complemented by operational efficiencies that we believe will produce attractive risk-adjusted returns.
We believe we have a disciplined approach to acquisitions, both in terms of the selection of targets and the
structuring of transactions, which has been exhibited by our four acquisitions to date. As of December 31, 2012,
we had $5.4 billion in assets, $4.2 billion in deposits and $1.1 billion in stockholders’ equity. We currently
operate a network of 101 full-service banking centers, with the majority of those banking centers located in the
greater Kansas City region and Colorado. We believe that our established presence positions us well for growth
opportunities in our current and complementary markets.
We have a management team consisting of experienced banking executives led by President and Chief Executive
Officer G. Timothy Laney. Mr. Laney brings 30 years of banking experience, 24 of which were at Bank of
America in a wide range of executive management roles, including serving on Bank of America’s Management
Operating Committee. In late 2007, Mr. Laney joined Regions Financial as Senior Executive Vice President and
Head of Business Services. Mr. Laney leads our team of executives that have significant experience in
completing and integrating mergers and acquisitions and operating banks. Additionally, our board of directors,
led by Chairman Frank Cahouet, the former Chairman, President and Chief Executive Officer of Mellon
Financial, is highly accomplished in the banking industry and includes individuals with broad experience
operating and working with financial institutions, regulators and governance considerations.
Our Acquisitions
A key component of our growth strategy is to grow through the acquisition of financial institutions, including
distressed financial institutions. We consider our ability to source, diligence and close transactions to be a core
skill set. We established our presence in the greater Kansas City region through two complementary acquisitions
completed in the fourth quarter of 2010. On October 22, 2010, we acquired selected assets and assumed selected
liabilities of Hillcrest Bank of Overland Park, Kansas from the FDIC. Through this transaction, we acquired nine
full-service banking centers and 32 retirement center locations, which are predominantly located in the greater
Kansas City region but also include one full-service banking center and six retirement centers in Colorado and
two full-service banking centers and six retirement centers in Texas. Retirement centers offer full-service
banking services to residents in retirement communities that value convenience and relationship banking. The
centers are designed to be efficient and are located within the premises of each community center and typically
measure approximately 130 square feet. They are staffed with a part-time banker and open for three hours per
day to offer consumer banking services. The products and services are centered on traditional depository
services, including checking, money market, and time deposit accounts. We do not have any current plans to
further develop this business line.
On December 10, 2010, we completed our acquisition, without FDIC assistance, of a portion of the franchise of
Bank Midwest, one of six subsidiaries of Dickinson Financial Corporation, that consisted of select performing
loans and client deposits, and included 39 full-service banking centers. As a result of these acquisitions, at
June 30, 2012 (the last date as of which data are available), we were the seventh largest depository institution in
the Kansas City MSA ranked by deposits with a 4.5% deposit market share according to SNL Financial.
1
We expanded in the Colorado market through two complementary acquisitions beginning with the purchase of
selected assets and assumption of selected liabilities of Bank of Choice, a state-chartered commercial bank based
in Greeley, Colorado, from the FDIC on July 22, 2011. In connection with this acquisition, we also acquired 16
full-service banking centers. On October 21, 2011, we acquired selected assets and assumed selected liabilities of
Community Banks of Colorado, a state chartered bank based in Greenwood Village, Colorado, from the FDIC,
We acquired 36 full-service banking centers in Colorado and four in California in connection with this
transaction. The Community Banks of Colorado acquisition enhanced our penetration into the Colorado market,
giving us a combined network of 52 full-service banking centers in that state and ranking us as the 14th largest
depository institution by deposits with a1.4% deposit market share as of June 30, 2012 (the last date as of which
data are available) according to SNL Financial.
The following table summarizes certain highlights of our four acquisitions to date as of each acquisition date:
Community Banks
of Colorado
Bank of Choice
Bank Midwest
Hillcrest Bank
Yes
Yes (1)
Date acquired . . . . . . October 21, 2011
FDIC-assisted . . . . . .
Loss share . . . . . . . .
Full-service banking
centers . . . . . . . . .
Deposits (millions) . .
. . .
Assets (millions)
. . . .
Primary Market
40
$1,195
$1,228
Colorado
July 22, 2011
Yes
No
December 10, 2010
No
No
16
$760
$950
Colorado
39
$2,386
$2,426
Greater Kansas
City Region
October 22, 2010
Yes
Yes(2)
9 (and 32
retirment centers)
$1,234
$1,377
Greater Kansas
City Region
(1) Commercial Shared-Loss Agreement.
(2) Single Family Shared-Loss Agreement and Commercial Shared-Loss Agreement.
We believe we have a disciplined approach to acquisitions, which has been exhibited in our transactions to date.
We believe that we have established critical mass in our current markets and have structured acquisitions that
limit our credit risk, which has positioned us for attractive risk-adjusted returns. Further details of our
acquisitions appear below.
Hillcrest Bank
On October 22, 2010, we acquired selected assets and assumed selected liabilities of Hillcrest Bank from the
FDIC, as receiver. Hillcrest Bank was a state-chartered non-member bank, established on December 3, 1975 as
Oak Park National Bank that subsequently changed its name to Oak Park Bank on May 1, 1987 and to Hillcrest
Bank on January 1, 1997. Included in the transaction were 41 banking centers, 26 of which are in the greater
Kansas City region (six of which are traditional banking centers and 20 of which are banking centers located
within senior living facilities that provide convenient, limited scope banking services consisting primarily of time
deposits to the employees and residents of these senior living facilities), eight of which are in Texas (two of
which are full-service banking centers and six of which are in senior living facilities) and seven of which are in
Colorado (one of which is a full-service banking center and six of which are in senior living facilities).
The Hillcrest Bank acquisition gave the Company assets with a fair value of $1.4 billion, including $781 million
of loans, $235 million of marketable investment securities, $134 million of cash and cash equivalents, and $226
million of other assets. Liabilities with a fair value of $1.3 billion were also assumed, including $1.2 billion of
non-brokered deposits, $84 million of Federal Home Loan Bank (“FHLB”) advances, and $21 million of other
liabilities. The acquisition excluded deposits of $250 million that were retained by the FDIC, and the FDIC made
a cash contribution of $183 million to us as part of the transaction.
2
The FDIC has agreed to absorb a portion of all future credit losses and workout expenses through a loss sharing
arrangement that covers single-family mortgage loans for a period of 10 years and commercial loans, including
other real estate owned (“OREO”), for a period of five years (excluding $3.1 million in consumer loans as of the
date of acquisition). The coverage amounts are subject to loss thresholds as follows (in thousands):
Commercial
Single family
Tranche
Loss Threshold
Loss-Coverage
Percentage
Tranche
Loss Threshold
Loss-Coverage
Percentage
1
2
3
Up to $295,592
$295,593-405,293
>$405,293
60%
0%
80%
1
2
3
Up to $4,618
$4,618-8,191
>$8,191
60%
30%
80%
We acquired other Hillcrest Bank assets that are not covered by the loss sharing arrangement with the FDIC,
including cash, certain investment securities acquired at fair market value and other tangible assets. The loss
sharing arrangement does not apply to subsequently acquired, purchased or originated assets. At June 30, 2012,
the covered assets consisted of assets with a book value of $456.0 million. The total unpaid principal balance
(“UPB”) (or for OREO, the carrying amount) of the covered assets at June 30, 2012 was $609.2 million. In
connection with the Hillcrest Bank acquisition, we created the newly chartered Hillcrest Bank, N.A. to hold the
acquired assets. Hillcrest Bank, N.A. was later merged into Bank Midwest as described under the heading “—
The Restructuring.”
Bank Midwest
In July 2010, we agreed to acquire, and on December 10, 2010 we completed the acquisition of certain assets and
liabilities formerly held by Bank Midwest, one of six banking subsidiaries owned by Dickinson Financial
Corporation, a privately held bank holding company located in Kansas City, Missouri. The acquired assets and
assumed liabilities included 39 of Bank Midwest’s 58 banking centers, $2.4 billion of Bank Midwest’s $3.3
billion of deposits and $905.4 million of Bank Midwest’s $2.4 billion of loans, and the rights to the name “Bank
Midwest.”
Of the 39 banking centers included in the transaction, 25 are in the greater Kansas City region and the remaining
14 are elsewhere in Missouri. The transaction excluded all of Bank Midwest’s banking centers that were located
in Wal-Mart locations, deposits of $862 million and all non-accrual loans and OREO, which were retained by
Dickinson Financial Corporation.
The Bank Midwest acquisition gave us assets with a fair value of $2.4 billion, including $882 million of loans,
$1.4 billion of cash and cash equivalents and $174 million of other assets. Liabilities with a fair value of $2.4
billion were also assumed, including $2.4 billion of non-brokered deposits and $40 million of other liabilities. In
connection with the Bank Midwest acquisition, we established the newly chartered national bank NBH Bank,
N.A., originally with the name “Bank Midwest, N.A.,” to hold the acquired assets.
As a result of the Hillcrest and Bank Midwest acquisitions, we were, at June 30, 2012 (the last date as of which
data are available), the seventh largest depository institution in the Kansas City MSA ranked by deposits with a
4.5% deposit market share, according to SNL Financial.
Bank of Choice
On July 22, 2011, our wholly owned bank subsidiary NBH Bank, N.A., acquired selected assets and assumed
selected liabilities of Bank of Choice from the FDIC as receiver. Bank of Choice was a Colorado state-chartered
commercial bank established in 1896 and based in Greeley, Colorado. Included in this transaction were 16 full-
service banking centers in Colorado.
3
The Bank of Choice acquisition gave the Company assets with a fair value of $950 million, including $361
million of loans, $134 million of marketable investment securities, $402 million of cash and cash equivalents,
and $53 million of other assets. Liabilities with a fair value of $889 million were also assumed, including $760
million of non-brokered deposits, $117 million of FHLB advances, and $12 million of other liabilities.
We did not enter into a loss sharing agreement with the FDIC on the Bank of Choice acquisition, but rather the
FDIC contributed a payment of $274 million, consisting of a $172 million asset discount and approximately $102
million for the difference in liabilities assumed and assets acquired.
Community Banks of Colorado
On October 21, 2011, our wholly owned bank subsidiary, NBH Bank, N.A., acquired selected assets and
assumed selected liabilities of Community Banks of Colorado from the FDIC as receiver. Community Banks of
Colorado was a Colorado state-chartered, Fed-member, commercial bank established in 1973 as Bank of Cripple
Creek and later changed its name to Community Banks of Colorado in 1995 and was based in Greenwood
Village, Colorado. Included in this transaction were 40 full-service banking centers, 36 of which are in Colorado
and four of which are in California.
The Community Banks of Colorado acquisition gave the Company assets with a fair value of $1.2 billion,
including $755 million of loans, $11 million of marketable investment securities, $250 million of cash and cash
equivalents, and $212 million of other assets. Liabilities with a fair value of $1.2 billion were also assumed,
including $1.2 billion of non-brokered deposits, $16 million of FHLB advances, and $17 million of other
liabilities.
The FDIC has agreed to absorb a portion of all future credit losses and workout expenses through a loss sharing
arrangement that covers the large majority of the Community Bank of Colorado’s commercial loans and OREO
($480 million) for a term of five years. The loss sharing arrangement does not cover any losses on single-family
residential loans or selected commercial real estate loans.
Tranche
Loss Threshold
1
2
3
Up to $204,194
$204,195-308,020
>$308,020
Loss-Coverage
Percentage
80%
30%
80%
With the Bank of Choice and Community Banks of Colorado acquisitions, we substantially increased our
presence in Colorado, becoming the third largest banking center network among Colorado based banks ranked by
deposits as of June 30, 2012 (the last date as of which data are available), according to SNL Financial. We
believe this market and our position in it offer attractive growth potential due to the number of distressed banks,
retrenching competitors and attractive demographic characteristics.
The Restructuring
In connection with the Hillcrest Bank and Bank Midwest acquisitions, we established two newly chartered banks,
Hillcrest Bank, N.A. and Bank Midwest, N.A. Subsequently, Bank Midwest, N.A. acquired Bank of Choice and
Community Banks of Colorado. In November 2011, we merged Hillcrest Bank, N.A. into Bank Midwest, N.A.,
consolidating our banking operations under a single charter. We changed the legal name of Bank Midwest, N.A.
to NBH Bank, N.A., which we refer to as “NBH Bank” or the “Bank,” on May 20, 2012. Through our subsidiary
NBH Bank, we operate under the following brand names: Bank Midwest in Kansas and Missouri, Community
Banks of Colorado in Colorado and California and Hillcrest Bank in Texas. We believe that conducting our
banking operations under a single charter streamlines our operations and enables us to more effectively and
efficiently execute our growth strategy. On March 26, 2012, we changed our legal name from NBH Holdings
Corp. to National Bank Holdings Corporation.
4
Market Area
Market Criteria
We focus on markets that we believe are characterized by some or all of the following:
• Attractive demographics with household income and population growth above the national average
• Concentration of business activity
• High-quality deposit bases
• Advantageous competitive landscape that provides opportunity to achieve meaningful market presence
• A substantial number of financial institutions, including troubled financial institutions as potential
acquisition targets
• Lack of consolidation in the banking sector and corresponding opportunities for add-on transactions
• Markets sizeable enough to support our long-term growth objectives
Current Markets
Our current markets are broadly defined as the greater Kansas City region and Colorado. Our specific emphasis
is on the I-35 corridor surrounding the Kansas City MSA and the Colorado Front Range corridor, defined as the
Denver, Boulder, Colorado Springs, Fort Collins and Greeley MSAs. The table below describes certain key
statistics regarding our presence in these markets as of June 30, 2012 (the last date as of which data are
available).
States
Deposit Market
Share Rank (1)
Banking Centers (1)
Deposits
(millions) (1)
Deposit Market
Share (1)
Missouri . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . . . . . . . .
9
14
13
41
56
24
$1,928.2
1,406.3
722.0
1.6%
1.4
1.1
MSAs
Kansas City, MO-KS . . . . . . . . . .
Denver-Aurora-Broomfield, CO .
Greeley, CO . . . . . . . . . . . . . . . . .
Saint Joseph, MO-KS . . . . . . . . .
Maryville, MO . . . . . . . . . . . . . . .
Kirksville, MO . . . . . . . . . . . . . . .
Fort Collins-Loveland, CO . . . . .
Deposit Market
Share Rank (1)
Banking Centers (1)
Deposits
(millions) (1)
Deposit Market
Share (1)
7
17
4
3
2
2
16
50
21
5
4
3
2
4
$1,906.8
606.7
222.9
244.1
167.0
139.3
89.9
4.5%
1.0
7.5
11.5
30.3
22.1
1.7
(1) Note: Excludes our Texas and California operations and MSAs in which we have less than $100 million in
deposits.
Source: SNL Financial as of June 30, 2012, except Banking Centers, which reflects the most recently available
data.
5
We believe that these markets have highly attractive demographic, economic and competitive dynamics that are
consistent with our objectives and favorable to executing our acquisition and organic growth strategy. The table
below describes certain key demographic statistics regarding these markets.
Deposits
(billions)
# of
Businesses
(thousands)
Population
(millions)
Population
Density
(# / sq. mile)
Population
Growth (1)
Median
Household
Income
Top 3
Competitor
Combined
Deposit
Market Share
Kansas City, MO-KS
MSA . . . . . . . . . . . . . . . .
CO Front Range(2) . . . . . . .
U.S. . . . . . . . . . . . . . . . . . . .
$42.7
80.3
77
182.7
2.1
4.2
263.7
280.2
88.7
12.4% $53,761
27,290
21.7
50,157
11.3
36%
52
54(3)
(1) Population growths are for the period 2000 through 2012.
(2) CO Front Range is a population weighted average of the following Colorado MSAs: Denver, Boulder,
Colorado Springs, Fort Collins and Greeley.
(3) Based on U.S. Top 20 MSAs (determined by population).
Source: SNL Financial as of December 31, 2012, except Deposits and Top 3 Competitor Combined Deposit
Market Shares, which reflects data as of June 30, 2012.
Prospective Markets
We believe there is significant opportunity to both enhance our presence in our current markets and enter new
complementary markets that meet our objectives. As we evaluate potential acquisition opportunities, we believe
there are many financial institutions that continue to face credit challenges, capital constraints and liquidity
issues. As of December 31, 2012, according to SNL Financial 37 banks in our current markets and in surrounding
states had Texas Ratios either (1) in excess of 100% or (2) less than 0%. Texas Ratio is a key measure of a
bank’s financial health and is defined as the sum of nonaccrual loans, troubled debt restructurings (“TDR’s”),
other real estate owned (“OREO”) and loans 90 days or more past due and still accruing divided by the sum of
the bank’s tangible common equity and loan loss reserves. If a bank’s Texas Ratio is negative, it indicates that
the bank has negative tangible common equity and is therefore generally considered insolvent and also a
potential acquisition target. Additionally, as of December 31, 2012, according to SNL Financial there were 88
other banks with assets between $750 million and $10 billion and Texas Ratios (1) less than 100% and (2) greater
than 0%, which present potential acquisition opportunities that we believe would complement our product
offerings while simultaneously taking advantage of operating efficiencies and scale and our local branding and
leadership. We believe those dynamics will provide ongoing opportunities for us to continue to execute our
acquisition strategy over the next several years. We also believe there are a number of healthy banks in these
markets that would complement our breadth of products and services and benefit from our operating
effectiveness and scale while welcoming our approach to local branding and leadership.
6
The table below highlights banks with a Texas Ratio either (1) in excess of 100% or (2) less than 0% and banks
with a Texas Ratio less than 100% and assets between $750 million and $10 billion:
Banks with Texas Ratios > 100%
or <0%
Total
Assets
($millions)
Total
Deposits
($millions)
# of
Banks
Other Banks with Assets Between
$750mm and $10bn
# of
Banks
Total
Assets
($millions)
Total
Deposits
($millions)
By Urban Corridor
Kansas City MSA . . . . . . . . . . . . . . . . . . . . . .
Colorado Front Range . . . . . . . . . . . . . . . . . . .
4
6
$
955
1,428
$
704
1,222
6
5
$ 10,070 $ 7,523
7,657
9,445
Urban Corridor Total . . . . . . . . . . . . . . . . . . . . . .
10
$ 2,383
$ 1,926
11
$ 19,515
$ 15,180
By State
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrounding States (Iowa, Montana, Nebraska,
Wyoming, South and North Dakota)
Surrounding States Total . . . . . . . . . . . . . . . . . . .
State & Surrounding States Total . . . . . . . . . . . .
13
9
4
26
11
37
$10,275
1,941
2,638
$ 8,972
1,398
2,296
$14,854
$12,666
$ 4,300
$ 3,543
$19,154
$16,209
24
6
12
42
46
88
$ 48,487 $ 35,881
18,902
9,690
27,079
11,850
$ 87,416 $ 64,473
$ 96,221 $ 72,361
$183,637 $136,834
Source: SNL Financial based on financial information as of December 31, 2012.
Our Business Strategy
Our strategic plan is to become a leading regional bank holding company through selective acquisitions of
financial institutions, including troubled financial institutions that have stable core franchises and significant
local market share as well as other complementary businesses, while structuring the transactions to limit risk. We
plan to achieve this through organic growth and the acquisition of financial institutions from the FDIC and
through conservatively structured unassisted transactions. We seek acquisitions that offer opportunities for clear
financial benefits through add-on transactions, long-term organic growth opportunities and expense reductions.
Additionally, our acquisition strategy is to identify markets that are relatively unconsolidated, establish a
meaningful presence within those markets, and take advantage of the operational efficiencies and enhanced
market position. Our focus is on building strong banking relationships with small- and mid-sized businesses and
consumers, while maintaining a low risk profile designed to generate reliable income streams and attractive risk-
adjusted returns. The key components of our strategic plan are:
• Disciplined acquisitions. We seek to carefully select banking acquisition opportunities that we believe
have stable core franchises and significant local market share, while structuring the transactions to limit
risk. Further, we seek acquisitions in attractive markets that offer substantial benefits through reliable
income streams, potential add-on transactions, long-term organic growth opportunities and expense
reductions. We believe we utilize a comprehensive, conservative due diligence process that is strongly
focused on loan credit quality.
• Attractive markets. We seek to acquire banking franchises in markets that exhibit attractive
demographic attributes. Our focus is on comparatively healthy business markets that are home to a
substantial number of financial institutions, including troubled financial institutions for which we
believe there are a limited number of potential acquirers. Additionally, we seek banking markets that
present favorable competitive dynamics and a lack of consolidation in order to position us for long-
term growth. We believe that our two current markets—the greater Kansas City region and
Colorado—meet these objectives. We intend to continue to make banking acquisitions in these markets
and in complementary markets to expand our existing franchise.
7
• Focus on client-centered, relationship-driven banking strategy. Our consumer bankers focus on
knowing their clients in order to best meet their financial needs, offering a full complement of loan,
deposit and online banking solutions. Our commercial bankers focus on small and mid-sized businesses
with an advisory approach that emphasizes understanding the client’s business and offering a complete
array of loan, deposit and treasury management products and services.
• Expansion through organic growth and enhanced product offerings. We believe that our focus on
attractive markets will provide long-term opportunities for organic growth, particularly in an improving
economic environment. We also believe that our focus on serving consumers and small- to mid-sized
businesses, coupled with our enhanced product offerings, will provide an expanded revenue base and
new sources of fee income.
• Operating platform and efficiencies. We have consolidated our acquired banks under one charter and
we intend to continue to utilize our comprehensive underwriting and risk management processes while
maintaining local branding, leadership and decision making. We have integrated all of our acquired
banks onto one state-of-the-art operating platform that we believe will provide scalable technology to
support and integrate future growth and realize operating efficiencies throughout our enterprise.
We believe our strategy—growth through selective acquisitions in attractive markets and growth through the
retention, expansion and development of client-centered relationships—provides flexibility regardless of
economic conditions. We also believe that our established platform for assessing, executing and integrating
acquisitions (including FDIC-assisted transactions) creates opportunities in a prolonged economic downturn
while the combination of attractive market factors, franchise scale in our targeted markets and our relationship-
centered banking focus creates opportunities in an improving economic environment.
Products and Services
Through NBH Bank, N.A., our primary business is to offer a full range of traditional banking products and
financial services to both our commercial and consumer customers, who currently are predominantly located in
Kansas, Missouri and Colorado. We offer a full array of lending products to cater to our customers’ needs,
including, but not limited to, small business loans, equipment loans, term loans, asset-backed loans, letters of
credit, commercial lines of credit, residential mortgage loans, home equity and consumer loans. We also offer
traditional depository products, including commercial and consumer checking accounts, non-interest-bearing
demand accounts, money market deposit accounts, savings accounts and time deposit accounts and cash
management services.
We offer a high level of personalized service to our customers through our relationship managers and banking
center personnel. We believe that a banking relationship that includes multiple services, such as loan and deposit
services, online banking solutions and treasury management products and services, is the key to profitable and
long-lasting customer relationships and that our local focus and local decision making provide us with a
competitive advantage over banks that do not have these attributes.
Lending Activities
Our primary strategic objective is to serve small- to medium-sized businesses in our market with a variety of
unique and useful services, including a full array of commercial mortgage and non-mortgage loans. Our
commercial bankers focus on small- and medium-sized businesses with an advisory approach that emphasizes
understanding the client’s business and offering a complete suite of loan, deposit and treasury management
products and services. Our consumer bankers focus on knowing their individual clients in order to best meet their
financial needs, offering a full complement of loan, deposit and online banking solutions. We strive to do
business in the areas served by our banking centers, which is also where our marketing is focused, and the vast
majority of our new loan customers are located in existing market areas.
8
Our loan portfolio includes commercial and industrial loans, commercial real estate loans, residential real estate
loans, agricultural loans and consumer loans. The principal risk associated with each category of loans we make
is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions
and the attributes of the borrower’s market or industry segment. Attributes of the relevant business market or
industry segment include the competitive environment, customer and supplier power, threat of substitutes and
barriers to entry and exit. Our credit policy requires that key risks be identified and measured, documented and
mitigated, to the extent possible, to seek to ensure the soundness of our loan portfolio.
Our credit policy also provides detailed procedures for making loans to individuals along with the regulatory
requirements to ensure that all loan applications are evaluated subject to our fair lending policy. Our credit policy
addresses the common credit standards for making loans to individuals, the credit analysis and financial
statement requirements, the collateral requirements, including insurance coverage where appropriate, as well as
the documentation required. Our ability to analyze a borrower’s current financial health and credit history, as
well as the value of collateral as a secondary source of repayment, when applicable, are significant factors in
determining the creditworthiness of loans to individuals. We have also adopted formal credit policies regarding
our underwriting procedures for other loans including commercial and commercial real estate loans. We require
various levels of internal approvals based on the characteristics of such loans, including the size, nature of the
exposure and type of collateral if any. We believe that the procedures required by our credit policies enhance
internal responsibility and accountability for underwriting decisions and permit us to monitor the performance of
credit decisioning. For more detail on our credit policies, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Financial Condition—Asset Quality.”
As of December 31, 2012, approximately 57% of our total portfolio was variable rate loans, approximately 43%
of our total loan portfolio was fixed rate loans and less than 0.9% of our total loan portfolio was unsecured. As of
December 31, 2012, of the loans we had originated year-to-date, approximately 35% were variable rate loans and
approximately 65% were fixed rate loans.
Commercial and Industrial Loans. We originate commercial and industrial loans and leases, including working
capital loans, equipment loans, oil and gas loans and other commercial loans and leases. The terms of these loans
vary by purpose and by type of underlying collateral, if any.
Working Capital Loans. Working capital loans generally have terms of up to one year and have variable interest
rates priced over the prime rate as published in the Wall Street Journal or LIBOR. The loans are usually secured
by accounts receivable and inventory and carry the personal guarantees of the principals of the business.
In some cases, we use an independent third party to assess and recommend appropriate advance rates (i.e., how
much we will lend) based on the liquidation value of collateral. Additionally, we may use third-party monitoring
of advance rates in some cases. For loans secured by accounts receivable or inventory, principal is typically
repaid as the assets securing the loan are converted into cash.
Equipment Loans. Equipment loans have terms of up to three to five years and are amortized over the terms of
the loans. Interest rates are either fixed or variable with variable rate loans priced over the prime rate as published
in the Wall Street Journal or LIBOR. Equipment loans are generally secured by the financed equipment at
advance rates that we believe are appropriate for the equipment type.
In our credit underwriting process, we carefully evaluate the borrower’s industry, operating performance,
liquidity and financial condition. We underwrite credits based on multiple repayment sources, including
operating cash flow, liquidation of collateral and guarantor support, if any. As of December 31, 2012,
approximately 96.6% of our commercial and industrial loans were secured and a significant portion of those
loans were supported by personal guarantees. We closely monitor the operating performance, liquidity and
financial condition of borrowers through analysis of periodic financial statements and meetings with the
borrower’s management. As part of our credit underwriting process, we also review the borrower’s total debt
obligations on a global basis. As of December 31, 2012, we had $270.6 million in commercial and industrial
9
loans and leases outstanding, comprising approximately 14.7% of our total loan portfolio. During the year ended
2012, we originated and closed $87.5 million of commercial and industrial loans, which was approximately
20.2% of total loans originated for portfolio investment during that period.
Real Estate Loans. Our real estate loans consist of commercial real estate loans and residential real estate loans.
Commercial Real Estate Loans. Commercial real estate loans, or CRE loans, consist of loans to finance the
purchase of commercial real estate, loans to finance inventory and working capital that are secured by
commercial real estate and construction and development loans.
Our CRE loans include loans on 1-4 family construction properties, commercial properties such as office
buildings, strip malls, or free-standing commercial properties, multi-family and investor properties and raw land
development loans.
These loans are typically secured by a first lien mortgage on multi-family, office, warehouse, hotel or retail
property plus assignments of all leases related to the properties. These loans are generally divided into two
categories: loans to commercial entities that will occupy most or all of the property (described as “owner-
occupied”) and non-owner occupied loans. In the case of owner-occupied loans, we are usually the primary
provider of financial services for the company and/or the principals. Underwriting guidelines generally require
borrowers to contribute cash equity that results in an 80% or less loan-to-value ratio on owner-occupied
properties and a 75% or less loan-to-value ratio on non-owner occupied properties. Debt service coverage ratios
are also required to comply with our standards. Exceptions to these guidelines are infrequent and are justified
based on other credit factors. Substantially all CRE loans require regular monthly amortization of principal and
are amortizing over 15 to 25 years with maturity dates that generally do not exceed 3 to 5 years. These loans are
either fixed rate or variable rate priced over the prime rate as published in the Wall Street Journal or LIBOR. We
seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our primary
markets and obtaining financial statements or tax returns or both from borrowers and guarantors at regular
intervals. It is also our policy to obtain personal guarantees from the principals of the borrowers.
Outside of owner-occupied CRE loans that are repaid through the cash flows generated by the borrowers’
business operations, commercial real estate is not a focus in our lending strategy. As of December 31, 2012, we
had $805.0 million in CRE loans outstanding, comprising approximately 43.9% of our total loan portfolio.
During the year ended 2012, we originated and closed $57.5 million of CRE loans, which was approximately
13.2% of total loans originated for portfolio investment during that period.
Residential Real Estate Loans. Residential real estate loans consist of loans secured by the primary or secondary
residence of the borrower. These loans consist of closed loans, which are typically amortizing over a 10 to 30
year term. We also offer open-ended home equity loans, which are loans secured by secondary financing on
residential real estate. Our loan-to-value benchmark for these loans is below 80% at inception along with
satisfactory debt-to-income ratios. Residential real estate loans are offered with fixed rates or variable rates
priced over U.S. Treasury indices or the prime rate as published in the Wall Street Journal.
Our primary focus is to maintain and expand relationships with realtors and other key contacts in the residential
real estate industry in order to originate new mortgages. As of December 31, 2012, we had a total of $538.7
million in outstanding residential real estate loans, comprising 29.3% of our total loan portfolio. During the year
ended 2012, we originated and closed $186.2 million of residential real estate loans, which was approximately
42.9% of total loans originated for portfolio investment during that period.
Agricultural Loans. Agricultural loans consist of loans to farmers and other agricultural businesses to finance
agricultural production. The principal source of repayment on these loans is the crops sold at the end of the
harvest season. Agricultural loans include term loans to finance agricultural land and equipment, as well as short
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term lines to support crop production. Loans to finance agricultural land are amortized over 15 to 25 years,
typically with three to five year maturities. Loans to finance agricultural equipment are amortized over five to ten
years, typically with three to five year maturities. Pricing may be fixed rate or variable rate priced over LIBOR or
the prime rate as published in the Wall Street Journal. We leverage specialists to ensure consistent, disciplined
underwriting and structuring of agricultural loans. As of December 31, 2012, we had a total of $173.4 million in
outstanding agricultural loans, comprising 9.4% of our total loan portfolio. During the year ended 2012, we
originated and closed $83.3 million of agricultural loans, which was approximately 19.2% of total loans
originated for portfolio investment during that period.
Consumer Loans. We offer a variety of consumer loans, including loans to banking center customers for
consumer and business purposes, to meet customer demand and to increase the yield on our loan portfolio. All of
our newly originated loans are on a direct to consumer basis. Consumer loans are structured as small personal
lines of credit and term loans, with the latter generally bearing interest at a higher rate and having a shorter term
than residential mortgage loans. Consumer loans are both secured (for example by deposit accounts, brokerage
accounts or automobiles) and unsecured and carry either a fixed rate or variable rate.
Examples of our consumer loans include:
•
•
•
home improvement loans not secured by real estate;
new and used automobile loans; and
personal lines of credit.
As of December 31, 2012, we had $50.3 million in consumer loans outstanding, comprising 2.7% of our total
loan portfolio. During the year ended 2012, we originated and closed $19.7 million of consumer loans, which
was approximately 4.5% of total loans originated for portfolio investment during that period.
Deposit Products and Other Funding Sources
We offer a variety of deposit products to our customers, including checking accounts, savings accounts, money
market accounts and other deposit accounts, including fixed-rate, fixed maturity retail time deposits ranging in
terms from 30 days to five years, individual retirement accounts, and non-retail time deposits consisting of jumbo
certificates greater than or equal to $100,000. As of December 31, 2012, our deposit portfolio was comprised of
16.1% non-interest bearing deposits and 41.7% time deposits. We intend to continue our efforts to attract lower
cost transaction deposits from our business lending relationships in order to lower our cost of funds and improve
our net interest margin.
Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing
interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from areas
surrounding our banking centers. In order to attract and retain deposits, we rely on providing quality service and
introducing new products and services that meet our customers’ needs.
Financial Products & Services
In addition to traditional banking activities, we provide other financial services to our customers, including:
internet banking, wire transfers, automated clearing house services, electronic bill payment, lock box services,
remote deposit capture services, merchant processing services, cash vault, controlled disbursements, positive pay
and cash management services (including account reconciliation, collections and sweep accounts).
Competition
The banking landscape in our primary markets of Colorado, Kansas and Missouri is highly competitive and quite
fragmented, with many small banks having limited market share while the large out of state national and super-
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regional banks control the majority of deposits and profitable banking relationships. We compete actively with
national, regional and local financial services providers, including banks, thrifts, credit unions, mortgage bankers
and finance companies. Our largest banking competitors in the Kansas City MSA are UMB, Commerce Bank,
US Bank, Bank of America, Valley View, Capitol Federal, Central Bancompany, CCB Financial Corp,
Enterprise Financial Services Corp, and our largest competitors in Colorado are Wells Fargo, FirstBank,
JPMorgan Chase, U.S. Bank, Bank of the West, KeyBank, Alpine Bank, Compass Bank, Vectra Bank and First
National Bank of Colorado.
Competition among providers of financial products and services continues to increase, with consumers having
the opportunity to select from a growing variety of traditional brick and mortar banks and nontraditional
alternatives, such as online banks. Competition among providers is based on many factors. We believe the most
important of these competitive factors that determine success are our consumer bankers’ focus on knowing their
individual clients in order to best meet their financial needs and our commercial bankers’ focus on small- and
medium-sized businesses with an advisory approach that emphasizes understanding the client’s business and
offering a complete array of loan, deposit and treasury management products and services. The primary factors
driving commercial and consumer competition for loans and deposits are interest rates, the fees charged,
customer service levels and the range of products and services offered. In addition, other competitive factors
include the location and hours of our branches and customer service orientation of our employees.
We recognize that there are banks with which we compete that have greater financial resources, access to more
capital and higher lending capacity than we do and offer a wider range of deposit and lending instruments than
we do. However, given our existing capital base, we expect to be able to meet the majority of small- to medium-
sized business and consumer credit needs. As of December 31, 2012, our legal lending limit to any one customer
was $130.0 million and our house limit to any one customer was $30.0 million.
Employees
At February 28, 2013, we had 1,155 full-time employees and 50 part-time employees. Given the nature of our
business, we have moved aggressively to add significant talent to our commercial and consumer bankers as well
as our risk management functions.
SUPERVISION AND REGULATION
The U.S. banking industry is highly regulated under federal and state law. Banking laws, regulations, and policies
affect the operations of the Company and its subsidiary. Investors should understand that the primary objective of
the U.S. bank regulatory regime is the protection of depositors, the Depositors Insurance Fund (“DIF”), and the
banking system as a whole, not the protection of the Company’s stockholders.
As a bank holding company, we are subject to inspection, examination, supervision and regulation by the Federal
Reserve. Our bank subsidiary is subject to supervision and regulation by the OCC. In addition, we expect that the
additional businesses that we may invest in or acquire will be regulated by various state and/or federal banking
regulators, including the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve and the FDIC.
Banking statutes and regulations are subject to continual review and revision by Congress, state legislatures and
federal and state regulatory agencies. A change in such statutes or regulations, including changes in how they are
interpreted or implemented, could have a material effect on our business. In addition to laws and regulations,
state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written
guidance pursuant to such laws and regulations, which are binding on us and our subsidiaries. These regulatory
issuances also may affect the conduct of our business or impose additional regulatory obligations. The
description below summarizes certain elements of the applicable bank regulatory framework. This description is
not intended to describe all laws and regulations applicable to us and our subsidiaries. The description is
qualified in its entirety by reference to the full text of the statutes, regulations, policies, interpretive letters and
other written guidance that are described.
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National Bank Holdings Corporation as a Bank Holding Company
Any entity that acquires direct or indirect control of a bank must obtain prior approval of the Federal Reserve to
become a bank holding company pursuant to the Bank Holding Company Act (“BHCA”). We became a bank
holding company in 2010 in connection with the acquisition of the assets and assumption of selected liabilities of
the former Hillcrest Bank from the FDIC by our newly chartered bank subsidiary, Hillcrest Bank, N.A. (now part
of NBH Bank, N.A.). As a bank holding company, we are subject to regulation under the BHCA and to
supervision, examination, and enforcement by the Federal Reserve. Federal Reserve jurisdiction also extends to
any company that we directly or indirectly control, such as our non-bank subsidiaries and other companies in
which we make a controlling investment. While subjecting us to supervision and regulation, we believe that our
status as a bank holding company (as opposed to a non-controlling investor) broadens the investment
opportunities available to us among public and private financial institutions, failing and troubled financial
institutions, seized assets and deposits and FDIC auctions.
Banking statutes, regulations and policies could restrict our ability to diversify into other areas of financial
services, acquire depository institutions and make distributions or pay dividends on our equity securities. They
may also require us to provide financial support to any bank that we control, maintain capital balances in excess
of those desired by management and pay higher deposit insurance premiums as a result of a general deterioration
in the financial condition of Bank Midwest or other depository institutions we control.
NBH Bank, N.A. as a National Bank
NBH Bank, N.A. (formerly Bank Midwest, N.A); is a national bank, chartered under federal law, and, as such, is
subject to supervision and examination by the OCC, NBH Bank’s primary banking regulator. NBH Bank’s
deposits are insured by the FDIC through the DIF, in the manner and to the extent provided by law. As an insured
bank, NBH Bank is subject to the provisions of the Federal Deposit Insurance Act, as amended (which we refer
to as the “FDI Act”) and the FDIC’s implementing regulations thereunder, and may also be subject to supervision
and examination by the FDIC under certain circumstances.
Under the FDIC Improvement Act of 1991 (which we refer to as “FDICIA”), NBH Bank must submit financial
statements prepared in accordance with GAAP and management reports signed by the Company’s and NBH
Bank’s chief executive officer and chief accounting or financial officer concerning management’s responsibility
for the financial statements, an assessment of internal controls, and an assessment of NBH Bank’s compliance
with various banking laws and FDIC and other banking regulations. In addition, we must submit annual audit
reports to federal regulators prepared by independent auditors. As allowed by regulations, we may use our audit
report prepared for the Company to satisfy this requirement. We must provide our auditors with examination
reports, supervisory agreements and reports of enforcement actions. The auditors must also attest to and report on
the statements of management relating to the internal controls. FDICIA also requires that NBH Bank form an
independent audit committee consisting of outside directors only, or that the Company’s audit committee be
entirely independent.
NBH Bank is subject to specific requirements pursuant to the OCC Operating Agreement it entered into with the
OCC in connection with our acquisition of Bank Midwest (which we refer to as the “OCC Operating
Agreement”). The OCC Operating Agreement requires that NBH Bank maintain total capital at least equal to
12% of risk-weighted assets, tier 1 capital at least equal to 11% of risk-weighted assets and tier 1 capital at least
equal to 10% of adjusted total assets and not pay a dividend to the Company. In the fourth quarter of 2013, the
Operating Agreement allows us to seek the OCC’s consent to reduce capital levels and their non-objection to pay
dividends. The OCC Operating Agreement requires, among other things, that NBH Bank provide notice to, and
obtain consent from, the OCC with respect to any additional failed bank acquisitions from the FDIC or the
appointment of any new director or senior executive officer of NBH Bank. In addition, the OCC Operating
Agreement required NBH Bank to submit a comprehensive business plan to the OCC and requires NBH Bank
not to significantly deviate from its business plan without the OCC’s consent and to review its progress under
such plan quarterly.
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NBH Bank (and, with respect to certain provisions, the Company) is also subject to a FDIC Order, dated
November 4, 2010 (which we refer to as the “FDIC Order”), issued in connection with the FDIC’s approval of
our applications for deposit insurance following the Bank Midwest acquisition. The FDIC Order requires, among
other things, that until fourth quarter of 2013, NBH Bank must obtain the FDIC’s approval before implementing
certain compensation plans and certain changes to its management and board of directors, submit updated
business plans and reports of material deviations from those plans to the FDIC and comply with the applicable
requirements of the FDIC Policy Statement. Additionally, the FDIC Order requires that NBH Bank maintain a
ratio of tier 1 capital to total assets equal to at least ten percent until the fourth quarter of 2013. The FDIC Order
also required that NBH Bank be initially capitalized with at least $390.0 million of paid-in capital and requires
that NBH Bank establish an audit committee of the Board of Directors comprised of at least three directors, none
of whom are officers of the bank and all of whom are independent, obtain adequate fidelity coverage, adopt an
accrual accounting system, submit to (and receive a non-objection by) the FDIC of a Community Reinvestment
Act (“CRA”) plan, obtain annual audits of its financial statements by an independent public accounting firm, and
make disclosures to proposed directors and stockholders of NBH Bank concerning the interests of any insider in
any transaction by the bank.
A failure by us or NBH Bank to comply with the requirements of the OCC Operating Agreement or the FDIC
Order, or the objection by the OCC or the FDIC to any materials or information submitted pursuant to the OCC
Operating Agreement or the FDIC Order, could prevent us from executing our business strategy and materially
and adversely affect us. As of December 31, 2012, NBH Bank was in compliance with all of the material terms
of the OCC Operating Agreement and FDIC Order.
We filed two comprehensive three-year business plans with the OCC in connection with the organization and
operation of Bank Midwest, N.A. and the acquisition of Hillcrest Bank, N.A. The OCC issued supervisory non-
objection with respect to each plan on March 22, 2011 and our board of directors subsequently adopted each
plan. Each plan covers the requirements mandated by the OCC, including a mission statement, an assessment of
the bank’s current and future operating environment, strategic goals and objectives, identification of present and
future product lines, adequacy of internal operations, management, staffing, policies and procedures, a risk
management program, compensation plans, policies on corporate governance, quarterly financial forecasts,
funding plan, capital plan, securities portfolio composition, lending activities, the intended geographic market
area and competitive factors, plans to adhere with consumer laws, a description of the bank’s Bank Secrecy Act
compliance plan, a description of the bank’s Community Reinvestment Act program, a description of the bank’s
current and retail branch footprint, a description of the bank’s owned and leased premises and equipment, an
assessment of the bank’s technology systems, a list of activities outsourced to third parties, an evaluation of the
bank’s vendor management program, a review of the bank’s security program, and an action plan to adhere with
the OCC comprehensive business plans.
We have implemented a quarterly monitoring and reporting process to remain in compliance with the
comprehensive business plans and the requirements of the OCC Agreement and FDIC Order. We also file a
written quarterly status report to the OCC regarding our adherence to the business plan, capital plan, loan
portfolio program, liquidity plan, risk management program, corporate governance, and changes to directors and
senior executive officers. In addition, NBH Bank is required to inform the OCC of acquisitions and has
previously provided the OCC with detailed acquisition plans for each completed acquisition and received prior
OCC supervisory non-objection to execute the acquisitions.
Regulatory Notice and Approval Requirements for Acquisitions of Control
We must generally receive federal bank regulatory approval before we can acquire an institution or business.
Specifically, as a bank holding company, we must obtain prior approval of the Federal Reserve in connection
with any acquisition that would result in the Company owning or controlling more than 5% of any class of voting
securities of a bank or another bank holding company. In acting on such applications, the Federal Reserve
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considers, among other factors: the effect of the acquisition on competition; the financial condition and future
prospects of the applicant and the banks involved; the managerial resources of the applicant and the banks
involved; the convenience and needs of the community, including the record of performance under the CRA; the
effectiveness of the applicant in combating money laundering activities; and the extent to which the proposal
would result in greater or more concentrated risks to the stability of the United States banking or financial
system. Our ability to make investments in depository institutions will depend on our ability to obtain approval
for such investments from the Federal Reserve. The Federal Reserve could deny our application based on the
above criteria or other considerations. For example, we could be required to sell banking centers as a condition to
receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce
the benefit of any acquisition.
Federal and state laws, including the BHCA and the Change in Bank Control Act, impose additional prior notice
or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or
indirect “control” of an FDIC-insured depository institution or bank holding company. Whether an investor
“controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a
general matter, an investor is deemed to control a depository institution or other company if the investor owns or
controls 25% or more of any class of voting securities. Subject to rebuttal, an investor is presumed to control a
depository institution or other company if the investor owns or controls 10% or more of any class of voting
securities and either the depository institution or company is a public company or no other person will hold a
greater percentage of that class of voting securities after the acquisition. If an investor’s ownership of our voting
securities were to exceed certain thresholds, the investor could be deemed to “control” us for regulatory
purposes. This could subject the investor to regulatory filings or other regulatory consequences.
Broad Supervision, Examination and Enforcement Powers
A principal objective of the U.S. bank regulatory regime is to protect depositors by ensuring the financial safety
and soundness of banks and other insured depository institutions. To that end, the Federal Reserve, the OCC and
the FDIC have broad regulatory, examination and enforcement authority over bank holding companies and
national banks. This authority serves to ensure compliance with banking statutes, regulations, and regulatory
guidance, orders, and agreements and safe and sound operation, including the power to issue cease and desist
orders, impose fines and other civil and criminal penalties, terminate deposit insurance and appoint a conservator
or receiver. Bank regulators regularly examine the operations of banks and bank holding companies. In addition,
banks and bank holding companies are subject to periodic reporting and filing requirements.
Bank regulators have various remedies available if they determine that a banking organization has violated any
law or regulation, that the financial condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of a banking organization’s operations are unsatisfactory, or that the banking
organization is operating in an unsafe or unsound manner. The bank regulators have the power to, among other
things: enjoin “unsafe or unsound” practices, require affirmative actions to correct any violation or practice, issue
administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or
other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers
and directors, terminate deposit insurance, and appoint a conservator or receiver.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory
agreements could subject the Company, its subsidiaries and their respective officers, directors and institution-
affiliated parties to the remedies described above and other sanctions. In addition, the FDIC could terminate
NBH Bank’s deposit insurance if it determined that the bank’s financial condition was unsafe or unsound or that
the bank engaged in unsafe or unsound practices or violated an applicable rule, regulation, order or condition
enacted or imposed by the bank’s regulators.
15
Interstate Banking
Interstate Banking for State and National Banks
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (which we refer to as the “Riegle- Neal
Act”), a bank holding company may acquire banks in states other than its home state, subject to any state
requirement that the bank has been organized and operating for a minimum period of time, not to exceed five
years, and the requirement that the bank holding company not control, prior to or following the proposed
acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or,
unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits
in the state (or such lesser or greater amount set by the state). The Dodd-Frank Wall Street Reform and
Consumer Protection Act (which we refer to as the “Dodd-Frank Act”) amended the BHCA to require that a bank
holding company be well capitalized and well managed, not merely adequately capitalized and adequately
managed, in order to acquire a bank located outside of the bank holding company’s home state.
The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate banking
centers. The Dodd-Frank Act permits a national or state bank, with the approval of its regulator, to open a de
novo branch in any state if the law of the state in which the branch is proposed would permit the establishment of
the branch if the bank were a bank chartered in that state. National banks may provide trust services in any state
to the same extent as a trust company chartered by that state.
FDIC Statement of Policy on Qualifications for Failed Bank Acquisitions
As the agency responsible for resolving failed depository institutions, the FDIC has discretion to determine
whether a party is qualified to bid on a failed institution. The FDIC Policy Statement imposes additional
restrictions and requirements on certain “private investors” and institutions to the extent that those investors or
institutions seek to acquire a failed insured depository institution from the FDIC. The FDIC adopted the FDIC
Policy Statement on August 26, 2009, and issued guidance regarding the policy statement on January 6, 2010 and
April 23, 2010.
The FDIC Policy Statement applies to private investors in a company (such as the Company) that proposes to
assume deposit liabilities (or liabilities and assets) from the resolution of a failed insured depository institution,
but does not apply to investors with 5% or less of the total voting power of an acquired depository institution or
its bank holding company, provided there is no evidence of concerted action by such investors. In the FDIC
Policy Statement Q&A, the FDIC indicated that it will presume that “concerted action” exists where investors
with 5% or less of the total voting power of an acquired depository institution or its bank holding company own,
in the aggregate, greater than two-thirds of the total voting power of such acquired depositary institution or its
bank holding company. This presumption may be rebutted if the investors or the placement agent provide
sufficient evidence that the investors are not participating in concerted action. In evaluating whether this
presumption has been rebutted, the FDIC will consider, among other things: (1) whether each investor was
among many potential investors contacted for investment and reached an independent decision to invest,
(2) whether any investors are managed or advised by a common investment manager or advisor, (3) whether any
investors are engaged or anticipate engaging, as part of a group consisting of substantially the same entities as the
stockholders of the acquired depository institution or holding company, in substantially the same combination of
interests, in any additional banking or non-banking activity in the United States, (4) whether any investor has any
significant ownership interest in or the right to acquire shares of any other investor, (5) whether there are any
agreements or understandings between any investors for the purpose of controlling the depository institution or
its bank holding company, (6) whether any investors (or any directors representing investors) will consult one
another concerning the voting of the depository institution’s or its bank holding company’s stock, (7) whether
any directors representing a particular investor will represent only the investor which nominated him or her or
will also represent additional investors and (8) the primary federal banking regulator’s evaluation of whether any
investors are acting in concert for purposes of applying the Change in Bank Control Act and the BHCA.
16
For those institutions and investors to which it applies, the FDIC Policy Statement imposes the following
provisions, among others. First, institutions are required to maintain a ratio of tier 1 common equity to total
assets of at least 10% for a period of three years, and thereafter maintain a capital level sufficient to be “well
capitalized” under regulatory standards during the remaining period of ownership of the investors. This amount
of capital exceeds the amount otherwise required under applicable regulatory requirements. Second, investors
that collectively own 80% or more of two or more depository institutions are required to pledge to the FDIC their
proportionate interests in each institution to indemnify the FDIC against any losses it incurs in connection with
the failure of one of the institutions. Third, institutions are prohibited from extending credit to investors and to
affiliates of investors. Fourth, investors may not employ ownership structures that use entities domiciled in bank
secrecy jurisdictions. The FDIC has interpreted this prohibition to apply to a wide range of non-U.S.
jurisdictions. In its guidance, the FDIC has required that non-U.S. investors subject to the FDIC Policy Statement
invest through a U.S. subsidiary and adhere to certain requirements related to record keeping and information
sharing. Fifth, investors are prohibited from selling or otherwise transferring the securities they hold for three
years after acquisition without FDIC approval. These transfer restrictions do not apply to open-ended investment
companies that are registered under the Investment Company Act, issue redeemable securities and allow
investors to redeem on demand. Sixth, investors may not employ complex and functionally opaque ownership
structures to invest in institutions. Seventh, investors that own 10% or more of the equity of a failed institution
are not eligible to bid for that institution in an FDIC auction. Eighth, investors may be required to provide
information to the FDIC regarding the investors and all entities in their ownership chains, such as information
regarding the size of the capital fund or funds, their diversification, their return profiles, their marketing
documents, their management teams and their business models. Ninth, the FDIC Policy Statement does not
replace or substitute for otherwise applicable regulations or statutes.
Limits on Transactions with Affiliates
Federal law restricts the amount and the terms of both credit and non-credit transactions (generally referred to as
“Covered Transactions”) between a bank and its nonbank affiliates. Covered Transactions with any single
affiliate may not exceed 10% of the capital stock and surplus of the bank, and Covered Transactions with all
affiliates may not exceed, in the aggregate, 20% of the bank’s capital and surplus. For a bank, capital stock and
surplus refers to the bank’s tier 1 and tier 2 capital, as calculated under the risk-based capital guidelines, plus the
balance of the allowance for credit losses excluded from tier 2 capital. The bank’s transactions with all of its
affiliates in the aggregate are limited to 20% of the foregoing capital. In addition, in connection with Covered
Transactions that are extensions of credit, the bank may be required to hold collateral to provide added security
to the bank, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the
restrictions on transactions with affiliates, including an expansion of what types of transactions are Covered
Transactions to include credit exposures related to derivatives, repurchase agreements and securities lending
arrangements and an increase in the amount of time for which collateral requirements regarding Covered
Transactions must be satisfied.
Bank Holding Companies as a Source of Strength
The Federal Reserve requires that a bank holding company serve as a source of financial and managerial strength
to each bank that it controls and, under appropriate circumstances, commit resources to support each such
controlled bank. This support may be required at times when the bank holding company may not have the
resources to provide the support. Because we are a bank holding company, the Federal Reserve views the
Company (and its consolidated assets) as a source of financial and managerial strength for any controlled
depository institutions.
Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could
require its bank holding company to guarantee a capital restoration plan. In addition, if the Federal Reserve
believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial
safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding
17
company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these
and other actions in support of controlled banks even if such action is not in the best interests of the bank holding
company or its stockholders.
The Dodd-Frank Act codified the requirement that holding companies, like the Company, serve as a source of
financial strength for their subsidiary depository institutions, by providing financial assistance to its insured
depository institution subsidiaries in the event of financial distress. Under the source of strength requirement
imposed by the Federal Reserve and codified in the Dodd-Frank Act, the Company could be required to provide
financial assistance to the Bank should it experience financial distress. If the capital of the Bank were to become
impaired, the OCC could assess the Company for the deficiency. If we failed to pay the assessment within three
months, the OCC could order the sale of our stock in the Bank to cover the deficiency.
In addition, capital loans by us to the Bank will be subordinate in right of payment to deposits and certain other
indebtedness of the Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory
agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Depositor Preference
The FDI Act provides that, in the event of the “liquidation or other resolution” of an insured depository
institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured
depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other
general unsecured claims against the institution. If our insured depository institution fails, insured and uninsured
depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors,
including us, with respect to any extensions of credit they have made to such insured depository institution.
Liability of Commonly Controlled Institutions
FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be
incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank
holding company and for any assistance provided by the FDIC to an FDIC-insured depository institution that is
in danger of default and that is controlled by the same bank holding company. “Default” means generally the
appointment of a conservator or receiver for the institution. “In danger of default” means generally the existence
of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The cross-
guarantee liability for a loss at a commonly controlled institution would be subordinated in right of payment to
deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to
depositors or general creditors, other than obligations owed to any affiliate of the depository institution (with
certain exceptions).
Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiary. Because the Company’s consolidated net
income consists largely of net income of its bank, the Company’s ability to pay dividends depends upon its
receipt of dividends from its subsidiary. The ability of a bank to pay dividends and make other distributions is
limited by federal and state law. The specific limits depend on a number of factors, including the bank’s type of
charter, recent earnings, recent dividends, level of capital and regulatory status. The regulators are authorized,
and under certain circumstances are required, to determine that the payment of dividends or other distributions by
a bank would be an unsafe or unsound practice and to prohibit that payment. For example, the FDI Act generally
prohibits a depository institution from making any capital distribution (including payment of a dividend) or
paying any management fee to its parent holding company if the depository institution would thereafter be
undercapitalized.
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Dividends that may be paid by a national bank without the express approval of the OCC are limited in the
aggregate for any calendar year to that bank’s retained net profits for the preceding two calendar years plus
retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as
defined by the OCC, consist of net income less dividends declared during the period. State-chartered subsidiary
banks are also subject to state regulations that limit dividends. Nonbank subsidiaries are also limited by certain
federal and state statutory provisions and regulations covering the amount of dividends that may be paid in any
given year.
Currently, the OCC Operating Agreement prohibits NBH Bank from paying a dividend to the Company until at
least the fourth quarter of 2013 and, once the prohibition period has elapsed, imposes other restrictions on NBH
Bank’s ability to pay dividends, including requiring prior non-objection from the OCC before any distribution is
made.
The ability of a bank holding company to pay dividends and make other distributions can also be limited. The
Federal Reserve has authority to prohibit a bank holding company from paying dividends or making other
distributions. The Federal Reserve has issued a policy statement that provides that a bank holding company
should not pay dividends unless: (a) its net income over the last four quarters (net of dividends paid) has been
sufficient to fully fund the dividends; (b) the prospective rate of earnings retention appears to be consistent with
the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries;
and (c) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly,
a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in
ways that weaken the bank holding company’s financial health, such as by borrowing. While we experienced a
third quarter 2012 net loss related to expenses incurred in connection with our IPO, our regulators did not object
to our plan to pay a quarterly cash dividend because doing so would not weaken our financial health. The Dodd-
Frank Act imposes, and Basel III (described below) once in effect will impose, additional restrictions on the
ability of banking institutions to pay dividends.
Regulatory Capital Requirements
In General
Bank regulators view capital levels as important indicators of an institution’s financial soundness. As a bank
holding company, we are subject to regulatory capital adequacy requirements implemented by the Federal
Reserve. In addition, the OCC imposes capital adequacy requirements on our subsidiary bank. The federal
banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy
that reflects the degree of risk associated with a banking organization’s operations. Under these guidelines, assets
are assigned to one of several risk categories, and nominal dollar amounts of assets and credit equivalent amounts
of off-balance-sheet items are multiplied by a risk adjustment percentage for the category. NBH Bank is, and
other depository institution subsidiaries that we may acquire or control in the future will be, subject to such
capital adequacy guidelines.
There are five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can result in
various enforcement actions by the bank’s regulator, including directives to increase capital, formal or informal
written agreements with the regulator, and various activities restrictions, all of which, if undertaken, could have a
direct material effect on our financial condition.
Quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding
company maintain minimum ratios of capital to risk-weighted assets. There are three categories of capital under
the guidelines. With the implementation of the Dodd-Frank Act, certain changes have been made as to the type of
capital that falls under each of these categories. For depository institution holding companies that (1) have more
than $15 billion of total consolidated assets as of December 31, 2009 or (2) were not mutual holding companies
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on May 19, 2010, tier 1 capital includes common shareholders’ equity, qualifying preferred stock and trust
preferred securities issued before May 19, 2010, less goodwill and certain other deductions (including a portion
of servicing assets and the unrealized net gains and losses, after taxes, on securities available for sale). Tier 2
capital includes preferred stock and trust preferred securities not qualifying as tier 1 capital, subordinated debt,
the allowance for credit losses and net unrealized gains on marketable equity securities, subject to limitations by
the guidelines. Tier 2 capital is limited to the amount of tier 1 capital (i.e., at least half of the total capital must be
in the form of tier 1 capital). Tier 3 capital includes certain qualifying unsecured subordinated debt. See “—
Changes in Laws, Regulations or Policies and the Dodd-Frank Act.”
Under the guidelines, capital is compared with the relative risk related to the balance sheet. To derive the risk
included in the balance sheet, a risk weighting is applied to each balance sheet asset and off-balance sheet item,
primarily based on the relative credit risk of the asset or counterparty. For example, claims guaranteed by the
U.S. government or one of its agencies are risk-weighted at 0% and certain real-estate related loans risk-weighted
at 50%. Off-balance sheet items, such as loan commitments and derivatives, are also applied a risk weight after
calculating balance sheet equivalent amounts. A credit conversion factor is assigned to loan commitments based
on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are
converted at 50% and then risk-weighted at 100%. Derivatives are converted to balance sheet equivalents based
on notional values, replacement costs and remaining contractual terms. For certain recourse obligations, direct
credit substitutes, residual interests in asset securitization and other securitized transaction that expose
institutions primarily to credit risk, the capital amounts and classification under the guidelines are subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
Banks and bank holding companies currently are required to maintain tier 1 capital and the sum of tier 1 and tier
2 capital equal to at least 6% and 10%, respectively, of their total risk-weighted assets (including certain off-
balance sheet items, such as standby letters of credit) to be deemed “well capitalized.” The federal bank
regulatory agencies may, however, set higher capital requirements for an individual bank or when a bank’s
particular circumstances warrant. At this time, the bank regulatory agencies are more inclined to impose higher
capital requirements in order to meet well-capitalized standards, and future regulatory change could impose
higher capital standards as a routine matter.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances
warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to
maintain strong capital positions substantially above the minimum supervisory levels, without significant
reliance on intangible assets. Also, the Federal Reserve considers a “tangible tier 1 leverage ratio” (deducting all
intangibles) and other indications of capital strength in evaluating proposals for expansion or engaging in new
capital to adjusted average total assets) guidelines for banks within their regulatory jurisdictions. These
guidelines provide for a minimum leverage ratio of 5% for banks to be deemed “well capitalized.” Our regulatory
capital ratios and those of NBH Bank are in excess of the levels established for “well-capitalized” institutions.
As an additional means to identify problems in the financial management of depository institutions, the FDI Act
requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for
institutions for which they are the primary federal regulator. The standards relate generally to operations and
management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to
take action against institutions that fail to meet such standards.
In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address
the risks that the activities of an institution pose to the institution and the public and private stakeholders,
including risks arising from certain enumerated activities. The federal banking agencies recently proposed
revised capital guidelines to the Dodd-Frank Act and to effect the implementation of Basel III (described below).
In addition, they may make additional changes in the future, based on these or other regulatory or supervisory
developments. We cannot be certain what impact proposed or future changes to existing capital guidelines will
have on us or NBH Bank.
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Basel I, Basel II and Basel III Accords
The current risk-based capital guidelines that apply to us and our subsidiary bank are based on the 1988 capital
accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as
the “Basel Committee”), a committee of central banks and bank supervisors, as implemented by federal bank
regulators. In 2008, the bank regulatory agencies began to phase-in capital standards based on a second capital
accord issued by the Basel Committee, referred to as Basel II, for large or “core” international banks (generally
defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10
billion or more). Because we do not anticipate controlling any large or “core” international bank in the
foreseeable future, Basel II will not apply to us.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel
Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital
requirements, known as Basel III. When fully phased-in on January 1, 2019, Basel III increases the minimum tier
1 common equity ratio to 4.5%, net of regulatory deductions and introduces a capital conservation buffer of an
additional 2.5% of common equity to risk-weighted assets, raising the target minimum tier 1 common equity
ratio to at least 7.0%. Basel III increases the minimum tier 1 capital ratio to 8.5% inclusive of the capital
conservation buffer, increases the minimum total capital ratio to 10.5% inclusive of the capital conservation
buffer and introduces a countercyclical capital buffer of up to 2.5% of common equity or other fully loss
absorbing capital for periods of excess credit growth. The capital conservation buffer is designed to absorb losses
during periods of economic stress. Banking institutions with a tier 1 common equity ratio above the minimum but
below the conservation buffer may face constraints on dividends, equity repurchases and compensation based on
the amount of such shortfall.
Basel III also introduces a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure
rather than total assets, and new liquidity standards. The phase-in of the new rules is to commence on January 1,
2013, with the phase-in of the capital conservation buffer commencing on January 1, 2016 and the rules to be
fully phased-in by January 1, 2019.
In November 2010, Basel III was endorsed by the Group of Twenty (G-20) Finance Ministers and Central Bank
Governors and will be subject to individual adoption by member nations, including the United States. On
December 16, 2010, the Basel Committee issued the text of the Basel III rules, which presents the details of
global regulatory standards on bank capital adequacy and liquidity agreed by the Basel Committee and endorsed
by the G-20 leaders. In June 2012, the federal banking agencies released proposed changes to the current capital
adequacy standards in light of Basel III and capital changes required by the Dodd-Frank Act. If finalized as
proposed in the U.S., Basel III would lead to higher capital requirements and more restrictive leverage and
liquidity ratios. The ultimate impact of the new capital and liquidity standards on us and our bank subsidiary is
currently being reviewed and will depend on a number of factors, including completion of the rulemaking
process and final implementation by the U.S. banking regulators. We cannot determine the ultimate effect that
potential legislation, or subsequent regulations, if enacted, would have upon our earnings or financial position.
Prompt Corrective Action
The FDI Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-
insured depository institutions that do not meet minimum capital requirements. A depository institution’s
treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels
compare to various capital measures and certain other factors, as established by regulation.
Under this system, the federal banking regulators have established five capital categories, well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which
all institutions are placed. The federal banking regulators have specified by regulation the relevant capital levels
for each of the five categories. Federal banking regulators are required to take various mandatory supervisory
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actions and are authorized to take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of the action depends upon the capital category in which the institution
is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator
for an institution that is critically undercapitalized.
Reserve Requirements
Pursuant to regulations of the Federal Reserve, all banks are required to maintain average daily reserves at
mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-
personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal
Reserve Bank.
Deposit Insurance Assessments
FDIC-insured banks are required to pay deposit insurance premiums to the FDIC. The FDIC has adopted a risk-
based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based
on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level
of supervisory concern the institution poses to the regulators. The FDIC recently raised assessment rates to
increase funding for the DIF, which is currently underfunded.
The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. In
addition, federal deposit insurance for the full net amount of deposits in non-interest-bearing transaction accounts
was extended through December 31, 2012 for all insured banks. Beginning January 1, 2013, all of a depositor’s
accounts at an insured bank, including all non-interest bearing transaction accounts, are insured by the FDIC up
to $250,000.
The Dodd-Frank Act changes the deposit insurance assessment framework, primarily by basing assessments on
an institution’s average total consolidated assets less average tangible equity (subject to risk-based adjustments
that would further reduce the assessment base for custodial banks) rather than domestic deposits, which is
expected to shift a greater portion of the aggregate assessments to large banks, as described in detail below. The
Dodd-Frank Act also eliminates the upper limit for the reserve ratio designated by the FDIC each year, increases
the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured
deposits by September 30, 2020, and eliminates the requirement that the FDIC pay dividends to depository
institutions when the reserve ratio exceeds certain thresholds.
The Dodd-Frank Act requires the DIF to reach a reserve ratio of 1.35% of insured deposits by September 30,
2020. On December 20, 2010, the FDIC raised the minimum designated reserve ratio of DIF to 2%. The ratio is
higher than the minimum reserve ratio of 1.35% as set by the Dodd-Frank Act. Under the Dodd- Frank Act, the
FDIC is required to offset the effect of the higher reserve ratio on small insured depository institutions, those
with consolidated assets of less than $10 billion.
On February 7, 2011, the FDIC approved a final rule on Assessments, Dividends, Assessment Base and Large
Bank Pricing. The final rule, mandated by the Dodd-Frank Act, changes the deposit insurance assessment system
from one that is based on domestic deposits to one that is based on average consolidated total assets minus
average tangible equity. Because the new assessment base under the Dodd-Frank Act is larger than the current
assessment base, the final rule’s assessment rates are lower than the current rates, which achieves the FDIC’s
goal of not significantly altering the total amount of revenue collected from the industry. In addition, the final
rule adopts a “scorecard” assessment scheme for larger banks and suspends dividend payments if the DIF reserve
ratio exceeds 1.5% but provides for decreasing assessment rates when the DIF reserve ratio reaches certain
thresholds. The final rule also determines how the effect of the higher reserve ratio will be offset for institutions
with less than $10 billion of consolidated assets.
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Continued action by the FDIC to replenish the DIF as well as changes contained in the Dodd-Frank Act may
result in higher assessment rates. NBH Bank may be able to pass part or all of this cost on to its customers,
including in the form of lower interest rates on deposits, or fees to some depositors, depending on market
conditions.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s
financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has
violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory
agency. If deposit insurance for a banking business we invest in or acquire were to be terminated, that would
have a material adverse effect on that banking business and potentially on the Company as a whole.
Permitted Activities and Investments by Bank Holding Companies
The BHCA generally prohibits a bank holding company from engaging, directly or indirectly, in activities other
than banking or managing or controlling banks, except for activities determined by the Federal Reserve to be so
closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the
Gramm-Leach-Bliley Financial Modernization Act of 1999 (which we refer to as the “GLB Act”) expanded the
permissible activities of a bank holding company that qualifies as a financial holding company. Under the
regulations implementing the GLB Act, a financial holding company may engage in additional activities that are
financial in nature or incidental or complementary to financial activity. Those activities include, among other
activities, certain insurance and securities activities. We have not yet determined whether it would be appropriate
or advisable in the future to become a financial holding company.
Privacy Provisions of the GLB Act and Restrictions on Cross-Selling
Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability of banks and
other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The
rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent
disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act
affect how consumer information is transmitted through diversified financial services companies and conveyed to
outside vendors.
Federal financial regulators have issued regulations under the Fair and Accurate Credit Transactions Act, which
have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new
customers, before information can be shared among different companies that we own or may come to own for the
purpose of cross-selling products and services among companies we own.
In connection with the regulations governing the privacy of consumer financial information, the federal banking
agencies adopted guidelines for establishing information security standards for such information. The guidelines
require banking organizations to establish an information security program to: (i) identify and assess the risks
that may threaten customer information; (ii) develop a written plan containing policies and procedures to manage
and control these risks; (iii) implement and test the plan; and (iv) adjust the plan on a continuing basis to account
for changes in technology, the sensitivity of customer information, and internal or external threats. The
guidelines also outline the responsibilities of directors of banking organizations in overseeing the protection of
customer information and address response programs for unauthorized access to customer information.
A number of states have adopted their own statutes concerning financial privacy and requiring notification of
security breaches.
Anti-Money Laundering Requirements
Under federal law, including the Bank Secrecy Act and the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), certain
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types of financial institutions, including insured depository institutions, must maintain anti-money laundering
programs that include established internal policies, procedures and controls; a designated compliance officer; an
ongoing employee training program; and testing of the program by an independent audit function. Among other
things, these laws are intended to strengthen the ability of U.S. law enforcement agencies and intelligence
communities to work together to combat terrorism on a variety of fronts. Financial institutions are prohibited
from entering into specified financial transactions and account relationships and must meet enhanced standards
for due diligence, customer identification, and recordkeeping, including in their dealings with non-U.S. financial
institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced
scrutiny of account relationships to guard against money laundering and to report any suspicious information
maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these
obligations and they must consider an institution’s anti-money laundering compliance when considering
regulatory applications filed by the institution, including applications for banking mergers and acquisitions. The
regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against
institutions found to be violating these obligations.
Office of Foreign Assets Control (“OFAC”) is responsible for helping to insure that U.S. entities do not engage
in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress.
OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in
terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Company or NBH Bank
finds a name on any transaction, account or wire transfer that is on an OFAC list, the Company or NBH Bank
must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate
authorities.
Consumer Laws and Regulations
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers
in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and
practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in
Savings Act, Electronic Funds Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act,
Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection
Act, GLB Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act and Real Estate Settlement
Procedures Act.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed
above. These state and local laws regulate the manner in which financial institutions deal with customers when
taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and
regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys
general and civil or criminal liability.
The Dodd-Frank Act creates a new independent Consumer Finance Protection Bureau (which we refer to as the
“Consumer Bureau”) that has broad authority to regulate and supervise retail financial services activities of banks
and various non-bank providers. The Consumer Bureau has authority to promulgate regulations, issue orders,
guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer
financial products and services. In general, however, banks with assets of $10 billion or less, such as NBH Bank,
will continue to be examined for consumer compliance by their primary bank regulator.
The Community Reinvestment Act
The CRA is intended to encourage banks to help meet the credit needs of their entire communities, including
low- and moderate-income neighborhoods, consistent with safe and sound operations. The regulators examine
banks and assign each bank a public CRA rating. The CRA then requires bank regulators to take into account the
bank’s record in meeting the needs of its community when considering certain applications by a bank, including
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applications to establish a branch or to conduct certain mergers or acquisitions. The Federal Reserve is required
to consider the CRA records of a bank holding company’s controlled banks when considering an application by
the bank holding company to acquire a bank or to merge with another bank holding company.
When we apply for regulatory approval to make certain investments, the regulators will consider the CRA record
of the target institution and our depository institution subsidiary. An unsatisfactory CRA record could
substantially delay approval or result in denial of an application.
Changes in Laws, Regulations or Policies and the Dodd-Frank Act
Congress and state legislatures may introduce from time to time measures or take actions that would modify the
regulation of banks or bank holding companies. In addition, federal and state regulatory agencies also
periodically propose and adopt changes to their regulations or change the manner in which existing regulations
are applied. Such changes could increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks and other financial institutions, all of which could affect
our investment opportunities and our assessment of how attractive such opportunities may be. We cannot predict
whether potential legislation will be enacted and, if enacted, the effect that it or any implementing regulations
would have on our business, results of operations, liquidity or financial condition.
The Dodd-Frank Act, which was signed into law on July 21, 2010, has a broad impact on the financial services
industry, imposing significant regulatory and compliance changes, increased capital, leverage and liquidity
requirements and numerous other provisions designed to improve supervision and oversight of the financial
services sector. In addition to certain implications of the Dodd-Frank Act discussed above, the following items
are also key provisions of the Dodd-Frank Act:
•
Limitation on Federal Preemption. The Dodd-Frank Act may reduce the ability of national banks to
rely upon federal preemption of state consumer financial laws. The Dodd-Frank Act also eliminates the
extension of preemption under the National Bank Act to operating subsidiaries of national banks. The
Dodd-Frank Act authorizes state enforcement authorities to bring lawsuits under non-preempted state
law against national banks and authorizes suits by state attorney generals against national banks to
enforce rules issued by the Consumer Bureau.
• Mortgage Loan Origination and Risk Retention. The Dodd-Frank Act imposes new standards for
mortgage loan originations on all lenders, including banks, in an effort to require steps to verify a
borrower’s ability to repay. The Dodd-Frank Act also generally requires lenders or securitizers to retain
an economic interest in the credit risk relating to loans the lender sells or mortgages and other asset-
backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but
could be increased or decreased by regulation.
• Corporate Governance. The Dodd-Frank Act addresses many investor protection, corporate
governance and executive compensation matters that will affect most U.S. publicly traded companies,
including the Company. The Dodd-Frank Act: (1) grants stockholders of U.S. publicly traded
companies an advisory vote on executive compensation (unless exempted by the Jumpstart Our
Business Startups Act (the “JOBS Act”); (2) enhances independence requirements for compensation
committee members and advisors; (3) requires companies listed on national securities exchanges to
adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC
with authority to adopt proxy access rules that would allow stockholders of publicly traded companies
to nominate candidates for election as a director and have those nominees included in a company’s
proxy materials.
Many of the requirements of the Dodd-Frank Act will be implemented over time, and most will be subject to
regulations implemented over the course of several years. Given the uncertainty surrounding the manner in which
many of the Dodd-Frank Act’s provisions will be implemented by the various regulatory agencies and through
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regulations, the full extent of the impact on our operations is unclear. The changes resulting from the Dodd-Frank
Act may impact the profitability of our business activities, require changes to certain of our business practices,
impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely
affect us.
Item 1A. RISK FACTORS.
Risks Relating to Our Banking Operations
We have recently completed four acquisitions and have a limited operating history from which investors can
evaluate our future prospects and financial and operating performance.
We were organized in June 2009 and acquired selected assets and assumed selected liabilities of Hillcrest Bank,
Bank Midwest, Bank of Choice and Community Banks of Colorado in October 2010, December 2010, July 2011
and October 2011, respectively. Because our banking operations began in 2010, we have a limited operating
history upon which investors can evaluate our operational performance or compare our recent performance to
historical performance. Although we acquired selected assets and assumed selected liabilities of four depository
institutions which had operated for longer periods of time than we have, their business models and experiences
are not reflective of our plans. Accordingly, our limited time operating our acquired franchises may make it
difficult for investors to evaluate our future prospects and financial and operating performance. Moreover,
because a large portion of our loans and OREO are covered by loss sharing agreements with the FDIC and all of
the loans and OREO we acquired were marked to fair value at the time of our acquisition, we believe that the
historical financial results of the acquisitions are less useful to an evaluation of our future prospects and financial
and operating performance. Certain other factors may also make it difficult for investors to evaluate our future
prospects and financial and operating performance, including, among others:
•
•
•
•
•
•
•
our current asset mix, loan quality and allowance for loan losses are not representative of our
anticipated future asset mix, loan quality and allowance for loan losses, which may change materially
as we undertake organic loan origination and banking activities and pursue future acquisitions;
a large portion of our loans and OREO were covered by loss sharing agreements with the FDIC, which
reimburse a variable percentage of losses experienced on these assets; thus, we may face higher losses
once the FDIC loss sharing arrangements expire and losses may exceed the discounts we received;
the income we report from certain acquired assets due to loan discount, accretable yield and the
accretion of the FDIC indemnification asset will be higher than the returns available in the current
market and, if we are unable to make new performing loans and acquire other performing assets in
sufficient volume, we may be unable to generate the earnings necessary to implement our growth
strategy;
our significant cash reserves and liquid investment securities portfolio, which result in large part from
the proceeds of our 2009 private offering of common stock and cash received in connection with our
acquisitions of Hillcrest Bank, Bank Midwest, Bank of Choice and Community Banks of Colorado, are
unlikely to be representative of our future cash position;
our acquisition history may not be indicative of our ability to execute our external growth strategy, and
our inability to execute such strategy would materially and adversely affect us.
our historical cost structure and capital expenditure requirements are not reflective of our anticipated
cost structure and capital spending as we integrate our acquisitions and operate our organic banking
platform; and
our regulatory capital ratios, minimums of which are required by agreements we have reached with our
regulators and which result in part from the proceeds of our private offering of common stock, are not
necessarily representative of our future regulatory capital ratios.
Continued or worsening general business and economic conditions could materially and adversely affect us.
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Our business and operations are sensitive to general business and economic conditions in the United States and in
our two core markets in Colorado and the greater Kansas City region. If the economies in our core markets, or
the U.S. economy more generally, are unable to steadily emerge from the recession that began in 2007 or we
experience worsening economic conditions, we could be materially and adversely affected. Weak economic
conditions may be characterized by deflation, fluctuations in debt and equity capital markets, including a lack of
liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on loans,
residential and commercial real estate price declines and lower home sales and commercial activity. All of these
factors would be detrimental to our business. Our business is significantly affected by monetary and related
policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these
policies are influenced by macroeconomic conditions and other factors that are beyond our control and could
have a material adverse effect on us.
Changes in the assumptions underlying our loss share accounting and acquisition method of accounting could
affect our financial information and have a material adverse effect on us.
A material portion of our financial results is based on loss share accounting, which is subject to assumptions and
judgments made by us and our regulators. In addition, as a result of our recent acquisitions, our financial
information is heavily influenced by the application of the acquisition method of accounting. Both methodologies
require us to make complex assumptions, which assumptions materially affect our financial results. If these
assumptions are incorrect or we change or modify our assumptions, it could have a material adverse effect on us
or our previously reported results. As such, any financial information generated through the use of loss share
accounting or the acquisition method of accounting is subject to modification or change. If our assumptions are
incorrect and we change or modify our assumptions, it could have a material adverse effect on us or our
previously reported results
Our business is highly susceptible to credit risk and fluctuations in the value of real estate collateralizes such
credit.
As a lender, we are exposed to the risk that our clients will be unable to repay their loans according to their terms
and that the collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The
risks inherent in making any loan include risks with respect to the ability of borrowers to repay their loans and, if
applicable, the period of time over which the loan is repaid, risks relating to proper loan underwriting and
guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers and risks resulting from uncertainties as to the future value of collateral. Similarly, we have
credit risk embedded in our securities portfolio. Our credit standards, procedures and policies may not prevent us
from incurring substantial credit losses, particularly in light of market developments in recent years.
Soft residential and commercial real estate markets, higher delinquency and default rates, heightened vacancy
rates and volatile and constrained secondary credit markets affect the real estate industry generally and in areas in
which our business is currently most heavily concentrated. We may be materially and adversely affected by
declines in real estate values. The effects of ongoing mortgage market challenges, combined with the ongoing
correction in residential real estate market prices and reduced levels of home sales, could adversely affect the
value of collateral securing mortgage loans, mortgage loan originations and gains on sale of mortgage loans.
Continued declines in real estate values and home sales volumes, and financial stress on borrowers as a result of
job losses or other factors, could have further adverse effects on borrowers that result in higher delinquencies and
greater charge-offs in future periods, which could materially and adversely affect us
We depend on our executive officers and key personnel to implement our strategy and could be harmed by the
loss of their services.
We believe that the implementation of our strategy will depend in large part on the skills of our executive
management team and our ability to motivate and retain these and other key personnel. Accordingly, the loss of
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service of one or more of our executive officers or key personnel could reduce our ability to successfully
implement our growth strategy and materially and adversely affect us. Although our Chief Executive Officer,
Chief Financial Officer, Chief Risk Officer, President Midwest Division and Chief of Integration, Technology
and Operations have entered into employment arrangements with us, it is possible that they may not complete the
term of their employment arrangements or may choose not to renew them upon expiration. Our success also
depends on the experience of our branch managers and lending officers and on their relationships with the clients
and communities they serve. The loss of these key personnel could negatively impact our banking operations.
The loss of key senior personnel, or the inability to recruit and retain qualified personnel in the future, could have
a material adverse effect on us.
Our allowance for loan losses and fair value adjustments may prove to be insufficient to absorb losses inherent
in our loan or OREO portfolio.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses
charged to expense, which we believe is appropriate to provide for probable losses inherent in our loan portfolio.
The amount of this allowance is determined by our management through periodic reviews.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which
may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding
our loans, identification of additional problem loans by us and other factors, both within and outside of our
control, may require an increase in the allowance for loan losses. If current trends in the real estate markets
continue, we expect that we will continue to experience increased delinquencies and credit losses, particularly
with respect to construction, land development and land loans. In addition, our regulators periodically review our
allowance for loan losses and may require an increase in the allowance for loan losses or the recognition of
further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in
future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance
for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital
and may have a material adverse effect on us.
Our loss sharing agreements impose restrictions on the operation of our business and extensive record-keeping
requirements, and failure to comply with the terms of our loss sharing agreements with the FDIC may result in
significant losses.
A significant portion of our revenue is derived from assets acquired in Hillcrest Bank and Community Banks of
Colorado transactions. Certain of the loans, commitments and foreclosed assets acquired in those transactions are
covered by the loss sharing agreements, which provide that a significant portion of the losses related to those
covered assets will be borne by the FDIC. We may, however, experience difficulties in complying with the
requirements of the loss sharing agreements, including the extensive record-keeping and documentation relating
to the status and reimbursement of covered assets. The required terms of the agreements are extensive and failure
to comply with any of the terms could result in a specific asset or group of assets losing their loss sharing
coverage. Additionally, complying with the extensive requirements to avail ourselves of the loss sharing
coverage could take management time and attention away from other aspects of running our business.
Our loss sharing agreements also impose limitations on the manner in which we manage loans covered by loss
sharing. For example, under the loss sharing agreements, we may not, without FDIC consent, sell a covered loan
even if in the ordinary course of our business we determine that taking such action would be advantageous for the
Company. These restrictions could impair our ability to manage problem loans, extend the amount of time that
such loans remain on our balance sheet and increase the amount of our losses.
We hold and acquire a significant amount of OREO from time to time, which may lead to increased operating
expenses and vulnerability to additional declines in real property values.
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When necessary, we foreclose on and take title to the real estate (some of which is covered by our FDIC loss
sharing arrangement) serving as collateral for our loans as part of our business. Real estate that we own but do
use in the ordinary course of our operations is referred to as “other real estate owned,” or “OREO” property.
Increased OREO balances have led to greater expenses as we incur costs to manage and dispose of the properties.
Despite some of the OREO being covered by loss sharing agreements with the FDIC, we expect that our earnings
will continue to be negatively affected by various expenses associated with OREO, including personnel costs,
insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with
property ownership, as well as by the funding costs associated with OREO assets. We evaluate OREO properties
periodically and write down the carrying value of the properties if the results of our evaluation require it. The
expenses associated with OREO and any further OREO write-downs could have a material adverse effect on us.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property, and we could become subject to
environmental liabilities with respect to one or more of these properties. During the ordinary course of business,
we may foreclose on and take title to properties securing defaulted loans. There is a risk that hazardous or toxic
substances could be found on these properties, and we may be liable for remediation costs, as well as for personal
injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or
toxic substances first affected any particular property. Environmental laws may require us to incur substantial
expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our
ability to use or sell the affected property. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to environmental liability.
Although we have policies and procedures to perform an environmental review before initiating any foreclosure
action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental
hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could
have a material adverse effect on us.
The expanding body of federal, state and local regulation and/or the licensing of loan servicing, collections or
other aspects of our business may increase the cost of compliance and the risks of noncompliance.
We service our own loans, and loan servicing is subject to extensive regulation by federal, state and local
governmental authorities as well as to various laws and judicial and administrative decisions imposing
requirements and restrictions on those activities. The volume of new or modified laws and regulations has
increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict
loan servicing activities including delaying or temporarily preventing foreclosures or forcing the modification of
certain mortgages. If regulators impose new or more restrictive requirements, we may incur additional significant
costs to comply with such requirements which may further adversely affect us. In addition, our failure to comply
with these laws and regulations could possibly lead to: civil and criminal liability; loss of licensure; damage to
our reputation in the industry; fines and penalties and litigation, including class action lawsuits; and
administrative enforcement actions. Any of these outcomes could materially and adversely affect us.
The fair value of our investment securities can fluctuate due to market conditions outside of our control.
We have historically taken a conservative investment strategy with our securities portfolio, with concentrations
of securities that are primarily backed by government sponsored enterprises. In the future, we may seek to
increase yields through more aggressive strategies, which may include a greater percentage of corporate
securities and structured credit products. Factors beyond our control can significantly influence the fair value of
securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These
factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or
with respect to the underlying securities, and changes in market interest rates and instability in the capital
markets. These factors, among others, could cause other-than-temporary impairments and realized and/or
unrealized losses in future periods and declines in other comprehensive income, which could have a material
adverse effect on us. The process for determining whether impairment of a security is other-than-temporary
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usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer
and any collateral underlying the security in order to assess the probability of receiving all contractual principal
and interest payments on the security.
We face significant competition from other financial institutions and financial services providers, which may
materially and adversely affect us.
Consumer and commercial banking is highly competitive. Our markets contain a large number of community and
regional banks as well as a significant presence of the country’s largest commercial banks. We compete with
other state and national financial institutions, including savings and loan associations, savings banks and credit
unions, for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance
companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several
government agencies, as well as major retailers, in providing various types of loans and other financial services.
Some of these competitors have a long history of successful operations in our markets, greater ties to local
businesses and more expansive banking relationships, as well as better established depositor bases. Some of our
competitors also have greater resources and access to capital and possess an advantage by being capable of
maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting
extensive promotional and advertising campaigns or operating a more developed internet platform. Competitors
may also exhibit a greater tolerance for risk and behave more aggressively with respect to pricing in order to
increase their market share.
Our ability to compete successfully depends on a number of factors, including, among others:
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the ability to develop, maintain and build upon long-term client relationships based on quality service,
effective and efficient products and services, high ethical standards and safe and sound assets;
the scope, relevance and pricing of products and services offered to meet client needs and demands;
the rate at which we introduce new products and services relative to our competitors;
the ability to attract and retain highly qualified employees to operate our business;
the ability to expand our market position;
client satisfaction with our level of service;
the ability to operate our business effectively and efficiently; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could
materially and adversely affect us.
We may not be able to meet the cash flow requirements of deposit withdrawals and other business needs unless
we maintain sufficient liquidity.
We require liquidity to make loans and to repay deposit and other liabilities as they become due or are demanded
by clients. We principally depend on checking, savings and money market deposit account balances and other
forms of client deposits as our primary source of funding for our lending activities. As a result of a decline in
depositor confidence, an increase in interest rates paid by competitors, general interest rate levels, FDIC
insurance costs, higher returns being available to clients on alternative investments and general economic
conditions, a substantial number of our clients could withdraw their bank deposits with us from time to time,
resulting in our deposit levels decreasing substantially, and our cash on hand may not be able to cover such
withdrawals and our other business needs, including amounts necessary to operate and grow our business. This
would require us to seek third party funding or other sources of liquidity, such as asset sales. Our access to third
party funding sources, including our ability to raise funds through the issuance of additional shares of our
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common stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, may
be impacted by our financial strength, performance and prospects and may also be impaired by factors that are
not specific to us, such as a disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of recent turmoil faced by banking organizations and the
unstable credit markets, all of which may make potential funding sources more difficult to access, less reliable
and more expensive. We may not have access to third party funding in sufficient amounts on favorable terms, or
the ability to undertake asset sales or access other sources of liquidity, when needed, or at all, which could
materially and adversely affect us.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such
structures are affected by a variety of factors, including changes in interest rates, which can impact the value of
financial instruments held by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in
nature and are directly affected by many factors, including domestic and international economic and political
conditions, broad trends in business and finance, legislation and regulation affecting the national and
international business and financial communities, monetary and fiscal policies, inflation, currency values, market
conditions, the availability and terms (including cost) of short-term or long-term funding and capital, the credit
capacity or perceived creditworthiness of clients and counterparties and the level and volatility of trading
markets. Such factors can impact clients and counterparties of a financial services institution and may impact the
value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference
between the interest income we earn on loans, investments and other interest earning assets, and the interest we
pay on interest bearing liabilities, such as deposits and borrowings. Because different types of assets and
liabilities may react differently and at different times to market interest rate changes, changes in interest rates can
increase or decrease our net interest income. When interest-bearing liabilities mature or reprice more quickly
than interest earning assets in a period, an increase in interest rates would reduce net interest income. Similarly,
when interest earning assets mature or reprice more quickly, and because the magnitude of repricing of interest
earning assets is often greater than interest bearing liabilities, falling interest rates would reduce net interest
income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and
liabilities, loan and investment securities portfolios and our overall results. Changes in interest rates may also
have a significant impact on any future loan origination revenues. Historically, there has been an inverse
correlation between the demand for loans and interest rates. Loan origination volume and revenues usually
decline during periods of rising or high interest rates and increase during periods of declining or low interest
rates. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of
the assets, both loans and investment securities, on our balance sheet. We may incur debt in the future and that
debt may also be sensitive to interest rates and any increase in interest rates could materially and adversely affect
us. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions
and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal
Reserve System (the “Federal Reserve”). Adverse changes in the Federal Reserve’s interest rate policies or other
changes in monetary policies and economic conditions could materially and adversely affect us.
We are dependent on our information technology and telecommunications systems and third-party servicers, and
systems failures, interruptions or breaches of security could have a material adverse effect on us.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology
and telecommunications systems and third-party servicers. We outsource many of our major systems, such as
data processing, loan servicing systems and deposit processing systems. The failure of these systems, or the
termination of a third-party software license or service agreement on which any of these systems is based, could
interrupt our operations. Because our information technology and telecommunications systems interface with and
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depend on third-party systems, we could experience service denials if demand for such services exceeds capacity
or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure
or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of
client business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which
could have a material adverse effect on us.
In addition, we provide our clients with the ability to bank remotely, including online over the internet and over
the telephone. The secure transmission of confidential information over the internet and other remote channels is
a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses,
phishing schemes and other security breaches. We may be required to spend significant capital and other
resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused
by security breaches or viruses. To the extent that our activities or the activities of our clients involve the storage
and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory
scrutiny, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses
could also cause existing clients to lose confidence in our systems and could materially and adversely affect us.
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes
Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in
our financial reports and have an adverse effect on our stock price.
As a publicly traded company, we are required to file periodic reports containing our consolidated financial
statements with the SEC within a specified time following the completion of quarterly and annual periods. We
will also be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 concerning internal control
over financial reporting. We may experience difficulty in meeting the SEC’s reporting requirements. Any failure
by us to file our periodic reports with the SEC in a timely manner could harm our reputation and cause investors
and potential investors to lose confidence in us and reduce the market price of our Class A common stock.
Beginning with our Annual Report on Form 10-K for our 2013 fiscal year, SEC rules will require that our Chief
Executive Officer and Chief Financial Officer periodically certify the existence and effectiveness of our internal
control over financial reporting. Beginning with the fiscal year ending December 31, 2018, or such earlier time as
we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (which
we refer to as the “JOBS Act”), our independent registered public accounting firm will be required to attest to our
assessment of our internal control over financial reporting. This process will require significant documentation of
policies, procedures and systems, review of that documentation by our internal auditing and accounting staff and
our outside independent registered public accounting firm, and testing of our internal control over financial
reporting by our internal auditing and accounting staff and our outside independent registered public accounting
firm. This process will involve considerable time and attention, may strain our internal resources, and will
increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor
fees during the implementation of these changes and thereafter.
During the course of our testing, we may identify deficiencies that would have to be remediated to satisfy the
SEC rules for certification of our internal control over financial reporting. A material weakness is defined by the
standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of
deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As
a consequence, we would have to disclose in periodic reports we file with the SEC any material weakness in our
internal control over financial reporting. The existence of a material weakness would preclude management from
concluding that our internal control over financial reporting is effective and would preclude our independent
auditors from attesting to our assessment of the effectiveness of our internal control over financial reporting is
effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our
financial reporting and may negatively affect the market price of our Class A common stock. Moreover, effective
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internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies
in our disclosure controls and procedures or internal control over financial reporting, it may materially and
adversely affect us.
Risks Relating to our Growth Strategy
We may not be able to effectively manage our growth.
Our future operating results depend to a large extent on our ability to successfully manage our rapid growth. Our
rapid growth has placed, and it may continue to place, significant demands on our operations and management.
Whether through additional acquisitions or organic growth, our current plan to expand our business is dependent
upon our ability to:
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continue to implement and improve our operational, credit, financial, management and other internal
risk controls and processes and our reporting systems and procedures in order to manage a growing
number of client relationships;
scale our technology platform;
integrate our acquisitions and develop consistent policies throughout the various businesses; and
attract and retain management talent.
We may not successfully implement improvements to, or integrate, our management information and control
systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing
systems and controls. In particular, our controls and procedures must be able to accommodate an increase in loan
volume in various markets and the infrastructure that comes with new banking centers and banks. Thus, our
growth strategy may divert management from our existing franchises and may require us to incur additional
expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively
manage and grow our banking franchise, we could be materially and adversely affected. In addition, if we are
unable to manage future expansion in our operations, we may experience compliance and operational problems,
have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support
such growth, any one of which could materially and adversely affect us.
Our acquisitions generally will require regulatory approvals, and failure to obtain them would restrict our
growth.
We intend to complement and expand our business by pursuing strategic acquisitions of community banking
franchises. Generally, any acquisition of target financial institutions, banking centers or other banking assets by
us will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly
including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on
applications, federal banking regulators consider, among other factors:
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the effect of the acquisition on competition;
the financial condition, liquidity, results of operations, capital levels and future prospects of the
applicant and the bank(s) involved;
the quantity and complexity of previously consummated acquisitions;
the managerial resources of the applicant and the bank(s) involved;
the convenience and needs of the community, including the record of performance under the
Community Reinvestment Act (which we refer to as the “CRA”);
the effectiveness of the applicant in combating money laundering activities; and
the extent to which the acquisition would result in greater or more concentrated risks to the stability of
the United States banking or financial system.
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Such regulators could deny our application based on the above criteria or other considerations, which would
restrict our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For
example, we could be required to sell banking centers as a condition to receiving regulatory approvals, and such
a condition may not be acceptable to us or may reduce the benefit of any acquisition.
The success of future transactions will depend on our ability to successfully identify and consummate
acquisitions of financial services franchises that meet our investment objectives. Because of the intense
competition for acquisition opportunities and the limited number of potential targets, we may not be able to
successfully consummate acquisitions on attractive terms, or at all, that are necessary to grow our business.
The success of future transactions will depend on our ability to successfully identify and consummate
transactions with target financials services franchises that meet our investment objectives. There are significant
risks associated with our ability to identify and successfully consummate these acquisitions. There are a limited
number of acquisition opportunities, and we expect to encounter intense competition from other banking
organizations competing for acquisitions and also from other investment funds and entities looking to acquire
financial institutions and financial services franchises. Many of these entities are well established and have
extensive experience in identifying and consummating acquisitions directly or through affiliates. Many of these
competitors possess ongoing banking operations with greater financial, technical, human and other resources and
access to capital than we do, which could limit the acquisition opportunities we pursue. Our competitors may be
able to achieve greater cost savings, through consolidating operations or otherwise, than we could. These
competitive limitations give others an advantage in pursuing certain acquisitions. In addition, increased
competition may drive up the prices for the acquisitions we pursue and make the other acquisition terms more
onerous, which would make the identification and successful consummation of those acquisitions less attractive
to us. Competitors may be willing to pay more for acquisitions than we believe are justified, which could result
in us having to pay more for them than we prefer or to forego the opportunity. As a result of the foregoing, we
may be unable to successfully identify and consummate acquisitions on attractive terms, or at all, that are
necessary to grow our business.
To the extent that we are unable to identify and consummate attractive acquisitions, or increase loans through
organic loan growth, we may be unable to successfully implement our growth strategy, which could materially
and adversely affect us.
We intend to grow our business through strategic acquisitions of financial services franchises coupled with
organic loan growth. Previous availability of attractive acquisition targets may not be indicative of future
acquisition opportunities, and we may be unable to identify any acquisition targets that meet our investment
objectives. Additionally, loan growth, excluding the effects of our acquisitions, has so far been limited and such
loan balances have declined as loan repayments from our clients have generally outpaced loan originations due
not only to our limited time to cultivate relationships with our clients, but also due to the generally weakened
economy and lower levels of quality borrowing demand. As a result, a significant portion of our income thus far
has been derived from the accretion recognized on acquired assets rather than from cash interest income. As our
acquired loan portfolio, which produces higher yields than our originated loans due to loan discount, accretable
yield and the accretion of the FDIC indemnification asset, is paid down, we expect downward pressure on our
income to the extent that the runoff is not replaced with other high-yielding loans. As a result of the foregoing, if
we are unable to replace loans in our existing portfolio with comparable high-yielding loans, we could be
materially and adversely affected. We could also be materially and adversely affected if we choose to pursue
riskier higher-yielding loans that fail to perform.
Projected operating results for businesses acquired by us may be inaccurate and may vary significantly from
actual results. To the extent that we make acquisitions that involve distressed assets, we may not be able to
realize the value we predict from these assets or make sufficient provision for future losses in the value of, or
accurately estimate the future writedowns to be taken in respect of, these assets.
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We will generally establish the pricing of transactions and the capital structure of banking franchises to be
acquired by us on the basis of financial projections for such banking franchises. In general, projected operating
results will be based on the judgment of our management team. In all cases, projections are only estimates of
future results that are based upon assumptions made at the time that the projections are developed and the
projected results may vary significantly from actual results. General economic, political and market conditions
can have a material adverse impact on the reliability of such projections. In the event that the projections made in
connection with our acquisitions, or future projections with respect to new acquisitions, are not accurate, such
inaccuracies could materially and adversely affect us. Any of the foregoing matters could materially and
adversely affect us.
Delinquencies and losses in the loan portfolios and other assets we acquire may exceed our initial forecasts
developed during our due diligence investigation prior to their acquisition and, thus, produce lower risk-adjusted
returns than we believed our purchase price supported. Furthermore, our due diligence investigation may not
reveal all material issues. The diligence process in FDIC-assisted transactions is also expedited due to the short
acquisition timeline that is typical for these transactions. If, during the diligence process, we fail to identify all
relevant issues related to an acquisition, we may be forced to later write down or write off assets, restructure our
operations, or incur impairment or other charges that could result in significant losses. Any of these events could
materially and adversely affect us. Current economic conditions have created an uncertain environment with
respect to asset valuations and there is no certainty that we will be able to sell assets or institutions after we
acquire them if we determine it would be in our best interests to do so. In addition, currently there is limited or no
liquidity for certain asset classes we hold, including commercial real estate and construction and development
loans.
Risks Relating to the Regulation of Our Industry
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material
adverse effect on our business
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance
changes. The key effects of the Dodd-Frank Act on our business are:
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changes to regulatory capital requirements;
exclusion of hybrid securities issued on or after May 19, 2010 from tier 1 capital;
creation of new government regulatory agencies (such as the Financial Stability Oversight Council,
which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop
and enforce rules for bank and non-bank providers of consumer financial products);
potential limitations on federal preemption;
changes to deposit insurance assessments;
regulation of debit interchange fees we earn;
changes in retail banking regulations, including potential limitations on certain fees we may charge;
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changes in regulation of consumer mortgage loan origination and risk retention.
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to
sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to
limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain
swaps and derivatives activities and to take certain principal positions in financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions,
however, will require regulations to be promulgated by various federal agencies in order to be implemented,
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some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act
may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-
Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us
more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These
changes may also require us to invest significant management attention and resources to evaluate and make any
changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new
requirements could also materially and adversely affect us. Any changes in the laws or regulations or their
interpretations could be materially adverse to investors in our common stock
We operate in a highly regulated environment and the laws and regulations that govern our operations,
corporate governance, executive compensation and accounting principles, or changes in them, or our failure to
comply with them, could materially and adversely affect us.
We are subject to extensive regulation, supervision, and legislation that govern almost all aspects of our
operations. Intended to protect clients, depositors and the Deposit Insurance Fund (the “DIF”) these laws and
regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business
activities in which we can engage, limit the dividends or distributions that we can pay, restrict the ability of
institutions to guarantee our debt, and impose certain specific accounting requirements on us that may be more
restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP.
Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often
impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure
follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business
activities, fines and other penalties, any of which could materially and adversely affect us. Further, any new laws,
rules and regulations could make compliance more difficult or expensive and also materially and adversely affect
us.
We are subject to substantial regulatory limitations that limit the way in which we may operate our business.
Our bank subsidiary, NBH Bank, N.A. (“NBH Bank” or the “Bank”), is subject to specific requirements pursuant
to the OCC Operating Agreement entered into in connection with our acquisition of certain assets of Bank
Midwest, N.A. The OCC Operating Agreement requires, among other things, that the Bank maintain various
financial and capital ratios and provide notice to, and obtain consent from, the OCC with respect to any
additional failed bank acquisitions from the FDIC or the appointment of any new director or senior executive
officer of the Bank. Additionally, the OCC Operating Agreement prohibits the Bank from paying a dividend to
the Company until at least the fourth quarter of 2013 and, once the prohibition period has elapsed, imposes other
restrictions on the Bank’s ability to pay dividends, including requiring prior non-objection from the OCC before
any distribution is made. Also, the OCC Operating Agreement requires that the Bank maintain total capital at
least equal to 12% of risk-weighted assets, tier 1 capital at least equal to 11% of risk-weighted assets and tier 1
capital at least equal to 10% of adjusted total assets.
The Bank (and, with respect to certain provisions, the Company) is also subject to the FDIC Order issued in
connection with the FDIC’s approval of our application for deposit insurance for the Bank. The FDIC Order
requires, among other things, that until fourth quarter of 2013, obtaining the FDIC’s approval before
implementing certain compensation plans, submit updated business plans and reports of material deviations from
those plans to the FDIC and comply with the applicable requirements of the FDIC Policy Statement.
Additionally, the FDIC Order requires that the Bank maintain capital levels of at least a 10% tier 1 leverage ratio
and a 10% tier 1 risk-based capital ratio until at least the fourth quarter of 2013.
A failure by us or the Bank to comply with the requirements of the OCC Operating Agreement or the FDIC
Order, or the objection by the OCC or the FDIC to any materials or information submitted pursuant to the OCC
Operating Agreement or the FDIC Order, could prevent us from executing our business strategy and materially
and adversely affect us.
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The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital
rules for U.S. banks is uncertain.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel
Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for
internationally active banking organizations in the United States and around the world, known as Basel III. Basel
III increases the requirements for minimum common equity, minimum tier 1 capital, and minimum total capital,
to be phased in over time until fully phased in by January 1, 2019.
Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as
the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and
risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for
insured depository institutions. In particular, bank holding companies will no longer be permitted to count trust
preferred securities toward their tier 1 capital. While we do not have currently have trust preferred securities,
many bank holding companies have long relied on trust preferred securities as a component of their regulatory
capital. In June 2012, the Federal Reserve, OCC and FDIC released proposed rules which would implement the
Basel III and Dodd-Frank Act capital requirements. While the proposed capital requirements would result in
generally higher regulatory capital standards, it is uncertain as to exactly how the new standards will ultimately
be applied to us and our subsidiary bank and their impact on us or NBH Bank.
The FDIC’s restoration plan and the related increased assessment rate could materially and adversely affect us.
The FDIC insures deposits at FDIC-insured depository institutions, such as our subsidiary bank, up to applicable
limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk
classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based
on its capital levels and the level of supervisory concern the institution poses to its regulators. Market
developments have significantly depleted the DIF of the FDIC and reduced the ratio of reserves to insured
deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has
increased the deposit insurance assessment rates and thus raised deposit insurance premiums for insured
depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may
need to be further special assessments or increases in deposit insurance premiums. We are generally unable to
control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or
financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased
levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may
materially and adversely affect us, including by reducing our profitability or limiting our ability to pursue certain
business opportunities.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws
and regulations, and our failure to comply with any supervisory actions to which we become subject as a result
of such examinations could materially and adversely affect us.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and
regulations. If, as a result of an examination, a federal banking agency were to determine that the financial
condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of
our operations had become unsatisfactory, or that the Company or its management was in violation of any law or
regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the
power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an
increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors,
to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an
imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory
actions, we could be materially and adversely affected.
37
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws
could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations
impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other
federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an
institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of
sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions
activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation.
The Federal Reserve may require us to commit capital resources to support our subsidiary bank.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding
company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to
support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank
holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding
company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary
bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that
directly or indirectly control an insured depository institution serve as a source of strength for the institution.
Under this requirement, we could be required to provide financial assistance to our subsidiary bank should our
subsidiary bank experience financial distress.
A capital injection may be required at times when we do not have the resources to provide it and therefore we
may be required to borrow the funds or raise additional equity capital from third parties. Any loans by a holding
company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness
of the subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume
any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled
to a priority of payment over the claims of the holding company’s general unsecured creditors, including the
holders of its indebtedness. Any financing that must be done by the holding company in order to make the
required capital injection may be difficult and expensive and may not be available on attractive terms, or at all,
which likely would have a material adverse effect on us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The federal Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial
institutions, among other duties, to institute and maintain an effective anti-money laundering program and file
suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement
Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to
impose significant civil money penalties for violations of those requirements, and has recently engaged in
coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of
Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of
compliance with the rules enforced by the Office of Foreign Assets Control (“OFAC”). If our policies,
procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions
that we have already acquired or may acquire in the future are deficient, we would be subject to liability,
including fines and regulatory actions (such as restrictions on our ability to pay dividends and the necessity to
obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans),
which could materially and adversely affect us. Failure to maintain and implement adequate programs to combat
money laundering and terrorist financing could also have serious reputational consequences for us.
38
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or
increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices
considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable
products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a
reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the
underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability
with respect to our lending and loan investment activities. They increase our cost of doing business and,
ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the
points and fees on loans that we do make.
Our ability to pay dividends is subject to regulatory limitations and our bank subsidiary’s ability to pay
dividends to us is also subject to regulatory limitations.
Our ability to declare and pay dividends depends both on the ability of our bank subsidiary to pay dividends to us
and on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital
adequacy and dividends. Because we are a separate legal entity from our bank subsidiary and we do not have
significant operations of our own, any dividends paid by us to our common stockholders would have to be paid
from funds at the holding company level that are legally available therefor. However, as a bank holding
company, we are subject to general regulatory restrictions on the payment of cash dividends. Federal bank
regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound
practices in conducting their business, which depending on the financial condition and liquidity of the holding
company at the time, could include the payment of dividends. Additionally, various federal and state statutory
provisions limit the amount of dividends that our bank subsidiary can pay to us as its holding company without
regulatory approval. Our bank subsidiary is currently prohibited by our OCC Operating Agreement from paying
dividends to us until at least the fourth quarter of 2013. Therefore, other than the net proceeds that we received or
will receive from the 2009 private offering and from any future financing at the holding company level, we do
not have, and do not expect to have in the near future, liquidity at the holding company level to pay dividends to
our common stockholders. Finally, holders of our common stock are only entitled to receive such dividends as
our board of directors may, in its unilateral discretion, declare out of funds legally available for such purpose
based on a variety of considerations, including, without limitation, our historical and projected financial
condition, liquidity and results of operations, capital levels, tax considerations, statutory and regulatory
prohibitions and other limitations, general economic conditions and other factors deemed relevant by our board
of directors. Accordingly, we may not pay the amount of dividends referenced in our current intention above, or
any dividends at all, to our common stockholders in the future.
Cautionary Note Regarding Forward-looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, predictions,
forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-
looking. These statements are often, but not always, made through the use of words or phrases such as
“anticipate,” “believes,” “can,” “would,” “should,” “could,” “may,” “predicts,” “potential,” “should,” “will,”
“estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases.
These statements are only predictions and involve estimates, known and unknown risks, assumptions and
uncertainties. Our actual results could differ materially from those expressed in or contemplated by such forward-
looking statements as a result of a variety of factors, some of which are more fully described in Part I under the
caption “Risk Factors.”
Any or all of our forward-looking statements in this annual report may turn out to be inaccurate. The inclusion of
such forward-looking statements should not be regarded as a representation by us that we will achieve the results
expressed in or contemplated by such forward-looking statements. We have based these forward-looking
39
statements largely on our current expectations and projections about future events and financial trends that we
believe may affect our financial condition, liquidity, results of operations, business strategy and growth
prospects. There are important factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity, performance or achievements expressed in or
contemplated by the forward looking statements, including, but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
ability to execute our business strategy;
changes in the regulatory environment, including changes in regulation that affect the fees that we
charge;
economic, market, operational, liquidity, credit and interest rate risks associated with our business;
our ability to identify potential candidates for, obtain regulatory approval, and consummate,
acquisitions of banking franchises on attractive terms, or at all;
our ability to integrate acquisitions and to achieve synergies, operating efficiencies and/or other
expected benefits within expected time-frames, or at all, or within expected cost projections, and to
preserve the goodwill of acquired banking franchises;
our ability to achieve organic loan and deposit growth and the composition of such growth;
business and economic conditions generally and in the financial services industry;
increased competition in the financial services industry, nationally, regionally or locally, resulting in,
among other things, lower risk-adjusted returns;
changes in the economy or supply-demand imbalances affecting local real estate values;
volatility and direction of market interest rates;
effects of any changes in trade and monetary and fiscal policies and laws, including the interest rate
policies of the Federal Reserve;
the ability in certain states to amend the state constitution to impose restrictions on financial services
by a simple majority of the people who actually vote;
governmental legislation and regulation, including changes in accounting regulation or standards;
failure of politicians to reach consensus on a bipartisan basis;
acts of war or terrorism, natural disasters such as tornadoes, flooding, hail storms and damaging winds,
earthquakes, hurricanes or fires, or the effects of pandemic flu;
the timely development and acceptance of new products and services and perceived overall value of
these products and services by users;
changes in the Company’s management personnel;
continued consolidation in the financial services industry;
ability to maintain or increase market share;
ability to implement and/or improve operational management and other internal risk controls and
processes and our reporting system and procedures;
a weakening of the economy which could materially impact credit quality trends and the ability to
generate quality loans;
the impact of current economic conditions and the Company’s performance, liquidity, financial
condition and prospects and on its ability to obtain attractive third-party funding to meet its liquidity
needs;
fluctuations in face value of investment securities due to market conditions;
40
•
•
•
•
•
•
•
changes in fiscal, monetary and related policies of the U.S. federal government, its agencies and
government sponsored entities;
inability to receive dividends from our subsidiary bank and to service debt, pay dividends to our
common stockholders and satisfy obligations as they become due;
costs and effects of legal and regulatory developments, including the resolution of legal proceedings or
regulatory or other governmental inquiries, and the results of regulatory examinations or reviews;
changes in estimates of future loan reserve requirements based upon the periodic review thereof under
relevant regulatory and accounting requirements;
changes in capital classification;
impact of reputational risk on such matters as business generation and retention; and
the Company’s success at managing the risks involved in the foregoing items.
All forward-looking statements are necessarily only estimates of future results. Accordingly, actual results may
differ materially from those expressed in or contemplated by the particular forward-looking statement, and,
therefore, you are cautioned not to place undue reliance on such statements. Any forward-looking statement is
qualified in its entirety by reference to the matters discussed elsewhere in this annual report. Further, any
forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after the date on which the statement is
made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.
Item 1B. UNRESOLVED STAFF COMMENTS.
None
Item 2.
PROPERTIES.
Our principal executive offices are located in the Denver Tech Center area immediately south of Denver,
Colorado. We also have approximately 70,000 square feet of office and operations space in Kansas City,
Missouri. At December 31, 2012, we operated 45 full-service banking centers in Kansas and Missouri, 50 in
Colorado, four in California and two in Texas, as well as 20 retirement center locations in Kansas and Missouri
and six retirement center locations in each of Colorado and Texas. Of these banking centers, 61 locations were
leased and 72 were owned.
Item 3.
LEGAL PROCEEDINGS.
From time to time we are a party to various litigation matters incidental to the conduct of our business. We are
not presently party to any legal proceedings the resolution of which we believe would have a material adverse
effect on our business, prospects, financial condition, results of operations or liquidity.
Item 4. MINE SAFETY DISCLOSURES.
None
41
Item 5. MARKET FOR REGISTRANT’s COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Part II
National Bank Holdings Corporation
Common Stock Data
Shares of the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the
symbol “NBHC” on September 20, 2012. Prior to September 20, 2012, there was no established public trading
market for the Company’s stock. The following table presents the high and low prices of actual transactions in
the Company’s common stock and cash dividends paid for the periods indicated:
Quarter
2012 First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$ —
$ —
$20.25
$19.92
$ —
$ —
$19.23
$17.90
Cash
Dividends
$ —
$ —
$ —
$0.05
The last sale price of our common stock on the NYSE was $18.09 per share on February 28, 2013. The Company
had 100 shareholders of record as of February 28, 2013. Management estimates that the number of beneficial
owners is significantly greater.
In October 2012, we commenced the payment of a $0.05 per share quarterly dividend to holders of our common
stock.
As a bank holding company, any dividends paid to us by our bank subsidiary are subject to various federal and
state regulatory limitations and also subject to the ability of our bank subsidiary to pay dividends to us. Currently,
the Bank is prohibited by our OCC Operating Agreement from paying dividends to us until at least the fourth
quarter of 2013, and, therefore, any dividends to our common stockholders would have to be paid from funds
legally available at the holding company level. Other than the net proceeds that we received or will receive, as
the case may be, from the 2009 private offering and from any future financing at the holding company level, we
do not have, and do not expect to have in the near future, liquidity sources at the holding company level to pay
dividends to our common stockholders. In addition, in the future, we and our bank subsidiary may enter into
credit agreements or other financing arrangements that prohibit or otherwise restrict our ability to declare or pay
cash dividends. Any determination to pay cash dividends in the future will be at the unilateral discretion of our
board of directors and will depend on a variety of considerations, including, without limitation, our historical and
projected financial condition, liquidity and results of operations, capital levels, tax considerations, statutory and
regulatory prohibitions and other limitations, general economic conditions and other factors deemed relevant by
our board of directors. See “Risk Factors—Our ability to pay dividends is subject to regulatory limitations and
our bank subsidiary’s ability to pay dividends to us is also subject to regulatory limitations.”
42
Performance Graph
The following graph presents a comparison of the Company’s performance to the indices named below. It
assumes $100 invested on September 19, 2012, with dividends invested on a total return basis.
Total Return Performance
110
105
100
95
90
e
u
l
a
V
x
e
d
n
I
85
09/19/12
Index
NBH
KBW Regional Banking Index
Russell 2000 Index
09/28/12
10/31/12
11/30/12
12/31/12
09/19/12
09/28/12
Period Ending
10/31/12
11/30/12
12/31/12
NBH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KBW Regional Banking Index . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
101.09
97.37
97.82
98.70
94.77
95.64
95.17
93.31
96.01
98.65
94.46
99.21
The following table sets forth information about our purchases of our $0.01 par value common stock, our only
class of stock registered pursuant to Section 12 of the Exchange Act, during the fourth quarter of 2012.
Period
October 1-31, 2012 . . . . . . . .
November 1-30, 2012 . . . . . .
December 1-31, 2012 . . . . . .
Total . . . . . . . . . . . . . . . . . . .
Total Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicaly
Announced Program
Maximum Amount
that May Yet Be
Purchased Under the
Program
0
0
240
240
$ —
$ —
$17.98
$17.98
0
0
240
240
$25,000,000
$25,000,000
$24,995,685
$24,995,685
On October 31, 2012, the Board of Directors authorized share repurchases of our common stock of up to $25
million, from time to time. The stock purchases detailed above were made under this authorization.
43
Item 6.
SELECTED FINANCIAL DATA
The following table sets forth summary selected historical financial information as of and for the years ended
December 31, 2012, 2011 and 2010, and as of December 31, 2009 and for the period from June 16, 2009
(inception) to December 31, 2009. The summary selected historical consolidated financial information set forth
below is derived from our audited consolidated financial statements.
Although we were incorporated on June 16, 2009, we did not have any substantive operations prior to the
Hillcrest Bank acquisition on October 22, 2010. Our results of operations for the post-Hillcrest Bank acquisition
periods are not comparable to our results of operations for the pre-Hillcrest Bank acquisition periods. Our results
of operations for the post-Hillcrest Bank acquisition periods reflect, among other things, the acquisition method
of accounting. In addition, we consummated the Bank Midwest acquisition on December 10, 2010, the Bank of
Choice acquisition on July 22, 2011 and the Community Banks of Colorado acquisition on October 21, 2011, all
of which were significant acquisitions and were also accounted for using the acquisition method of accounting.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The summary selected historical consolidated financial data set forth below should be read together with our
consolidated financial statements and the related notes thereto and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this annual report. Such information is not
necessarily indicative of anticipated future results.
44
—
—
—
—
—
—
—
—
565
Summary Selected Historical Consolidated Financial Data
December 31, 2012 December 31, 2011 December 31, 2010 December 31, 2009 (1)
Consolidated Balance Sheet
Information (unaudited, $ in
thousands):
Cash and cash equivalents . . . . . . . .
Investment securities available-for-
sale . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held-to-
maturity . . . . . . . . . . . . . . . . . . . .
Non-marketable equity securities . .
Loans receivable (2): . . . . . . . . . . . .
Covered under FDIC loss
$ 769,180
$1,628,137
$1,907,730
$1,099,288
1,718,028
1,862,699
1,254,595
577,486
32,996
6,801
29,117
—
17,800
sharing agreements . . . . . . .
608,222
952,715
703,573
Not covered under FDIC loss
sharing agreements . . . . . . .
1,229,848
1,321,336
865,297
Less: Allowance for loan
losses . . . . . . . . . . . . . . . . . .
(15,380)
(11,527)
(48)
Loans receivable, net . . . .
1,822,690
2,262,524
1,568,822
FDIC indemnification asset . . . . . . .
Other real estate owned . . . . . . . . . .
Premises and equipment, net . . . . . .
Goodwill and other intangible
assets . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . .
86,923
94,808
121,436
87,205
100,023
223,402
120,636
87,315
92,553
38,842
161,395
54,078
37,320
79,715
24,066
Total assets . . . . . . . . . . . . . . . . . . .
5,410,775
6,352,026
5,105,521
1,099,853
Deposits . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . .
4,200,719
119,497
Total liabilities . . . . . . . . . . . . . . . . .
4,320,216
Total stockholders’ equity . . . . . . . .
1,090,559
5,063,053
200,244
5,263,297
1,088,729
3,473,339
638,423
4,111,762
993,759
—
2,357
2,357
1,097,496
Total liabilities and stockholders’
equity . . . . . . . . . . . . . . . . . . . . . .
$5,410,775
$6,352,026
$5,105,521
$1,099,853
45
For the year ended
December 31, 2012
For the year ended
December 31, 2011
For the year ended
December 31, 2010
For the Period
June 16, 2009 through
December 31, 2009(1)
Consolidated Statement of
Operations Data:
Interest income . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . .
$
Net interest income . . . . . . .
Provision for loan losses . . . . . . .
Net interest income after
provision for loan
losses . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . .
Non-interest income . . . . . . . . . .
Non-interest expense . . . . . . . . . .
Income (loss) before income
233,485
29,234
204,251
27,995
176,256
—
37,379
209,598
$
197,159
41,696
155,463
20,002
135,461
60,520
28,966
155,538
taxes . . . . . . . . . . . . . . . . . . . .
4,037
69,409
4,580
(543)
(0.01)
(0.01)
20.84
19.17
27,446
41,963
0.81
0.81
20.87
19.10
$
$
$
$
$
$
$
$
$
$
Provision (benefit) for income
before taxes . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . .
Share Information (3):
Earnings (loss) per share,
basic . . . . . . . . . . . . . . . . . . . .
Earnings (loss) per share,
diluted . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . .
Tangible book value per
share (4)
. . . . . . . . . . . . . . . . .
Weighted average common
shares outstanding,
basic (5) . . . . . . . . . . . . . . . . . .
Weighted average common
shares outstanding,
diluted (5) . . . . . . . . . . . . . . . .
$
$
$
$
$
$
21,422
5,512
15,910
88
15,822
37,778
4,385
48,981
9,004
2,953
6,051
0.11
0.11
19.13
17.60
$
$
$
$
$
$
481
—
481
—
481
—
1,847
(1,366)
168
(1,534)
(0.07)
(0.07)
18.82
18.82
52,214,175
51,978,744
53,000,454
21,251,006
52,214,175
52,104,021
53,000,454
21,251,006
Common shares
outstanding (5)
Other Financial Data:
. . . . . . . . . . . .
52,327,672
52,157,697
51,936,280
58,318,304
Adjusted pre-tax, pre-provision
net revenue (6)
Adjusted non-interest
. . . . . . . . . . . .
expense (6) . . . . . . . . . . . . . . .
$
$
53,280
187,676
$
$
47,035
138,039
$
$
1,991
18,293
$
$
(1,366)
1,847
(1) The Company was incorporated on June 16, 2009, but neither the Company nor NBH Bank had any
substantive operations prior to the first acquisition on October 22, 2010. The period from June 16, 2009 to
December 31, 2009 contained 200 days.
(2) Total loans are net of unearned discounts and deferred fees and costs.
(3) Per share information is calculated based on the aggregate number of our shares of Class A common stock,
including 250,000 Founders’ Shares, and Class B non-voting common stock outstanding.
(4) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial
measures. Tangible book value per share is computed as total stockholders’ equity less goodwill and other
46
intangible assets, net, divided by common shares outstanding at the balance sheet date. For purposes of
computing tangible common equity to tangible assets, tangible common equity is calculated as common
stockholders’ equity less goodwill and other intangible assets, net, and tangible assets is calculated as total
assets less goodwill and other intangible assets, net. We believe that the most directly comparable GAAP
financial measures are book value per share and total stockholders’ equity to total assets. See the
reconciliation under “About Non-GAAP Financial Measures.”
(5) On March 11, 2010, we repurchased 6,382,024 shares of our Class A common stock.
(6) Ratio is annualized for the period from June 16, 2009 to December 31, 2009. See note 1 above.
Key Ratios (1)
For the year ended
December 31, 2012
For the year ended
December 31, 2011
For the year ended
December 31, 2010
For the year ended
December 31, 2009
Return on average assets . . . . . . . . . . . . .
Return on average tangible assets . . . . . .
Adjusted return on average
-0.01%
0.05%
assets (2) (3) . . . . . . . . . . . . . . . . . . . .
0.27%
Adjusted return on average tangible
assets (2) (3) . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . .
Return on average tangible equity . . . . .
Adjusted return on average
0.33%
-0.05%
0.27%
equity (2) (3) . . . . . . . . . . . . . . . . . . . .
1.44%
Adjusted return on average tangible
equity (2) (3) . . . . . . . . . . . . . . . . . . . .
Return on risk weighted assets . . . . . . . .
Pre-tax, pre-provision net revenue to
1.89%
-0.03%
risk weighted assets (2) . . . . . . . . . . . .
1.73%
0.81%
0.88%
0.33%
0.39%
4.01%
4.63%
1.62%
2.03%
2.21%
4.70%
0.44%
0.44%
0.09%
0.09%
0.62%
0.62%
0.13%
0.13%
0.46%
0.69%
Adjusted pre-tax, pre-provision net
revenue to risk weighted
assets (2) (3) . . . . . . . . . . . . . . . . . . . .
Interest earning assets to interest bearing
liabilities (end of period) (4) . . . . . . . .
Loans to deposits ratio (end of
2.87%
2.51%
0.15%
134.68%
127.91%
129.91%
period) . . . . . . . . . . . . . . . . . . . . . . . . .
43.76%
44.91%
45.17%
Non-interest bearing deposits to total
deposits (end of period)
. . . . . . . . . . .
Yield on earning assets (4) . . . . . . . . . . .
Cost of interest bearing liabilities (4) . . .
Interest rate spread (5) . . . . . . . . . . . . . .
Net interest margin (6) . . . . . . . . . . . . . .
Non-interest expense to average
16.14%
4.55%
0.74%
3.81%
3.98%
13.41%
4.31%
1.15%
3.17%
3.40%
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
3.62%
3.01%
Adjusted non-interest expense to
average assets (2) (3)
. . . . . . . . . . . . .
Efficiency ratio (7) . . . . . . . . . . . . . . . . .
Adjusted efficiency ratio (2) (3) . . . . . . .
Asset Quality Data (8) (9) (10)
Non-performing loans to total loans . . . .
Covered non-performing loans to total
3.24%
84.53%
75.67%
2.66%
61.72%
71.91%
2.22%
2.23%
0.95%
non-performing loans . . . . . . . . . . . . .
27.14%
29.19%
97.12%
47
9.39%
1.63%
1.65%
-0.02%
1.21%
3.56%
1.33%
84.34%
90.18%
-0.33%
-0.33%
-0.33%
-0.33%
-0.33%
-0.33%
-0.33%
-0.33%
NM
NM
NM
N/A
N/A
N/A
0.23%
N/A
NM
N/A
NM
NM
NM
NM
N/A
N/A
Key Ratios (1)
Non-performing assets to total
For the year ended
December 31, 2012
For the year ended
December 31, 2011
For the year ended
December 31, 2010
For the year ended
December 31, 2009
assets (11) . . . . . . . . . . . . . . . . . . . . . .
2.53%
2.72%
1.35%
Covered non-performing assets to total
non-performing assets . . . . . . . . . . . . .
41.70%
53.55%
99.38%
Allowance for loan losses to total
loans . . . . . . . . . . . . . . . . . . . . . . . . . .
0.84%
Allowance for loan losses to total non-
covered loans . . . . . . . . . . . . . . . . . . .
1.25%
Allowance for loan losses to non-
performing loans . . . . . . . . . . . . . . . . .
Net charge-offs to average loans . . . . . .
37.64%
1.19%
Consolidated Capital Ratios
Total stockholders’ equity to total
0.51%
0.87%
22.71%
0.51%
0.00%
0.01%
0.32%
0.01%
N/A
N/A
N/A
N/A
N/A
N/A
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
20.16%
17.14%
19.46%
99.79%
Tangible common equity to tangible
assets (2) (12) . . . . . . . . . . . . . . . . . . .
Tier 1 leverage . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital . . . . . . . . . . . . .
Total risk-based capital . . . . . . . . . . . . . .
18.85%
18.21%
51.86%
52.71%
15.91%
15.10%
49.92%
50.53%
18.19%
17.88%
69.57%
69.57%
99.79%
N/A
N/A
N/A
(1) Ratio is annualized
(2) Ratio represents non-GAAP financial measure.
(3) “Adjusted” calculations exclude bargain purchase gains, initial public offering related expenses, stock-based
compensation expense (related to the initial public offering and those not related to the initial public
offering), acquisition costs, and loss (gain) on sale of investment securities. Tax adjustments are calculated
at a rate equal to the effective tax rate for each period, with the exception of the year ended December 31,
2012. This period was calculated at a tax rate of 39.5%, which is adjusted for the effects of the non-
deductibility of the expenses related to our initial public offering.
Interest earning assets include assets that earn interest/accretion or dividends, except for the FDIC
indemnification asset that earns accretion but is not part of interest earning assets. Any market value
adjustments on investment securities are excluded from interest earnings assets. Interest bearing liabilities
include liabilities that must be paid interest.
Interest rate spread represents the difference between the weighted average yield on interest earning assets
and the weighted average costs of interest bearing liabilities.
(4)
(5)
(6) Net interest margin represents net interest income, including accretion income, as a percentage of average
interest earning assets.
(7) The efficiency ratio represents non-interest expense, less intangible asset amortization, as a percentage of
net interest income plus non-interest income.
(8) Non-performing loans consist of non-accruing loans, loans 90 days or more past due and still accruing
interest and restructured loans, but exclude any loans accounted for under ASC 310-30 in which the pool is
still performing. These ratios may therefore not be comparable to similar ratios of our peers.
(9) Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
(10) Total loans are net of unearned discounts and fees.
(11) Non-performing assets include participated OREO interests of outside participating banks for which the
Company has control and excludes the Company’s minority interests in OREO properties for which the
Company does not have a controlling interest. See note 11 to the consolidated financial statements for
further details.
(12) Tangible common equity to tangible assets is a non-GAAP financial measure. For purposes of computing
tangible common equity to tangible assets, tangible common equity is calculated as common stockholders’
equity less goodwill and other intangible assets, net, and tangible assets is calculated as total assets less
48
goodwill and other intangible assets, net. We believe that the most directly comparable GAAP financial
measure is total stockholders’ equity to total assets. See the reconciliation under “About Non-GAAP
Financial Measures.”
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present in this annual report, including “tangible assets,” “return
on tangible assets,” “return on tangible equity,” “tangible book value,” “tangible book value per share,” “pre-tax,
pre-provision net revenue to risk weighted assets,” “adjusted net revenue,” “adjusted non-interest expense,” and
“tangible common equity” are supplemental measures that are not required by, or are not presented in accordance
with, accounting principles generally accepted in the United States, or “non-GAAP financial measures.” We
consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational
decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP
financial measures provide meaningful supplemental information regarding our performance by excluding
certain expenditures or assets that we believe are not indicative of our primary business operating results. We
believe that management and investors benefit from referring to these non-GAAP financial measures in assessing
our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
We believe that these measures provide useful information to management and investors that is supplementary to
our financial condition, results of operations and cash flows computed in accordance with GAAP; however we
acknowledge that our non-GAAP financial measures have a number of limitations relative to GAAP financial
measures. First, certain non-GAAP financial measures exclude provisions for loan losses and income taxes, and
both of these expenses significantly impact our financial statements. Additionally, the items that we exclude in
our adjustments are not necessarily consistent with the items that our peers may exclude from their results of
operations and key financial measures and therefore may limit the comparability of similarly named financial
measures and ratios. We compensate for these limitations by providing the equivalent GAAP measures whenever
we present the non-GAAP financial measures and by including the following reconciliation of the impact of the
components adjusted for in the non-GAAP financial measure so that both measures and the individual
components may be considered when analyzing our performance.
49
Below is a reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Less: bargain burchase gain after tax . . . . . . . .
Add: impact of initial public offering related
For the
Year Ended
December 31, 2012
For the
Year Ended
December 31, 2011
For the
Year Ended
December 31, 2010
For the
Year Ended
December 31, 2009
$
(543)
—
$ 41,963
(36,589)
$ 6,051
(25,388)
$(1,534)
—
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,974
Add: impact of stock-based compensation
after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,927
Add: impact of initial public offering related
stock-based compensation, after tax . . . . . . .
Add: impact of acquisition costs after tax . . . .
Less (add): loss (gain) on sale of securities
3,267
526
after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(408)
600
7,596
—
2,984
400
Adjusted net revenue after tax . . . . . . . . . . . . .
$ 15,743
$ 16,954
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Add: impact of income taxes . . . . . . . . . . . . . .
Add: impact of provision . . . . . . . . . . . . . . . . .
Pre-tax, pre-provision net income . . . . . . . . . .
Less: bargain burchase gain . . . . . . . . . . . . . . .
Add: impact of initial public offering related
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: impact of stock-based compensation . . . .
Add: impact of initial public offering related
stock-based compensation . . . . . . . . . . . . . .
Add: impact of acquisition costs . . . . . . . . . . .
Less (add): loss (gain) on sale of securities . . .
$
(543)
4,580
27,995
32,032
—
7,974
8,144
4,934
870
(674)
$ 41,963
27,446
20,002
89,411
(60,520)
600
12,564
—
4,935
645
Adjusted pre-tax, pre-provision net revenue . .
$ 53,280
$ 47,635
Non-interest expense . . . . . . . . . . . . . . . . . . . .
Less: impact of initial public offering related
$209,598
$155,538
—
11,164
—
9,460
(7)
$ 1,280
$ 6,051
2,953
88
9,092
(37,778)
—
16,612
—
14,076
(11)
$ 1,991
$ 48,981
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,974)
(600)
—
Less: impact of non initial public offering
related stock-based compensation . . . . . . . .
(8,144)
(12,564)
(16,612)
Less: impact of initial public offering related
stock-based compensation . . . . . . . . . . . . . .
Less: impact of acquisition costs . . . . . . . . . . .
(4,934)
(870)
—
(4,935)
—
(14,076)
—
—
—
—
—
$(1,534)
$(1,534)
168
—
(1,366)
—
—
—
—
—
—
$(1,366)
$ 1,847
—
—
—
—
Adjusted non-interest expense . . . . . . . . . . . . .
$187,676
$137,439
$ 18,293
$ 1,847
Return on average assets . . . . . . . . . . . . . . . . . .
Less: bargain purchase gain, after tax . . . . . . .
Add: impact of initial public offering related
-0.01%
0.00%
0.81%
-0.71%
0.44%
-1.84%
-0.33%
0.00%
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.14%
0.01%
0.00%
0.00%
Add: impact of non initial public offering
related stock-based compensation, after
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: impact of initial public offering related
stock-based compensation, after tax . . . . . . .
Add: impact of acquisition costs, after tax . . . .
0.15%
0.00%
0.06%
0.81%
0.00%
0.69%
0.00%
0.00%
0.00%
0.09%
0.06%
0.01%
50
For the
Year Ended
December 31, 2012
For the
Year Ended
December 31, 2011
For the
Year Ended
December 31, 2010
For the
Year Ended
December 31, 2009
Less: gain (loss) on sale of investment
securities, after tax . . . . . . . . . . . . . . . . . . . .
Adjusted return on average assets . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . .
Add: impact of goodwill . . . . . . . . . . . . . . . . . .
Add: impact of other intangibles . . . . . . . . . . .
Add: impact of core deposit intangible
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible assets . . . . . . . . . . .
Less: bargain purchase gain, after tax . . . . . . .
Add: impact of initial public offering related
-0.01%
0.27%
-0.01%
0.00%
0.00%
0.06%
0.05%
0.00%
0.01%
0.33%
0.81%
0.01%
0.00%
0.05%
0.88%
-0.72%
0.00%
0.09%
0.44%
0.00%
0.00%
0.00%
0.44%
-1.85%
0.00%
-0.33%
-0.33%
0.00%
0.00%
0.00%
-0.33%
0.00%
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.14%
0.01%
0.00%
0.00%
Add: impact of non initial public offering
related stock-based compensation, after
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: impact of initial public offering related
stock-based compensation, after tax . . . . . . .
Add: impact of acquisition costs, after tax . . . .
Less: gain (loss) on sale of investment
securities, after tax . . . . . . . . . . . . . . . . . . . .
Adjusted return on average tangible assets . . .
Return on average equity . . . . . . . . . . . . . . . . .
Less: bargain purchase gain, after tax . . . . . . .
Add: impact of initial public offering related
0.09%
0.06%
0.01%
-0.01%
0.33%
-0.05%
0.00%
0.15%
0.00%
0.06%
0.01%
0.39%
4.01%
-3.50%
0.82%
0.00%
0.69%
0.00%
0.09%
0.62%
-2.60%
0.00%
0.00%
0.00%
0.00%
-0.33%
-0.33%
0.00%
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.73%
0.06%
0.00%
0.00%
Add: impact of non initial public offering
related stock-based compensation, after
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: impact of initial public offering related
stock-based compensation, after tax . . . . . . .
Add: impact of acquisition costs, after tax . . . .
Less: gain (loss) on sale of investment
securities, after tax . . . . . . . . . . . . . . . . . . . .
Adjusted return on average equity . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . .
Add: impact of goodwill . . . . . . . . . . . . . . . . . .
Add: impact of other intangibles . . . . . . . . . . .
Add: impact of core deposit intangible
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible equity . . . . . . . . . .
Less: bargain purchase gain, after tax . . . . . . .
Add: impact of initial public offering related
0.45%
0.30%
0.05%
-0.04%
1.44%
-0.05%
0.00%
0.00%
0.32%
0.27%
0.00%
0.73%
0.00%
0.29%
0.04%
1.62%
4.01%
0.23%
0.11%
0.27%
4.63%
-3.80%
1.14%
0.00%
0.97%
0.00%
0.13%
0.62%
0.00%
0.00%
0.00%
0.62%
-2.62%
0.00%
0.00%
0.00%
0.00%
-0.33%
-0.33%
0.00%
0.00%
0.00%
-0.33%
0.00%
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.79%
0.06%
0.00%
0.00%
Add: impact of non initial public offering
related stock-based compensation, after
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: impact of initial public offering related
0.49%
stock-based compensation, after tax . . . . . . .
0.33%
51
0.79%
0.00%
1.15%
0.00%
0.00%
0.00%
For the
Year Ended
December 31, 2012
For the
Year Ended
December 31, 2011
For the
Year Ended
December 31, 2010
For the
Year Ended
December 31, 2009
Add: impact of acquisition costs, after tax . . . .
Less: gain (loss) on sale of investment
securities, after tax . . . . . . . . . . . . . . . . . . . .
Adjusted return on average tangible equity . . .
Return on risk weighted assets . . . . . . . . . . . . .
Add: impact of income taxes . . . . . . . . . . . . . .
Add: impact of provision . . . . . . . . . . . . . . . . .
Pre-tax, pre-provision net revenue to risk
weighted assets . . . . . . . . . . . . . . . . . . . . . . .
Less: bargain purchase gain . . . . . . . . . . . . . . .
Add: impact of initial public offering related
0.05%
-0.04%
1.89%
-0.03%
0.25%
1.51%
1.73%
0.00%
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.43%
Add: impact of non initial public offering
related stock-based compensation . . . . . . . .
0.44%
Add: impact of initial public offering related
stock-based compensation . . . . . . . . . . . . . .
Add: impact of acquisition costs . . . . . . . . . . .
Less: gain (loss) on sale of investment
0.27%
0.05%
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0.04%
Adjusted pre-tax, pre-provision net revenue to
risk weighted assets . . . . . . . . . . . . . . . . . . .
Non-interest expense to average assets . . . . . .
Less: impact of initial public offering related
2.87%
3.62%
0.31%
0.04%
2.03%
2.21%
1.44%
1.05%
4.70%
-3.18%
0.03%
0.66%
0.00%
0.26%
0.03%
2.51%
3.01%
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0.14%
-0.01%
Less: impact of non initial public offering
0.98%
0.00%
0.13%
0.46%
0.22%
0.01%
0.69%
-2.85%
0.00%
1.25%
0.00%
1.06%
0.00%
0.15%
3.56%
0.00%
related stock-based compensation . . . . . . . .
-0.14%
-0.24%
-1.21%
Less: impact of initial public offering related
stock-based compensation . . . . . . . . . . . . . .
Less: impact of acquisition costs . . . . . . . . . . .
Adjusted non-interest expense to average
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . .
Add: bargain purchase gain . . . . . . . . . . . . . . .
Add: gain (loss) on sale of investment
-0.09%
-0.02%
3.24%
84.53%
0.00%
0.00%
-0.10%
2.66%
61.72%
20.18%
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.24%
-0.22%
Less: impact of initial public offering related
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-3.31%
-0.32%
Less: impact of non initial public offering
0.00%
-1.02%
1.33%
84.34%
157.08%
0.05%
0.00%
related stock-based compensation . . . . . . . .
-3.38%
-6.79%
-81.90%
Less: impact of initial public offering related
stock-based compensation . . . . . . . . . . . . . .
Add: impact of acquisition costs . . . . . . . . . . .
Adjusted efficiency ratio . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . .
Less: impact of goodwill
. . . . . . . . . . . . . . . . .
Less: impact of intangible assets, net . . . . . . . .
-2.05%
-0.36%
75.67%
$20.84
(1.14)
(0.53)
Tangible book value per share . . . . . . . . . . . . .
$19.17
0.00%
-2.67%
71.91%
$20.87
(1.14)
(0.63)
$19.10
0.00%
-69.39%
90.18%
$ 19.13
(1.00)
(0.53)
$ 17.60
52
0.00%
0.00%
-0.33%
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
$18.82
0.00
0.00
$18.82
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following management discussion and analysis of our financial condition and results of operations should be
read in conjunction with our audited consolidated financial statements and related notes as of and for the years
ended December 31, 2012, 2011 and 2010, and with the other financial and statistical data presented in this
annual report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions that may cause actual results to differ materially from management’s expectations. Factors that
could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward-
Looking Statements” and “Risk Factors” and should be read herewith.
Readers are cautioned that meaningful comparability of current period financial information to prior periods is
limited. Prior to the completion of the Hillcrest Bank acquisition on October 22, 2010, we had no banking
operations and our activities were limited to corporate organization matters and due diligence. Following our
Hillcrest Bank acquisition, we completed three additional acquisitions: Bank Midwest on December 10, 2010,
Bank of Choice on July 22, 2011 and Community Banks of Colorado on October 21, 2011. As a result, our
operating results are limited to the periods since these acquisitions, and the comparability of periods is
compromised due to the timing of these acquisitions. Additionally, the comparability of data related to our
acquisitions prior to the respective dates of acquisition is limited because, in accordance with Accounting
Standards Codification (“ASC”) Topic 805, Business Combinations, the assets acquired and liabilities assumed
were recorded at fair value at their respective dates of acquisition and do not have a significant resemblance to
the assets and liabilities of the predecessor banking franchises. The comparability of pre-acquisition data is
compromised not only by the fair value accounting applied, but also by the FDIC loss sharing agreements in
place that cover a portion of losses incurred on certain assets acquired in the Hillcrest Bank and the Community
Banks of Colorado acquisitions. In the Bank Midwest acquisition, only specific, performing loans were chosen
for acquisition. Additionally, we acquired the assets of Bank of Choice at a substantial discount from the FDIC.
We received a considerable amount of cash during the settlement of these acquisitions, we paid off certain
borrowings, and we contributed significant capital to each banking franchise we acquired. All of these actions
materially changed the balance sheet composition, liquidity, and capital structure of the acquired banking
franchises.
In May 2012, we changed the name of Bank Midwest, N.A. to NBH Bank, N.A. (“NBH Bank” or the “Bank”) and
all references to NBH Bank, N.A. should be considered synonymous with references to BankMidwest, N.A. prior
to the name change.
Overview
National Bank Holdings Corporation is a bank holding company that was incorporated in the State of Delaware
in June 2009. In October 2009, we raised net proceeds of approximately $974 million through a private offering
of our common stock. We completed the initial public offering of our common stock in September 2012. We are
executing a strategy to create long-term stockholder value through the acquisition and operation of community
banking franchises and other complementary businesses in our targeted markets. We believe these markets
exhibit attractive demographic attributes, are home to a substantial number of financial institutions, including
troubled financial institutions, and present favorable competitive dynamics, thereby offering long-term
opportunities for growth. Our emphasis is on creating meaningful market share with strong revenues
complemented by operational efficiencies that we believe will produce attractive risk-adjusted returns.
We believe we have a disciplined approach to acquisitions, both in terms of the selection of targets and the
structuring of transactions, which has been exhibited by our four acquisitions to date. As of December 31, 2012,
we had $5.4 billion in assets, $4.2 billion in deposits and $1.1 billion in equity. We currently operate a network
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of 101 full-service banking centers, with the majority of those banking centers located in the greater Kansas City
region and Colorado. We believe that our established presence positions us well for growth opportunities in our
current and complementary markets.
Our strategic plan is to be a leading regional bank holding company through selective acquisitions of financial
institutions, including troubled financial institutions that have stable core franchises and significant local market
share, as well as other complementary businesses, while structuring transactions to limit risk. We plan to achieve
this through the growth of our existing banking franchise and through the acquisition of banking franchises from
the FDIC and through conservatively structured unassisted transactions. We seek acquisitions that offer
opportunities for clear financial benefits through add-on transactions, long-term organic growth opportunities and
expense reductions. Additionally, our acquisition strategy is to identify markets that are relatively
unconsolidated, establish a meaningful presence within those markets, and take advantage of operational
efficiencies and enhanced market position. Our focus is on building strong banking relationships with small to
mid-sized businesses and consumers, while maintaining a low risk profile designed to generate reliable income
streams and attractive risk-adjusted returns. Through our acquisitions, we have established a solid core banking
franchise with operations in the greater Kansas City region and in Colorado, with a sizable presence for deposit
gathering and client relationship building necessary for growth.
Operating Highlights and Key Challenges
Prior to completion of the Hillcrest Bank acquisition on October 22, 2010, we had no banking operations and our
activities were limited to corporate organization matters and acquisition due diligence. Our first full year with
banking operations was 2011 and includes the results of operations of Hillcrest Bank and NBH Bank for the
entire year, Bank of Choice from July 22, 2011 and Community Banks of Colorado from October 21, 2011. 2012
marked our first full year with the operations of all four of our acquisitions. These operations resulted in the
following highlights as of and for the year ended 2012:
Attractive risk profile.
• As of December 31, 2012, 70.7%, or $1.3 billion, of our total loans (by dollar amount) were acquired
loans and all of those loans were recorded at their estimated fair value at the time of acquisition.
• As of December 31, 2012, 33.1%, or $608.2 million, of our total loans (by dollar amount) were covered
by loss sharing agreements with the FDIC.
• As of December 31, 2012, 48.0%, or $45.5 million, of our total other real estate owned (by dollar
amount) was covered by loss sharing agreements with the FDIC.
Strong capital position.
• As of December 31, 2012, our consolidated tier 1 leverage ratio was 18.2% and our consolidated tier 1
risk-based capital ratio was 51.9%.
• As of December 31, 2012 we had approximately $400 million of capital available to deploy while
maintaining a 10% tier 1 leverage ratio, and we had approximately $475 million of available capital to
deploy at an 8% tier 1 leverage ratio.
• Tangible book value per share increased from $19.10 at December 31, 2011 to $19.17 at December 31,
2012.
• The after-tax accretable yield on ASC 310-30 loans plus the after-tax yield on the FDIC
Indemnification asset, net, in excess of 4.5%, an approximate yield on new loan originations, and
discounted at 5%, adds $0.50 per share to our tangible book value per share as of December 31, 2012.
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Foundation for loan growth.
• As of December 31, 2012, we have over $1.1 billion of loans outstanding that are associated with a
“strategic” client relationship.
• Loans associated with our strategic client relationships had strong credit quality with only 0.6% in non-
performing loans as of December 31, 2012.
•
For the year ended 2012, organic loan originations totaled $434 million, representing a threefold
increase from $139 million for year ended 2011.
• A $436 million decrease in total loans was led by a $478 million decrease in our non-strategic loans
during 2012 as we successfully worked out troubled loans acquired in our FDIC-assisted transactions.
Client deposit funded balance sheet.
• As of December 31, 2012, total deposits made up 97.2% of our total liabilities.
• Transaction accounts increased to 58.3% as of December 31, 2012 from 45.0% of total deposits at
December 31, 2011.
• As of December 31, 2012, we did not have any brokered deposits.
Attractive risk-adjusted returns and revenue streams.
•
For the year ended December 31, 2012, our adjusted pre-tax pre-provision net revenue was 2.87% of
total risk weighted assets (for reconciliation, see “Selected Financial Data—About Non-GAAP
Financial Measures”).
• Our average annual yield on our loan portfolio was 8.37% during 2012.
• Cost of deposits declined 40 basis points during the year ended 2012 due to the continued emphasis on
our commercial and consumer relationship banking strategy and lower cost transaction accounts.
Investments in infrastructure.
• We have successfully integrated all of our acquired banks onto a common operating platform across
our franchise.
• We have invested in our risk management and regulatory framework, enabling us to support operations
well above our current needs.
• We have implemented the financial control structure needed to support a public company.
During 2011 and early 2012, we completed the deployment of much of the cash received in our acquisitions into
our investment securities portfolio. We also actively worked to resolve the troubled loans and OREO that we
acquired through our acquisition of three failed banks. Accordingly, we expect that continued steady resolution
of troubled assets, coupled with loan payoffs, will offset a large portion of our loan originations in the near-term.
As a result, we expect that our investment securities portfolio will continue to be one of the largest components
of our balance sheet.
We have worked to actively grow our banking franchise and implement consistent lending policies and a
technology and operating infrastructure designed to support our acquisition strategy, provide for future growth
and achieve operational efficiencies. This included the implementation of a scalable data processing and
operating platform and hiring key personnel to execute our relationship banking strategy. In May and July 2012,
we completed the integration of Community Banks of Colorado and Bank of Choice, respectively, onto our
operating platform and we now have all of our operations on a common operating platform. We expect that the
integration of these operations will provide additional efficiencies and enable us to support growth.
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Key Challenges.
There are a number of significant challenges confronting us and our industry. Economic conditions remain
guarded and increasing bank regulation is adding costs and uncertainty to all U.S. banks. We face a variety of
challenges in implementing our business strategy, including being a new entity, hiring talented people, the
challenges of acquiring distressed franchises and rebuilding them, deploying our remaining capital on quality
targets, low interest rates and low demand from borrowers.
Continued uncertainty about the economic outlook has strained the advancement of an economic recovery, both
nationally and in our core markets. Residential real estate values have recovered somewhat from their lows, and
we consider this with guarded optimism. Commercial real estate values, however, remain under pressure and it is
difficult to determine when that trend will change, or if it already has. Any deterioration in credit quality or
elevated levels of non-performing assets, would ultimately have a negative impact on the quality of our loan
portfolio. While the economic data has been mixed, any advancement in the broad economy has not yet directly
translated into a substantial increase in loan demand, as many clients are relying on their cash balances for near-
term investments, rather than borrowings.
While much of the decline of our total loan balances during 2012 was the result of actively resolving our problem
and non-strategic loans acquired in our FDIC-assisted transactions, the weak loan demand also contributed to the
decline as organic loan growth did not outpace the repayments and resolutions of existing loans. Additionally, the
historically low interest rate environment limits the yields we are able to obtain on interest earning assets,
including both new assets acquired as we grow and assets that replace existing, higher yielding assets as they are
paid down or mature. For example, our acquired loans generally have produced higher yields than our originated
loans due to the recognition of accretion of fair value adjustments and accretable yield. As a result, we expect the
yields on our loans to decline as our acquired loan portfolio pays down or matures and we expect downward
pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with
comparable high-yielding loans.
Increased regulation, such as the rules and regulations promulgated under the Dodd-Frank Act or potential higher
required capital ratios, could reduce our competitiveness as compared to other banks or lead to industry-wide
decreases in profitability. While certain external factors are out of our control and may provide obstacles during
the implementation of our business strategy, we believe we are prepared to deal with these challenges. We
remain flexible, yet methodical, in our strategic decision making so that we can quickly respond to market
changes and the inherent challenges and opportunities that accompany such changes.
Performance Overview
As a financial institution, we routinely evaluate and review our consolidated statements of financial condition
and results of operations. We evaluate the levels, trends and mix of the statements of financial condition and
statements of operations line items and compare those levels to our budgeted expectations, our peers, industry
averages and trends. Due to our short operating history, comparisons to our prior historical performance are
limited, but are used to the extent practical.
Within our statements of financial condition, we specifically evaluate and manage the following:
Loan balances—We monitor our loan portfolio to evaluate loan originations, payoffs, and profitability. We
forecast loan originations and payoffs within the overall loan portfolio, and we work to resolve problem loans
and OREO in an expeditious manner. We track the runoff of our covered assets as well as the loan relationships
that we have identified as “non-strategic” and put particular emphasis on the buildup of “strategic” relationships.
Asset quality—We monitor the asset quality of our loans and OREO through a variety of metrics, and we work to
resolve problem assets in an efficient manner. Specifically, we monitor the resolution of problem loans
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through payoffs, pay downs and foreclosure activity. We marked all of our acquired assets to fair value at the
date of their respective acquisitions, taking into account our estimation of credit quality. Additionally, the
majority of the loans and all of the OREO acquired in the Hillcrest Bank acquisition are covered by loss sharing
agreements with the FDIC, and, as of the date of acquisition, approximately 61.8% of loans and 83.5% of OREO
acquired in the Community Banks of Colorado acquisition were covered by a loss sharing agreement. As of
December 31, 2012, 33.1% of our total loans and 48.0% of our OREO was covered by loss sharing agreements
with the FDIC.
Many of the loans that we acquired in the Hillcrest Bank, Bank of Choice and Community Banks of Colorado
acquisitions had deteriorated credit quality at the respective dates of acquisition. These loans have historically
been and currently are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality. As of December 31, 2012 and 2011, 44.7% and 57.5% of our loans were accounted
for under this guidance, which is described more fully below under “—Application of Critical Accounting
Policies” and in note 2 in our consolidated financial statements.
Our evaluation of traditional credit quality metrics and the allowance for loan losses (“ALL”) levels, especially
when compared to industry averages or to other financial institutions, takes into account that any credit quality
deterioration that existed at the date of acquisition was considered in the original valuation of those assets on our
balance sheet. Additionally, many of these assets are covered by the loss sharing agreements. All of these factors
limit the comparability of our credit quality and ALL levels to peers or other financial institutions.
Deposit balances—We monitor our deposit levels by type, market and rate. Our loans are funded primarily
through our deposit base, and we seek to optimize our deposit mix in order to provide reliable, low-cost funding
sources.
Liquidity—We monitor liquidity based on policy limits and through projections of sources and uses of cash. In
order to test the adequacy of our liquidity, we routinely perform various liquidity stress test scenarios that
incorporate wholesale funding maturities, if any, certain deposit run-off rates and committed line of credit draws.
We manage our liquidity primarily through our balance sheet mix, including our cash and our investment
security portfolio, and the interest rates that we offer on our loan and deposit products, coupled with contingency
funding plans as necessary.
Capital—We monitor our capital levels, including evaluating the effects of potential acquisitions, to ensure
continued compliance with regulatory requirements and with the OCC Operating Agreement and FDIC Order
that we entered into with our regulators in connection with our Bank Midwest acquisition, which is described
under “Supervision and Regulation”. We review our tier 1 leverage capital ratios, our tier 1 risk-based capital
ratios and our total risk-based capital ratios on a quarterly basis.
Within our consolidated results of operations, we specifically evaluate the following:
Net interest income—Net interest income represents the amount by which interest income on interest earning
assets exceeds interest expense incurred on interest-bearing liabilities. We generate interest income through
interest and dividends on investment securities, interest-bearing bank deposits and loans. Our acquired loans have
generally produced higher yields than our originated loans due to the recognition of accretion of fair value
adjustments and accretable yield, as is more fully described under “—Application of Critical Accounting
Policies.” As a result, we expect downward pressure on our interest income to the extent that the runoff of our
acquired loan portfolio is not replaced with comparable high-yielding loans. We incur interest expense on our
interest-bearing deposits and repurchase agreements and would also incur interest expense on any future
borrowings, including any debt assumed in acquisitions. We strive to maximize our interest income by acquiring
and originating loans and investing excess cash in investment securities. Furthermore, we seek to minimize our
interest expense through low-cost funding sources, thereby maximizing our net interest income.
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Provision for loan losses—The provision for loan losses includes the amount of expense that is required to
maintain the ALL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet
date. Additionally, we incur a provision for loan losses on loans accounted for under ASC Topic 310-30 as a
result of a decrease in the net present value of the expected future cash flows during the periodic remeasurement
of the cash flows associated with these pools of loans. The determination of the amount of the provision for loan
losses and the related ALL is complex and involves a high degree of judgment and subjectivity to maintain a
level of ALL that is considered by management to be appropriate under GAAP.
Non-interest income—Non-interest income consists primarily of service charges, bank card fees, gains on sales
of investment securities, and other non-interest income. Also included in non-interest income is FDIC loss
sharing income (expense), which consists of accretion of our FDIC indemnification asset and reimbursement of
costs related to the resolution of covered assets, and amortization of our clawback liability. For additional
information, see “—Application of Critical Accounting Policies—Acquisition Accounting Application and the
Valuation of Assets Acquired and Liabilities Assumed” and note 2 in our consolidated financial statements. Due
to fluctuations in the accretion rates on the FDIC indemnification asset and the amortization of clawback liability
and due to varying levels of expenses related to the resolution of covered assets, the FDIC loss sharing income
(expense) is not consistent on a period-to-period basis and, absent additional acquisitions with FDIC loss sharing
agreements, is expected to decline over time as covered assets are resolved.
Non-interest expense—The primary components of our non-interest expense are salaries and employee benefits,
occupancy and equipment, professional fees and data processing and telecommunications. Any expenses related
to the resolution of covered assets are also included in non-interest expense. These expenses are dependent on
individual resolution circumstances and, as a result, are not consistent from period to period. We seek to manage
our non-interest expense in order to maximize efficiencies.
Net income—We utilize traditional industry return ratios such as return on average assets, return on average
equity and return on risk-weighted assets to measure and assess our returns in relation to our balance sheet
profile.
Application of Critical Accounting Policies
We use accounting principles and methods that conform to GAAP and general banking practices. We are
required to apply significant judgment and make material estimates in the preparation of our financial statements
and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required
to apply these principles where actual measurement is not possible or practical. Most significant of these
estimates relate to the fair value determination of assets acquired and liabilities assumed in business
combinations and the application of acquisition accounting, the accounting for acquired loans and the related
FDIC indemnification asset, the determination of the ALL, and the valuation of stock-based compensation. These
critical accounting policies and estimates are summarized below, and are further analyzed with other significant
accounting policies in note 2, “Summary of Significant Accounting Policies” in the notes to the consolidated
financial statements for the year ended 2012.
Implications of and Elections Under the JOBS Act
Pursuant to the JOBS Act, an emerging growth company can elect to opt out of the extended transition period for
any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or the
SEC. We have elected to opt out of such extended transition period, which election is irrevocable.
Although we are still evaluating the JOBS Act, we may take advantage of some or all of the reduced regulatory
and reporting requirements that will be available to us so long as we qualify as an emerging growth company,
including, but not limited to, reduced disclosure obligations regarding executive compensation in our
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periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved.
Acquisition Accounting Application and the Valuation of Assets Acquired and Liabilities Assumed
We account for business combinations under the acquisition method of accounting in accordance with ASC
Topic 805 Business Combinations. Assets acquired and liabilities assumed are measured and recorded at fair
value at the date of acquisition, including any identifiable intangible assets. The initial fair values are determined
in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements and Disclosures. If the
fair value of net assets acquired exceeds the fair value of consideration paid, a bargain purchase gain is
recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets
acquired, goodwill is recognized at the acquisition date. The determination of fair value requires the use of
estimates and significant judgment is required. Fair values are subject to refinement for up to one year after the
closing date of an acquisition as information relative to closing date fair values becomes available. Any change in
the acquisition date fair value of assets acquired and liabilities assumed may materially affect our financial
position, results of operations and liquidity.
The determination of the fair value of loans acquired takes into account credit quality deterioration and
probability of loss; therefore, the related ALL is not carried forward. We segregate total loans into two separate
categories: (a) loans receivable—covered and (b) loans receivable—non-covered, both of which are more fully
described below. We further segregate loans based on the accounting treatment into (a) loans accounted for under
ASC Topic 310-30 and (b) loans excluded from ASC Topic 310-30, which also includes our originated loans.
OREO is recorded at fair value, less estimated selling costs. The fair value of OREO property is generally
estimated using both market and income approach valuation techniques incorporating observable market data to
formulate an opinion of the estimated fair value. When current appraisals are not available, judgment is used
based on managements’ experience for similar properties.
Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if
they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the
entity). Deposit liabilities and the related depositor relationship intangible assets, known as the core deposit
intangible assets, may be exchanged in observable exchange transactions. As a result, the core deposit intangible
asset is considered identifiable, because the separability criterion has been met. The fair value of core deposit
intangible assets is determined based on a discounted cash flow methodology that considers primary asset
attributes such as expected customer runoff rates, cost of the deposit base, and reserve requirements.
An FDIC indemnification asset is recognized when the FDIC contractually indemnifies, in whole or in part, us
for a particular uncertainty. The recognition and measurement of an indemnification asset is based on the related
indemnified items. We recognize an indemnification asset at the same time that the indemnified item is
recognized and we measure it on the same basis as the indemnified items, subject to collectability or contractual
limitations on the indemnified amounts.
Under FDIC loss sharing agreements, we may be required to return a portion of cash received from the FDIC at
acquisition in the event that losses do not reach a specified threshold, based on the initial discount less
cumulative servicing amounts for the covered assets acquired. Such liabilities are referred to as clawback
liabilities and are considered to be contingent consideration as they require the return of a portion of the initial
consideration in the event that certain contingencies are met. We recognize clawback liabilities that represent
contingent consideration at fair value at the date of acquisition. The clawback liabilities are included in due to
FDIC in the accompanying consolidated statements of financial condition, and are periodically re-measured. Any
changes in value are reflected in both the carrying amount of the clawback liability and the related accretion that
is recognized through FDIC loss sharing income in the consolidated statements of operations until the
contingency is resolved.
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Accounting for Acquired Loans and the Related FDIC Indemnification Asset
The loan portfolio is segregated into covered loans, which consist of loans acquired in the Hillcrest Bank and
Community Banks of Colorado transactions that are covered by FDIC loss sharing agreements, and non-covered
loans, which consist of originated and acquired loans that are not covered by loss sharing agreements. The loan
portfolio is segregated into these two categories due to their significantly different risk characteristics and due to
the financial statement implications, which are summarized below. We further segregate our loan portfolio into
loans that are accounted for under ASC Topic 310-30, and those that are excluded from this accounting guidance.
The estimated fair values of acquired loans are based on a discounted cash flow methodology that considers
various factors, including the type of loan or pool of loans with similar characteristics, and related collateral,
classification status, fixed or variable interest rate, maturity and any prepayment terms of loan, whether or not the
loan is amortizing, and a discount rate reflecting our assessment of risk inherent in the cash flow estimates. The
determination of the fair value of acquired loans, including covered loans, takes into account credit quality
deterioration and probability of loss, and as a result, the related allowance for loan losses is not carried forward at
the time of acquisition.
A significant portion of the loans acquired in the Hillcrest Bank, Bank of Choice, and Community Banks of
Colorado acquisitions had deteriorated credit quality at the date of acquisition and management accounted for all
loans acquired through these acquisitions under ASC Topic 310-30 (with the exception of loans with revolving
privileges which were outside the scope of ASC Topic 310-30). These loans are grouped based on purpose and/or
type of loan, geography and risk rating, and take into account the sources of repayment and collateral, and each
such grouping is treated as a pool. Each pool is accounted for as a single loan for which the integrity is
maintained throughout the life of the asset. When a pool exhibits evidence of credit deterioration since
origination and it is probable at the date of acquisition that we will not collect all principal and interest payments
in accordance with the terms of the loan agreement, the expected shortfall in the expected future cash flows
compared to the contractual amount due is recognized as a non-accretable difference. Any excess of the expected
future cash flows over the acquisition date fair value is known as the accretable discount, or accretable yield, and
through accretion, is recognized as interest income over the remaining life of each pool. Loans that meet the
criteria for non-accrual of interest at the time of acquisition may be considered performing upon and subsequent
to acquisition, regardless of whether the customer is contractually delinquent, if the timing and expected cash
flows on such loans can be reasonably estimated and if collection of the new carrying value of such loans is
expected.
The expected future cash flows of such pools are periodically re-estimated utilizing the same cash flow
methodology used at the time of acquisition and subsequent decreases to the expected future cash flows will
generally result in a provision for loan losses charge to our consolidated statements of operations. Conversely,
subsequent increases in the expected future cash flows result in a transfer from the non-accretable difference to
the accretable yield, which is then accreted as a yield adjustment over the remaining life of the pool. These cash
flow estimations are inherently subjective as they require material estimates, all of which may be susceptible to
significant change.
Loans outside the scope of ASC Topic 310-30 are accounted for under ASC Topic 310, Receivables. Discounts
created when the loans are recorded at their estimated fair values at acquisition are accreted over the remaining
life of the loan as an adjustment to the related loan’s yield. Similar to originated loans, the accrual of interest
income is discontinued on acquired loans that are not accounted for under ASC Topic 310-30 when the collection
of principal or interest, in whole or in part, is doubtful. Interest is not accrued on loans 90 days or more past due
unless they are well secured and in the process of collection.
The fair value of covered loans and covered OREO does not include the estimated fair value of the expected
reimbursement of cash flows from the FDIC for the losses on these covered assets, as those cash flows are
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measured and recorded separately in the FDIC indemnification asset, which represents the estimated fair value of
anticipated reimbursements from the FDIC for expected losses on covered assets, subject to the loss thresholds
and any contractual limitations in the loss sharing agreements. Fair value is estimated using the net present value
of projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses
and the applicable loss sharing percentages. These cash flows are discounted to reflect the uncertainty of the
timing of the loss sharing reimbursement from the FDIC and the discount is accreted in connection with the
expected speed of reimbursements. This accretion is included in FDIC indemnification asset accretion in the
consolidated statements of operations. The expected indemnification asset cash flows are re-estimated in
conjunction with the periodic re-estimation of cash flows on covered loans and covered OREO. Improvements in
cash flow expectations on covered loans and covered OREO generally result in a related decline in the expected
indemnification cash flows and are reflected prospectively as a negative yield adjustment on the indemnification
asset. Conversely, declines in cash flow expectations on covered loans and covered OREO generally result in an
increase in the net present value of the expected indemnification asset cash flows and are reflected as both as an
increase in the FDIC indemnification asset accretion income and an increase to the balance of the
indemnification asset in the current period. As indemnified assets are resolved, the indemnification asset is
reduced by the amount owed to us by the FDIC and a corresponding claim receivable is recorded in other assets
in the consolidated statements of financial condition until cash is received from the FDIC.
In 2012, the FASB released ASU 2012-06 Subsequent Accounting for an Indemnification Asset Recognized at the
Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. This guidance
clarified that any amortization of changes in the value of an indemnification asset should be limited to the
contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification
agreement and the remaining life of the indemnified assets). This guidance resulted in no changes to our
accounting for our indemnification asset.
Allowance for Loan Losses
The determination of the ALL, which represents management’s estimate of probable losses inherent in our loan
portfolio at the balance sheet date, including acquired and covered loans to the extent necessary, involves a high
degree of judgment and complexity. The determination of the ALL takes into consideration, among other
matters, the estimated fair value of the underlying collateral, economic conditions, particularly as such conditions
relate to the market areas in which we operate historical net loan losses and other factors that warrant
recognition. Any change in these factors, or the rise of any other factors that we, or our regulators, may deem
necessary to consider when estimating the ALL, may materially affect the ALL and provisions for loan losses.
For further discussion of the ALL, see “—Financial Condition—Asset Quality” and “—Financial Condition—
Allowance for Loan Losses” and notes 2 and 8 to our consolidated financial statements.
Stock-based Compensation
We utilize a Black-Scholes option pricing model to measure the expense associated with stock option awards and
a Monte Carlo simulation model to measure the expense associated with market-vesting portions of restricted
shares. These models require inputs of highly subjective assumptions with regard to expected stock price
volatility, forfeiture and dividend rates and option life. These subjective input assumptions materially affect the
fair value estimates and the associated stock-based compensation expense.
One of the key inputs to the Black-Scholes option pricing model is expected volatility. As a private entity,
volatility was estimated using the calculated value method, whereby the expected volatility was calculated based
on 17 comparable companies that were publicly traded. NBHC became a publicly traded company on
September 20, 2012 and upon becoming a public entity, the Company was subject to a change in accounting
policy under the provisions of ASC Topic 718 Compensation-Stock Compensation, whereby expected volatility
of grants, modifications, repurchases or cancellations that occur subsequent to the Company becoming a public
entity are calculated using a time-based weighted migration of the Company’s own stock price volatility coupled
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with those of the peer group. The weighting will become increasingly dependent on our own stock-price
volatility as time passes, until such time that our stock has a historical volatility equal to that of the expected term
of the awards being measured. Grants of stock-based awards that existed prior to the Company becoming a
public entity will not be re-measured under the public-company provisions unless those grants are subsequently
modified, repurchased, or cancelled. This change in accounting policy may have a material effect on the
valuation of future grants of stock-based compensation. See note 17 to our consolidated financial statements for
more information on stock-based compensation.
The valuation methodologies employed in determining the expense associated with stock-based compensation
vary widely, as do the award types and the subjective assumptions used in those valuation methodologies. As a
result, these differences in practice can have a material impact on the financial performance of us or our peers,
and can limit meaningful comparisons between our performance over different periods and the performance
results of our peers.
Acquisition Activity
An integral component of our growth strategy has been to capitalize on market opportunities and acquire banking
franchises. We considered numerous factors and evaluated various geographic areas when we were assessing
potential acquisition targets. Our primary focus was on markets that we believe are characterized by some or all
of the following: (i) attractive demographics with household income and population growth above the national
average; (ii) concentration of business activity; (iii) high quality deposit bases; (iv) an advantageous competitive
landscape that provides opportunity to achieve meaningful market presence; (v) a substantial number of financial
institutions, including troubled financial institutions; (vi) lack of consolidation in the banking sector and
corresponding opportunities for add-on transactions; and (vii) markets sizeable enough to support our long-term
growth objectives. We structured our business strategy around these criteria because we believed they would
provide the best long-term opportunities for growth.
With these criteria in mind, and consistent with our growth strategy, we completed two acquisitions during the
fourth quarter of 2010 that established a foundation to build upon in the future. Through the acquisitions of Bank
Midwest and Hillcrest Bank, we have formed the seventh largest depository institution in the Kansas City MSA
with a 4.5% deposit market share as of June 30, 2012 (the most recent data available), according to SNL
Financial. Through our acquisition of Hillcrest Bank from the FDIC in October 2010, we acquired and now
operate 8 full-service banking centers, along with 32 retirement center locations, which are predominantly in the
greater Kansas City region, but also include six retirement centers in Colorado and two full-service banking
centers and six retirement centers in Texas. We acquired approximately $1.4 billion in assets and approximately
$1.2 billion in non-brokered deposits with a loss sharing agreement that covers losses incurred on commercial
loans, single family residential loans and OREO, and the FDIC made a cash contribution of approximately $183
million to us as part of the transaction. Through our Bank Midwest transaction in December 2010, we acquired
approximately $2.4 billion in assets and approximately $2.4 billion in non-brokered deposits, and 39 full-service
banking centers throughout Missouri and eastern Kansas.
In July 2011, we expanded our footprint with the acquisition of Greeley, Colorado-based Bank of Choice. The
acquisition of Bank of Choice added 16 full-service banking centers in Colorado, which includes banking centers
along the fast-growing Front Range of the Rocky Mountains. We acquired $949.5 million in assets and assumed
$760.2 million of non-brokered deposits from Bank of Choice at a $171.6 million asset discount in a no loss
sharing structure from the FDIC. We believe this acquisition provided a significant presence in an attractive
market with several potential add-on opportunities.
In October 2011, we broadened our Colorado presence with the acquisition of the Community Banks of Colorado
from the FDIC. Through this acquisition, we added 36 full-service banking centers in Colorado and four full-
service banking centers in California, along with selected assets and selected liabilities of the former Community
Banks of Colorado. We acquired approximately $1.2 billion in assets and approximately $1.2 billion in deposits
62
with the Community Banks of Colorado acquisition at a discount of approximately $113.5 million, which
includes a $15.5 million discount on two specific loan pools, and with a commercial loss sharing agreement that
covers losses incurred on certain loans and OREO, the majority of which are commercial in nature.
This acquisition, along with our Bank of Choice acquisition and our existing Colorado locations, now provides us
with 50 full service banking centers and 6 retirement centers in that state, ranking as the fourteenth largest
depository institution in Colorado with a 1.4% deposit market share as of June 30, 2012 (the most recent date
available) according to SNL Financial.
All of our acquisitions were accounted for under the acquisition method of accounting, and accordingly, all assets
acquired and liabilities assumed were recorded at their respective acquisition date fair values. We recognized pre-
tax gains on bargain purchases of $37.8 million and $60.5 million in our acquisitions of Hillcrest Bank and Bank
of Choice, respectively. The gains represent the amount by which the acquisition-date fair value of the
identifiable net assets acquired exceeded the fair value of the consideration paid. In our Bank Midwest
transaction, the consideration paid exceeded the fair value of all net assets acquired and, as a result, we
recognized $52.4 million of goodwill at the date of acquisition. With respect to our Community Banks of
Colorado acquisition, we recognized $7.2 million of goodwill. Major categories of assets acquired and liabilities
assumed at their recorded fair value as of their respective acquisition dates, as well as any applicable gain
recorded on each transaction, are presented in the following table (in thousands):
Assets Acquired:
Cash and cash equivalents . . . . . . . . .
Investment securities, available for
sale . . . . . . . . . . . . . . . . . . . . . . . . .
Non-marketable securities . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC indemnification asset . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Goodwill
Core deposit intangible assets . . . . . .
Other real estate owned . . . . . . . . . . .
Premises and equipment
. . . . . . . . . .
Accrued interest receivable . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . .
Community Banks
of Colorado*
Bank of Choice** Bank Midwest Hillcrest Bank
$ 250,160
$402,005
$1,369,737 $ 134,001
11,361
2,753
754,883
150,987
7,188
4,810
29,749
212
4,007
12,174
134,369
9,840
361,247
—
—
5,190
34,335
21
1,989
507
55,360
400
882,615
—
52,442
21,650
—
36,224
4,458
3,520
235,255
4,042
781,342
159,706
—
5,760
51,600
157
3,816
1,066
Total assets . . . . . . . . . . . . . . . . .
$1,228,284
$949,503
$2,426,406 $1,376,745
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank
advances . . . . . . . . . . . . . . . . . . . . .
Due to FDIC . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . .
$1,194,987
$760,227
$2,385,897 $1,234,013
16,381
15,977
553
386
117,148
2,526
751
8,331
—
—
11,089
29,420
83,894
11,454
7,279
2,327
Total liabilities . . . . . . . . . . . . . .
$1,228,284
$888,983
$2,426,406 $1,338,967
Gain on bargain purchase
(before tax) . . . . . . . . . . . . . . .
$
—
$ 60,520
$
— $
37,778
*
The fair value of loans and OREO acquired in the Community Banks of Colorado acquisition decreased
$7.1 and $1.6 million during the measurement period from the original estimates. The change resulted in an
increase to the indemnification asset of $5.5 million, an increase in goodwill of $2.7 million and a decrease
to the clawback liability of $0.5 million. These adjustments are reflected in the above table.
63
** The fair value of loans acquired in the Bank of Choice acquisition decreased by $2.7 million during the
measurement period from the original estimates. The change resulted in a decrease to the gain on bargain
purchase of an identical amount. Both adjustments are reflected in the above table.
In accordance with the application of the acquisition method of accounting, the fair value discounts on loans are
being accreted over the lives of the loans as an adjustment to yield, with the exception of any non-accretable
difference, as is described in our application of critical accounting policies. Additionally, as of the date of
acquisition, 99.6% of the loans and all of the OREO acquired in the Hillcrest Bank transaction were covered by
FDIC loss sharing agreements, and 61.8% of loans and 83.5% of OREO in the Community Banks of Colorado
transaction were covered by loss sharing agreements with the FDIC, whereby we are to be reimbursed by the
FDIC for a portion of the losses incurred as a result of the resolution and disposition of these problem assets.
Both the application of the acquisition method of accounting and the loss sharing agreements with the FDIC are
discussed in more detail below and in the notes to the consolidated financial statements.
In November 2011, we completed the merger, integration and consolidation of Hillcrest Bank into NBH Bank.
We also completed the integration and consolidation of operations of our Community Banks of Colorado
acquisition in May 2012, and in July 2012, we completed the integration and consolidation of the operations of
Bank of Choice. We have invested in our infrastructure and technology through the implementation of an
efficient, industry-leading, scalable platform that we believe supports our risk management activities and our
potential for significant future growth and new product offerings. We have centralized many of our operational
functions in Kansas City, which has desirable cost and labor market characteristics. We have built enterprise
wide finance and risk management capabilities that we expect will afford efficiencies as we grow. We intend to
continue our growth organically and through acquisitions, and in addition to broadening our greater Kansas City
and Colorado footprints, we may also consider acquisitions in additional complementary markets through either
FDIC-assisted or conservatively structured unassisted transactions to capitalize on market opportunities.
Financial Condition
Total assets at December 31, 2012 were $5.4 billion compared to $6.4 billion at December 31, 2011, a decrease
of $1.0 billion. The decrease in total assets was largely driven by a decrease in non-strategic loan balances of
$478.0 million, which was a reflection of our workout progress on troubled loans (many of which were covered)
that we acquired with our various acquisitions. We also originated $434.3 million of loans during 2012, which
offset normal client payments and sustained the loan balances in our strategic portfolio. We coupled the overall
loan balance decrease with an $862.3 million decrease in total deposits, as we sought to retain only those
depositors who were interested in time deposits at market rate and developing a banking relationship and
continued our focus on migrating toward a client-based deposit mix with higher concentrations of lower cost
demand, savings and money market (“transaction”) deposits. We also utilized available cash and purchased
$1.1 billion of investment securities during 2012. Our FDIC indemnification asset decreased $136.5 million
during 2012 as a result of $135.2 million of payments from and claims submitted to the FDIC for reimbursement
on continued workout progress on our acquired problem loans and OREO coupled with an increase in actual and
expected cash flows on our covered assets. These increases in cash flows also contributed to a net reclassification
of $47.5 million of non-accretable difference to accretable yield during the period, which is being accreted to
income over the remaining life of those loans.
Total assets were $6.4 billion at December 31, 2011 compared to $5.1 billion at December 31, 2010, an increase
of $1.3 billion. The increase was primarily a result of the two acquisitions that we completed during 2011; the
acquisitions of Bank of Choice and Community Banks of Colorado, through which we collectively acquired $2.2
billion in assets at their respective acquisition dates, accounted for the increase in our total assets at
December 31, 2011. The increase from the acquisitions was offset by the cash settlement of $564.1 million of
pending investment security transactions during the first quarter of 2011 that were outstanding at December 31,
2010 as the Company invested a significant portion of the cash that was received in the Bank Midwest
transaction. Accounting guidance requires that the pending investment securities be recorded on the statement of
financial condition in the investment
64
securities line with a corresponding liability until the trades were settled. This resulted in a grossed-up balance
sheet at December 31, 2010 as the cash settlement of $564.1 million of investment securities did not occur until
January 2011. Other notable changes from December 31, 2010 to December 31, 2011 included an increase in
investment securities of $614.9 million due to the further deployment of available cash and a $705.2 million
increase in our loan portfolio and a $66.6 million increase in other real estate owned, both due to the above
mentioned acquisitions. Total deposits increased $1.6 billion, or 45.8% during 2011, due to our acquisitions of
Bank of Choice and Community Banks of Colorado, which at December 31, 2011, comprised $1.9 billion of our
total deposits. We also transitioned the deposit mix to lower cost deposits through a shift from time deposits to
demand deposits during the year.
65
Investment Securities
Available-for-sale
Total investment securities available-for-sale were $1.7 billion at December 31, 2012, compared to $1.9 billion at
December 31, 2011, a decrease of $0.2 billion, or 7.8%. During the first quarter of 2012, we re-evaluated the
securities in our available-for-sale investment portfolio and identified securities that we now intend to hold until
maturity. The securities that were transferred included residential mortgage pass-through securities issued or
guaranteed by U.S. Government agencies or sponsored enterprises with a collective amortized cost of
approximately $715.2 million and net unrealized gains of approximately $38.9 million on the date of transfer.
These securities were classified as available-for-sale at December 31, 2011. During the year ended 2012, we also
purchased $1.1 billion of available-for-sale securities, which was partially offset by $493.2 million of maturities
and paydowns. The purchases included U.S. Treasury securities, mortgage backed securities and asset backed
securities. Our available-for-sale investment securities portfolio is summarized as follows for the periods
indicated (in thousands):
December 31, 2012
December 31, 2011
Amortized
Cost
Fair
Value
Percent of
Portfolio
Weighted
Average
Yield Earned
Year-to-Date
Amortized
Cost
Fair
Value
Percent of
Portfolio
Weighted
Average
Yield Earned
Year-to-Date
U.S. Treasury securities . . . $
U.S. Government
sponsored agency and
government
sponsored enterprises
obligations . . . . . . . . . . .
Asset backed securities . . .
Mortgage-backed securities
(“MBS”):
Residential mortgage
pass-through
securities issued or
guaranteed by U.S.
Government
agencies
or sponsored
enterprises . . . . . . .
Other residential MBS
issued or
guaranteed by U.S.
Government
agencies or
sponsored
enterprises . . . . . . .
Other MBS issued or
guaranteed by U.S.
Government
agencies
or sponsored
enterprises . . . . . . .
Other securities . . . . .
300 $
300
0.02% 0.13% $
3,300 $
3,300
0.18% 0.27%
—
89,881
—
90,003
0.00% 0.00%
5.24% 0.61%
3,009
—
3,010
—
0.16% 0.63%
—
—
658,169
678,017
39.46% 2.03% 1,139,058 1,191,537
63.97% 3.21%
931,979
949,289
55.26% 2.13%
620,122
643,625
34.55% 2.97%
—
419
—
419
0.00% 0.00%
0.02% 0.00%
20,123
419
20,808
419
1.12% 2.73%
0.02% 0.00%
Total investment securities
available-for-sale . . . . . . $1,680,748 $1,718,028 100.00% 2.01% $1,786,031 $1,862,699 100.00% 3.11%
66
As of December 31, 2012, approximately 94.7% of the available-for-sale investment portfolio is backed by mortgages. The
residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate Federal Home Loan
Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Government National Mortgage
Association (“GNMA”) securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA
and GNMA securities.
At December 31, 2012, adjustable rate securities comprised 11.6% of the available-for-sale MBS portfolio and the remainder of the
portfolio was comprised of fixed rate securities with 10 to 30 year maturities, with a weighted average coupon of 2.8% per annum.
During the year ended 2012, we sold approximately $20.8 million of available-for-sale investment securities. The sale was
comprised of one fixed-rate collateralized mortgage obligation backed by commercial property. We realized a gross gain of $0.7
million on the sale of the security, which is included in gain on sale of securities, net in the accompanying consolidated statements
of operations.
During the year ended 2011, we sold approximately $229.5 million of available-for-sale investment securities. The sales were
comprised of $33.4 million of fixed-rate MBS pass-through securities and $153.9 million of fixed-rate residential collateral
mortgage obligations and $42.2 million of U.S. Treasury securities. We realized net losses on the sale of these securities of $0.6
million during the year ended 2011, which is included in gain on sale of securities in the accompanying consolidated statements of
operations.
The available-for-sale investment portfolio included $37.3 million and $76.7 million of net unrealized gains, inclusive of $321
thousand and $1 thousand of unrealized losses, at December 31, 2012 and 2011, respectively. We do not believe that any of the
securities with unrealized losses were other-than-temporarily-impaired.
The table below summarizes the contractual maturities of our available-for-sale investment portfolio as of December 31, 2012 (in
thousands):
Due in one year
or less
Due after one year
through
five years
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Due after five years
through ten years
Weighted
Average
Yield
Carrying
Value
Due after
ten years
Other securities
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
U.S. Treasury securities . . . . . . . $
U.S. Government sponsored
300
0.13% $ —
0.00% $ —
0.00% $
— 0.00% $—
0.00% $
300
0.13%
—
28,036
0.00%
—
0.56% 61,967
0.00%
0.64%
—
—
0.00%
0.00%
— 0.00%
— 0.00%
—
—
0.00%
0.00%
— 0.00%
0.61%
90,003
—
0.00%
5
2.76% 246,936
1.20%
431,076
2.52%
—
0.00%
678,017
2.03%
—
0.00%
—
0.00%
13,506
2.29%
935,783
2.13%
—
0.00%
949,289
2.13%
agency obligations . . . . . . . . . .
Asset backed securities . . . . . . . .
Mortgage-backed securities
(“MBS”):
Residential mortgage pass-
through securities issued
or guaranteed by U.S.
Government agencies or
sponsored enterprises . . .
Other residential MBS
issued or guaranteed by
U.S. Government
agencies or sponsored
enterprises . . . . . . . . . . . .
Other MBS issued or
guaranteed by U.S.
Government agencies or
sponsored enterprises . . .
Other securities . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . $28,336
0.56% $61,972
0.64% $260,442
1.25% $1,366,859
—
—
0.00%
—
—
0.00%
—
—
0.00%
— 0.00%
—
—
419
2.25% $419
0.00%
— 0.00%
419 —
0.00% $1,718,028
2.01%
The estimated weighted average life of the available-for-sale MBS portfolio as of December 31, 2012 and 2011 was 3.4 years. This
estimate is based on various assumptions, including repayment characteristics, and actual results may differ. The U.S. Treasury
securities have contractual maturities of less than one year. As of December 31, 2012, the duration of the total available-for-sale
investment portfolio was 3.1 years and the asset-backed securities portfolio within the available-for-sale investment portfolio had a
duration of 0.5 year.
67
Held-to-maturity
At December 31, 2012, we held $577.5 million of held-to-maturity investment securities. As previously
discussed, during the first quarter of 2012, we re-evaluated the securities in our available-for-sale investment
portfolio and identified securities that we now intend to hold until maturity. We transferred residential mortgage
pass-through securities issued or guaranteed by U.S. Government agencies or sponsored agencies with a
collective amortized cost of approximately $715.2 million and unrealized gains of approximately $38.9 million
on the date of transfer. These securities were classified as available-for-sale at December 31, 2011. During the
year ended December 31, 2012, we also purchased $2.2 million of held-to-maturity mortgage-backed securities.
At December 31, 2011 the Company held $6.8 million of held-to-maturity investment securities, of which $3.2
million were purchased by the Company under the classification of available-for-sale and transferred to the held-
to-maturity classification and $3.6 million were purchased under the classification of held-to-maturity. Held-to-
maturity investment securities are summarized as follows as of the dates indicated (in thousands):
December 31, 2012
Amortized
Cost
Fair
Value
Percent of
Portfolio
Weighted
Average Yield
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . . . . .
$577,486
$584,551
100.00%
Total investment securities held-to-maturity . . . .
$577,486
$584,551
100.00%
3.60%
3.60%
December 31, 2011
Amortized
Cost
Fair
Value
Percent of
Portfolio
Weighted
Average Yield
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . . . . .
$ 6,801
$ 6,829
100.00%
Total investment securities held-to-maturity . . . .
$ 6,801
$ 6,829
100.00%
2.44%
2.44%
The residential mortgage pass-through held-to-maturity investment portfolio is comprised only of fixed rate
FNMA and GNMA securities.
At December 31, 2012, the fair value of the held-to-maturity investment portfolio was $584.6 million with $7.1
million of unrealized gains. The table below summarizes the contractual maturities of our held-to-maturity
investment portfolio as of December 31, 2012 (in thousands):
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five year
. . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$ —
—
—
577,486
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$577,486
Weighted
Average
Yield
—
—
—
3.60%
—
3.60%
The estimated weighted average life of the held-to-maturity investment portfolio as of December 31, 2012 was
3.8 years. As of December 31, 2012, the duration of the total held-to-maturity investment portfolio was 3.6 years
and the duration of the entire investment securities portfolio was 3.2 years.
68
Non-marketable securities
Non-marketable securities include Federal Reserve Bank stock and FHLB stock. At December 31, 2012 and
2011, we held $25.0 million of Federal Reserve Bank stock and at December 31, 2012 and 2011 we also held
$8.0 million and $4.1 million of FHLB stock, respectively. We hold these securities in accordance with debt and
regulatory requirements. These are restricted securities which lack a market and are therefore carried at cost.
Loans Overview
Our loan portfolio at December 31, 2012 was comprised of loans that were acquired in connection with the
acquisitions of Hillcrest Bank and Bank Midwest in the fourth quarter of 2010, our acquisition of Bank of Choice
during the third quarter of 2011, and our acquisition of Community Banks of Colorado during the fourth quarter
of 2011, in addition to new loans that we have originated. The majority of the loans acquired in the Hillcrest
Bank and Community Banks of Colorado transaction are covered by loss sharing agreements with the FDIC, and
we present covered loans separately from non-covered loans due to the FDIC loss sharing agreements associated
with these loans.
As discussed in note 2 to our consolidated financial statements, in accordance with applicable accounting
guidance, all acquired loans are recorded at fair value at the date of acquisition, and an allowance for loan losses
is not carried over with the loans but, rather, the fair value of the loans encompasses both credit quality and
market considerations. Loans that exhibit signs of credit deterioration at the date of acquisition are accounted for
in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated
Credit Quality (“ASC 310-30”). Management accounted for all loans acquired in the Hillcrest Bank, Bank of
Choice, and Community Banks of Colorado acquisitions under ASC Topic 310-30, with the exception of loans
with revolving privileges which were outside the scope of ASC Topic 310-30. In our Bank Midwest transaction,
we did not acquire all of the loans of the former Bank Midwest but, rather, selected certain loans based upon
specific criteria of performance, adequacy of collateral, and loan type that were performing at the time of
acquisition. As a result, none of the loans acquired in the Bank Midwest transaction are accounted for under ASC
Topic 310-30.
Consistent with differences in the risk elements and accounting, the loan portfolio is presented in two categories:
(i) loans covered by FDIC loss sharing agreements, or “covered loans,” and (ii) loans that are not covered by
FDIC loss sharing agreements, or “non-covered loans.” The portfolio is further stratified based on (i) ASC 310-
30 loans and (ii) Non ASC 310-30 loans. Additionally, inherent in the nature of acquiring troubled banks, only
certain of our acquired clients conform to our long-term business model of in-market, relationship-oriented
banking. During the year ended 2012, we developed a management tool to evaluate the progress of working out
the troubled loans acquired in our FDIC-assisted acquisitions and the progress of organic loan growth, whereby
we have designated loans as “strategic” or “non-strategic.” Criteria utilized in the designation of a loan as
“strategic” include (a) geography, (b) total relationship with borrower and (c) credit metrics commensurate with
our current underwriting standards. At December 31, 2012, strategic loans totaled $1.1 billion and had very good
credit quality as represented by a non-performing loans ratio of 0.6%. We believe this secondary presentation of
our loan portfolio provides a meaningful basis to understand the underlying drivers of changes in our loan
portfolio balances.
69
The table below shows the loan portfolio composition and the breakdown of the portfolio between covered ASC
310-30 loans, covered non ASC 310-30 loans, non-covered ASC 310-30 loans and non-covered non ASC 310-30
loans at December 31, 2012 and 2011. Covered loans comprised 33.1% of the total loan portfolio at
December 31, 2012, compared to 41.9% at December 31, 2011 (dollars in thousands):
Covered loans
Non-covered loans
December 31, 2012
ASC
310-30
Non
ASC 310-30
Total
covered
loans
ASC
310-30
Non
ASC 310-30
Total
non-covered
loans
Total loans
% of
Total
Commercial . . . $ 73,685
Commercial
$47,307
$120,992 $ 9,484
$140,112
$ 149,596 $ 270,588
14.7%
real estate . . .
Agriculture . . .
Residential real
estate . . . . . .
. . . .
Consumer
396,414
38,890
13,693
17,094
410,107
55,984
169,621
8,843
225,271
108,580
18,956
3
2,180
—
21,136
3
87,144
18,981
430,465
31,347
394,892
117,423
517,609
50,328
804,999
173,407
43.9%
9.4%
538,745
50,331
29.3%
2.7%
Total
. . . . . . . .
$527,948
$80,274
$608,222 $294,073
$935,775
$1,229,848
$1,838,070
100.0%
Covered loans
Non-covered loans
December 31, 2011
ASC
310-30
Non
ASC 310-30
Total
covered
loans
ASC
310-30
Non
ASC 310-30
Total
non-covered
loans
Total loans
% of
Total
Commercial . . . $123,108
Commercial
$ 79,044
$202,152 $ 31,482
$139,297
$ 170,779 $ 372,931
16.4%
real estate . . .
Agriculture . . .
Residential real
estate . . . . . .
. . . .
Consumer
626,089
56,839
15,939
28,535
642,028
85,374
243,297
13,989
267,153
52,040
510,450
66,029
1,152,478
151,403
50.6%
6.7%
21,043
7
2,111
—
23,154
7
147,239
44,616
352,492
29,731
499,731
74,347
522,885
74,354
23.0%
3.3%
Total
. . . . . . . .
$827,086
$125,629
$952,715 $480,623
$840,713
$1,321,336
$2,274,051
100.0%
Strategic loans comprised 61.3 % of the total loan portfolio at December 31, 2012, compared to 47.7% at
December 31, 2011. The table below shows the loan portfolio composition categorized between strategic and
non-strategic at the respective dates (dollars in thousands):
December 31, 2012
December 31, 2011
Strategic
Non-Strategic
Total
Strategic
Non-Strategic
Total
Commercial . . . . . . . . . . . . . .
Commercial real estate . . . . .
Agriculture . . . . . . . . . . . . . .
Residential real estate . . . . . .
. . . . . . . . . . . . . . .
Consumer
$ 163,193
278,907
160,963
480,137
44,266
$107,395
526,092
12,444
58,608
6,065
$ 270,588 $ 191,512
291,051
131,823
415,730
55,334
804,999
173,407
538,745
50,331
$ 181,419
861,427
19,580
107,155
19,020
$ 372,931
1,152,478
151,403
522,885
74,354
Total
. . . . . . . . . . . . . . . . . . .
$1,127,466
$710,604
$1,838,070
$1,085,450
$1,188,601
$2,274,051
Strategic loans increased $42.0 million, or 3.9%, at December 31, 2012 compared to December 31, 2011, as
routine paydowns of existing loans largely offset originations of $434.3 million, particularly in the first half of
the year, as our originations steadily grew throughout the year as we began to realize the benefit of a full sales
cycle in our Kansas City market and our Colorado acquisitions made in the latter half of 2011 began to stabilize.
70
The largest decrease in loan balances came from our non-strategic commercial real estate loans, which declined
$335.3 million during 2012 as we focused our efforts on working out of the troubled loans acquired in our FDIC-
assisted acquisitions. We successfully increased our balances in our strategic agriculture and residential real
estate portfolios as we continued to generate new relationships and our residential mortgage promotions gained
momentum with the low interest rates and high refinance activity.
Commercial loans consist of loans made to finance business operations and secured by inventory or other
business-related collateral such as accounts receivable or equipment. Commercial real estate loans include loans
on 1-4 family construction properties, owner-occupied and non-owner-occupied commercial properties such as
office buildings, shopping centers, or free standing commercial properties, multi-family properties and raw land
development loans. Agriculture loans include loans on farm equipment and farmland loans. Residential real
estate loans include 1-4 family closed and open end loans, in both senior and junior collateral positions (both
owner occupied and non-owner occupied). Consumer loans include both secured and unsecured loans to retail
clients.
Our loan origination strategy involves lending primarily to clients within our markets; however, our acquired
loans include clients in various geographies. The table below shows the geographic breakout of our loan portfolio
at December 31, 2012, based on the domicile of the borrower or, in the case of collateral-dependent loans, the
geographic location of the collateral (in thousands):
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan balance
$ 695,024
545,511
170,890
119,541
61,363
52,982
192,759
Percent of
loan portfolio
37.8%
29.7%
9.3%
6.5%
3.3%
2.9%
10.5%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,838,070
100.0%
The decline in total loans from $2.3 billion at December 31, 2011 to $1.8 billion at December 31, 2012 was
primarily driven by decreases in our non-strategic loan portfolios as the problem credits acquired in our FDIC-
assisted transactions migrated to resolution, as well as the repayment of many loans that do not conform to our
business model of in-market, relationship-oriented loans with credit metrics commensurate with our current
underwriting standards. We have an enterprise-level, dedicated special asset resolution team that is working to
resolve problem loans in an expeditious manner and through 2012, our resolution of the troubled assets acquired
with our acquisitions of three failed banks, coupled with routine loan paydowns, outpaced our originations.
Acquired loans were marked to fair value at the time of acquisition and, as a result, we have been able to resolve
many of these assets without significant losses.
New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients
in our markets and provide needed services at competitive rates. New loan originations continued to increase as
our Midwest market stabilized during the period. We expect that our Colorado markets will continue to
contribute to loan growth as bankers are further deployed and our presence in those markets increases.
71
The widespread economic uncertainty has limited organic loan growth and we anticipate this will continue to be
a challenge in the near future. The following table represents new loan originations for the last two years on a
quarterly basis (in thousands):
Commercial
Commercial
real estate
Agriculture
First quarter 2011 . . . . . . . . . . . . . . . . .
Second quarter 2011 . . . . . . . . . . . . . . .
Third quarter 2011 . . . . . . . . . . . . . . . .
Fourth quarter 2011 . . . . . . . . . . . . . . . .
First quarter 2012 . . . . . . . . . . . . . . . . .
Second quarter 2012 . . . . . . . . . . . . . . .
Third quarter 2012 . . . . . . . . . . . . . . . .
Fourth quarter 2012 . . . . . . . . . . . . . . . .
Full year 2011 . . . . . . . . . . . . . . . .
Full year 2012 . . . . . . . . . . . . . . . .
$ 1,128
1,390
14,226
9,955
20,102
10,799
25,640
30,988
$26,699
87,529
$ 5,194
2,081
818
4,062
18,546
6,816
11,135
20,993
$12,155
57,490
$ 3,101
2,476
651
1,575
7,570
22,444
24,328
28,978
$ 7,803
83,320
Residential
real estate
$ 14,170
16,707
16,908
35,745
33,016
40,123
60,320
52,778
Consumer
Total
$ 1,223
2,207
2,772
3,083
3,155
4,057
6,505
6,025
$ 24,816
24,861
35,375
54,420
82,389
84,239
127,928
139,762
$ 83,530
186,237
$ 9,285
19,742
$139,472
434,318
Covered loans
The Company has two loss sharing agreements with the FDIC for the assets related to the Hillcrest Bank
acquisition and a separate loss sharing agreement that covers certain assets related to the Community Banks of
Colorado acquisition, whereby the FDIC will reimburse us for a portion of the losses incurred as a result of the
resolution and disposition of the covered assets of these banks.
The Hillcrest Bank loss sharing agreements with the FDIC cover substantially all of the loans acquired in the
Hillcrest Bank transaction, including single family residential mortgage loans, commercial real estate loans,
commercial and industrial loans, unfunded commitments, and OREO. For purposes of the Hillcrest Bank loss
sharing agreements, the anticipated losses on the covered assets are grouped into two categories, commercial
assets and single family assets, and each category has its own specific loss sharing agreement. The term for loss
sharing on single family residential real estate loans is ten years from the date of acquisition, and the Company
will share in losses and recoveries with the FDIC for the entire term. The term for the loss sharing agreement on
commercial loans is eight years. Under the commercial loss sharing agreement, the Company will share in losses
and recoveries with the FDIC for the first five years. After the first five years, the FDIC will not share in losses
but only in recoveries for the remaining term of the agreement. The loss sharing agreements cover losses on
loans (and any acquired or resultant OREO) in the respective categories and have provisions through which we
are required to be reimbursed for up to 90 days of accrued interest and direct expenses related to the resolution of
these assets. Within the categories, there are three tranches of losses, each with a specified loss-coverage
percentage. The categories, and the respective loss thresholds and coverage amounts are as follows (dollars in
thousands):
Commercial
Single family
Tranche
Loss Threshold
Loss-Coverage
Percentage
Tranche
Loss Threshold
Loss-Coverage
Percentage
1
2
3
Up to $295,592
$295,593-405,293
>$405,293
60%
0%
80%
1
2
3
Up to $4,618
$4,618-8,191
>$8,191
60%
30%
80%
With the purchase and assumption agreement of Community Banks of Colorado with the FDIC, we entered into a
loss sharing agreement with the FDIC whereby the FDIC will reimburse us for a portion of the losses incurred as
a result of the resolution and disposition of certain covered assets of Community Banks of Colorado. Covered
assets include certain single family residential mortgage loans, commercial real estate loans, commercial and
72
industrial loans, agriculture loans, consumer loans, unfunded commitments, and OREO. As of the date of
acquisition, covered loans of Community Banks of Colorado totaled approximately 61.8% of the total
outstanding loan principal balances of Community Banks of Colorado. For purposes of the Community Banks of
Colorado loss sharing agreement, the anticipated losses on the covered assets are grouped into one category,
commercial assets, and are subject to one loss share agreement lasting eight years. Under the agreement, the
Company will share in losses and recoveries with the FDIC for the first five years and thereafter, the FDIC will
not share in losses but only in recoveries for the remaining term of the agreement. The loss sharing agreement
covers losses on covered loans (and any acquired or resultant OREO) and has provisions under which we will be
reimbursed for up to 90 days of accrued interest and direct expenses related to the resolution of these assets.
There are three tranches of losses, each with a specified loss-coverage percentage. The respective loss thresholds
and coverage amounts are as follows (dollars in thousands):
Tranche
Loss Threshold
Loss-Coverage Percentage
1
2
3
Up to $204,194
$204,195-308,020
>$308,020
80%
30%
80%
Under the Hillcrest Bank and Community Banks of Colorado loss sharing agreements, the reimbursable losses
from the FDIC are based on the book value of the related covered assets as determined by the FDIC at the date of
acquisition, and the FDIC’s book value does not necessarily correlate with our book value of the same assets.
This difference is primarily because we recorded the loans at fair value at the date of acquisition in accordance
with applicable accounting guidance.
As of December 31, 2012 and 2011, respectively, we had incurred $195.1 million and $159.5 million of losses on
our Hillcrest Bank covered assets since the beginning of the loss sharing agreement as measured by the FDIC’s
book value, substantially all of which was related to the commercial assets. Additionally, as of December 31,
2012 and December 31, 2011, respectively, we had incurred approximately $131.4 million and $43.1 million of
losses related to our Community Banks of Colorado loss sharing agreement. The fair value adjustments assigned
to the related covered loans at the time of acquisition encompassed anticipated losses such as these, and as a
result, our financial statement losses are mitigated and do not correspond to the losses reported for loss sharing
purposes.
Subsequent to December 31, 2012, we submitted a request for $0.7 million of loss sharing reimbursements from
the FDIC for $1.2 million of losses related to Hillcrest Bank and an additional request for $11.2 million of
reimbursement related to $14.0 million in losses for Community Banks of Colorado, all incurred (as measured by
the FDIC’s book value) during the three months ended December 31, 2012.
The status of covered assets and any incurred losses require extensive recordkeeping and documentation and are
submitted to the FDIC on a monthly and quarterly basis. The loss claims filed are subject to review and approval,
including extensive audits, by the FDIC or its assigned agents for compliance with the terms in our loss sharing
agreements. We have focused on resolving the covered loans in an expeditious manner in an effort to utilize the
benefits offered by the loss sharing agreements, and often times, loans pay down prior to the scheduled maturity
date.
73
The table below shows the contractual maturities of our covered loans for the dates indicated (in thousands):
December 31, 2012
Due within
1 Year
Due after 1 but
within 5 Years
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial.
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,973
270,090
18,826
12,447
3
$ 59,262
122,217
8,737
8,157
—
Due after
5 Years
$12,757
17,800
28,421
532
—
Total
$120,992
410,107
55,984
21,136
3
Total covered loans . . . . . . . . . . . . . . . . . . .
$350,339
$198,373
$59,510
$608,222
December 31, 2011
Due within
1 Year
Due after 1 but
within 5 Years
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$123,692
409,213
37,361
10,081
—
$ 56,964
199,003
12,134
12,602
7
Due after
5 Years
$21,496
33,812
35,879
471
—
Total
$202,152
642,028
85,374
23,154
7
Total covered loans . . . . . . . . . . . . . . . . . . .
$580,347
$280,710
$91,658
$952,715
The interest rate sensitivity of covered loans with maturities over one year is as follows at the dates indicated (in
thousands):
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
$ 19,197
42,342
4,345
8,041
—
December 31, 2012
Variable
$ 52,822
97,675
32,813
648
—
Total
$ 72,019
140,017
37,158
8,689
—
Total covered loans . . . . . . . . . . . . . . . . . . . . . . .
$ 73,925
$183,958
$257,883
December 31, 2011
Fixed
Variable
Total
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,370
74,621
4,587
3,878
7
$ 54,090
158,194
43,426
9,195
—
$ 78,460
232,815
48,013
13,073
7
Total covered loans . . . . . . . . . . . . . . . . . . . . . . .
$107,463
$264,905
$372,368
For more information on how interest is accounted for under ASC 310-30, please refer below under
“Accretable Yield” and to the notes to our consolidated financial statements. Notes 4 and 7 to our consolidated
financial statements provide additional information on our covered loans, including a breakout of past due status,
credit quality indicators, and non-accrual status.
74
Non-covered loans
The tables below show the contractual maturities of our non-covered loans at the dates indicated (in thousands):
December 31, 2012
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 34,120
133,089
22,379
50,265
23,839
$ 88,094
155,408
68,946
65,784
17,668
$ 27,382
106,395
26,098
401,560
8,821
Total
$ 149,596
394,892
117,423
517,609
50,328
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$263,692
$395,900
$570,256
$1,229,848
December 31, 2011
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
. . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
Commercial real estate . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 62,725
185,526
19,684
84,383
33,234
$ 85,367
186,672
23,067
103,881
32,407
$ 22,687
138,252
23,278
311,467
8,706
Total
$ 170,779
510,450
66,029
499,731
74,347
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$385,552
$431,394
$504,390
$1,321,336
The interest rate sensitivity of non-covered loans with maturities over one year is as follows at the dates indicated
(in thousands):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Rate
$ 31,974
118,858
55,849
244,648
15,295
December 31, 2012
Variable Rate
$ 83,502
142,945
39,195
222,696
11,194
Total
$115,476
261,803
95,044
467,344
26,489
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$466,624
$499,532
$966,156
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Rate
$ 32,988
110,416
20,713
181,107
23,671
December 31, 2011
Variable Rate
$ 75,066
214,508
25,632
234,241
17,442
Total
$108,054
324,924
46,345
415,348
41,113
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$368,895
$566,889
$935,784
Notes 4 and 7 to our consolidated financial statements provides additional information on our non-covered loans,
including a detailed breakout of loan categories, past due status, credit quality indicators, and non-accrual status.
75
Accretable Yield
The fair value adjustments assigned to loans that are accounted for under ASC Topic 310-30 include both
accretable yield and a non-accretable difference that are based on expected cash flows from the loans. Accretable
yield is the excess of a pool’s cash flows expected to be collected over the recorded balance of the related pool of
loans. The non-accretable difference represents the expected shortfall in future cash flows from the contractual
amount due in respect of each pool of such loans. Similar to the entire fair value adjustment for loans outside the
scope of ASC Topic 310-30, the accretable yield is accreted into income over the estimated remaining life of the
loans in the applicable pool.
Below is the composition of the net book value for loans accounted for under ASC Topic 310-30 at
December 31, 2012 and 2011 (in thousands):
December 31, 2012
December 31, 2011
Contractual cash flows . . . . . . . . . . . . . . . .
Nonaccretable difference . . . . . . . . . . . . . . .
Accretable yield . . . . . . . . . . . . . . . . . . . . . .
$1,444,279
(488,673)
(133,585)
$2,030,374
(536,171)
(186,494)
Total loans accounted for under ASC
Topic 310-30 . . . . . . . . . . . . . . . . . .
$ 822,021
$1,307,709
Loan pools accounted for under ASC Topic 310-30 are periodically remeasured to determine expected future
cash flows. In determining the expected cash flows, prepayment assumptions on smaller homogeneous loans are
based on statistical models that take into account factors such as the loan interest rate, credit profile of the
borrowers, the years in which the loans were originated, and whether the loans were fixed or variable rate loans.
Prepayments may be assumed on large loans if circumstances specific to that loan warrant a prepayment
assumption. No prepayments are presumed for small homogeneous commercial loans; however, prepayment
assumptions are made that consider similar prepayment factors listed above for smaller homogeneous loans.
Decreases to the expected future cash flows in the applicable pool generally result in an immediate provision for
loan losses charged to the consolidated statements of operations. Conversely, increases in the expected future
cash flows in the applicable pool result in a transfer from the non-accretable difference to the accretable yield,
and have a positive impact on accretion income prospectively. This re-measurement process resulted in the
following changes to the accretable yield during the years ended December 31, 2012 and 2011 (in thousands):
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . .
Additions through acquisitions . . . . . . . . . . . . . . . . . . . .
Reclassification from non-accretable difference . . . . . . .
Reclassification to non-accretable difference . . . . . . . . .
Accretion income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$ 186,494
—
60,119
(12,621)
(100,407)
$ 74,329
130,321
45,871
(409)
(63,618)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 133,585
$186,494
During 2012, we re-measured the expected cash flows of all 30 of the loan pools accounted for under ASC Topic
310-30 utilizing the same cash flow methodology used at the time of acquisition. Increases in expected cash
flows are reflected as an increase in the accretion rates as well as an increased amount of accretable yield that
will be recognized over the expected remaining lives of the underlying loan pools. During the year we
reclassified $47.5 million, net, from non-accretable difference to accretable yield. The re-measurements also
resulted in a $19.0 million impairment during the year ended 2012, primarily driven by our land and
development, commercial real estate, and constructions pools. One land and development pool contributed $6.9
million, or 36.2% of the total impairment and one commercial real estate pool contributed $6.2 million, or
32.8%, of the total impairment for the year ended 2012. These impairments are reflected in provision for loan
loss in the consolidated statement of operations.
76
During 2011, we re-measured the expected cash flows in 14 of the 30 (16 of the 30 were created in the fourth
quarter of 2011 with the Community Banks of Colorado acquisition) loan pools accounted for under ASC Topic
310-30 utilizing the same cash flow methodology used at the time of acquisition. This resulted in an increase in
expected cash flows in certain loan pools for the year ended 2011. These increases in expected cash flows are
reflected as an increase in the accretion rates as well as an increased amount of accretable yield that will be
recognized over the expected lives of the underlying loan pools. During the year ended 2011, we reclassified
$45.5 million, net of non-accretable difference to accretable yield. The re-measurement also resulted in $4.2
million impairment in 2011 of a commercial and industrial loan pool from the Hillcrest Bank acquisition, a $0.1
million impairment of an agricultural loan pool and a $0.7 million impairment in a single family residential loan
pool, both of which were from the Bank of Choice acquisition. These impairments are reflected in provision for
loan loss in the consolidated statement of operations.
In addition to the accretable yield on loans accounted for under ASC Topic 310-30, the fair value adjustments on
loans outside the scope of 310-30 are also accreted to interest income over the life of the loans. At December 31,
2012 and 2011, our total remaining accretable yield and fair value mark was as follows (in thousands):
Remaining accretable yield on loans accounted for under
ASC Topic 310-30
Remaining accretable fair value mark on loans not
accounted for under ASC Topic 310-30
Total remaining accretable yield and fair value mark at
December 31,
2012
2011
$133,585
$186,494
19,434
42,150
$153,019
$228,644
Asset Quality
All of the assets acquired in our acquisitions were marked to fair value at the date of acquisition, and the fair
value adjustments to loans included a credit quality component. We utilize traditional credit quality metrics to
evaluate the overall credit quality of our loan portfolio; however our credit quality ratios are limited in their
comparability to industry averages or to other financial institutions because:
1. Any asset quality deterioration that existed at the date of acquisition was considered in the original fair value
adjustments; and
2. 41.7% of our non-performing assets (by dollar amount) at December 31, 2012 are covered by loss sharing
agreements with the FDIC.
Asset quality is fundamental to our success. Accordingly, for the origination of loans, we have established a
credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled
to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the
appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan.
We have established underwriting standards and loan origination procedures that require appropriate
documentation, including financial data and credit reports. For loans secured by real property, we require
property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where
appropriate.
Additionally, we have implemented procedures to timely identify loans that may become problematic in order to
ensure the most beneficial resolution to the Company. Asset quality is monitored by our credit risk management
department and evaluated based on quantitative and subjective factors such as the timeliness of contractual
payments received. Additional factors that are considered, particularly with commercial loans over $250,000,
77
include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our
collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due
and on an internal risk rating system, and both are discussed in more detail below.
Our internal risk rating system uses a series of grades which reflect our assessment of the credit quality of
covered and non-covered loans based on an analysis of the borrower’s financial condition, liquidity and ability to
meet contractual debt service requirements. Loans that are perceived to have acceptable risk are categorized as
“pass” loans. “Special mention” loans represent loans that have potential credit weaknesses that deserve close
attention. Special mention loans include borrowers that have potential weaknesses or unwarranted risks that,
unless corrected, may threaten the borrower’s ability to meet debt service requirements. However, these
borrowers are still believed to have the ability to respond to and resolve the financial issues that threaten their
financial situation. Loans classified as “substandard” have a well-defined credit weakness and are inadequately
protected by the current paying capacity of the obligor or of the collateral pledged, if any. Although these loans
are identified as potential problem loans, they may never become non-performing. Substandard loans have a
distinct possibility of loss if the deficiencies are not corrected. “Doubtful” loans are loans that management
believes that collection of payments in accordance with the terms of the loan agreement are highly questionable
and improbable. Doubtful loans that are not covered by loss sharing agreements are deemed impaired and put on
non-accrual status.
In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan
agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a
loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their
original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are
considered “troubled debt restructurings” in accordance with ASC Topic 310-40 Troubled Debt Restructurings
by Creditors. Under this guidance, modifications to loans that fall within the scope of ASC Topic 310-30 are not
considered troubled debt restructurings, regardless of otherwise meeting the definition of a troubled debt
restructuring. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified
as OREO until sold, and are carried at the lower of the related loan balance or the fair value of the collateral less
estimated costs to sell, with any initial valuation adjustments charged to the ALL and any subsequent declines in
carrying value charged to impairments on OREO.
Non-performing Assets
Non-performing assets consist of covered and non-covered non-accrual loans, accruing loans 90 days or more
past due, troubled debt restructurings, OREO (48.0% of which was covered by FDIC loss sharing agreements at
December 31, 2012) and other repossessed assets. However, loans and troubled debt restructurings accounted for
under ASC Topic 310-30, as described below, are excluded from our non-performing assets. Our non-performing
assets include $11.1 million and $14.8 million of covered loans not accounted for under ASC Topic 310-30 and
$45.5 million and $77.1 million of covered OREO at December 31, 2012 and 2011, respectively. In addition to
being covered by loss sharing agreements, these assets were marked to fair value at the time of acquisition,
mitigating much of our loss potential on these non-performing assets. As a result, the levels of our non-
performing assets are not fully comparable to those of our peers or to industry benchmarks.
As of December 31, 2012 and 2011, 64.2% and 63.3%, respectively, of loans accounted for under ASC Topic
310-30 were covered by the FDIC loss sharing agreements. Loans accounted for under ASC Topic 310-30 were
recorded at fair value based on cash flow projections that considered the deteriorated credit quality and expected
losses. These loans are accounted for on a pool basis and any non-payment of contractual principal or interest is
considered in our periodic re-estimation of the expected future cash flows. To the extent that we decrease our
cash flow projections, we record an immediate impairment expense through the provision for loan losses. We
recognize any increases to our cash flow projections on a prospective basis through an increase to the pool’s
yield over its remaining life once any previously recorded impairment expense has been recouped. As a result of
78
this accounting treatment, these pools may be considered to be performing, even though some or all of the
individual loans within the pools may be contractually past due. Loans accounted for under ASC Topic 310-30
were classified as performing assets at December 31, 2012 and 2011, as the carrying value of the respective loan
or pool of loans cash flows were considered estimatable and probable of collection. Therefore, interest income,
through accretion of the difference between the carrying value of the loans in the pool and the pool’s expected
future cash flows, is being recognized on all acquired loans accounted for under ASC Topic 310-30.
The following table sets forth the non-performing assets as of the dates presented (in thousands):
December 31, 2012
December 31, 2011
Non-Covered Covered
Total
Non-Covered Covered
Total
Non-accrual loans:
Commercial loans . . . . . . . . . . . . . . . .
Commercial real estate loans . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . .
$ 1,466
10,216
207
4,894
291
$ 3,034 $ 4,500
11,669
251
6,408
291
1,453
44
1,514
—
Total non-accrual loans . . . . . . . . . . . . . . . .
17,074
6,045
23,119
$
760
21,960
29
1,899
1
24,649
$ 4,614 $ 5,374
30,007
29
2,359
1
8,047
—
460
—
13,121
37,770
Loans past due 90 days or more and still
accruing interest:
Commercial loans . . . . . . . . . . . . . . . .
Commercial real estate loans . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . .
Total accruing loans 90 days past due . . . . .
Accruing restructured loans (1) . . . . . . . . . . .
Total non-performing loans . . . . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other repossessed assets . . . . . . . . . . . . . . .
—
—
—
22
3
25
—
—
—
—
—
—
—
—
—
22
3
25
—
—
—
290
35
325
178
149
—
—
—
327
178
149
—
290
35
652
12,673
29,772
49,297
800
5,047
11,092
45,511
531
17,720
40,864
94,808
1,331
10,958
35,932
43,530
873
1,367
12,325
14,815
77,106
680
50,747
120,636
1,553
Total non-performing assets . . . . . . . . . . . .
$79,869
$57,134 $137,003
$80,335
$92,601 $172,936
Allowance for loan losses . . . . . . . . . . . . . .
Total non-performing loans to total non-
covered, total covered, and total
loans, respectively . . . . . . . . . . . . . . . . . .
Total non-performing assets to total
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to non-
performing loans . . . . . . . . . . . . . . . . . . .
$ 15,380
$ 11,527
2.42%
1.82%
2.22%
2.72%
1.56%
2.23%
2.53%
37.64%
2.72%
22.71%
(1)
Includes restructured loans less than 90 days past due and still accruing.
Our OREO of $94.8 million at December 31, 2012 includes $5.3 million of participant interests in OREO, in
connection with our repossession of collateral on loans for which we were the lead bank and we have a
controlling interest. We have recorded a corresponding payable to those participant banks in other liabilities. The
$94.8 million of OREO at December 31, 2012 excludes $10.6 million of minority interest in participated OREO
in connection with the repossession of collateral on loans for which we were not the lead bank and we do not
have a controlling interest. These properties have been repossessed by the lead banks and we have recorded our
receivable due from the lead banks in other assets as minority interest in participated OREO.
79
During the year ended 2012, $87.8 million of OREO was foreclosed on or otherwise repossessed and $93.4 million of
OREO was sold, including $2.9 million of non-covered gains and $6.7 million of covered gains that are subject to
reimbursement to the FDIC at the applicable loss share coverage percentage. OREO write-downs of $20.2 million were
recorded during the year, of which $14.2 million, or 70.2%, were covered by FDIC loss sharing agreements. OREO
balances decreased $25.8 million during the year to $94.8 million, 48.0% of which was covered by FDIC loss sharing
agreements, compared to OREO balances of $120.6 million at December 31, 2011, $77.1 million, or 63.9 %, of which
was covered by the FDIC loss sharing agreement.
During 2011, $52.3 million of OREO was foreclosed on or otherwise repossessed, $34.3 million and $29.8 million of
OREO was acquired with Bank of Choice and Community Banks of Colorado acquisition, respectively, and $51.7
million of OREO was sold, with covered gains of $2.2 million and non-covered gains of $0.9 million, resulting in a net
increase to OREO balances of $66.6 million over the year. At December 31, 2011, 63.9% of OREO was covered by
loss sharing agreements with the FDIC.
Although non-performing loans have decreased $9.9 million over the year, the ratio of non-performing loans to total
loans at December 31, 2012 decreased only slightly from December 31, 2011 because total loans have also decreased.
The non-performing assets to total assets ratio decreased year over year primarily due to the net decrease in OREO and
non-accrual loans, offset, slightly by an increase in TDR’s.
The following table presents the carrying value of our accruing and non-accrual loans compared to the unpaid principal
balance (“UPB”) as of December 31, 2012 (in thousands):
Accruing
Nonaccrual
Unpaid
principal
balance
Carrying
value
Carrying
value/
UPB
Unpaid
principal
balance
Carrying
value
Carrying
value/
UPB
Unpaid
principal
balance
Total
Carrying
value
Carrying
value/
UPB
Covered loans:
Commercial . . . . . . $ 157,144 $ 117,958
Commercial real
75.1% $12,569 $ 3,034
24.1% $ 169,713 $ 120,992
71.3%
estate . . . . . . . . .
Agriculture . . . . . . .
Residential real
estate . . . . . . . . .
Consumer . . . . . . . .
Total covered loans . .
Non-covered loans:
Commercial . . . . . .
Commercial real
estate . . . . . . . . .
Agriculture . . . . . . .
Residential real
estate . . . . . . . . .
Consumer . . . . . . . .
Total non-covered
557,282
61,263
408,654
55,940
73.3% 42,703
46
91.3%
1,453
44
3.4%
95.7%
599,985
61,309
410,107
55,984
68.4%
91.3%
23,421
4
19,622
3
83.8%
75.0%
1,546
—
1,514
—
97.9%
0.0%
24,967
4
21,136
3
84.7%
75.0%
799,114
602,177
75.4% 56,864
6,045
10.6%
855,978
608,222
71.1%
153,721
148,130
96.4%
4,535
1,466
32.3%
158,256
149,596
94.5%
439,398
118,962
384,676
117,216
87.5% 18,128 10,216
207
98.5%
316
56.4%
65.5%
457,526
119,278
394,892
117,423
86.3%
98.4%
539,050
60,555
512,715
50,037
95.1%
82.6%
6,794
315
4,894
291
72.0%
92.4%
545,844
60,870
517,609
50,328
94.8%
82.7%
loans . . . . . . . . . . . . 1,311,686
1,212,774
92.5% 30,088 17,074
56.7% 1,341,774 1,229,848
91.7%
Total loans . . . . . . . . . $2,110,800 $1,814,951
86.0% $86,952 $23,119
26.6% $2,197,752 $1,838,070
83.6%
Past Due Loans
Past due status is monitored as an indicator of credit deterioration. Covered and non-covered loans are considered past
due or delinquent when the contractual principal or interest due in accordance with the terms of the loan
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agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due
and not accounted for under ASC Topic 310-30 are put on non-accrual status unless the loan is well secured and
in the process of collection. Pooled loans accounted for under ASC Topic 310-30 that are 90 days or more past
due and still accreting are included in loans 90 days or more past due and still accruing interest and are
considered to be performing as is further described above under “Non-Performing Assets.” The table below
shows the past due status of covered and non-covered loans, based on contractual terms of the loans as of
December 31, 2012 and 2011 (in thousands):
Non-covered
December 31, 2012
Covered
Total
Non-covered
December 31, 2011
Covered
Total
Loans 30-89 days past due and still
accruing interest . . . . . . . . . . . . . . .
$ 9,399
$ 13,594 $ 22,993
$ 31,279
$ 55,182 $ 86,461
Loans 90 days past due and still
accruing interest (accounted for
under ASC 310-30) . . . . . . . . . . . . .
Loans 90 days or more past due and
still accruing interest (excluded
from ASC 310-30) . . . . . . . . . . . . .
Non-accrual loans . . . . . . . . . . . . . . . .
Total past due and non-accrual
29,878
116,883
146,761
64,714
109,655
174,369
25
17,074
—
6,045
25
23,119
325
24,649
327
13,121
652
37,770
loans . . . . . . . . . . . . . . . . . . . . . . . .
$56,376
$136,522 $192,898
$120,967
$178,285 $299,252
Total past due and non-accrual loans
to total non-covered, total covered,
and total loans, respectively . . . . . .
Total non-accrual loans to total non-
covered, total covered, and
total loans, respectively . . . . . . . . .
% of total past due and non-accrual
loans that carry fair value
adjustments . . . . . . . . . . . . . . . . . . .
% of total past due and non-accrual
loans that are covered by FDIC loss
sharing agreement . . . . . . . . . . . . . .
4.6%
22.4%
10.5%
9.2%
18.7%
13.2%
1.4%
1.0%
1.3%
1.9%
1.4%
1.7%
63.1%
95.6%
86.1%
84.0%
98.9%
92.9%
70.8%
59.6%
Total loans 30 days or more past due and still accruing interest and non-accrual loans represented 10.5% of total
loans as of December 31, 2012 compared to 13.2% at December 31, 2011. Loans 30-89 days past due and still
accruing interest decreased $63.5 million at December 31, 2012 compared to December 31, 2011. Loans 90 days
or more past due and still accruing interest decreased $28.2 million at December 31, 2012 compared to
December 31, 2011. The decreases in past due loans is reflective of improved credit quality and the successful
workout strategies employed by our special assets division during the period. Additionally, of the $146.8 million
of loans 90 days or more past due and still accruing interest, all but $25 thousand are accounted for under ASC
Topic 310-30 and continued to accrete interest and 79.6% of the aforementioned $146.8 million of loans 90 days
or more past due and still accruing interest are covered by FDIC loss sharing agreements.
Non-accrual loans decreased $14.7 million during the period primarily due to resolution of certain assets and
foreclosures during the period. The covered and non-covered non-accrual loans are primarily secured by real
estate both in and outside of our market areas.
Allowance for Loan Losses
The ALL represents the amount that we believe is necessary to absorb probable losses inherent in the loan
portfolio at the balance sheet date and involves a high degree of judgment and complexity. Determination of the
81
ALL is based on an evaluation of the collectability of loans, the realizable value of underlying collateral and, to
the extent applicable, prior loss experience. The ALL is critical to the portrayal and understanding of our
financial condition, liquidity and results of operations. The determination and application of the ALL accounting
policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions,
estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or
results of operations.
In accordance with the applicable guidance for business combinations, acquired loans were recorded at their
acquisition date fair values, which were based on expected future cash flows and included an estimate for future
loan losses, therefore no ALL was recorded as of the acquisition date. Any estimated losses on acquired loans
that arise after the acquisition date are reflected in a charge to the provision for loan losses. Losses incurred on
covered loans are reimbursable at the applicable loss share percentages in accordance with the loss sharing
agreements with the FDIC. Accordingly, any provision for loan losses relating to covered loans is partially offset
by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest
income.
Loans accounted for under the accounting guidance provided in ASC Topic 310-30 have been grouped into pools
based on the predominant risk characteristics of purpose and/or type of loan. The timing and receipt of expected
principal, interest and any other cash flows of these loans are periodically re-estimated and the expected future
cash flows of the collective pools are compared to the carrying value of the pools. To the extent that the expected
future cash flows of each pool is less than the book value of the pool, an allowance for loan losses will be
established through a charge to the provision for loan losses and, for loans covered by loss sharing agreements
with the FDIC, a related adjustment to the FDIC indemnification asset for the portion of the loss that is covered
by the loss sharing agreements. If the re-estimated expected future cash flows are greater than the book value of
the pools, then the improvement in the expected future cash flows will be accreted into interest income over the
remaining expected life of the loan pool.
We periodically re-estimate the expected future cash flows of loans accounted for under ASC Topic 310-30.
During 2012 and 2011, these re-estimations resulted in an overall increase in expected cash flows in certain loan
pools, which, absent previous valuation allowances within the same pool, is reflected in increased accretion as
well as an increased amount of accretable yield and is recognized over the expected remaining lives of the
underlying loans as an adjustment to yield. In some pools, the re-measurements of expected future cash flows
resulted in decreases in expected cash flows and are reflected as provision for loan loss on loans accounted for
under ASC Topic 310-30. In 2012, a loan pool within the commercial loan segment had previous valuation
allowances of $1.1 million, which was reversed as a result of an increase in expected cash flows. Net
impairments on ASC 310-30 loans were $19.0 million, $5.0 million and $0.0 million for 2012, 2011 and 2010, of
which $14.9 million, $4.2 million and $0.0 million was covered by FDIC loss sharing agreements, respectively.
Due to the timing of our first acquisition in the last quarter of 2010, there were no re-estimations of cash flows
during 2010. The $19.0 million of net 310-30 impairments were largely driven by impairments of $8.8 million in
the land and development pools, $6.9 million of which was in the acquired Community Banks of Colorado
portfolio and $1.9 million of which was in the acquired Hillcrest Bank portfolio, and impairments of $7.5 million
in the commercial real estate portfolio, which included impairments of $6.2 million in the acquired Hillcrest
Bank portfolio, a $0.8 million impairment in the acquired Community Banks of Colorado portfolio, and $0.4
million impairment in the acquired Bank of Choice portfolio.
For all loans not accounted for under ASC Topic 310-30, the determination of the ALL follows an established
process to determine the appropriate level of ALL that is designed to account for changes in credit quality. This
process provides an ALL consisting of a specific allowance component based on certain individually evaluated
loans and a general allowance component based on estimates of reserves needed for all other loans, segmented
based on similar risk characteristics.
82
Impaired loans less than $250,000 are included in the general allowance population. Impaired loans over
$250,000 are subject to individual evaluation on a regular basis to determine the need, if any, to allocate a
specific reserve to the impaired loan. Typically, these loans consist of commercial, commercial real estate and
agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific
allowances are determined by collectively analyzing:
•
•
•
•
the borrower’s resources, ability, and willingness to repay in accordance with the terms of the loan
agreement;
the likelihood of receiving financial support from any guarantors;
the adequacy and present value of future cash flows, less disposal costs, of any collateral;
the impact current economic conditions may have on the borrower’s financial condition and liquidity or
the value of the collateral.
In evaluating the loan portfolio for an appropriate ALL level, unimpaired loans are grouped into segments based
on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio is
further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of applying
loss ratios and determining applicable subjective adjustments to the ALL. The application of subjective
adjustments is based upon qualitative risk factors, including:
•
•
•
•
•
•
•
economic trends and conditions;
industry conditions;
asset quality;
loss trends;
lending management;
portfolio growth; and
loan review/internal audit results.
We have identified five primary loan segments that are further stratified into 22 loan classes to provide more
granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific
factors affecting each loan class.
Following are the loan classes within each of the five primary loan segments:
Commercial
Commercial real estate
Agriculture
Residential real estate
Consumer
Wholesale
Manufacturing
Transportation/warehousing
Finance and insurance
Oil and gas
All other commercial and industrial Owner-occupied
1-4 family construction
1-4 family-acquisition and development
Commercial construction
Commercial-acquisition and development
Multi-family
Non-owner occupied
Total agriculture Sr. lien 1-4 family closed end Secured
Jr. lien 1-4 family closed end Unsecured
Sr. lien 1-4 family open end Credit card
Jr. lien 1-4 family open end
Overdraft
Actual historical loss data is limited due to the relatively recent inception date of the Company and the recent
acquisitions of the Bank of Choice and the Community Banks of Colorado further limits loss history on those
acquired loans. The methodology used in establishing the historical loss ratios for acquired residential real estate,
consumer and agriculture loans was the three-year historical net charge-off percentage, which includes NBH’s
loss history over the last 2 years, plus an additional year realized by Bank Midwest prior to acquisition by NBH.
83
We believe use of the historical net charge-off data for the aforementioned residential real estate, consumer and
agriculture loans is an appropriate baseline due to the fact that we acquired approximately 84% of these loan
types on a combined basis. The percentage acquired by each loan type was as follows: residential real estate
(82%), consumer (90%), and agriculture (98%). Bank of Choice was acquired on July 22, 2011, and Community
Banks of Colorado was acquired on October 21, 2011, and all of the loans acquired in those transactions were
recorded at fair value at the respective dates of acquisition. Additionally, the majority of the loans acquired with
those acquisitions are accounted for under ASC Topic 310-30.
Historical loss ratios of loan classes are calculated based on the proportion of actual charge-offs experienced to
the total population of loans in the class. The historical baseline is then adjusted based on our analysis of the
current conditions as they relate to the subjective adjustment factors described above. Portions of the ALL may
be allocated for specific loans or specific loan classes; however, the entire ALL is available for any loan that, in
our judgment, should be charged-off.
Year ended 2012
In addition to the $19.0 million of provision for loan losses expense for our loans accounted for under ASC Topic
310-30, we recorded $9.0 million of provision for loan losses for loans not accounted for under ASC Topic
310-30 as we provided for loan charge-offs and credit risks inherent in the December 31, 2012 non ASC Topic
310-30 balances.
We charged off $25.2 million of loans during 2012, primarily related to commercial and commercial real estate
loans. Approximately $16.8 million of these charge-offs were related to loans accounted for under ASC Topic
310-30 and were provided for during the previous re-measurements. Of the $8.4 million non 310-30 charge-offs,
$2.4 million was related to one commercial and industrial loan which was a result of fraudulent collateral
accepted by the acquired institution and we do not believe is indicative of expected future charge-offs. At
December 31, 2012, there were ten impaired loans that carried specific reserves totaling $1.9 million.
Year ended 2011
For the year ended December 31, 2011, we recorded $15.0 million of provision for loan losses for loans not
accounted for under ASC Topic 310-30 as we provided for loan charge-offs and risks inherent in the
December 31, 2011 non ASC Topic 310-30 balances.
We charged off $6.4 million of loans not accounted for under ASC Topic 310-30 during 2011, $3.4 million of
which was a result of a large anchor tenant vacating several commercial properties and declaring bankruptcy, and
$1.4 million of commercial and industrial loans primarily as a result of a heavy equipment loan. During 2011, we
also charged-off $3.1 million of commercial and industrial loans accounted for under ASC Topic 310-30 as a
result of decreased estimated cash flows.
After considering the abovementioned factors, we believe that the ALL of $15.4 million and $11.5 million was
adequate to cover probable losses inherent in the loan portfolio at December 31, 2012 and 2011, respectively.
However, it is likely that future adjustments to the ALL will be necessary and any changes to the assumptions,
circumstances or estimates used in determining the ALL could adversely affect the Company’s results of
operations, liquidity or financial condition.
84
The following schedule presents, by class stratification, the changes in the ALL from December 31, 2011 to
December 31, 2012 (in thousands):
2012
2011
310-30
Non 310-30
Total
310-30
Non 310-30
Total
Beginning allowance for loan
losses . . . . . . . . . . . . . . . . . . .
$
2,188 $
9,339 $
11,527 $
— $
48
$
48
Charge-offs:
Commercial . . . . . . . .
Commercial real
estate . . . . . . . . . . .
Agriculture . . . . . . . . .
Residential real
estate . . . . . . . . . . .
Consumer and
overdrafts . . . . . . . .
Total charge-offs . . . . . . . .
Recoveries . . . . . . . . . . . . .
Net charge-offs . . . . . . . . .
Provision for loan loss . . . .
Ending allowance for loan
(216)
(3,140)
(3,356)
(3,111)
(1,399)
(4,510)
(15,578)
(144)
(2,605)
(8)
(18,183)
(152)
(872)
(1,132)
(2,004)
(19)
(16,829)
275
(16,554)
19,018
(1,502)
(8,387)
799
(7,588)
8,977
(1,521)
(25,216)
1,074
(24,142)
27,995
—
—
—
—
(3,111)
288
(2,823)
5,011
(3,378)
—
(3,378)
—
(288)
(288)
(1,330)
(6,395)
695
(5,700)
14,991
(1,330)
(9,506)
983
(8,523)
20,002
losses . . . . . . . . . . . . . . . . . . .
$
4,652 $
10,728 $
15,380 $
2,188
$ 9,339
$
11,527
Ratio of net charge-offs during
the period to average total
loans during the period,
respectively . . . . . . . . . . . . . .
Ratio of allowance for loan
losses to total loans
outstanding at period end,
respectively . . . . . . . . . . . . . .
Ratio of allowance for loan
losses to non-covered loans
outstanding at period end . . . .
Ratio of allowance for non
310-30 loan losses to total
non-performing loans at
period end . . . . . . . . . . . . . . .
Ratio of allowance for non
310-30 loan losses to non-
performing, non-covered
loans at period end . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . .
Average total loans outstanding
during the period . . . . . . . . . .
Non-covered loans . . . . . . . . . . .
Total non-performing loans . . . .
Non-performing, non-covered
loans . . . . . . . . . . . . . . . . . . . .
1.56%
0.78%
1.19%
0.34%
0.68%
0.51%
0.57%
1.06%
0.84%
0.17%
0.97%
0.51%
—
—
—
—
1.25%
—
—
0.87%
26.25%
37.64%
—
18.40%
22.71%
36.03%
51.66%
—
25.99%
32.08%
$ 822,021 $1,016,049
$1,838,070
$1,307,709
$966,342
$2,274,051
$ 968,345 $2,026,437
$1,058,092
$ 294,073 $ 935,775 $1,229,848
— $
40,864 $
40,864 $
$ 823,598
$ 480,623
$837,898
$840,713
— $ 50,750
$1,661,496
$1,321,336
50,750
$
— $
29,772 $
29,772 $
— $ 35,934
$
35,934
85
The following table presents the allocation of the ALL and the percentage of the total amount of loans in each
loan category listed as of the dates presented:
Commercial and industrial . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and overdrafts . . . . . . . . . . . . . . . . . . . . .
Total loans
$ 270,588
804,999
173,407
538,745
50,331
December 31, 2012
% of total
loans
Related
ALL
15% $ 2,798
7,396
44%
592
9%
4,011
29%
583
3%
% of ALL
18%
48%
4%
26%
4%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,838,070
100% $15,380
100%
Commercial and industrial . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and overdrafts . . . . . . . . . . . . . . . . . . . . .
Total loans
$ 372,931
1,152,478
151,403
522,885
74,354
December 31, 2011
% of total
loans
Related
ALL
16% $ 2,959
3,389
51%
282
7%
4,121
23%
776
3%
% of ALL
26%
29%
2%
36%
7%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,274,051
100% $11,527
100%
FDIC Indemnification Asset and Clawback Liability
We recorded FDIC indemnification assets at fair value in connection with our Hillcrest Bank and Community
Banks of Colorado acquisitions. The FDIC indemnification asset represents the net present value of the expected
reimbursements from the FDIC for probable losses on covered loans and OREO that were acquired in the
Hillcrest Bank and Community Banks of Colorado transactions. The initial fair values were established by
discounting the expected future cash flows with a market discount rate for like maturity and risk instruments. The
discount is accreted to income in connection with the expected timing of the related cash flows, and may increase
or decrease from period to period due to changes in amounts and timing of expected cash flows from covered
loans and OREO. As covered assets are resolved, whether it be through repayment, short sale of the underlying
collateral, the foreclosure on, and sale of collateral, or the sale or charge-off of loans or OREO, the portion of any
loss incurred that is reimbursable by the FDIC is recognized as FDIC loss sharing income in non-interest income.
Any gains or losses realized from the resolution of covered assets reduce or increase, respectively, the amount of
the FDIC indemnification asset.
In 2012, we recognized $13.8 million of negative accretion on the FDIC indemnification asset as the
performance of our covered assets has improved and reduced the carrying value of the FDIC indemnification
asset by $135.2 million as a result of claims filed with the FDIC as discussed below. The negative accretion
resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower
expected reimbursements from the FDIC. The increase in expected cash flows from these underlying assets is
reflected in increased accretion rates on covered loans as well as an increased amount of accretable yield on our
covered loans accounted for under ASC Topic 310-30 and is being recognized over the expected lives of the
underlying covered loans as an adjustment to yield. During 2012, we submitted $135.2 million of loss share
claims to the FDIC for the reimbursable portion of losses related to the Hillcrest Bank and Community Banks of
Colorado covered assets incurred during the fourth quarter of 2011 through the third quarter of 2012. Included in
the $135.2 million were $12.6 million of claims related to additional losses incurred during the period that were
not previously considered in the carrying amount of the indemnification asset. During 2012, the FDIC paid $75.9
million, $33.1 million of which was related to losses incurred during the fourth quarter of 2011 and $42.8 million
86
of which was related to losses incurred during the nine months ended September 30, 2012 and submitted to the
FDIC during the three months ended December 31, 2012. Subsequent to December 31, 2012, we received $37.1
million related to claims filed in 2012 and have one remaining claim of $20.0 million that is expected to be paid
during the first quarter of 2013. The loss claims filed are subject to review and approval, including extensive
audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements.
During 2011, we recognized $6.1 million of negative accretion related to the FDIC indemnification asset as a
result of improved performance of our covered assets and we received $89.1 million from the FDIC for
reimbursement of losses that occurred from the date of acquisition of Hillcrest Bank through September 30,
2011, in accordance with our loss sharing agreements. Included in the $89.1 million received from the FDIC
were reimbursements of expenses incurred for the resolution of covered assets netted with recoveries received on
covered assets that were not included in the expected cash flows of the indemnification assets.
Within 45 days of the end of each of the loss sharing agreements with the FDIC, we may be required to
reimburse the FDIC in the event that the Company’s losses on covered assets do not reach the second tranche in
each related loss sharing agreement, based on the initial discount received less cumulative servicing amounts for
the covered assets acquired. At December 31, 2012 and 2011, this clawback liability was carried at $31.3 million
and $30.0 million, respectively, and is included in due to FDIC in our consolidated statements of financial
condition.
Other real estate owned
OREO is comprised of properties acquired through the foreclosure or repossession process, or any other
resolution activity that results in partial or total satisfaction of problem loans. We have a dedicated, enterprise-
level problem asset resolution team that is actively working to resolve problem loans and to obtain and
subsequently sell the underlying collateral. The OREO balance of $94.8 million at December 31, 2012 includes
the interests of several outside participating banks totaling $5.3 million, for which an offsetting liability is
recorded in other liabilities and excludes $10.6 million of the Company’s minority interests in OREO which are
held by outside banks where we were not the lead bank and do not have a controlling interest, for which a
receivable is included in other assets. Of the $94.8 million of OREO at December 31, 2012, $45.5 million, or
48.0%, was covered by the loss sharing agreements with the FDIC. At December 31, 2011, $77.1 million, or
63.9%, of OREO was covered by the loss sharing arrangement with the FDIC. Any losses on these assets are
substantially offset by a corresponding change in the FDIC indemnification asset. We sold $102.9 million and
$51.7 million of OREO during 2012 and 2011, respectively, and realized net gains on sales of $9.6 million in
2012 and $3.1 million in 2011. Changes in OREO for during 2012 and 2011 were as follows (in thousands):
For the year ended
December 31,
2012
2011
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases through acquisition at fair value . . . . . . . . . . .
Transfers from loan portfolio . . . . . . . . . . . . . . . . . . . . . .
Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of OREO . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 120,636
—
87,765
(20,215)
(102,941)
9,563
$ 54,078
64,084
52,294
(1,138)
(51,745)
3,063
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 94,808
$120,636
87
Other Assets
Significant components of other assets were as follows as of the periods indicated (in thousands):
FDIC indemnification-claimed . . . . . . . . . . . . . . . . .
Minority interst in participated other real estate
December 31,
2012
December 31,
2011
$ 59,291
$ —
owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,627
—
Accrued interest on interest bearing bank deposits
and investment securities . . . . . . . . . . . . . . . . . . . .
Accued interest on loans . . . . . . . . . . . . . . . . . . . . . .
Other receivable from FDIC . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
5,585
7,088
—
17,432
5,651
10,371
11,191
11,629
Total other assets . . . . . . . . . . . . . . . . . . . . . . . .
$100,023
$38,842
Year ended December 31, 2012
Other assets increased $61.2 million in 2012, largely because the FDIC indemnification-claimed increased $59.3
million during the year in connection with the loss share claims submitted to the FDIC that remained unpaid as of
December 31, 2012. Also contributing to the increase in other assets was $10.6 million of minority interest in
participated OREO that we recorded in connection with the repossession of collateral on loans for which we were
not the lead bank and we do not have a controlling interest. These properties have been repossessed by the lead
banks and we have recorded our receivable due from the lead banks in other assets as minority interest in
participated OREO. The other receivable due from FDIC decreased $11.2 million as settlement items related to
the Community Banks of Colorado acquisition in the fourth quarter of 2011 were settled with FDIC.
Year ended December 31, 2011
During 2011, accrued interest on interest bearing bank deposits and investment securities increased $3.0 million.
Approximately $0.5 million of the difference was attributable to the accrued interest related to the pending
investment trades that was included in other liabilities at December 31, 2010. The securities and related accrued
interest receivable were settled in cash during the first quarter of 2011.
Other Liabilities
Significant components of other liabilities were as follows as of the dates indicated (in thousands):
December 31,
2012
December 31,
2011
Participant interest in other real estate owned . . . . . .
Accrued and deferred income taxes payable . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrant liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other liabilities . . . . . . . . . . . . . . . . . . . . .
$ 5,321
4,972
4,239
12,263
5,461
2,285
$34,541
$ —
45,081
11,017
15,916
6,845
5,816
$84,675
Other liabilities decreased $50.1 million during 2012, largely due to a $40.1 decrease in accrued and deferred
taxes payable. Accrued and deferred income taxes payable decreased $40.1 million from $45.1 million during the
year ended 2012 primarily as a result of tax payments paid during that period which included the taxes due on
our $60.5 million bargain purchase gain realized in 2011 in connection with our Bank of Choice acquisition.
88
During 2012, we continued to lower the interest rates on our deposits, coupled with the shift from higher-cost
time deposits to lower cost transaction accounts. The lower cost mix of deposits resulted in a decrease in accrued
interest payable of $6.8 million during 2012. Offsetting these decreases was the $5.3 million of participant
interests in other real estate owned that we recorded which represents participant banks’ interests in properties
that we have repossessed. These participant interests are also reflected in our other real estate owned balances.
We have outstanding warrants to purchase 830,750 shares of our common stock, which are classified as a liability
and included in other liabilities in our consolidated statements of financial condition. The warrants were granted to
certain lead stockholders and all warrants have an exercise price of $20.00 per share. The term of the warrants is for
ten years and the expiration dates of the warrants range from October 20, 2019 to September 30, 2020. We revalue
the warrants at the end of each reporting period using a Black-Scholes model and any change in fair value is
reported in the statements of operations as “loss (gain) from change in fair value of warrant liability” in non-interest
expense in the period in which the change occurred. The warrant liability decreased $1.4 million in 2012 to $5.5
million at December 31, 2012 and decreased $0.1 million in 2011 to $6.8 million at December 31, 2011. The value
of the warrant liability, and the expense that results from an increase to this liability, has a direct correlation to our
stock price. Accordingly, any increase in our stock price would result in an increase in the warrant liability and the
associated expense. More information on the accounting and measurement of the warrant liability can be found in
notes 2 and 19 in our audited consolidated financial statements.
Year ended 2011
During 2011, accrued and deferred income tax payable increased $39.9 million due to our net income of $42.0
million, which was largely driven by the $60.5 million bargain purchase gain associated with the Bank of Choice
acquisition. The other liabilities component of total other liabilities increased $4.1 million due to increases in
miscellaneous expenses accrued during 2011.
Accrued interest payable decreased $4.4 million from December 31, 2010 to December 31, 2011 due to lower
interest rates offered on deposits and the shift from longer term time deposits to savings, money market and
demand deposits during the period.
Funding Sources
Deposits from banking clients serve as a primary funding source for our banking operations. Our banking centers
function as the primary deposit gathering stations, where we seek to price deposits competitively in accordance
with other depository institutions in the area and according to our needs.
Deposits
Our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low cost
funding source for our loans, but also provide a foundation for the customer relationships that are critical to
future loan growth. The following table presents information regarding our deposit composition at December 31,
2012 and 2011 (in thousands):
December 31, 2012
December 31, 2011
Non-interest bearing demand deposits . . . . . . . . . . . . . . . .
Interest bearing demand deposits . . . . . . . . . . . . . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total transaction accounts . . . . . . . . . . . . . . . . . . . . . .
Time deposits < $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits > $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 677,985
529,996
187,339
1,052,681
2,448,001
1,121,757
630,961
16% $ 678,735
537,160
13%
169,378
4%
893,184
25%
58% 2,278,457
27% 1,680,531
15% 1,104,065
Total time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,752,718
42% 2,784,596
13%
11%
3%
18%
45%
33%
22%
55%
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,200,719
100% $5,063,053
100%
89
During the year ended December 31, 2012, our total deposits decreased $862.3 million. We assumed a significant
amount of deposits with our acquisitions in the fourth quarter of 2010 and in 2011, and we have actively worked
to restructure our deposit base by retaining only those acquired time deposit clients who were interested in time
deposits at market rate and developing a banking relationship and as a result, our time deposits decreased $1.0
billion in 2012. At December 31, 2012 the mix of transaction deposits to total deposits improved to 58% from
45% at the end of the prior year. Our transaction deposits have been steadily increasing as a result of our strategic
shift away from time deposits and to lower cost demand deposits, savings and money market accounts, which is
consistent with our consumer banking strategy. Approximately 55% of the remaining acquired time deposits are
scheduled to mature by December 31, 2013.
During the year ended December 31, 2011, our total deposits increased $1.6 billion, which was attributable to the
acquisitions of Bank of Choice and Community Banks of Colorado. Bank of Choice was acquired during the
third quarter of 2011 and contributed $756.3 million of total deposits at December 31, 2011. Community Banks
of Colorado, acquired during the fourth quarter of 2011, contributed $1.1 billion in total deposits at December 31,
2011.
At December 31, 2012, we had $1.2 billion of time deposits that were scheduled to mature within 12 months,
$0.4 billion of which were in denominations of $100,000 or more, and $.8 billion of which were in
denominations less than $100,000. At December 31, 2011, we had $2.3 billion of time deposits that were
scheduled to mature within 12 months, $0.9 billion of which were in denominations of $100,000 or more, $1.4
billion of which were in denominations less than $100,000. Note 13 to the consolidated financial statements
provides a maturity schedule and weighted average rates of time deposits outstanding at December 31, 2013 and
2012.
In connection with our FDIC-assisted bank acquisitions, the FDIC provided Bank of Choice, Hillcrest Bank, and
Community Banks of Colorado depositors with the right to redeem their time deposits at any time during the life
of the time deposit, without penalty, unless the depositor accepts new terms. At December 31, 2012 and
December 31, 2011, the Company had approximately $164.3 million and $1.1 billion, respectively, of time
deposits that were subject to the penalty-free withdrawals.
Regulatory Capital
Our subsidiary bank and the holding company are subject to the regulatory capital adequacy requirements of the
Federal Reserve Board, the FDIC and the OCC, as applicable. Failure to meet the minimum capital requirements
can initiate certain mandatory and possibly further discretionary actions by regulators that could have a material
adverse effect on us. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, banks must meet specific capital requirements that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-
weightings and other factors. Through these judgments, assets are risk weighted according to the perceived risk
they pose to capital on a scale of 0% to 100%, with 100% risk-weighted assets signifying higher risk assets that
warrant higher levels of capital. While many non-covered assets (particularly loans and OREO) typically fall in
to 50% or 100% risk-weighted classifications, our covered assets are all considered to be 20% risk-weighted for
risk-based capital calculations.
Typically, banks are required to maintain a tier 1 risk-based capital ratio of 4.00%, a total risk-based capital ratio
of 8.00% and a tier 1 leverage ratio of 4.00% in order to meet minimum, adequately capitalized regulatory
requirements. To be considered well-capitalized (under prompt corrective action provisions), banks must
maintain minimum capital ratios of 6.00% for tier 1 risk-based capital, 10.00% for total risk-based capital and
5.00% for the tier 1 leverage ratio. In connection with the approval of the de novo charters for Hillcrest Bank and
NBH Bank, we agreed with our regulators to maintain capital levels of at least 10% tier 1 leverage ratio, 11% tier
90
1 risk based capital ratio and 12% tier 1 risk-based capital ratio at our subsidiary bank(s) through December,
2013. Following the merger of Hillcrest Bank into NBH Bank in November 2011, only NBH Bank remains
subject to these capital ratios. In July 2011, we contributed $100 million to NBH Bank to provide additional
capital to fund the acquisition of Bank of Choice from the FDIC and to ensure that NBH Bank would continue to
meet or exceed the abovementioned agreed-upon capital ratios. In October 2011 we contributed capital of $174
million to NBH Bank to fund the Community Banks of Colorado acquisition from the FDIC.
At December 31, 2012 and at December 31, 2011, our subsidiary bank(s) and the consolidated holding company
exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as
further detailed in note 15 of our consolidated financial statements.
Results of Operations
Our net income depends largely on net interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities. Our results of operations are also
affected by provisions for loan losses and non-interest income, such as service charges, bank card income and
FDIC loss sharing income. Our primary operating expenses, aside from interest expense, consist of salaries and
employee benefits, professional fees, occupancy costs, and data processing expense.
Overview of Results of Operations
Year ended 2012
We recorded a net loss of $0.5 million during the year ended December 31, 2012, inclusive of initial public
offering related expenses of $8.0 million, which represents our first full year with the operations of all of our
acquisitions. These results reflect the increased revenues and expenses associated with our acquisitions of Bank
of Choice and Community Banks of Colorado in the second half of 2011, in addition to the further build-out of
our business development and operational functions that support our lending activities and the continued
integration of our acquisitions. We completed the integration of Community Banks of Colorado in May 2012 and
the integration of Bank of Choice in July 2012. During 2012 we continued to benefit from the strong yields on
our loan portfolio while our dedicated workout group actively worked to resolve our acquired troubled assets.
The activity in this resolution process is evidenced by the elevated levels of OREO related expenses and problem
loan expenses. During 2012, in addition to net transfers of $47.5 million of non-accretable difference to
accretable yield to be recognized in the future, we recorded $19.0 million of provision for loan losses,
approximately $14.9 million of which was attributable to covered loans. The FDIC coverage of these
impairments is reflected in the estimated cash flows underlying the FDIC indemnification asset.
Years ended 2011 and 2010
During the year ended December 31, 2011, we recorded net income of $42.0 million compared to net income of
$6.1 million during the year ended December 31, 2010. The primary drivers of net income during those periods
were the pre-tax gains on bargain purchases of $60.5 million and $37.8 million recorded during the years ended
2011 and 2010 in connection with our Bank of Choice and Hillcrest Bank acquisitions, respectively. As
previously discussed, meaningful comparability to prior periods is limited due to the Community Banks of
Colorado acquisition in October 2011, the Bank of Choice acquisition in July 2011, the Hillcrest Bank and NBH
Bank acquisitions in the fourth quarter of 2010, and the lack of banking operations prior to those acquisitions.
Net Interest Income
We regularly review net interest income metrics to provide us with indicators of how the various components of
net interest income are performing. We regularly review: (i) our deposit mix and the cost of deposits; (ii) our loan
mix and the yield on loans; (iii) the investment portfolio and the related yields; and (iv) net interest income
simulations for various forecast periods.
91
The following tables present the components of net interest income for the periods indicated. Due to the timing
of our acquisitions, particularly as it relates to Bank of Choice on July 22, 2011 and Community Banks of
Colorado on October 21, 2011, the comparability of the periods presented in the tables below is limited. The
tables include: (i) the average daily balances of interest-earning assets and interest bearing liabilities; (ii) the
average daily balances of non-interest earning assets and non-interest bearing and liabilities; (iii) the total amount
of interest income earned on interest earning assets; (iv) the total amount of interest expense incurred on interest-
bearing liabilities; (v) the resultant average yields and rates; (vi) net interest spread; and (vii) net interest margin,
which represents the difference between interest income and interest expense, expressed as a percentage of
interest-earning assets. The effects of trade-date accounting of investment securities for which the cash had not
settled are not considered interest-earning assets and are excluded from this presentation for timeframes prior to
their cash settlement, as are the market value adjustments on the investment securities available-for-sale. Non-
accrual and restructured loan balances are included in the average loan balances; however, the forgone interest on
non-accrual and restructured loans is not included in the dollar amounts of interest earned. All amounts presented
are on a pre-tax basis.
92
The table below presents the components of net interest income for the years ended December 31, 2012, 2011 and 2010
(in thousands):
Year ended December 31, 2012
Year ended December 31, 2011
Year ended December 31, 2010
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest earning assets:
310-30 loans . . . . . . . . . . . . . $1,058,092 $100,407
Non 310-30 loans (1)(2) . . . .
69,249
Investment securities
968,345
9.49% $ 823,598 $ 63,618
70,451
837,898
7.15%
7.72% $ 121,194
87,582
8.41%
$10,345
6,808
8.54%
7.77%
available-for-sale . . . . . . . . 1,785,785
42,590
2.38% 1,846,483
59,313
3.21%
62,941
1,501
2.38%
Investment securities held-to-
maturity . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . .
Interest-bearing deposits . . . .
Total interest earning
516,490
31,796
770,328
17,752
1,535
1,952
410
3.44%
4.83%
20,071
0.25% 1,042,871
10
1,132
2,635
—
2.44%
5.64%
1,667
0.25% 1,036,964
— 0.00%
5.28%
88
0.26%
2,680
assets . . . . . . . . . . . . . 5,130,836 233,485
4.55% $4,571,331 $197,159
4.31% $1,310,348
$21,422
1.63%
Cash and due from banks . . . $
Other assets . . . . . . . . . . . . . .
Allowance for loan losses . . .
69,129
599,327
(12,531)
Total assets . . . . . . . . . . . . . . 5,786,761
Interest bearing liabilities:
Savings deposits and interest
bearing checking . . . . . . . . $1,691,645 $
Time deposits . . . . . . . . . . . . . 2,192,469
Securities sold under
agreements to
repurchase . . . . . . . . . . . . .
52,385
Federal Home Loan Bank
100,210
497,411
(3,616)
$5,165,336
4,389
61,995
(569)
$1,376,163
5,482
23,643
0.32% $1,219,191 $
1.08% 2,382,637
5,986
35,588
0.49% $
1.49%
78,300
252,224
$
496
4,987
0.63%
1.98%
109
0.21%
31,727
96
0.30%
1,653
1,707
5
0.30%
24
1.41%
advances . . . . . . . . . . . . . .
—
— 0.00%
1,669
26
1.56%
Total interest bearing
liabilities . . . . . . . . . . $3,936,499 $ 29,234
0.74% $3,635,224 $ 41,696
1.15% $ 333,884
$ 5,512
1.65%
Demand deposits . . . . . . . . . .
Other liabilities . . . . . . . . . . .
641,890
114,374
Total liabilities . . . . . . . . . . . . 4,692,763
Stockholders’ equity . . . . . . . 1,093,998
Total liabilities and
365,461
118,029
4,118,714
1,046,622
31,453
27,556
392,893
983,270
stockholders’ equity . . . . . . $5,786,761
$5,165,336
$1,376,163
Net interest income . . . . . . . . . . . .
$204,251
$155,463
$15,910
Interest rate spread . . . . . . . . . . . . .
Net interest earning assets . . . . . . . $1,194,337
Net interest margin . . . . . . . . . . . .
Ratio of average interest earning
assets to average interest
bearing liabilities . . . . . . . . . . . .
3.81%
3.98%
$ 936,107
3.17%
3.40%
$ 976,464
-0.02%
1.21%
130.34%
125.75%
392.46%
(1) Originated loans are net of deferred loan fees, less costs.
(2) Loan fees, less costs on originated loans, are included in interest income over the life of the loan.
Net interest income totaled $204.3 million, $155.5 million and $15.9 million for the years ended December 31, 2012,
2011 and 2010, respectively. The year-over-year increases were primarily driven by increases in average
93
interest-earning assets that resulted from our acquisitions. Despite the continued low interest rate environment, the net
interest margin widened 58 basis points to 3.98% during 2012. The 2012 expansion of the net interest margin was
benefited by higher earning asset yields of 24 basis points and was driven by increased yields on loan pools accounted
for under ASC Topic 310-30. Yields earned on the ASC 310-30 loan pools improved 177 basis points from the prior
year to 9.49% during 2012. Additionally, the cost of interest-bearing liabilities declined 41 basis points and continued
to benefit from an improved deposit mix and lower costs of time deposits.
Average loans made up $2.0 billion, or 39.5% of total average interest earning assets during 2012, compared to $1.7
billion, or 36.3%, of total average interest-earning assets during 2011. Loan balances at the beginning of the year were
elevated from our 2011 acquisitions and declined throughout the year as we successfully exited non-strategic loans.
Yields on the ASC 310-30 loan portfolio were very strong and was attributable to the accretion of accretable yield on
those loans and increases in these yields are a result of the effects of life-to-date transfers of non-accretable difference
to accretable yield that are being recognized over the remaining life of these loans.
The majority of our loans were acquired and were subject to acquisition accounting guidance whereby the assets and
liabilities, including loans, were recorded at fair value at the date of acquisition. The accretable yield on our loans
accounted for under ASC Topic 310-30 and the fair value adjustments on our acquired loans excluded from ASC Topic
310-30 are being accreted to income over the life of the loans as an adjustment to yield and, as a result, a significant
portion of our interest income on loans is attributable to this accretion. Our acquired loans generally produce higher
yields than our originated loans due to the recognition of accretion of interest rate adjustments and accretable yield. As
a result, we expect downward pressure on our interest income to the extent that the runoff of our acquired loan
portfolio is not replaced with comparable high-yielding loans. Note 2 to our consolidated financial statements provides
more information on the accounting treatment of acquired loans.
Average investment securities, measured from the date of settlement, comprised 44.9% of total interest earning assets
at December 31, 2012 compared to 40.4% and 4.8% at December 31, 2011 and 2010, respectively, as we have steadily
reinvested the excess cash received from acquisitions and funds from net loan pay downs into our investment securities
portfolio, however, with the current low interest rate environment, lower re-investment yields have resulted in a 59
basis point decline in yields earned on the total investment portfolio.
94
The following table summarizes the changes in net interest income by major category of interest earning assets
and interest bearing liabilities, identifying changes related to volume and changes related to rates for the years
ended 2012 compared to 2011. Comparisons for the years 2011 compared to 2010 are not meaningful due to the
timing of our initial acquisitions in the fourth quarter of 2010.
Year ended December 31, 2012
Compared To Year ended
December 31, 2011
Increase (decrease) due to
Net
Rate (3)
Volume
(In thousands)
Interest income:
310-30 loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,113 $ 18,676 $ 36,789
(1,202)
Non 310-30 loans (1)(2)
(16,723)
(1,950)
Investment securities available-for-sale . . . . . . . . . . . . . . .
17,742
Investment securities held-to-maturity . . . . . . . . . . . . . . . . 12,587
403
661
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(683)
(689)
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,968 (12,170)
(14,773)
5,155
(258)
6
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $39,690 $ (3,364) $ 36,326
Interest expense:
Savings deposits and interest bearing checking . . . . . . . . . $ 2,320 $ (2,824) $
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . .
(2,840)
62
(26)
(9,105)
(49)
—
(504)
(11,945)
13
(26)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
(484)
(11,978)
(12,462)
Net change in net interest income . . . . . . . . . . . . $40,174 $ 8,614 $ 48,788
(1) Originated loans are net of deferred loan fees, less costs.
(2) Loan fees, less costs on originated loans, are included in interest income over the life of the loan
(3) Also includes changes for difference in number of days due to the leap year in 2012.
During 2012, total interest expense related to interest-bearing liabilities was $29.2 million compared to $41.7
million in 2011 and $5.5 million in 2010, or an average cost of 0.74%, 1.15% and 1.65% during the respective
periods. The largest component of interest expense in each period was related to time deposits, which carried an
average rate of 1.08% and 1.49% and 1.98% during 2012, 2011 and 2010, respectively.
Our rates on deposits have been higher than the average in the markets in which we operate, primarily because
our acquired banks had their deposit rates higher than market at the time we acquired them. We have been
steadily lowering deposit rates as we shift towards a more consumer-based banking strategy and focus on lower
cost transaction accounts.
95
Below is a breakdown of deposits and the average rates paid during the periods indicated (in thousands):
For the three months ended
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
Non-interest bearing
demand . . . . . . . . . . . . . . $ 662,763
Interest bearing demand . . .
484,178
Money market accounts . . . 1,033,350
176,209
Savings accounts . . . . . . . .
Time deposits . . . . . . . . . . . 1,832,790
0.00% $ 636,277
0.18%
500,240
0.34% 1,014,793
181,939
0.13%
0.85% 2,063,622
0.00% $ 622,936
523,202
0.22%
995,668
0.39%
187,046
0.14%
1.00% 2,298,782
0.00% $ 645,972
532,574
0.24%
955,983
0.40%
181,332
0.16%
1.14% 2,580,053
0.00% $ 625,884
506,257
0.32%
924,432
0.46%
161,604
0.19%
1.25% 2,931,920
0.00%
0.38%
0.46%
0.19%
1.26%
Total
average deposits . . . $4,189,290
0.48% $4,396,871
0.59% $4,627,634
0.69% $4,895,914
0.79% $5,150,097
0.84%
Provision for Loan Losses
The provision for loan losses represents the amount of expense that is necessary to bring the ALL to a level that we
deem appropriate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The
determination of the ALL, and the resultant provision for loan losses, are subjective and involve estimates and
assumptions.
Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss-
sharing agreements with the FDIC. Accordingly, any provisions made that relate to covered loans are partially offset by
a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income.
Below is a summary of the provision for loan losses for the periods indicated (in thousands):
Provision for impairment on loans accounted for under ASC Topic 310-30
Provison for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,018
8,977
$ 5,011
14,991
Total provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,995
$20,002
2012
2011
The provision for impairment expense on covered assets has an offsetting increase in non-interest income as a result of
the loss sharing agreements with the FDIC. The provisions for loan losses charged to non-covered loans were related to
a combination of providing an ALL for new loans, changes in the market conditions and qualitative factors used in
analyzing the ALL and specific impairments on non-covered loans. Through the re-measurement process, we recorded
$19.0 million of provision for loans accounted for under ASC Topic 310-30 in 2012, $14.9 million of which is covered
by loss sharing agreements with the FDIC, to reflect decreased expected future cash flows, which was primarily driven
by our land and development, commercial real estate, and commercial construction pools. One land pool contributed
$6.9 million, or 36.2%, of the total impairment for the year ended 2012 and one commercial real estate pool
contributed $6.2 million, or 32.8%, of the total impairment for the year ended 2012. The decreases in expected future
cash flows are reflected immediately in our financial statements. Increases in expected future cash flows are reflected
through an increase in accretable yield that is accreted to income in future periods, and during the year ended 2012, we
transferred $47.5 million, net, from non-accretable difference to accretable yield to reflect an increase in expected
future cash flows on loans accounted for under ASC Topic 310-30.
96
The provision for impairment expenses on loans accounted for under ASC Topic 310-30 during 2011 related to
three covered 310-30 pools where expected cash flows decreased resulting in impairment of $5.0 million. All
other 310-30 pools experienced increases in expected cash flows during 2011.
Non-Interest Income
The table below details the components of non-interest income during the years ended 2012, 2011 and 2010,
respectively (in thousands):
FDIC indemnfication asset accretion . . . . . . . . . . . . . . . .
FDIC loss sharing income . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank card fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of mortgages, net . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on sale of securities, net . . . . . . . . . . . . . . . . .
Gain on recoveries of previously charged-off acquired
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
$(13,820)
12,069
17,392
9,699
—
1,214
674
$ (6,132)
1,410
16,810
7,611
60,520
1,103
(645)
$ 1,689
547
1,094
517
37,778
268
11
4,298
5,853
5,902
2,907
—
259
Total non-interest income . . . . . . . . . . . . . . . . . . . . .
$ 37,379
$89,486
$42,163
Year ended 2012
Non-interest income for 2012 totaled $37.4 million. We recognized negative accretion of $13.8 million during
2012 related to the FDIC indemnification asset. The negative accretion during 2012 resulted from an increase in
actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements
from the FDIC. The increase in expected cash flows from these underlying assets is reflected in increased
accretion rates on covered loans and is being recognized over the remaining expected lives of the underlying
covered loans as an adjustment to yield.
Service charges of $17.4 million represented the largest component of non-interest income at 46.5%. Service
charges represent various fees charged to clients for banking services, including fees such as non-sufficient funds
charges, overdraft fees and service charges on deposit accounts. Service charges increased $.6 million from 2011
to 2012, primarily due to the addition of Bank of Choice and Community Banks of Colorado in the last half of
2011.
Bank card fees are comprised primarily of interchange fees on the debit cards that we have issued to our clients.
These transactional charges totaled $9.7 million and $7.6 million during 2012 and 2011, respectively. Bank of
Choice and Community Banks of Colorado had substantially fewer debit cards issued and, as a result, the
addition of those banks’ bank card fees did not mirror that of NBH Bank during similar time periods. Other
bankcard fees include merchant services fees and credit card fees.
Gain on recoveries of previously charged-off acquired loans represents recoveries on loans that were previously
charged-off by the predecessor bank prior to takeover by the FDIC. A portion of these recoveries are shared with
the FDIC and the sharing of these recoveries is reflected as reimbursement to FDIC for recoveries on non-
covered loans.
Years ended 2011 and 2010
Non-interest income totaled $89.5 million and $42.2 million for the years ended 2011 and 2010, respectively.
The primary components of non-interest income during 2011 were the bargain purchase gain of $60.5 million
97
resulting from the Bank of Choice acquisition, service charges, which totaled $16.8 million, FDIC
indemnification asset negative accretion expense of $6.1 million and gain on recoveries of previously charged of
loans of $5.9 million. The primary driver of non-interest income in 2010 was the $37.8 million bargain purchase
gain that resulted from the Hillcrest Bank acquisition.
The negative accretion in 2011 resulted from an increase in actual and expected cash flows on the underlying
covered assets, resulting in lower expected reimbursements from the FDIC. The increase in expected cash flows
from these underlying assets, which was driven by an increase in expected cash flows in 10 of the 14 loan pools
remeasured during 2011, is reflected in increased accretion rates on covered loans and is being recognized over
the remaining expected lives of the underlying covered loans as an adjustment to yield.
Excluding the bargain purchase gain associated with the acquisition of Bank of Choice, for the year ended 2011,
58.0% of our non-interest income was service charges. Non-sufficient funds charges represented the largest
component of service charges and totaled $13.6 million during 2011.
FDIC loss sharing income
FDIC loss sharing income represents the income recognized in connection with the actual reimbursement of
costs/recoveries of resolution of covered assets from the FDIC. The primary drivers of the FDIC loss sharing
income are the FDIC reimbursements of the costs of resolving covered assets.
Activity in the FDIC loss sharing income during the years ended 2012, 2011 and 2010 was as follows (in
thousands):
Clawback liability amortization . . . . . . . . . . . . . . . . . . . . . . .
Clawback liability remeasurement . . . . . . . . . . . . . . . . . . . . .
Reimbursement to FDIC for gain on sale of and income
2012
2011
2010
(1,377)
100
(845)
(2,778)
(117)
—
from covered OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,457)
(1,130)
Reimbursement to FDIC for recoveries on non-covered
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3)
(1,227)
—
—
FDIC reimbursement of costs of resolution of covered
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,806
7,390
664
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,069
$ 1,410
$ 574
Year ended 2012
We recorded the FDIC indemnification asset at its estimated fair value of $159.7 million at the date of the
Hillcrest Bank acquisition and an additional $151.0 million at the date of the Community Banks of Colorado
acquisition. The initial fair values were established by discounting the expected future cash flows with a market
discount rate for like maturity and risk instruments. The discount is accreted to income in connection with the
expected timing of the related cash flows, and may increase or decrease from period to period due to changes in
amounts and timing of expected cash flows from covered loans and OREO.
Other FDIC loss sharing income (expense) during 2012 was primarily comprised of FDIC reimbursements of
costs of resolution of covered assets of $16.8 million, reimbursements to the FDIC for gains on sales of and
income from covered OREO of $3.5 million, and the clawback amortization of $1.4 million.
During 2012, we received $75.9 million in payments from the FDIC. Of these payments, $54.1 million were
related to Community Banks of Colorado for losses that were incurred from the fourth quarter of 2011 through
the first quarter of 2012. Payments from the FDIC during 2012 related to Hillcrest Bank totaled $21.8 million
98
and were for losses that occurred from the fourth quarter of 2011 through the second quarter of 2012. Subsequent
to December 31, 2012 we have received payments of $31.0 million related to Community Banks of Colorado for
losses that occurred during the second quarter of 2012 and $6.1 million for losses that occurred during the third
quarter of 2012 related to Hillcrest Bank.
Years ended 2011 and 2010
In September 2011, we received $83.5 million from the FDIC for reimbursement of losses that occurred from the
date of acquisition of Hillcrest Bank through June 30, 2011, and in December 2011, we received $5.6 million for
reimbursements of losses that occurred during the third quarter of 2011, all in accordance with our loss sharing
agreements. As part of the FDIC loss sharing agreement, we share equally in recoveries of loans that had been
previously charged-off by the acquired institution (Hillcrest Bank and Community Banks of Colorado in this
case) with the FDIC. This recovery-sharing arrangement resulted in $1.2 million of expense during the year
ended December 31, 2011 that represents our reimbursement to the FDIC for their portion of these recoveries and
is represented in the above table as “Reimbursement to FDIC for recoveries on non-covered loans.”
Non-Interest Expense
Our operating strategy is to capture the efficiencies available by consolidating the operations of our acquisitions
and several of our key operating objectives affect our non-interest expense. First, immediately following each of
our four acquisitions, we began efforts to consolidate as many functions as possible and we completed the
conversion to our new data processing platform in phases. The first phase was completed during the second
quarter of 2011, and the second phase was completed during the fourth quarter of 2011 in connection with the
merger of Hillcrest Bank into NBH Bank under a single charter. Our Community Banks of Colorado and Bank of
Choice acquisitions were converted in May 2012 and July 2012, respectively. We incurred significant
professional fees related to the preparation and conversion of these acquisitions. Second, we believe the merger
of Hillcrest Bank into NBH Bank, as well as the conversion and integration of Bank of Choice and Community
Banks of Colorado, will provide opportunities to further streamline operations and increase efficiencies. Third,
our business strategy includes growth strategies that may require added expenses to be incurred as we grow our
operations through acquisitions and organic growth.
We incurred certain expenses in connection with our initial public offering that significantly impacted our
earnings. We did not sell new shares in our initial public offering, and as a result, none of those expenses were
offset against any proceeds, but were expensed. Such expenses included underwriting discounts and related fees,
listing fees on the New York Stock Exchange and related registration and filing fees, legal and account expenses.
These expenses totaled approximately $8.0 million during 2012. Additionally, we incurred stock based
compensation on awards that had a public listing vesting requirement. As discussed below, during 2012, we
incurred $4.9 million of stock-based compensation that had previously been deferred.
99
The table below details non-interest expense for the periods presented (in thousands):
Salaries and employee benefits . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications and data processing . . . . . . . . . . .
Marketing and business development
. . . . . . . . . . . . . .
Supplies and printing . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned expenses . . . . . . . . . . . . . . . . . .
Problem loan expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset amortization . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . .
ATM/debit card expenses . . . . . . . . . . . . . . . . . . . . . . . .
Initial public offering related expenses . . . . . . . . . . . . .
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) from change in fair value of warrant
liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest expense . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
$ 94,111
20,558
11,156
14,857
5,540
2,967
20,313
8,532
5,344
4,731
4,269
7,974
870
$ 67,480
17,975
14,250
12,905
6,034
1,387
7,064
4,389
4,359
4,550
2,892
—
4,935
$25,876
1,392
1,338
849
65
352
673
615
—
712
206
—
14,076
(1,385)
9,761
(56)
7,374
44
2,783
Total non-interest expense . . . . . . . . . . . . . . . . . . .
$209,598
$155,538
$48,981
Year ended 2012
The largest component of non-interest operating expense is salaries and employee benefits. Exclusive of stock-
based compensation expense noted below, salaries and employee benefits totaled $81.0 million in 2012.
Increases reflect staff added as part of the Bank of Choice and Community Banks of Colorado acquisitions in the
second half of 2011 along with the further build out of sales teams and corporate and operating functions during
2011 and 2012.
Salaries and employee benefits included $13.1 million of stock-based compensation expense during 2012. The
expense associated with stock-based compensation is being recognized by tranche over the requisite service
period and at December 31, 2012, there was $2.8 million of total unrecognized compensation expense related to
non-vested stock options and $2.3 million of total unrecognized compensation expense related to non-vested
restricted stock, which is expected to be recognized over a weighted average period of 0.7 years and 0.8 years,
respectively.
The valuation methodologies employed in determining the expense associated with stock-based compensation
vary widely, as do the award types and the subjective assumptions used in those valuation methodologies. As a
result, these differences in practice can have a material impact on the financial performance of us or our peers,
and can limit meaningful comparisons between our performance over different periods and the performance
results of our peers.
Occupancy and equipment expense totaled $20.6 million for the year of 2012, and increased $2.6 million over
2011. The increase was driven by the impact of our Bank of Choice and Community Banks of Colorado
acquisitions in the second half of 2011 and was primarily the result of increased depreciation expense on the
premises and equipment associated with those acquisitions.
Professional fees totaled $11.2 million during 2012 and decreased $3.1 million from the year ended 2011. The
decrease in professional fees between 2012 and 2011 was the result of adding full-time staff to perform some of
the functions that were being performed by consultants.
100
Telecommunications and data processing expense totaled $14.9 million for the year ended 2012, compared to
$12.9 million during the year ended 2011, an increase of $2.0 million. These increases were primarily due to the
impact of our Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011.
Telecommunications and data processing expenses contain both fixed costs and volume-based components
driven by the number of client accounts. While there is a cost associated with each additional account, additional
efficiencies are available due to a lower incremental cost per account at higher levels of account volume.
Significant components of our non-interest expense are our problem loan expenses and OREO related expenses.
We incur these expenses in connection with the resolution process of our acquired troubled loan portfolios.
During the year ended 2012, we incurred $20.3 million of OREO related expenses and $8.5 million of problem
loan expenses. Of the $28.8 million in collective OREO and problem loan expenses incurred during the year
ended 2012, $15.0 million was covered by loss sharing agreements with the FDIC. The losses on covered assets
that are reimbursable from the FDIC are based on the book value of the related covered assets as determined by
the FDIC at the date of acquisition, and the FDIC’s book value does not necessarily correlate with our book value
of the same assets. This difference is primarily because we recorded the OREO at fair value at the date of
acquisition in accordance with applicable accounting guidance. Any losses recorded after the acquisition date are
recorded at the full-loss value in other non-interest expense, and any related reimbursement from the FDIC is
recorded in non-interest income as FDIC loss sharing income.
Years ended 2011 and 2010
Operating results for the year ended December 31, 2011 included non-interest expense of $155.5 million,
compared to $49.0 million for the year ended December 31, 2010. The primary reason for the increase was due to
the fact that our company had been operating for twelve months during 2011 compared to a partial quarter during
the three months ended December 31, 2010, and we acquired two banks in 2011.
Salaries and employee benefits is the largest component of non-interest operating expense during 2011 and 2010,
totaling $67.5 million and $25.9 million, respectively. In the Hillcrest Bank and Bank Midwest acquisitions, the
majority of key lending functions were not retained as we are implementing a different lending strategy than the
predecessor banks. During the period, several key positions were staffed and additional hiring was in process as
we build a workforce to support and grow the Company.
Included in the $67.5 million of salaries and employee benefits for the year ended 2011 was $12.6 million of
expense related to stock-based compensation. In connection with the formation of the Company in 2009, all
members of the board of directors and executive management and other select members of management were
granted stock-based compensation arrangements that contain a variety of vesting requirements over the course of
several years. During the fourth quarter of 2011, we reversed approximately $4.5 million of previously recorded
stock-based compensation expense, of which $2.9 million related to expense recognized during 2010, in
connection with the 134,167 restricted shares and 402,500 stock options that were forfeited by our former Chief
Financial Officer upon his separation from the Company. Also during the fourth quarter of 2011, the Company
granted 195,000 shares of restricted stock and 993,000 stock options all of which were subject to a variety of
vesting requirements, including the Company’s shares becoming publicly listed on a national exchange. In
accordance with ASC Topic 718, the Company started recognizing compensation expense on the grants that had
vesting requirements tied to the Company’s shares becoming listed on a national exchange subsequent to that
vesting requirement being met, with an expense recognition catch-up for the portion of the expense that has been
delayed until that vesting criteria is met. As a result, no expense was recorded on these particular grants during
2011. The expense associated with stock-based compensation is being recognized by tranche over the requisite
service period and at December 31, 2011, there was $8.2 million of total unrecognized compensation expense
related to non-vested stock options and $7.1 million of total unrecognized compensation expense related to non-
vested restricted stock, which is expected to be recognized over a weighted average period of 0.8 years and 1.0
years, respectively.
101
The valuation methodologies employed in determining the expense associated with stock-based compensation
vary widely, as do the award types and the subjective assumptions used in those valuation methodologies. As a
result, these differences in practice can have a material impact on the financial performance of us or our peers,
and can limit meaningful comparisons between our performance over different periods and the performance
results of our peers.
Occupancy and equipment was $18.0 million and $1.4 million for the years ended 2011 and 2010, respectively,
an increase of $16.6 million. The acquisitions of Bank of Choice, Bank Midwest, Community Banks of
Colorado, and Hillcrest Bank and the related additional facilities are the primary reason for the increase.
For the year ended 2011, professional fees totaled $14.3 million, exclusive of $4.9 million of professional fees
related to due diligence and transactional expenses on potential and consummated acquisitions that are included
in acquisition related costs in the consolidated statements of operations. Professional fees for the year ended
December 2011 included expenses related to the accounting and administration of the FDIC loss share
agreements, the creation of the new operating platform and the merger of Hillcrest Bank into NBH Bank.
As a result of our acquisitions, telecommunications and data processing expense totaled $12.9 million for the
year ended December 31, 2011, an increase of $12.1 million over 2010, primarily due to our acquisitions.
Income taxes
Income taxes are accounted for in accordance with ASC 740, Income Taxes. Under this guidance, deferred
income taxes are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of enacted tax laws. ASC 740 requires the
establishment of a valuation allowance against the net deferred tax asset unless it is more-likely-than-not that the
tax benefit of the deferred tax asset will be realized. For purposes of projecting whether the deferred tax asset
will be realized, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable
income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax
planning strategies varies, adjustments to the carrying value of the deferred tax assets may be required.
ASC 740 also requires the projected realization of tax benefits related to uncertain tax positions to be evaluated
based upon the likelihood of successfully defending those positions. For tax positions meeting the more likely
than not threshold, the amount recognized in the financial statements is the largest benefit that has greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Interest and
penalties on uncertain tax positions are recognized as a component of income tax expense. If our assessment of
whether a tax position meets or no longer meets the more likely than not threshold were to change, adjustments
to income tax benefits may be required.
Income tax expense totaled $4.6 million for the year ended December 31, 2012, as compared with $27.4 million
for the year ended December 31, 2011. These amounts equate to effective tax rates of 113.4% and 39.5% for the
respective periods.
The increase in the effective tax rate for the year ended December 31, 2012, as compared to the year ended
December 31, 2011, is primarily attributable to $8.0 million of expenses associated with the initial public
offering of our stock which are non-deductible for income tax purposes. These expenses had a substantial impact
on our net loss for the year ended December 31, 2012 and, given that no income tax benefit was recorded against
these expenses, income tax expense as a percentage of income before income taxes in 2012 is significantly higher
than in 2011.
Our marginal tax rate (the rate we pay on each incremental dollar of earnings) is approximately 39%. However,
our effective tax rate (income tax expense divided by income before income taxes) for a given period is driven
largely by income and expense items that are non-taxable or non-deductible in the calculation of income tax
102
expense. Due to the impact of the non-deductible expenses discussed above, our effective tax rate of 113.4% at
December 31, 2012 is inflated and therefore not comparable to prior years. We expect our effective tax rate to be
more consistent with our marginal tax rate in future years.
Additional information regarding income taxes can be found in note 22 of our audited consolidated financial
statements.
Liquidity and Capital Resources
Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay
our obligations to depositors and other creditors, while providing ample available funds for opportunistic and
strategic investments. Liquidity is represented by our cash and cash equivalents and pledgeable investment
securities, and is detailed in the table below as of December 31, 2012 and 2011 (in thousands):
Cash and due from banks . . . . . . . . . . . . . . .
Due from Federal Reserve Bank of Kansas
City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and interest bearing bank
deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pledgeable investment securities, at fair
December 31, 2012
December 31, 2011
$
90,505
$
93,862
579,267
1,421,734
99,408
112,541
value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,084,046
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,853,226
1,670,924
$3,299,061
Total on-balance sheet liquidity decreased $445.8 million from December 31, 2011 to December 31, 2012. The
decrease was largely due to funding our high-priced time deposits roll-off, offset somewhat with loan payoffs as
we worked through more of our non-strategic loans acquired with our FDIC-assisted acquisitions.
Our acquisitions have significantly increased our liquidity position. Net of settlement amounts paid to the
respective sellers, we acquired $1.5 billion of cash and cash equivalents and $290.6 million of investment
securities available-for-sale in our completion of the Hillcrest Bank and Bank Midwest acquisitions. Our
acquisitions of the Bank of Choice and Community Banks of Colorado provided $402.0 million and
approximately $250.2 million of additional cash, respectively, as the FDIC contributed cash as a part of the
purchase discount in each of these transactions.
Aside from the deployment of our capital and cash received from acquisitions, our primary sources of funds are
deposits from clients, prepayments and maturities of loans and investment securities, the sale of investment
securities, reimbursement of covered asset losses from the FDIC and the funds provided from operations.
Additionally, we anticipate having access to third party funding sources, including the ability to raise funds
through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of
debt, and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of
liquidity would provide adequate funding and liquidity for at least a 12 month period.
Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits,
settlement of repurchase agreements, capital expenditures, operating expenses and debt payments, particularly
subsequent to acquisitions. For additional information regarding our operating, investing, and financing cash
flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are sales and
purchases of investment securities and originations and pay offs and pay downs of loans. At December 31, 2012,
pledgeable investment securities represented our largest source of liquidity. Our available-for-sale investment
103
securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective
investment securities portfolio totaled $2.3 billion at December 31, 2012, inclusive of pre-tax net unrealized
gains of $44.3 million. The gross unrealized gains are detailed in note 5 of our consolidated financial statements
for the year ended December 31, 2012. As of December 31, 2012, our investment securities portfolio consisted
primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or
sponsored agencies, and prime auto asset-backed securities. The anticipated repayments and marketability of
these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment
securities portfolio, or provide optionality for reductions in our deposit funding base.
Through December 31, 2012, the majority of our capital expenditures have been through our acquisitions and the
related subsequent branch purchases. Aside from these, our capital outlays were $41.1million and $21.8 million
during 2012 and 2011, respectively. The majority of capital outlays were related to the development and
implementation of our new operating platform and the build out of the new facilities in downtown Kansas City,
Missouri that were completed during the summer of 2011 and now house a significant portion of our operations
and the purchase of branch assets from the FDIC subsequent to our acquisitions.
At present, financing activities are limited to changes in repurchase agreements, time deposits, the clawback
liability and the repayment of any FHLB advances assumed in acquisitions. Maturing time deposits, and holders
of $164.3 million of time deposits assumed in the Hillcrest Bank, Bank of Choice, and Community Banks of
Colorado acquisitions that have not yet accepted new terms, represent a potential use of funds, as these
depositors have the option to move the funds without penalty. As of December 31, 2012, $1.2 billion of time
deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market
conditions, and our consumer banking strategy focusing on both lower cost transaction accounts and term
deposits, we expect to replace a significant portion of those maturing time deposits.
In July 2011, we joined the FHLB of Des Moines and since have purchased $8.0 million of FHLB stock as is
required by the membership agreement. Through this relationship, we can obtain additional liquidity by pledging
unencumbered qualifying loans to obtain FHLB advances.
As the Company matures, we expect that our liquidity at the holding company will subsequently decrease as we
continue to deploy available capital and until such time that our subsidiary bank is permitted to pay, and does pay
dividends up to the holding company.
NBH Bank is prohibited from paying dividends to the holding company until at least the fourth quarter of 2013.
As a result, the holding company’s current sources of funds are limited to cash and cash equivalents on hand,
which totaled $100.6 million at December 31, 2012. The holding company may seek to borrow funds and raise
capital in the future, the success and terms of which will be subject to market conditions and other factors.
To date, stockholders’ equity has been most significantly impacted by the repurchase of 6,382,024 shares in 2010
in connection with achieving compliance following the January 6, 2010 and April 23, 2010 interpretive guidance
issued on the FDIC Policy Statement. Our stockholders’ equity is also significantly impacted by the retention of
earnings (losses), changes in unrealized gains on securities, net of tax and the payment of dividends. As was
discussed under “—Regulatory Capital,” we have agreed to maintain capital levels of at least 10% tier 1 leverage
ratio, 11% tier 1 risk-based capital ratio and 12% total risk-based capital ratio at NBH Bank until at least the
fourth quarter of 2013, and at December 31, 2012 and 2011, NBH Bank exceeded all capital requirements to
which it was subject.
On October 31, 2012, our board of directors approved a $25 million share repurchase and through December 31,
2012, we repurchased 240 shares. Subsequent to December 31, 2012 and through February 28, 2013, we
repurchased an additional 12,763 shares through this repurchase authorization. On October 31, 2012, we declared
our first quarterly dividend of $0.05 per share, which was paid on December 14, 2012, to holders of record on
November 30, 2012. Additionally, on February 19, 2013, our board of directors declared a quarterly dividend of
104
$0.05 per share, payable on March 15, 2013 to shareholders of record on February 28, 2013. See “Risk Factors—
Risks Relating to Our Class A Common Stock—Our ability to pay dividends is subject to regulatory limitations
and our bank subsidiary’s ability to pay dividends to us, which is also subject to regulatory limitations.”
Asset/Liability Management and Interest Rate Risk
The principal objective of the Company’s 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 earnings
and preserving adequate levels of liquidity and capital. The asset and liability management function is under the
guidance of the Asset Liability Committee from direction of the board of directors. The Asset Liability
Committee meets monthly to review, among other things, the sensitivity of the Company’s assets and liabilities
to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also
reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
Management and the board of directors are responsible for managing interest rate risk and employing risk
management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income
simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the
nature and timing of interest rate changes, yield curve shape, prepayments on loans, securities and deposits,
deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash
flows.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits
for acceptable changes in 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 market value of
assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk
because it measures the present value of the 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.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at
December 31, 2012. The table below illustrates the impact of an immediate and sustained 200 and 100 basis
point increase and a 50 basis point decrease in interest rates on net interest income based on the interest rate risk
model at December 31, 2012:
Hypothetical
Shift in Interest
Rates (in bps)
200
100
-50
% Change in Projected
Net Interest Income
12.84%
7.43%
-2.88%
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 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.
105
The federal funds rate is the basis for overnight funding and the market expectations for changes in the federal
funds rate influence the yield curve. The federal funds rate is currently at 0.25% and has been since December
2008. Should interest rates decline further, net interest margin and net interest income would be compressed
given the current mix of rate sensitive assets and liabilities.
As part of the asset/liability management strategy, management has emphasized the origination of shorter
duration loans as well as variable rate loans to limit the negative exposure to a rate increase. The strategy with
respect to liabilities has been to emphasize transaction accounts, particularly non-interest or low interest-bearing
non-maturing deposit accounts which are less sensitive to changes in interest rates. In response to this strategy,
non-maturing deposit accounts have been steadily increasing and totaled 58.3% of total deposits at December 31,
2012 compared to 45.0% at December 31, 2011. We currently have no brokered time deposits and intend to
continue to focus on our strategy of increasing non-interest or low interest-bearing non-maturing deposit
accounts and accordingly, we have no current plans to use brokered deposits in the near future.
Off-Balance Sheet Activities
In the normal course of business, we are a party to various contractual obligations, commitments and other
commitments that we enter into to meet the financing needs of clients, including commitments to extend credit,
commercial and consumer lines of credit and standby letters of credit. Unused commitments do not necessarily
represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.
We do not anticipate any material losses arising from commitments or contingent liabilities and we do not
believe that there are any material commitments to extend credit that represent risks of an unusual nature. These
financing commitments are detailed in the following table (in thousands):
December 31, 2012
Non-
Covered
Covered
Total
Covered
December 31, 2011
Non-
Covered
Total
Commitments to fund loans
Residential . . . . . . . . . . . . . . . . . . . . . . . $ — $ 73,251 $ 73,251 $ 1,517 $ 30,194 $ 31,711
Commercial and commercial real
Construction and land development
Consumer
estate . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Credit card lines of credit
Unfunded commitments under lines of
528
426
—
—
49,394
6,256
1,688
16,591
49,922
6,682
1,688
16,591
2,437
3,565
—
—
38,937
776
39,690
20,738
41,374
4,341
39,690
20,738
credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and standby letters of credit . . .
23,890
3,595
133,859
7,096
157,749
10,691
68,223
3,051
135,001
16,986
203,224
20,037
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,439 $288,135 $316,574
$78,793 $282,322 $361,115
106
Contractual Obligations
In addition to the financing commitments detailed above under “—Off-Balance Sheet Activities,” in the normal
course of business, we enter into contractual obligations that require future cash settlement. The following table
summarizes the contractual cash obligations as of December 31, 2012 and the expected timing of those payments
(in thousands):
Less than 1
year
1-3 years
3-5 years
More than 5
years
Long-term debt obligations . . . . . . . . . . . . . . . . . . $
Capital lease obligations . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clawback liability . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ — $ —
—
—
—
4,692
6,084
3,227
3,036
9,510
6,316
63,245
484,882
1,198,752
—
—
—
$ —
—
21,362
—
5,839
31,271
Total
$
—
—
35,365
18,862
1,752,718
31,271
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,208,295
$500,476 $70,973
$58,472
$1,838,216
Impact of Inflation and Changing Prices
The primary impact of inflation on our operations is reflected in increasing operating costs and is reflected in
non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in
nature. As a result, changes in interest rates have a more significant impact on our performance than do changes
in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same
direction, or have the same magnitude, as changes in the prices of goods and services. Although not as critical to
the banking industry as many other industries, inflationary factors may have some impact on our ability to grow,
total assets, earnings, and capital levels. We do not expect inflation to be a significant factor in the near future.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth on pages 105 through 106 of Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
107
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
National Bank Holdings Corporation:
We have audited the accompanying consolidated statements of financial condition of National Bank Holdings
Corporation and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated
statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2012. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of National Bank Holdings Corporation and subsidiaries as of December 31, 2012 and 2011,
and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2012, in conformity with U.S. generally accepted accounting principles.
Kansas City, Missouri
March 18, 2013
108
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2012 and 2011
(In thousands, except share and per share data)
December 31,
2012
2011
ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due from Federal Reserve Bank of Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and interest bearing bank deposits . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available-for-sale (at fair value) . . . . . . . . . . . . . . . . . . . . . .
Investment securities held-to-maturity (fair value of $584,551 and $6,829 at
December 31, 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,505 $
579,267
99,408
769,180
1,718,028
93,862
1,421,734
112,541
1,628,137
1,862,699
577,486
32,996
6,801
29,117
Loans receivable, net—covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net—non-covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net
608,222
1,229,848
1,838,070
(15,380)
1,822,690
952,715
1,321,336
2,274,051
(11,527)
2,262,524
Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, net
. . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,923
94,808
121,436
59,630
27,575
100,023
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,410,775
223,402
120,636
87,315
59,630
32,923
38,842
$6,352,026
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 677,985 $ 678,735
Interest bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
537,160
1,062,562
Savings and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,784,596
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,063,053
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
529,996
1,240,020
1,752,718
4,200,719
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,685
31,271
34,541
4,320,216
47,597
67,972
84,675
5,263,297
Stockholders’ equity:
Common stock, par value $0.01 per share: 400,000,000 million shares authorized
and 53,279,579 and 52,157,697 shares issued and 52,327,672 and 52,157,697
shares outstanding at December 31, 2012 and 2011, respectively . . . . . . . . . . .
Additional paid in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock of 240 and 0 shares at December 31, 2012 and 2011, respectively,
(4)
at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,573
Accumulated other comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,090,559
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,410,775
523
1,006,194
43,273
522
994,705
46,480
—
47,022
1,088,729
$6,352,026
See accompanying notes to the consolidated financial statements.
109
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2012, 2011 and 2010
(In thousands, except share and per share data)
2012
2011
2010
Interest and dividend income:
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest and dividends on investment securities . . . . . . . . . . . . . .
Dividends on non-marketable securities . . . . . . . . . . . . . . . . . . . .
Interest on interest-bearing bank deposits . . . . . . . . . . . . . . . . . . .
Total interest and dividend income . . . . . . . . . . . . . . . . . . . .
169,656 $
60,342
1,535
1,952
233,485
134,069 $
59,323
1,132
2,635
197,159
Interest expense:
Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income before provision for loan losses . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . .
Non-interest income:
FDIC indemnification asset accretion . . . . . . . . . . . . . . . . . . . . . .
FDIC loss sharing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank card fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of mortgages, net
. . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on sale of securities, net . . . . . . . . . . . . . . . . . . . . . . .
Gain on recoveries of previously charged-off acquired loans . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications and data processing . . . . . . . . . . . . . . . . . . .
Marketing and business development . . . . . . . . . . . . . . . . . . . . . .
Supplies and printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Problem loan expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ATM/debit card expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial public offering related expenses . . . . . . . . . . . . . . . . . . . . .
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
29,125
109
29,234
204,251
27,995
176,256
(13,820)
12,069
17,392
9,699
—
1,214
674
4,298
5,853
37,379
94,111
20,558
11,156
14,857
5,540
2,967
20,313
8,532
5,344
4,731
4,269
7,974
870
8,376
209,598
4,037
4,580
(543) $
Income (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average number of common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,214,175
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,214,175
(0.01) $
(0.01) $
41,574
122
41,696
155,463
20,002
135,461
(6,132)
1,410
16,810
7,611
60,520
1,103
(645)
5,902
2,907
89,486
67,480
15,070
13,650
12,905
6,034
1,387
9,969
4,389
4,359
4,550
2,892
600
4,935
7,318
155,538
69,409
27,446
41,963
$
0.81 $
0.81 $
17,153
1,501
88
2,680
21,422
5,483
29
5,512
15,910
88
15,822
1,689
547
1,094
517
37,778
268
11
—
259
42,163
25,876
1,392
1,338
849
65
352
673
615
—
712
206
—
14,076
2,827
48,981
9,004
2,953
6,051
0.11
0.11
51,978,744
52,104,021
53,000,454
53,000,454
See accompanying notes to the consolidated financial statements.
110
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2012, 2011 and 2010
(In thousands)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss), net of tax:
Securities available-for-sale:
2012
2011
2010
(543) $41,963 $ 6,051
Net unrealized gains arising during the period, net of tax of $75,
$26,263 and $3,138 for the years ended 2012, 2011 and 2010,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for net securities (gains) losses
included in net income, net of tax (benefit) expense of $263,
($245) and $4 for the years ended 2012, 2011 and 2010,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for net unrealized holding gains on
securities transferred between available-for-sale and held-to-
maturity, net of tax of $15,159, $0 and $0 for the years ended
2012, 2011 and 2010, respectively . . . . . . . . . . . . . . . . . . . . . . .
83
40,537
6,092
(411)
400
(7)
(23,711)
—
—
$(24,039) $40,937 $ 6,085
Net unrealized holding gains on securities transferred between available-
for-sale to held-to-maturity:
Net unrealized holding gains on securities transferred, net of
tax of $15,159, $0 and $0 for the years ended 2012, 2011
and 2010, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: amortization of net unrealized holding gains to
income, net of tax of $3,751, $0, and $0 for the years
ended 2012, 2011 and 2010, respectively . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . .
23,711
(6,121)
17,590
(6,449)
—
—
—
—
—
40,937
—
6,085
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (6,992) $82,900 $12,136
See accompanying notes to the consolidated financial statements.
111
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended 2012, 2011 and 2010
(In thousands, except share and per share data)
Balance, December 31, 2009 . . . . . . . . . .
Shares repurchased (6,382,024
Common
stock
Additional
paid-in
capital
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
income, net
Total
$584
$1,098,446
$ (1,534)
$—
$ —
$1,097,496
shares) . . . . . . . . . . . . . . . . . . . . .
(64)
(127,577)
—
—
—
(127,641)
Issuance of warrants (593,250
warrants)
. . . . . . . . . . . . . . . . . . . —
Stock-based compensation . . . . . . . —
Net income . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income . . . . . —
Balance, December 31, 2010 . . . . . . . . . .
520
Stock-based compensation . . . . . . . —
Restricted stock vesting . . . . . . . . . .
2
Redemption of restricted stock . . . . —
Net income . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income . . . . . —
Balance, December 31, 2011 . . . . . . . . . .
522
Stock-based compensation . . . . . . . —
Restricted stock vesting . . . . . . . . . .
1
Redemption of restricted stock . . . . —
Purchase of treasury shares (240
shares) . . . . . . . . . . . . . . . . . . . . . —
Dividends paid ($0.05 per share) . . . —
Net loss . . . . . . . . . . . . . . . . . . . . . . —
Other comprehensive loss . . . . . . . . —
(4,845)
16,613
—
—
982,637
12,564
—
(496)
—
—
994,705
13,078
—
(1,589)
—
—
—
—
6,051 —
—
—
—
—
—
4,517 —
—
—
—
41,963 —
—
—
46,480 —
—
—
—
—
—
—
—
—
—
—
—
(4)
(2,664) —
(543) —
—
—
—
—
—
6,085
6,085
—
—
—
—
40,937
47,022
—
—
—
—
—
—
(6,449)
(4,845)
16,613
6,051
6,085
993,759
12,564
2
(496)
41,963
40,937
1,088,729
13,078
1
(1,589)
(4)
(2,664)
(543)
(6,449)
Balance, December 31, 2012 . . . . . . . . . .
$523
$1,006,194
$43,273
$ (4)
$40,573
$1,090,559
See accompanying notes to the consolidated financial statements.
112
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012, 2011 and 2010
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
operating activities:
2012
2011
2010
(543) $
41,963
$
6,051
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of securities, net . . . . . . . . . . . . . . . . .
Deferred income tax (benefit) expense . . . . . . . . . . . . . . .
Discount accretion, net of premium amortization . . . . . .
Loan accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of mortgage loans . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans held for sale . . . . . . . . . . . .
Amortization of indemnification asset . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on the sale of other real estate owned, net . . .
Impairment on other real estate owned . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in due to FDIC, net . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . .
(Decrease) increase in other liabilities . . . . . . . . . . . . . . .
27,995
12,300
(674)
(23,233)
17,459
(120,034)
(1,214)
49,312
13,820
—
(9,563)
20,215
13,078
(36,701)
2,143
(42,232)
Net cash (used in) provided by operating activities . . . .
(77,872)
20,002
7,028
645
(10,754)
5,504
(75,760)
(1,103)
26,801
6,132
(60,520)
(3,063)
1,138
12,564
5,844
5,094
23,108
4,623
(3,467)
12,252
(13,320)
5,811
228,374
269,854
5
88
228
(11)
2,561
743
(12,586)
(268)
16,611
(1,689)
(37,778)
432
—
16,613
13,564
(10,038)
(13,589)
(19,068)
3,024
—
(16,800)
—
69,118
—
—
Cash flows from investing activities:
(Purchase) sale of FHLB of Des Moines stock . . . . . . . . .
Sale of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of FRB stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of FRB Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of investment securities available-for-sale . . . . . . .
Maturities of investment securities available-for-sale . . .
Maturities of investment securities held-to-maturity . . . .
Purchase and settlement of investment securities
available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and settlement of investment securities held-to-
maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of premises and equipment
. . . . . . . . . . . . . . . .
Proceeds from sales of other real estate owned . . . . . . . .
Decrease in FDIC indemnification asset
. . . . . . . . . . . . .
Net cash provided from acquisitions . . . . . . . . . . . . . . . .
(4,018)
139
—
—
20,794
493,224
176,650
(1,131,749)
(1,467,361)
(460,169)
(2,234)
401,331
(41,077)
102,941
63,368
—
—
399,839
(21,823)
51,745
82,848
636,918
—
79,626
(950)
8,029
—
1,492,167
Net cash provided by investing activities . . . . . . . . . . . .
79,369
181,675
1,174,045
Cash flows from financing activities:
Net decrease in deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in repurchase agreements . . . . . . . . . . . . . . . . . .
Repayment of FHLB advances . . . . . . . . . . . . . . . . . . . . .
FDIC Clawback liability . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock redemptions . . . . . . . . . . . . . . . . . . . . . .
(862,334)
6,088
—
—
(2,616)
(1,588)
(365,500)
18,832
(133,529)
14,800
—
(496)
(146,571)
—
(83,894)
11,571
—
—
113
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012, 2011 and 2010
(In thousands)
(Repurchase) issuance of common stock . . . . . . . . . . . . . . .
(4)
2
(127,641)
Net cash used in financing activities . . . . . . . . . . . . . . .
(860,454)
(465,891)
(346,535)
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the year
(858,957)
1,628,137
(279,593)
1,907,730
808,442
1,099,288
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 769,180
$1,628,137
$1,907,730
2012
2011
2010
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid during the year for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Issuance of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Issuance of value appreciation rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
36,012
45,652
$
$
— $
— $
Supplemental schedule of non-cash investing activities:
46,063
16,772
$
$
— $
$
1,147
8,503
685
4,845
750
Loans transferred to other real estate owned at fair value . . . . . . . . . . $
82,444
FDIC indemnification asset claims transferred to other assets . . . . . . $ 135,213
Available-for-sale investment securities transferred to
$
$
52,294
84,100
$
$
11,604
—
investment securities held-to-maturity . . . . . . . . . . . . . . . . . . . $ 754,063 $
— $
Investment trades transacted but not settled . . . . . . . . . . . . . . . . . $
— $
— $ 564,094
—
See accompanying notes to the consolidated financial statements.
114
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 1 Basis of Presentation
National Bank Holdings Corporation, formerly known as NBH Holdings Corp., (the “Company”) is a bank
holding company that was incorporated in the State of Delaware in June 2009 with the intent to acquire and
operate community banking franchises and other complementary businesses in targeted markets. The
accompanying consolidated financial statements include the accounts of the Company, and its wholly owned
subsidiary, NBH Bank, N.A. NBH Bank, N.A. is the resulting entity from the Company’s acquisitions to date and
it offers consumer and commercial banking through 101 full-service banking centers that are predominately
located in the greater Kansas City area and Colorado. The results of operations of each acquisition is included
from the respective dates of the acquisition (October 22, 2010 for Hillcrest Bank, N.A., December 10, 2010 for
Bank Midwest, N.A., July 22, 2011 for Bank of Choice, and October 21, 2011 for Community Banks of
Colorado), and as such, the operating results for the years ended 2011 and 2010 have limited comparability to
that of 2012.
The accompanying financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) and where applicable, with general practices in the banking industry or
guidelines prescribed by bank regulatory agencies. The consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the results presented. All such
adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications of prior years’ amounts are made whenever necessary to
conform to current period presentation.
The Company’s significant accounting policies followed in the preparation of the consolidated financial
statements are disclosed in Note 2. GAAP requires management to make estimates that affect the reported
amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. By their
nature, estimates are based on judgment and available information. Management has made significant estimates
in certain areas, such as the amount and timing of expected cash flows from assets, the valuation of the FDIC
indemnification asset and clawback liability, the valuation of other real estate owned, the fair value adjustments
on assets acquired and liabilities assumed, the valuation of core deposit intangible assets, the deferred tax assets,
the evaluation of investment securities for other-than-temporary impairment (“OTTI”), the fair values of
financial instruments, the allowance for loan losses (“ALL”), and contingent liabilities. Because of the inherent
uncertainties associated with any estimation process and future changes in market and economic conditions, it is
possible that actual results could differ significantly from those estimates.
Pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company qualifies as an emerging
growth company and can elect to opt out of the extended transition period for any new or revised accounting
standards that may be issued by the Financial Accounting Standards Board or the SEC. The Company has elected
to opt out of such extended transition period, which election is irrevocable.
The Company is still evaluating the JOBS Act and may take advantage of some or all of the reduced regulatory
and reporting requirements that will be available so long as the Company qualifies as an emerging growth
company, including, but not limited to, reduced disclosure obligations regarding executive compensation in the
Company’s periodic reports and proxy statements, and exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 2 Summary of Significant Accounting Policies
a) Acquisition activities—The Company accounts for business combinations under the acquisition method of
accounting. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of
acquisition, including identifiable intangible assets. If the fair value of net assets acquired exceeds the fair value
of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the
consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date.
Fair values are subject to refinement for up to a maximum of one year after the closing date of an acquisition as
information relative to closing date fair values becomes available.
The determination of the fair value of loans acquired takes into account credit quality deterioration and
probability of loss therefore, the related ALL is not carried forward at the time of acquisition. The Company has
segregated total loans into two separate categories: (a) loans receivable—covered and (b) loans receivable—non-
covered, both of which are more fully described below.
Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if
they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the
entity). Deposit liabilities and the related depositor relationship intangible assets, known as the core deposit
intangible assets, may be exchanged in observable exchange transactions. As a result, the core deposit intangible
asset is considered identifiable, because the separability criterion has been met.
An FDIC indemnification asset is recognized when the FDIC contractually indemnifies, in whole or in part, the
Company for a particular uncertainty. The recognition and measurement of an indemnification asset is based on
the related indemnified items. The Company recognizes an indemnification asset at the same time that the
indemnified item is recognized and measures it on the same basis as the indemnified items, subject to
collectibility or contractual limitations on the indemnified amounts.
Under FDIC loss sharing agreements, the Company may be required to return a portion of cash received from the
FDIC in the event that losses do not reach a specified threshold, based on the initial discount less cumulative
servicing costs for the covered assets acquired. Such liabilities are referred to as clawback liabilities and are
considered to be contingent consideration as they require the return of a portion of the initial consideration in the
event that certain contingencies are met. The Company recognizes clawback liabilities that represent contingent
consideration at fair value at the date of acquisition. The clawback liabilities are included in due to FDIC in the
accompanying consolidated statements of financial condition, and are periodically re-measured and any changes
in value are reflected in both the carrying amount of the clawback liability and the related accretion that is
recognized through other FDIC loss sharing income in the consolidated statements of operations until the
contingency is resolved.
b) Cash and cash equivalents—Cash and cash equivalents include cash, cash items, amounts due from other
banks, amounts due from the Federal Reserve Bank of Kansas City, federal funds sold, and interest-bearing bank
deposits.
c) Investment securities—Investment securities may be classified in three categories: trading, available-for-sale
and held-to-maturity. Management determines the appropriate classification at the time of purchase and
reevaluates the classification at each reporting period. The Company has classified the majority of its investment
portfolio as available-for-sale. Any sales of available-for-sale securities are for the purpose of executing the
Company’s asset/liability management strategy, reducing borrowings, funding loan growth, providing liquidity,
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
or eliminating a perceived credit risk in a specific security. Held-to maturity securities are carried at amortized
cost and the available-for-sale securities are carried at estimated fair value. Unrealized gains or losses on
securities available-for-sale are reported as accumulated other comprehensive income (“AOCI”), a component of
stockholders’ equity, net of income tax. Gains and losses realized upon sales of securities are calculated using the
specific identification method and are included in gains or losses on sale of securities, net in the consolidated
statements of operations. Premiums and discounts are amortized to interest income over the estimated lives of the
securities. Prepayment experience is periodically evaluated and a determination made regarding the appropriate
estimate of the future rates of prepayment. When a change in a bond’s estimated remaining life is necessary, a
corresponding adjustment is made in the related premium amortization or discount accretion. Purchases and sales
of securities, including any corresponding gains or losses, are recognized on a trade-date basis and a receivable
or payable is recognized for pending transaction settlements.
Management evaluates all investments for OTTI on a quarterly basis, and more frequently when economic or
market conditions warrant such evaluation. Impairment is considered to be other-than-temporary if it is likely
that all amounts contractually due will not be received for debt securities and when there is no positive evidence
indicating that an investment’s carrying amount is recoverable in the near term for equity securities. When
impairment is considered other than temporary, the cost basis of the security is written down to fair value, with
the impairment charge related to credit included in earnings, while the impairment charge related to all other
factors is recognized in other comprehensive income. If the Company has the intent to sell the security or it is
more likely than not that the Company will be required to sell the security, the entire amount of the OTTI is
recorded in earnings. In evaluating whether the impairment is temporary or other than temporary, the Company
considers, among other things, the severity and duration of the unrealized loss position; adverse conditions
specifically related to the security; changes in expected future cash flows; downgrades in the rating of the
security by a rating agency; the failure of the issuer to make scheduled interest or principal payments; whether
the Company has the intent to sell the security; and whether it is more likely than not that the Company will be
required to sell the security.
d) Non-marketable securities—Non-marketable securities include Federal Reserve Bank stock and Federal
Home Loan Bank stock. These securities have been acquired for debt or regulatory purposes, are carried at cost,
and are classified as available-for-sale.
e) Loans receivable—covered—Loans acquired in FDIC assisted transactions that are covered under loss sharing
agreements are referred to as covered loans. Pursuant to the terms of the loss sharing agreements, the FDIC will
reimburse the Company for a percentage of losses on covered assets up to stated loss thresholds. The Company
must reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Company
a reimbursement under loss sharing agreements.
Covered loans are recorded at their estimated fair value at the time of acquisition. Estimated fair values of
covered loans were based on a discounted cash flow methodology that considers various factors including the
type of loan and related collateral, the expected timing of cash flows, classification status, fixed or variable
interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the
Company’s assessment of risk inherent in the cash flow estimates. Covered loans were grouped together
according to similar characteristics such as type of loan, loan purpose, geography, risk rating and underlying
collateral and were treated as distinct pools when applying various valuation techniques and, in certain
circumstances, for the ongoing monitoring of the credit quality and performance of the pools. Each pool is
accounted for as a single loan for which the integrity is maintained throughout the life of the asset.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The Company accounts for and evaluates acquired loans in accordance with the provisions of Accounting
Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit
Quality. When loans exhibit evidence of credit deterioration since origination and it is probable at the date of
acquisition that the Company will not collect all principal and interest payments in accordance with the terms of
the loan agreement, the expected shortfall in future cash flows, as compared to the contractual amount due, is
recognized as a non-accretable difference. Any excess of expected cash flows over the acquisition date fair value
is known as the accretable yield, and is recognized as accretion income over the life of each pool. Loans that are
accounted for under ASC Topic 310-30 that meet the criteria for non-accrual of interest at the time of acquisition
or subsequent to acquisition, may be considered performing, regardless of whether the customer is contractually
delinquent, if the timing and expected cash flows on such loans can be reasonably estimated and if collection of
the new carrying value of such loans is expected.
The expected cash flows of loans accounted for under ASC Topic 310-30 are periodically reestimated utilizing
the same cash flow methodology used at the time of acquisition and subsequent decreases to the expected cash
flows will generally result in a provision for loan losses charge to the Company’s consolidated statements of
operations. Any increases to the cash flow projections are recognized on a prospective basis through an increase
to the pool’s accretion income over its remaining life once any previously recorded provision expense has been
reversed. These cash flow evaluations are inherently subjective as they require material estimates, all of which
may be susceptible to significant change.
Covered loans outside the scope of ASC Topic 310-30 are accounted for under ASC Topic 310, Receivables.
Discounts created when the loans are recorded at their estimated fair values at acquisition are accreted over the
remaining term of the loan as an adjustment to the related loan’s yield. Similar to non-covered and originated
loans described below, the accrual of interest income on covered loans that are not accounted for under ASC
Topic 310-30 is discontinued when the collection of principal or interest, in whole or in part, is doubtful. Interest
is generally not accrued on loans 90 days or more past due unless they are well secured and in the process of
collection.
In the event of borrower default of covered loans or non-covered loans, as described below, the Company may
seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and
remediation procedures that may include modifying or restructuring a loan from its original terms, for economic
or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial
difficulties in order to facilitate repayment. Such restructured loans are considered “troubled debt restructurings”
and are identified in accordance with ASC Topic 310-40 Troubled Debt Restructurings by Creditors. Under this
guidance, modifications to loans that fall within the scope of ASC Topic 310-30 are not considered troubled debt
restructurings, regardless of otherwise meeting the definition of a troubled debt restructuring.
f) Loans receivable—non-covered—Loans receivable that are not covered by loss sharing agreements include
loans that are acquired through acquisitions and loans originated by the Company. Much like covered loans,
acquired non-covered loans are initially recorded at fair value and are accounted for under either ASC Topic 310-
30 or ASC Topic 310, as described above. Loans originated by the Company are carried at the principal amount
outstanding, net of premiums, discounts, unearned income, and deferred loan fees and costs. Non-refundable loan
origination and commitment fees, net of direct costs of originating or acquiring loans, and fair value adjustments
for acquired loans, are deferred and recognized as an adjustment to the loans’ effective yield over the estimated
remaining lives of the related loans.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Interest income on acquired loans that are accounted for under ASC Topic 310 and interest income on loans
originated by the Company is accrued and credited to income as it is earned using the interest method based on
daily balances of the principal amount outstanding. However, interest is generally not accrued on loans 90 days
or more past due, unless they are well secured and in the process of collection. Additionally, in certain situations,
loans that are not contractually past due may be placed on non-accrual status due to the continued failure to
adhere to contractual payment terms by the borrower coupled with other pertinent factors, such as insufficient
collateral value or deficient primary and secondary sources of repayment. Accrued interest receivable is reversed
when a loan is placed on non-accrual status and payments received generally reduce the carrying value of the
loan. Interest is not accrued while a loan is on non-accrual status and interest income is generally recognized on a
cash basis only after payment in full of the past due principal and collection of principal outstanding is
reasonably assured. A loan may be placed back on accrual status if all contractual payments have been received,
or sooner under certain conditions and collection of future principal and interest payments is no longer doubtful.
g) Loans held for sale—Loans originated and intended for sale in the secondary market are carried at the lower
of aggregate cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation
allowance that is recorded as a charge to income. Deferred fees and costs related to these loans are not amortized,
but are recognized as part of the cost basis of the loan at the time it is sold. Gains or losses are recognized upon
sale and are included in gain on sale of mortgages, net. Loans held for sale have primarily been fixed rate single-
family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this
category are sold within 45 days. These loans are generally sold with the mortgage servicing rights released.
Under limited circumstances, buyers may have recourse to return a purchased loan to the Company. Recourse
conditions may include early payment default, breach of representations or warranties, or documentation
deficiencies.
h) Allowance for loan losses—The allowance for loan losses (“ALL”) represents management’s estimate of
probable credit losses inherent in loans, including acquired and covered loans to the extent necessary, as of the
balance sheet date. The determination of the ALL takes into consideration, among other matters, the estimated
fair value of the underlying collateral, economic conditions, historical net loan losses, any declines in cash flow
assumptions from acquisition, and other factors that warrant recognition. In addition, various regulatory agencies,
as an integral part of the examination process, periodically review the ALL. Such agencies may require the
Company to recognize additions to the ALL or increases to adversely graded classified loans based on their
judgments about information available to them at the time of their examinations.
The Company uses an internal risk rating system to indicate credit quality in the loan portfolio. The risk rating
system is applied to covered and non-covered loans and uses a series of grades, which reflect management’s
assessment of the risk attributable to loans based on an analysis of the borrower’s financial condition and ability
to meet contractual debt service requirements. Loans that management perceives to have acceptable risk are
categorized as “Pass” loans. The “Special Mention” loans represent loans that have potential credit weaknesses
that deserve management’s close attention. Special mention loans include borrowers that have potential
weaknesses or unwarranted risks that, unless corrected, may threaten the borrower’s ability to meet debt
requirements. However, these borrowers are still believed to have the ability to respond to and resolve the
financial issues that threaten their financial situation. Loans classified as “Substandard” are inadequately
protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. “Doubtful” loans are
loans that management believes the collection of payments in accordance with the terms of the loan agreement is
highly questionable and improbable. Loans accounted for under ASC Topic 310-30, despite being 90 days or
more past due or internally adversely classified, may be classified as performing upon and subsequent to
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
acquisition, regardless of whether the customer is contractually delinquent, if the timing and expected cash flows
on such loans can be reasonably estimated and if collection of the carrying value of such loans is expected.
Interest accrual is discontinued on doubtful loans and certain substandard loans that are excluded from ASC
Topic 310-30, as is more fully discussed in note 7.
The Company routinely evaluates risk-rated credits for impairment. Impairment, if any, is typically measured for
each loan based on a thorough analysis of the most probable source of repayment, including the present value of
the loan’s expected future cash flows, the loan’s estimated fair value, or the estimated fair value of the underlying
collateral less costs of disposition for collateral dependent loans. General allowances are established for loans
with similar characteristics. In this process, general allowance factors are based on an analysis of historical loss
and recovery experience, if any, related to the acquired loans, as well as certain industry experience, with
adjustments made for qualitative or environmental factors that are likely to cause estimated credit losses to differ
from historical experience. To the extent that the data supporting such factors has limitations, management’s
judgment and experience play a key role in determining the allowance estimates.
Additions to the ALL are made by provisions for loan losses that are charged to operations. The allowance is
decreased by charge-offs due to losses and is increased by provisions for loan losses and recoveries. When it is
determined that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the
ALL. If repayment of the loan is collateral dependent, the fair value of the collateral, less cost to sell, is used to
determine charge-off amounts.
The Company maintains an ALL for loans accounted for under ASC Topic 310-30 as a result of impairment to
loan pools arising from the periodic re-valuation of these loans. Any impairment in the individual pool is
generally recognized in the current period as provision for loan losses. Any improvement in the estimated cash
flows, is generally not recognized immediately, but is instead reflected as an adjustment to the related loan pools
yield on a prospective basis once any previously recorded impairment has been recaptured.
i) FDIC indemnification asset—An FDIC indemnification asset results from loss sharing agreements in FDIC-
assisted transactions and is measured separately from the related covered assets as they are not contractually
embedded in those assets and are not transferable should the Company choose to dispose of the covered assets.
The FDIC indemnification asset represents the estimated fair value of expected reimbursements from the FDIC
for losses on covered loans and covered OREO. Pursuant to the terms of the loss sharing agreements, covered
loans and OREO are subject to stated loss thresholds whereby the FDIC will reimburse the Company for a
percentage of losses and expenses up to the stated loss thresholds. The FDIC indemnification asset is initially
recorded at its estimated fair value. Fair value is estimated using projected cash flows related to the loss sharing
agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These
cash flows are discounted to reflect the uncertainty of the timing of the loss sharing reimbursement from the
FDIC and the discount is accreted to income in connection with the expected speed of reimbursements. This
accretion is included in FDIC indemnification asset accretion in the consolidated statements of operations.
The accounting for the FDIC indemnification asset is closely related to the accounting for the underlying,
indemnified loans or OREO. The Company reestimates the expected indemnification asset cash flows in
conjunction with the periodic reestimation of cash flows on covered assets. Improvements in cash flow
expectations on covered assets generally result in a related decline in the expected indemnification cash flows
and are reflected prospectively as a negative yield adjustment on the indemnification asset. Declines in cash flow
expectations on covered assets generally result in an increase in expected indemnification cash flows and are
reflected as an increase to the indemnification asset. As indemnified assets are resolved and the Company is
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
reimbursed by the FDIC for the value of the resolved portion of the FDIC indemnification asset, the Company
reduces the carrying value of the FDIC indemnification asset.
j) Clawback liability—A clawback liability is recorded to reflect the contingent liability assumed in an FDIC-
assisted transaction whereby the Company is obligated to refund a portion of cash received from the FDIC at
acquisition in the event that losses do not reach a specified threshold, based on the initial discount received less
cumulative servicing amounts for the covered assets acquired. Such a liability is considered to be contingent
consideration as it requires a payment by the Company to the FDIC in the event that certain contingencies are
met. The clawback liability is recorded at its acquisition date fair value and is included in due to FDIC in the
accompanying statements of financial condition. The clawback liability is remeasured at each reporting period
and any changes are reflected in both the carrying amount of the clawback liability and the related accretion that
is recognized through other FDIC loss sharing income in the consolidated statements of operations until the
contingency is resolved.
k) Value appreciation rights—Value appreciation rights (“VAR”) may be issued in business combinations as
part of the consideration transferred and a finite term is set forth in each VAR agreement. The VAR is tied to the
Company’s stock price and is remeasured at each reporting period based on the spread between the strike price of
the VAR and the average multiple of price to tangible book value indicated by national and regional bank
indices, multiplied by the maximum number of applicable units.
l) Premises and equipment—With the exception of premises and equipment acquired through business
combinations, which are initially measured and recorded at fair value, purchased land is stated at cost, and
buildings and equipment are carried at cost, including capitalized interest when appropriate, less accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset.
The Company generally assigns depreciable lives of 39 years for buildings, 7 to 15 years for building
improvements, and 3 to 7 years for equipment. Leasehold improvements are amortized over the shorter of their
estimated useful lives or remaining lease terms. Maintenance and repairs are charged to non-interest expense as
incurred. The Company reviews premises and equipment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An impairment loss is recognized when the sum of
the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less
than its carrying amount.
m) Goodwill and intangible assets—Goodwill is established and recorded if the consideration given during an
acquisition transaction exceeds the fair value of the net assets received. Goodwill has an indefinite useful life and
is not amortized, but is evaluated annually for potential impairment, or when events or circumstances indicate a
potential impairment. The Company first evaluates potential impairment of goodwill by comparing the fair value
of the reporting unit to its carrying amount. Any excess of carrying value over fair value would indicate a
potential impairment and the Company would proceed to perform an additional test to determine whether
goodwill has been impaired and calculate the amount of that impairment. Intangible assets that have finite useful
lives, such as core deposit intangibles, are amortized over their estimated useful lives. The Company’s core
deposit intangible assets represent the value of the anticipated future cost savings that will result from the
acquired core deposit relationships versus an alternative source of funding.
Judgment may be used in assessing goodwill and intangible assets for impairment. Estimates of fair value are
based on projections of revenues, operating costs and cash flows of the reporting unit considering historical and
anticipated future results, general economic and market conditions, as well as the impact of planned business or
operational strategies. The valuations use a combination of present value techniques to measure fair value and
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
consider market factors. Additionally, judgment is used in determining the useful lives of finite-lived intangible
assets. Adverse changes in the economic environment, operations of the reporting unit, or changes in judgments
and projections could result in a significantly different estimate of the fair value of the reporting unit and could
result in an impairment of goodwill and/or intangible assets.
n) Other real estate owned—OREO consists of property that has been foreclosed on or repossessed by deed in
lieu of foreclosure. The assets are initially recorded at the fair value of the collateral less estimated costs to sell,
with any initial valuation adjustments charged to the ALL. Subsequent valuation adjustments, if any, in addition
to gains and losses realized on sales and net operating expenses, are recorded in other non-interest expense. Costs
associated with maintaining property, such as utilities and maintenance, are charged to expense in the period in
which they occur, while costs relating to the development and improvement of property are capitalized to the
extent the balance does not exceed fair value. All OREO acquired through acquisition is recorded at fair value,
less cost to sell, at the date of acquisition. The Company’s loss sharing agreements with the FDIC cover losses
and expenses incurred on OREO resulting from the covered assets in the Hillcrest Bank and Community Banks
of Colorado transactions in the same manner, and are included in the same loss thresholds, as the covered loans.
o) Securities sold under agreements to repurchase—The Company enters into sales of securities under
agreements to repurchase as of a specified future date. These repurchase agreements are considered financing
agreements and the obligation to repurchase assets sold is reflected as a liability in the consolidated statements of
financial condition of the Company. The repurchase agreements are collateralized by debt securities that are
under the control of the Company.
p) Stock-based compensation—The Company accounts for stock-based compensation in accordance with ASC
Topic 718, Compensation—Stock Compensation. The Company grants stock-based awards including stock
options and restricted stock. Stock option grants are for a fixed number of common shares and are issued to
employees and directors at exercise prices which are not less than the fair value of a share of stock at the date of
grant. The options vest over a time period stated in each option agreement and may be subject to other
performance vesting conditions, which require the related compensation expense to be recorded ratably over the
requisite service period starting when such conditions become probable. Certain stock options contain vesting
conditions that were tied to the Company’s shares becoming publicly listed on a national exchange. Restricted
stock is granted for a fixed number of shares, the transferability of which is restricted until such shares become
vested according to the terms in the award agreement. Restricted shares typically have multiple vesting
qualifications which may include time vesting of a set portion of the restricted shares following a qualified
investment transaction (a performance criterion), market criteria that are tied to specified market conditions of
the Company’s common stock price and/or vesting tied to the Company’s shares becoming publicly listed on a
national exchange.
The fair value of awards is measured using either a Black-Scholes model or a Monte Carlo simulation model,
depending on the vesting requirement of each grant. Expense is typically recognized over the expected vesting
period, by vesting tranche, based on the fair value of the awards on the grant date. In accordance with ASC Topic
718, the Company recognized compensation expense on the grants that have vesting requirements tied to the
Company’s shares becoming listed on a national exchange subsequent to that vesting requirement being met. The
amortization of stock-based compensation reflects any estimated forfeitures and the expense realized in
subsequent periods may be adjusted to reflect the actual forfeitures realized. The outstanding stock options and
restricted shares carry a maximum contractual term of 10 years. To the extent that any award is forfeited,
surrendered, terminated, expires, or lapses without being exercised, the shares of stock subject to such award not
delivered as a result thereof are again made available for awards under the Plan.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
q) Warrants—The Company issued warrants to certain lead stockholders. The warrants are for a fixed number of
shares and expire ten years from the date of issuance. If exercised, the Company must settle the warrants in its
own stock. The exercise price and the number of warrants is subject to a down-round provision whereby
subsequent equity issuances at a price below the existing exercise price will result in a downward adjustment to
the exercise price and an increase to the number of warrants, and as a result, the warrants are classified as a
liability in the Company’s consolidated statements of financial condition. The Company is required to revalue the
warrants at the end of each reporting period and any change in fair value is reported in the statements of
operations as other non-interest expense in the period in which the change occurred. The fair value of the
warrants is calculated using a Black-Scholes model.
r) Income taxes—The Company and its subsidiaries file U.S. federal and certain state income tax returns on a
consolidated basis. Additionally, the Company and its subsidiaries file separate state income tax returns with
various state jurisdictions. The provision for income taxes includes the income tax balances of the Company and
all of its subsidiaries.
Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis
and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax
rates in the period of change. The Company establishes a valuation allowance when management believes, based
on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not
be realized.
The Company recognizes and measures income tax benefits based upon a two-step model: 1) a tax position must
be more likely than not to be sustained based solely on its technical merits in order to be recognized; and 2) the
benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon
settlement. The difference between the benefit recognized for a position in this model and the tax benefit claimed
on a tax return is treated as an unrecognized tax benefit. The Company recognizes income tax related interest and
penalties in other non-interest expense.
s) Earnings (loss) per share (EPS)—Basic earnings (loss) per share are computed by dividing income allocated
to common stockholders by the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per common share are computed by dividing income allocated to common stockholders
by the weighted average common shares outstanding during the period, plus amounts representing the dilutive
effect of stock options outstanding, unvested restricted shares, warrants to issue common stock, or other contracts
to issue common shares (“common stock equivalents”). Common stock equivalents are excluded from the
computation of diluted earnings (loss) per common share in periods in which they have an anti-dilutive effect.
Note 3 Recent Accounting Pronouncements
Accounting for Indemnification Assets—In October 2012, the Financial Accounting Standards Board (“FASB”)
released ASU 2012-06 Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date
as a Result of a Government-Assisted Acquisition of a Financial Institution. This guidance clarified that any
amortization of changes in the value of an indemnification asset should be limited to the contractual term of the
indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life
of the indemnified assets). This guidance resulted in no changes to the accounting for the Company’s
indemnification asset.
123
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Presentation of Comprehensive Income—In June 2011, the FASB issued ASU 2011-05, “Presentation of
Comprehensive Income.” This guidance provides entities with an option of presenting the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. This guidance
eliminates the option to present the components of other comprehensive income as part of the statement of
changes in stockholders’ equity. The Company was required to adopt this update retrospectively for the quarter
ended March 31, 2012. Adoption of this update affects the presentation of the components of comprehensive
income in the Company’s financial statements, but did not have an impact on the Company’s consolidated
statements of financial condition, results of operations or liquidity. ASU 2011-12 delayed the effective date of
certain requirements of ASU 2011-05 related to the presentation of reclassifications of items out of accumulated
other comprehensive income.
Goodwill Impairment Testing—In September 2011, the FASB issued ASU 2011-08, Testing for Goodwill
Impairment, which amends ASC Topic 350 to allow companies the option of performing a qualitative assessment
before calculating the fair value of the reporting unit (i.e. step one of the goodwill impairment test). If the
Company determines, on the basis of qualitative factors, that it is more likely than not that the fair value of the
reporting unit is greater than its carrying amount, the two-step impairment test would not be required. The
amendments were effective for interim and annual goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. However, early adoption was permitted. The Company adopted the amended
standard for the year ending December 31, 2012, as required. The adoption of this standard did not have a
material impact on the Company’s consolidated financial statements, results of operations or liquidity.
Fair Value Measurements—In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement to facilitate
convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) to achieve common
fair value measurement and disclosure requirements. The amendments in the ASU provide common requirements
for measuring fair value and for disclosing information about fair value measurements. They do not require
additional fair value measurements and are not intended to establish valuation standards or affect valuation
practices outside of financial reporting. The amendments provided in the ASU were effective for the Company
for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a
material impact on the Company’s consolidated financial statements, results of operations or liquidity.
Reconsideration of Effective Control for Repurchase Agreements—In April, 2011, the FASB issued ASU
2011-03 “Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU
remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or
redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. This
guidance also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund
substantially all of the cost of purchasing replacement financial assets. The guidance in this ASU was effective
for the first interim or annual period beginning on or after December 15, 2011. The guidance is applied
prospectively to transactions or modifications of existing transactions that occur on or after the effective date and
early adoption was not permitted. The Company adopted the methodologies prescribed by this ASU in 2012,
which did not have a material effect on its financial statements, results of operations or liquidity.
Disclosures About Offsetting Assets and Liabilities—In December 2011, the FASB issued ASU 2011-11,
Disclosures about Offsetting Assets and Liabilities. Under the ASU, an entity will be required to disclose both
gross and net information about instruments and transactions eligible for offset in the balance sheet, as well as
instruments and transactions subject to an agreement similar to a master netting agreement. In January 2013, the
FASB released ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which
124
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
amended ASU 2011-11 to specifically include only derivatives accounted for under Topic 815, repurchase and
reverse repurchase agreements, and securities borrowing and lending transactions that are either offset or subject
to an enforceable master netting arrangement. The disclosure requirements are effective for annual reporting
periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application
required. The adoption of these accounting pronouncements is not expected to have a material impact on the
Company’s consolidated financial statements.
Note 4 Acquisition Activities
The Company completed two acquisitions in 2011 and two acquisitions in 2010. The Company has determined
that each of the acquisitions, as more fully described below, constitutes a business combination as defined in
ASC Topic 805, Business Combinations. Accordingly, as of the date of the acquisitions, the Company recorded
the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with
the guidance provided in ASC Topic 820, Fair Value Measurements and Disclosures. Fair value is established by
discounting the expected future cash flows with a market discount rate for like maturity and risk instruments. The
estimation of expected future cash flows requires significant assumptions about appropriate discount rates,
expected future cash flows, market conditions and other future events and actual results could differ materially.
The determination of the initial fair values of loans, OREO and the FDIC indemnification asset and clawback
liability involve a high degree of judgment and complexity. The Company has made the determinations of fair
value using the best information available at the time; however, the assumptions used are subject to change and,
if changed, could have a material effect on the Company’s financial position and results of operations.
Community Banks of Colorado—On October 21, 2011, the Company entered into a purchase and assumption
agreement with the FDIC, as receiver, to acquire certain assets and assume substantially all of the liabilities of
the former Community Banks of Colorado of Greenwood Village, Colorado. Upon closing the acquisition, the
Company reopened the 36 full-service banking centers in Colorado and the 4 full-service banking centers in
California previously owned by Community Banks of Colorado, as branches of NBH Bank, N.A., branded as
Community Banks of Colorado.
Excluding the effects of acquisition accounting adjustments, the Company acquired assets of $1.3 billion and
assumed deposits and other liabilities of $1.2 billion in connection with the acquisition of Community Banks of
Colorado. The net assets were acquired at a discount of $98.0 million, which is reflected as a portion of the cash
acquired, and the settlement amount received from the FDIC at close was $61.4 million. In conjunction with the
Community Banks of Colorado purchase and assumption agreement, the Company also provided the FDIC with
Value Appreciation Rights (“VAR”) whereby the FDIC was entitled to a payment equal to the excess of the
Company’s common stock price and a strike price of $18.93 per unit at a future time, not to exceed two years.
The VAR was applicable to a maximum of 100,000 units and the Company estimated the fair value of the VAR
at the date of acquisition of Community Banks of Colorado to be approximately $0.5 million, and is included in
due to FDIC in the 2011 and 2010 accompanying consolidated statements of financial condition. The VAR was
settled in cash in 2012 for $0.1 million.
125
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The Company has determined that the Community Banks of Colorado acquisition constitutes a business
combination as defined under ASC Topic 805. In accordance with that guidance, the Company recorded all
assets acquired and liabilities assumed at their fair values as of the date of acquisition. Information regarding the
fair value adjustments recorded by the Company in accordance with ASC Topic 805 is shown in the following
table (in thousands):
As
Acquired
from FDIC
Fair Value
Adjustments
Settlement
amount received
from FDIC
As recorded by
the Company
Assets acquired:
Cash and cash equivalents . . . . .
Investment securities, available
for sale . . . . . . . . . . . . . . . . . . .
Non-marketable securities . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . .
FDIC indemnification asset
. . . .
Other real estate owned . . . . . . . .
Premises and equipment . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . .
Core deposit intangible asset
. . .
Due from FDIC . . . . . . . . . . . . . .
Accrued interest and other
assets . . . . . . . . . . . . . . . . . . . .
$ 188,770
$
11,361
2,753
966,248
—
72,478
212
—
—
9,936
—
—
—
(211,365)
150,987
(42,729)
—
7,188
4,810
—
6,245
—
$61,390
$ 250,160
—
—
—
—
—
—
—
—
—
—
11,361
2,753
754,883
150,987
29,749
212
7,188
4,810
9,936
6,245
Total assets . . . . . . . . . . . . .
$1,258,003
$ (91,109)
$61,390
$1,228,284
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank
advances . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . .
Due to FDIC . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . .
$1,194,987
$
—
$ —
$1,194,987
15,000
553
630
386
1,381
—
15,347
—
—
—
—
—
16,381
553
15,977
386
Total liabilities . . . . . . . . . .
$1,211,556
$ 16,728
$ —
$1,228,284
The fair value of loans and OREO acquired in the Community Banks of Colorado acquisition decreased $7.1 and
$1.6 million during the measurement period from the original estimates. The change resulted in an increase to the
indemnification asset of $5.5 million, an increase in goodwill of $2.7 million and a decrease to the clawback
liability of $0.5 million. These adjustments are reflected in the above table.
At the date of acquisition, the gross contractual amounts receivable for loans not subject to the requirements of
ASC Topic 310-30 was $144.7 million, the Company’s best estimate of contractual cash flows not expected to be
collected was $27.0 million and recorded fair value was $116.8 million. In connection with the purchase and
assumption agreement with the FDIC, the Company entered into a loss sharing agreement with the FDIC
whereby the Company will be reimbursed by the FDIC for a portion of the losses incurred on certain loans and
certain OREO as a result of the resolution and disposition of the problem assets of Community Banks of
Colorado. The loss sharing agreement with the FDIC covers a significant portion of the Community Banks of
Colorado commercial loans, select other loans and unfunded commitments, and OREO, which are collectively
126
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
referred to as the “covered assets.” However, the Company also acquired other assets of Community Banks of
Colorado that are not covered by the loss sharing agreements, including $250.2 million of cash and cash
equivalents, $11.4 million of investment securities, $2.8 million of non-marketable securities, $288.2 million of
non-covered loans and overdrafts, $4.9 million of non-covered OREO, and other assets. The loss sharing
agreement covers losses on select loans and OREO and has provisions that reimburse the Company for direct
expenses related to the resolution of the covered assets. For purposes of the loss sharing agreement, there are
three tranches of losses, each beginning after the loss threshold of the previous tranche has been met, and each
with a specified loss-coverage percentage. The loss thresholds and coverage amounts are as follows (dollars in
thousands):
Tranche
1
2
3
Loss Threshold
Up to $204,194
204,195-308,020
>308,020
Loss-Coverage
Percentage
80%
30%
80%
The FDIC’s obligation to reimburse the Company for losses with respect to covered assets begins with the first
dollar of loss incurred. The Company is also required to refund to the FDIC its share of recoveries under the loss
sharing agreements. The term for the loss sharing agreement is eight years. The Company will share in losses and
recoveries with the FDIC for the first five years. After the first five years, the FDIC will not share in losses but
only in recoveries for the remaining three years. The reimbursable losses from the FDIC are based on the book
value of the relevant covered assets as determined by the FDIC at the date of acquisition and may not directly
correspond to the Company’s carrying value of the related assets. The expected reimbursements from the FDIC
under the loss sharing agreement were recorded as an indemnification asset at the estimated fair value of
$151.0 million at the date of acquisition.
Within 45 days of the end of the loss sharing agreement with the FDIC, the Company may be required to pay the
FDIC in the event that losses do not reach a specified threshold, based on the initial discount received less
cumulative servicing amounts for the covered assets acquired. The Company recorded $14.8 million as the
estimated fair value of this clawback liability at the acquisition date.
In connection with the Community Banks of Colorado transaction, the Company recognized approximately
$7.2 million of goodwill and a $4.8 million core deposit intangible. The goodwill of $7.2 million recorded at the
date of acquisition represents the amount by which the fair value of the consideration paid exceeds the
acquisition-date fair value of the identifiable net assets acquired and synergies expected to be realized through
consolidating the operations of Community Banks of Colorado with the Company’s existing operations.
Bank of Choice—On July 22, 2011, the Company entered into a purchase and assumption agreement with the
FDIC, as receiver, to acquire certain assets and assume substantially all of the liabilities of the former Bank of
Choice of Greeley, Colorado through its Bank Midwest, N.A. subsidiary. Upon closing the acquisition, the
Company reopened the 16 full-service banking centers previously owned by the Bank of Choice, as branches of
NBH Bank, N.A., branded as Bank of Choice. Excluding the effects of acquisition accounting adjustments, the
Company acquired assets of $772.6 million and assumed deposits and other liabilities of $872.7 million in
connection with the acquisition of Bank of Choice. The net liabilities were acquired at a discount of $171.6
million, which is reflected as a portion of the cash acquired. In conjunction with the Bank of Choice purchase and
assumption agreement, the Company also provided the FDIC with VAR whereby the FDIC was entitled to a cash
or stock payment equal to the excess of the Company’s common stock price and a strike price of $17.95 per unit
127
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
at a future time, not to exceed two years. The VAR was applicable to a maximum of 100,000 units and the
Company estimated the fair value of the VAR at the date of acquisition of Bank of Choice to be approximately
$0.6 million, which is included in due to FDIC in the accompanying consolidated statements of financial
condition at 2011. This VAR was settled in cash in 2012 for $0.2 million.
The Company has determined that the Bank of Choice acquisition constitutes a business combination as defined
in ASC Topic 805. Accordingly, as of the date of acquisition, the Company recorded the assets acquired and
liabilities assumed at fair value. The Company determined initial fair values in accordance with the guidance
provided in ASC Topic 820. Fair value was established by discounting the expected future cash flows with a
market discount rate for like maturity and risk instruments. The estimation of expected future cash flows requires
significant assumptions about appropriate discount rates, expected future cash flows, market conditions and other
future events and actual results could differ materially. The determination of the fair values of loans involves a
high degree of judgment and complexity and the Company has made the determinations of fair value using the
best information available at the time.
A summary of the assets acquired and liabilities assumed in connection with the Bank of Choice acquisition and
information regarding the fair value adjustments recorded by the Company in accordance with ASC Topic 805
Business Combinations are shown in the table below (in thousands):
As Acquired
from FDIC
Fair Value
Adjustments
Settlement
amount
received from
FDIC
As recorded
by the
Company
Assets acquired:
Cash and cash equivalents . . . . . . . . . . . . $128,265
Investment securities, available for
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-marketable securities . . . . . . . . . . . .
Loans* . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . .
Gain on bargain purchase* . . . . . . . . . . .
Premises and equipment
. . . . . . . . . . . . .
Core deposit intangible asset . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . .
134,369
9,840
447,738
49,833
—
21
—
2,496
$
—
$273,740
$402,005
—
—
(86,491)
(15,498)
(60,520)
—
5,190
—
—
—
—
—
—
—
—
—
134,369
9,840
361,247
34,335
(60,520)
21
5,190
2,496
Total assets . . . . . . . . . . . . . . . . . . . $772,562
$(157,319)
$273,740
$888,983
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . $760,227
106,840
Federal Home Loan Bank advances . . . .
751
Accrued interest payable . . . . . . . . . . . . .
—
Due to FDIC . . . . . . . . . . . . . . . . . . . . . .
4,881
Other liabilities . . . . . . . . . . . . . . . . . . . .
$
—
10,308
—
2,526
3,450
Total liabilities . . . . . . . . . . . . . . . . . $872,699
$ 16,284
$ —
—
—
—
—
$ —
$760,227
117,148
751
2,526
8,331
$888,983
* The fair value of loans acquired decreased by $2.7 million during the measurement period from the original
estimates. The change resulted in a decrease to the gain on bargain purchase of an identical amount. Both
adjustments are reflected in the above table.
128
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
At the date of acquisition, the gross contractual amounts receivable for loans not subject to the requirement of
ASC Topic 310-30 was $50.2 million, the Company’s best estimate of contractual cash flows not expected to be
collected was $7.0 million and recorded fair value was $43.5 million.
In connection with the Bank of Choice transaction, the Company recognized a $5.2 million core deposit
intangible and a bargain purchase gain of $60.5 million. The bargain purchase gain of $60.5 million recorded at
the date of acquisition represents the amount by which the acquisition-date fair value of the identifiable net assets
acquired (inclusive of the $171.6 million purchase discount from the FDIC) exceeds the fair value of the
consideration transferred.
Bank Midwest, N.A.—In July 2010, the Company agreed to acquire, and on December 10, 2010 completed the
acquisition of, certain assets and the assumption of certain liabilities formerly held by Bank Midwest, one of six
banking subsidiaries owned by Dickinson Financial Corporation. In this transaction, the Company acquired 39
locations across Missouri and eastern Kansas, $2.4 billion of deposits and approximately $905.4 million of loans.
The Company had specific performance criteria for the assets purchased and, as a result, did not acquire any non-
accrual loans or OREO in connection with the Bank Midwest transaction.
The Company paid $56.0 million cash for the Bank Midwest net assets. The fair value of consideration paid
exceeded the fair value of the Bank Midwest net assets acquired and resulted in the establishment of goodwill in
the amount of $52.4 million, which will be tax deductible. In conjunction with the purchase and assumption of
the Bank Midwest net assets, the Company infused $390 million of capital into Bank Midwest at the time of
closing. Information regarding the assets acquired and liabilities assumed on December 10, 2010 in connection
with the Bank Midwest acquisition are shown in the table below (in thousands):
As Acquired
from DFC
Fair Value
Adjustments
Settlement
amount paid to
DFC
As recorded by
the Company
Assets acquired:
Cash and cash equivalents . . . . . .
Investment securities, available
for sale . . . . . . . . . . . . . . . . . . .
Non-marketable securities . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . .
Accrued interest receivable . . . . .
Other assets . . . . . . . . . . . . . . . . . .
$1,425,737
$ —
$(56,000)
$1,369,737
55,360
400
905,354
30,662
—
—
4,458
3,520
—
—
(22,739)
5,562
52,442
21,650
—
—
—
—
—
—
—
—
—
—
55,360
400
882,615
36,224
52,442
21,650
4,458
3,520
Total assets . . . . . . . . . . . . . .
$2,425,491
$ 56,915
$(56,000)
$2,426,406
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . .
Other liabilities . . . . . . . . . . . . . . .
$2,384,982
11,089
29,420
Total liabilities . . . . . . . . . . .
$2,425,491
$
$
915
—
—
915
$ —
—
—
$ —
$2,385,897
11,089
29,420
$2,426,406
129
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Hillcrest Bank, N.A.—On October 22, 2010, the Company entered into a purchase and assumption agreement
with the FDIC, as receiver, to acquire certain assets and assume substantially all of the liabilities of the former
Hillcrest Bank of Overland Park, Kansas.
Prior to the acquisition, Hillcrest Bank was a bank headquartered in Overland Park, Kansas, which operated nine
full-service banking branches and 32 retirement center branches in four states. Excluding the effects of
acquisition accounting adjustments, the Company purchased assets of $1.6 billion and assumed deposits and
liabilities of $1.3 billion in connection with the acquisition of Hillcrest Bank. The net assets were acquired at a
discount of $182.7 million, which is reflected as a portion of the cash acquired, and the settlement amount paid to
the FDIC at close was $56.3 million. In conjunction with the Hillcrest Bank purchase and assumption agreement,
the Company also provided the FDIC with VAR whereby the FDIC was entitled to a cash payment equal to the
excess of the Company’s common stock price and a strike price of $18.65 per unit at a future time, not to exceed
two years. The VAR was applicable to a maximum of 100,000 units and the Company estimated the fair value of
the VAR at the date of acquisition of Hillcrest Bank and at December 31, 2010 to be approximately $0.7 million,
which is included in due to FDIC in the December 31, 2011 and 2010 consolidated statements of financial
condition. This VAR was settled in cash in 2012 for $0.3 million. The Company infused $170 million of capital
into Hillcrest Bank immediately following the closing of the transaction.
A summary of the assets acquired and liabilities assumed in connection with the Hillcrest Bank acquisition is
shown in the table below (in thousands):
Assets acquired:
Cash and cash equivalents . . . . . . . . . . .
Investment securities, available for
sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-marketable securities . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC indemnification asset
. . . . . . . . . .
Other real estate owned, covered by loss
. . . . . . . . . . . . . . . . .
Gain on bargain purchase . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . .
share agreement
As Acquired
from FDIC
Fair Value
Adjustments
$ 190,344
$
235,255
4,042
1,016,394
—
111,332
—
—
157
4,882
—
—
—
(235,052)
159,706
(59,732)
(37,778)
5,760
—
—
Settlement
amount
paid to
FDIC
As recorded
by the
Company
$(56,343)
$ 134,001
—
—
—
—
—
—
—
—
—
235,255
4,042
781,342
159,706
51,600
(37,778)
5,760
157
4,882
Total assets . . . . . . . . . . . . . . . . . . .
$1,562,406
$(167,096)
$(56,343)
$1,338,967
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . .
Accrued interest payable . . . . . . . . . . . .
Due to FDIC . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .
$1,234,013
80,460
7,279
—
1,575
$
—
3,434
—
11,454
752
$ —
—
—
—
—
$1,234,013
83,894
7,279
11,454
2,327
Total liabilities . . . . . . . . . . . . . . . .
$1,323,327
$ 15,640
$ —
$1,338,967
130
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
In connection with the purchase and assumption agreement of Hillcrest Bank with the FDIC, the Company
entered into loss sharing agreements with the FDIC whereby the Company will be reimbursed by the FDIC for a
portion of the losses incurred as a result of the resolution and disposition of the problem assets of Hillcrest Bank.
The loss sharing agreements with the FDIC cover substantially all of Hillcrest Bank’s loans including single
family residential mortgage loans, commercial real estate, commercial and industrial loans, unfunded
commitments, and OREO, which are collectively referred to as the “covered assets.” However, the Company also
acquired other assets of the failed bank that are not covered by the loss sharing agreements including $190.3
million of cash and cash equivalents, $239.3 million of investment securities purchased at fair value, $3.1 million
of consumer loans and overdrafts, and other tangible assets. For purposes of the loss sharing agreements, the
anticipated losses on the covered assets are grouped into two categories, commercial assets and single family
assets, and each category has its own specific loss sharing agreement. The loss sharing agreement categories
cover losses on both loans and OREO in their respective categories and have provisions that reimburse the
Company for direct expenses related to the resolution of these assets. Within the categories, there are three
tranches of losses, each beginning after the loss threshold of the previous tranche has been met, and each with a
specified loss-coverage percentage. The categories, and the respective loss thresholds and coverage amounts are
as follows (in thousands):
Tranche
1
2
3
Commercial
Loss
Threshold
$ 295,592
405,293
>405,293
Loss-Coverage
Percentage
Tranche
60%
0%
80%
1
2
3
Single family
Loss
Threshold
Loss-Coverage
Percentage
$ 4,618
8,191
>8,191
60%
30%
80%
The FDIC’s obligation to reimburse the Company for losses with respect to covered assets begins with the first
dollar of loss incurred. The term for loss sharing on single family residential real estate loans is ten years, while
the term for loss sharing on all other covered loans is five years. The reimbursable losses from the FDIC are
based on the book value of the relevant covered assets as determined by the FDIC at the date of acquisition. New
loans originated after that date are not covered by the provisions of the loss sharing agreements. The Company
will refund the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Company
under the loss sharing agreement.
The expected reimbursements from the FDIC under the loss sharing agreements were recorded as an
indemnification asset at its estimated fair value of $159.7 million on the acquisition date. The indemnification
asset reflects the present value of the expected net cash reimbursement related to the loss sharing agreement
described above.
Within 45 days of the end of the loss sharing agreements with the FDIC, the Company may be required to pay
the FDIC in the event that losses do not reach a specified threshold, based on the initial discount received less
cumulative servicing amounts for the covered assets acquired. The Company recorded $11.5 million as the
estimated fair value of this clawback liability at the acquisition date. The clawback liability is included in due to
FDIC in the accompanying consolidated statements of financial condition.
The Company believes that the FDIC loss sharing agreement mitigates the Company’s risk of loss on assets
acquired. Nonetheless, to the extent the actual values realized for the acquired assets are different from the
estimates, the FDIC indemnification asset will generally be impacted in an offsetting manner due to the loss
131
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
sharing support from the FDIC. Additionally, the tax treatment of FDIC assisted acquisitions is complex and
subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date.
In connection with the Hillcrest Bank transaction, the Company recognized approximately $37.8 million of
bargain purchase gain and a $5.8 million core deposit intangible. The amount of bargain purchase gain recorded
represents the excess of the fair value of the assets acquired (inclusive of the $182.7 million purchase discount
from the FDIC) compared to the fair value of liabilities assumed (inclusive of the settlement amount paid to the
FDIC of $56.3 million) at the date of acquisition.
Note 5 Investment Securities
During the year ended December 31, 2012, the Company re-evaluated the securities classified as available-for-
sale and identified securities that the Company intends to hold until maturity. As a result, during the first quarter
of 2012, the Company transferred residential mortgage pass-through securities issued or guaranteed by U.S.
Government agencies or sponsored enterprises with a collective fair value of $754.1 million from an available-
for-sale classification to the held-to-maturity classification. The $754.1 million of securities transferred to held-
to-maturity included $38.9 million of unrealized gains, net. As a result of the change in intent, the transferred
securities were transferred to held-to-maturity at their fair value on the date of the transfer. The unrealized net
gain continues to reside in “accumulated other comprehensive income, net of tax” in the Company’s consolidated
statements of financial condition and will be accreted into interest income over the remaining life of the
securities. This accretion is simultaneously offset by the amortization of the premium that was recorded to the
investment securities balance at the time of the transfer, which represents the fair value adjustment, resulting in
no impact to earnings.
Available-for-sale
Available-for-sale investment securities are summarized as follows as of the dates indicated (in thousands):
December 31, 2012
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
Fair Value
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . $
Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . . . . . . .
Other residential MBS issued or guaranteed by
U.S. Government agencies or sponsored
enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 $ —
$ — $
89,881
122
—
300
90,003
658,169
19,849
(1)
678,017
931,979
419
17,630
—
(320)
—
949,289
419
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,680,748 $37,601
$(321) $1,718,028
132
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
December 31, 2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. Government sponsored agency obligations . . . . . . .
Mortgage-backed securities (“MBS”):
3,300 $ —
3,009
1
$ — $
—
3,300
3,010
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . . . . . . . 1,139,058
52,480
(1)
1,191,537
Other residential MBS issued or guaranteed by
U.S. Government agencies or sponsored
enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other MBS issued or guaranteed by U.S.
Government agencies or sponsored
enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
620,122
23,503
—
643,625
20,123
419
685
—
—
—
20,808
419
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,786,031 $76,669
$ (1)
$1,862,699
At December 31, 2012 and 2011, mortgage-backed securities represented 94.7% and 99.6%, respectively, of the
Company’s available-for-sale investment portfolio and all mortgage-backed securities were backed by
government sponsored enterprises (“GSE”) collateral such as Federal Home Loan Mortgage Corporation
(“FHLMC”) and Federal National Mortgage Association (“FNMA”), and the government sponsored agency
Government National Mortgage Association (“GNMA”).
The table below summarizes the unrealized losses as of the dates shown, along with the length of the impairment
period (in thousands):
Less than 12 months
December 31, 2012
12 months or more
Total
Fair Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through
securities issued or guaranteed by U.S.
Government agencies or sponsored
enterprises . . . . . . . . . . . . . . . . . . . . . . $
17
$ —
$
8
$ (1)
$
25
$ (1)
Other residential MBS issued or
guaranteed by U.S. Government
agencies or sponsored enterprises . . . .
130,686
(320) —
—
130,686
(320)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130,703
$(320)
$ 8
$ (1)
$130,711
$(321)
133
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Less than 12 months
Unrealized
Fair
Losses
Value
December 31, 2011
12 months or more
Unrealized
Fair
Losses
Value
Total
Fair
Value
Unrealized
Losses
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20
$20
$(1)
$(1)
$—
$—
$—
$—
$20
$20
$(1)
$(1)
Management evaluated all of the securities in an unrealized loss position and concluded that no other-than-
temporary-impairment existed at December 31, 2012 or December 31, 2011. The Company had no intention to
sell these securities before recovery of their amortized cost and believes it will not be required to sell the
securities before the recovery of their amortized cost.
The Company pledges certain securities as collateral for public deposits, securities sold under agreements to
repurchase and to secure borrowing capacity at the Federal Reserve Bank, if needed. The fair value of available-
for-sale investment securities pledged as collateral totaled $89.2 million at December 31, 2012 and $198.6
million December 31, 2011. The decrease of pledged available-for-sale investment securities was primarily
attributable to the transfer of a significant amount of pledged securities from available-for-sale to held-to-
maturity. Investment securities may also be pledged as collateral should the Company utilize its line of credit at
the FHLB of Des Moines; however, no investment securities were pledged for this purpose at December 31, 2012
or December 31, 2011.
The table below summarizes the contractual maturities, as of the last scheduled repayment date, of the available-
for-sale investment portfolio as of December 31, 2012 (in thousands):
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
28,300
61,885
256,395
1,333,749
419
Fair Value
$
28,336
61,972
260,442
1,366,859
419
Total investment securities available-for-sale . . . . . . .
$1,680,748
$1,718,028
Actual maturities of mortgage-backed securities may differ from contractual maturities depending on the
repayment characteristics and experience of the underlying financial instruments. The estimated weighted
average life of the available-for-sale mortgage-backed securities portfolio was 3.4 years as of December 31, 2012
and December 31, 2011. This estimate is based on assumptions and actual results may differ.
The Company’s U.S. Treasury securities have contractual maturities of less than one year. Other securities of
$0.4 million have no stated contractual maturity date as of December 31, 2012.
134
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Held-to-maturity
At December 31, 2012 and December 31, 2011 the Company held $577.5 million and $6.8 million of held-to-
maturity investment securities, respectively. The increase was attributable to the transfer of securities with a fair
value of $754.1 million from an available-for-sale classification to the held-to-maturity classification during the
first quarter of 2012. Held-to-maturity investment securities are summarized as follows as of the dates indicated
(in thousands):
December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . .
$577,486
Total investment securities held-to-maturity . . . . .
$577,486
$7,065
$7,065
$—
$—
$584,551
$584,551
December 31, 2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . .
$ 6,801
Total investment securities held-to-maturity . . . . .
$ 6,801
$
$
28
28
$—
$—
$ 6,829
$ 6,829
The table below summarizes the contractual maturities, as of the last scheduled repayment date, of the held-to-
maturity investment portfolio at December 31, 2012 (in thousands):
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$ —
—
—
Fair Value
$ —
—
—
577,486
584,551
—
—
Total investment securities held-to-maturity . . . . . . . . . .
$577,486
$584,551
The carrying value of held-to-maturity investment securities pledged as collateral totaled $127.9 million at
December 31, 2012. At December 31, 2011, none of the $6.8 million of held-to-maturity investment securities
were pledged as collateral. Actual maturities of mortgage-backed securities may differ from scheduled maturities
depending on the repayment characteristics and experience of the underlying financial instruments. The
estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of
December 31, 2012 was 3.8 years and 6.4 years as of December 31, 2011. This estimate is based on assumptions
and actual results may differ.
135
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 6 Non-marketable Securities
Non-marketable securities include Federal Reserve Bank stock and FHLB stock. At December 31, 2012, the
Company held $25.0 million of Federal Reserve Bank stock, $7.5 million of FHLB Des Moines stock, and
$0.5 million of FHLB San Francisco stock, for regulatory or debt facility purposes. At December 31, 2011 the
Company held $25.0 million of Federal Reserve Bank stock, $3.5 million of FHLB Des Moines stock, and
$0.6 million of FHLB San Francisco stock.
This stock is restricted and is carried at cost. There have been no identified events or changes in circumstances
that may have an adverse effect on the investments carried at cost. Management evaluated all of the non-
marketable securities and concluded that no OTTI existed at December 31, 2012 or December 31, 2011.
Note 7 Loans
The loan portfolio is comprised of loans that were acquired in connection with the Company’s acquisitions of
Bank of Choice and Community Banks of Colorado in 2011, Hillcrest Bank and Bank Midwest in 2010, and new
loans originated by the Company. The majority of the loans acquired in the Hillcrest Bank and Community
Banks of Colorado transactions are covered by loss sharing agreements with the FDIC, and covered loans are
presented separately from non-covered loans due to the FDIC loss sharing agreements associated with these
loans.
Covered loans comprised 33.1% of the total loan portfolio at December 31, 2012, compared to 41.9% of the total
loan portfolio at December 31, 2011. The table below shows the loan portfolio composition and the amounts of
loans that are accounted for in accordance with ASC Topic 310-30 (in thousands):
Covered Loans
Non-Covered Loans
December 31, 2012
ASC
310-30
Non ASC
310-30
Total
Covered
Loans
ASC
310-30
Non ASC
310-30
Total Non-
Covered
Loans
Total Loans
% of
Total
Commercial . . . . . . . . . $ 73,685 $47,307 $120,992 $
Commercial real
9,484 $140,112 $ 149,596 $ 270,588
14.7%
estate . . . . . . . . . . . .
Agriculture . . . . . . . . . .
Residential real
estate . . . . . . . . . . . .
Consumer . . . . . . . . . . .
396,414
38,890
13,693
17,094
410,107
55,984
169,621
8,843
225,271
108,580
394,892
117,423
804,999
173,407
43.9%
9.4%
18,956
3
2,180
—
21,136
3
87,144
18,981
430,465
31,347
517,609
50,328
538,745
50,331
29.3%
2.7%
Total . . . . . . . . . . . . . . . $527,948 $80,274 $608,222 $294,073 $935,775 $1,229,848 $1,838,070 100.0%
136
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Covered Loans
Non-Covered Loans
December 31, 2011
ASC
310-30
Non ASC
310-30
Total
Covered
Loans
ASC
310-30
Non ASC
310-30
Total Non-
Covered
Loans
Total Loans
Commercial . . . . . . . . $123,108 $ 79,044 $202,152 $ 31,482 $139,297 $ 170,779 $ 372,931
Commercial real
% of
Total
16.4%
estate . . . . . . . . . . .
Agriculture . . . . . . . . .
Residential real
estate . . . . . . . . . . .
Consumer . . . . . . . . . .
626,089
56,839
15,939
28,535
642,028
85,374
243,297
13,989
267,153
52,040
510,450
66,029
1,152,478
151,403
50.6%
6.7%
21,043
7
2,111
—
23,154
7
147,239
44,616
352,492
29,731
499,731
74,347
522,885
74,354
23.0%
3.3%
Total . . . . . . . . . . . . . . $827,086 $125,629 $952,715 $480,623 $840,713 $1,321,336 $2,274,051 100.0%
Covered Loans
The following tables summarize the carrying value of all covered loans by segment as of December 31, 2012 and
December 31, 2011, net of deferred discounts on loans excluded from ASC Topic 310-30, fees and costs of $4.0
million and $13.1 million, respectively (in thousands):
December 31, 2012
ASC
310-30
Non ASC
310-30
Total
covered
loans
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 73,685
—
$44,823
2,484
$118,508
2,484
Total commercial . . . . . . . . . . . . . . . . . . . . . .
73,685
47,307
120,992
Commercial real estate
Commercial construction . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Land and development . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,076
136,512
153,799
31,027
396,414
38,890
18,956
3
11
9,848
3,631
203
13,693
17,094
2,180
—
75,087
146,360
157,430
31,230
410,107
55,984
21,136
3
Total covered loans . . . . . . . . . . . . . . . . . . . .
$527,948
$80,274
$608,222
137
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
December 31, 2011
ASC
310-30
Non ASC
310-30
Total
covered
loans
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$123,108
—
$ 73,183
5,861
$196,291
5,861
Total commercial . . . . . . . . . . . . . . . . . . . . .
123,108
79,044
202,152
Commercial real estate
Commercial construction . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . .
Land and development . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,331
219,176
246,520
48,062
626,089
56,839
21,043
7
20
4,141
10,226
1,552
15,939
28,535
2,111
—
112,351
223,317
256,746
49,614
642,028
85,374
23,154
7
Total covered loans . . . . . . . . . . . . . . . . . . .
$827,086
$125,629
$952,715
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the
terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans accounted for
under ASC Topic 310-30 were not classified as non-performing assets at the respective acquisition dates, at
December 31, 2012 or at December 31, 2011 as the carrying value of the respective pools’ cash flows were
considered estimable and probable of collection. Therefore, interest income, through accretion of the difference
between the carrying value of the loans and the expected cash flows, was recognized on all acquired loans
accounted for under ASC Topic 310-30.
138
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Pooled loans accounted for under ASC Topic 310-30 that are 90 days or more past due and still accreting are
considered to be performing and are included in loans 90 days or more past due and still accruing. At
December 31, 2012 and December 31, 2011, $6.0 million and $13.1 million, respectively, of covered loans
accounted for outside the scope of ASC Topic 310-30 were on non-accrual. Loan delinquency for covered loans
is shown in the following tables at December 31, 2012 and 2011, respectively, (in thousands):
Covered Loans December 31, 2012
30-59
days past
due
60-89
days
past
due
Greater
than 90
days past
due
Total past
due
Current
Total
loans
Loans > 90
days past
due and
still
accruing
Non-
accrual
2,786 $ 3,383 $ — $ 597
10
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . .
Finance and insurance . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial . . .
Total commercial . . . . . . . . . . . . .
Commercial real estate
1-4 family construction . . . . . . . . . . . .
1-4 family acquisition/development . . .
Commercial construction . . . . . . . . . . .
Commercial acquisition/
development . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . .
Total commercial real estate . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . .
Total residential real estate . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . .
Credit Card . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . .
Total covered loans excluded
$ — $ — $
—
—
—
—
75
—
75
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
30
21
51
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
597 $
10
—
—
—
—
370
597 $
10
—
—
—
105
391
32
337
3,274
10
2,379
37,386
42
337
3,274
10
2,484
37,777
977
1,103
46,204
47,307
—
—
—
—
—
1,074
—
1,074
11
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,074
—
1,074
11
—
—
—
—
—
—
—
—
—
—
—
3,631
11
—
203
8,150
624
—
3,631
11
—
203
9,224
624
12,619
17,083
13,693
17,094
1,862
—
50
268
2,180
—
—
—
—
—
1,862
—
50
268
2,180
—
—
—
—
—
from ASC Topic 310-30 . . . . .
75
51
2,062
2,188
78,086
80,274
Loans accounted for under ASC 310-30
Commercial
. . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . .
458
8,150
1,247
—
—
563
3,034
16
—
—
4,239
107,809
2,571
2,264
—
5,260
118,993
3,834
2,264
—
68,425
277,421
35,056
16,692
3
73,685
396,414
38,890
18,956
3
4,239
107,809
2,571
2,264
—
Total covered loans accounted for
under ASC 310-30 . . . . . . . . . .
9,855
3,613
116,883
130,351
397,597
527,948
116,883
Total covered loans . . . . . . . . . . .
$9,930
$3,664 $118,945 $132,539 $475,683 $608,222 $116,883
$6,045
139
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
27
2,400
3,034
—
—
—
—
203
1,250
—
1,453
44
1,514
—
—
—
1,514
—
—
—
—
—
6,045
—
—
—
—
—
—
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Covered Loans December 31, 2011
30-59
days past
due
60-89
days
past
due
Greater
than 90
days past
due
Total
past
due
Current
Total
loans
Loans >
90
days
past
due and
still
accruing
Non-
accrual
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . $
Manufacturing . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial . . . . . .
319 $ — $ 1,069 $ 1,388 $ 4,043 $ 5,431 $ — $ 1,069
—
—
167
—
—
—
—
—
50
—
167
—
2,148
6,424
270
500
2,730
241
3,713
57,370
320
500
2,897
241
5,861
63,794
—
—
167
—
100
2,990
—
—
—
—
108
2,760
50
—
—
—
1,940
674
Total commercial
. . . . . . . . . . . . . . . .
2,983
2,868
4,326
10,177
68,867
79,044
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . .
1-4 family acquisition/development . . . . . .
Commercial construction . . . . . . . . . . . . . .
Commercial acquisition/development . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . . . . . .
Total residential real estate . . . . . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . .
Credit Card . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . .
Total covered loans excluded from
—
—
—
—
—
789
—
789
133
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
149
—
149
—
—
—
—
—
—
—
—
—
—
—
—
7,009
—
—
—
1,099
—
8,108
—
—
—
—
—
—
—
—
—
—
—
—
7,009
—
—
—
2,037
—
9,046
133
—
—
—
—
—
—
—
—
—
—
—
3,217
20
—
1,552
496
1,608
6,893
28,402
1,762
—
87
262
2,111
—
—
—
—
—
—
10,226
20
—
1,552
2,533
1,608
15,939
28,535
1,762
—
87
262
2,111
—
—
—
—
—
60
118
178
—
—
—
—
—
149
—
149
—
—
—
—
—
—
—
—
—
—
—
40
3,338
4,614
—
7,009
—
—
—
1,038
—
8,047
—
460
—
—
—
460
—
—
—
—
—
ASC Topic 310-30 . . . . . . . . . . . . .
3,905
3,017
12,434
19,356 106,273 125,629
327
13,121
Loans accounted for under ASC 310-30
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,027
13,114
157
—
—
1,763
19,320
4,967
—
—
10,183
98,746
439
287
—
20,973
131,180
5,563
287
—
102,135
494,909
51,276
20,756
7
123,108
626,089
56,839
21,043
7
10,183
98,746
439
287
—
Total covered loans accounted for under
ASC 310-30 . . . . . . . . . . . . . . . . . . . .
22,298
26,050
109,655
158,003
669,083
827,086
109,655
—
—
—
—
—
—
Total covered loans . . . . . . . . . . . . . . . . $26,203 $29,067 $122,089 $177,359 $ 775,356 $ 952,715 $109,982 $ 13,121
140
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Credit exposure for all covered loans as determined by the Company’s internal risk rating system was as follows
as of December 31, 2012 and 2011, respectively (in thousands):
Covered Loans December 31, 2012
Special
Mention
Substandard Doubtful
Total
Pass
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial . . . . . . . . . . . . . . . . .
50 $ —
—
32
190
147
—
279
—
10
—
2,457
6,500
8,496
Total commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . .
11,471
6,690
$
3,333
10
—
2,995
—
27
21,515
27,880
$ — $
—
—
—
—
—
1,266
1,266
3,383
42
337
3,274
10
2,484
37,777
47,307
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development . . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development
. . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . .
Total residential real estate . . . . . . . . . . . . . . . . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
11
—
—
4,850
493
5,354
14,626
348
—
50
268
666
—
—
—
—
—
—
—
—
—
—
3,093
131
3,224
60
—
—
—
—
—
—
—
—
—
—
—
3,631
—
—
190
1,281
—
5,102
2,408
1,037
—
—
—
1,037
—
—
—
—
—
—
—
—
—
13
—
—
13
—
477
—
—
—
477
—
—
—
—
—
—
3,631
11
—
203
9,224
624
13,693
17,094
1,862
—
50
268
2,180
—
—
—
—
—
Total covered loans excluded from ASC 310-30 . . .
32,117
9,974
36,427
1,756
80,274
Loans accounted for under ASC 310-30
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,451
93,470
31,469
9,037
3
2,286
53,528
1,242
—
—
38,227
237,849
6,179
9,919
—
7,721
11,567
—
—
—
73,685
396,414
38,890
18,956
3
Total covered loans accounted for under ASC 310-
30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159,430
57,056
292,174
19,288
527,948
Total covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . $191,547 $67,030
$328,601
$21,044 $608,222
141
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Covered Loans December 31, 2011
Special
Mention
Substandard Doubtful
Total
Pass
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
All other commercial and industrial
286 $ —
270
323
869
112
5,821
18,571
50
177
—
—
—
13,160
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,252
13,387
$
5,145
—
—
2,028
129
40
29,213
36,555
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development
. . . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential real estate . . . . . . . . . . . . . . . . . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
262
20
—
1,552
740
728
3,302
25,393
162
—
87
252
501
—
—
—
—
—
—
—
—
—
—
755
76
831
977
—
—
—
10
10
—
—
—
—
—
—
4,497
—
—
—
1,038
804
6,339
2,165
1,600
—
—
—
1,600
—
—
—
—
—
$ — $
—
—
—
—
—
2,850
2,850
—
5,467
—
—
—
—
—
5,467
—
—
—
—
—
—
—
—
—
—
—
5,431
320
500
2,897
241
5,861
63,794
79,044
—
10,226
20
—
1,552
2,533
1,608
15,939
28,535
1,762
—
87
262
2,111
—
—
—
—
—
Total covered loans excluded from ASC 310-30 . .
55,448
15,205
46,659
8,317
125,629
Loans accounted for under ASC 310-30
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,886
133,513
43,891
12,116
7
11,491
145,387
3,090
63
—
62,859
276,052
9,858
8,864
—
10,872
71,137
—
—
—
123,108
626,089
56,839
21,043
7
Total covered loans accounted for under ASC 310-
30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
227,413
160,031
357,633
82,009
827,086
Total covered loans . . . . . . . . . . . . . . . . . . . . . . . . . $282,861 $175,236
$404,292
$90,326 $952,715
142
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Non-covered loans
The following tables summarize the carrying value of all non-covered loans by segment net of deferred discounts
on loans excluded from ASC Topic 310-30, fees and costs of $16.4 million and $28.4 million, as of
December 31, 2012 and 2011, respectively (in thousands):
December 31, 2012
ASC
310-30
Non ASC
310-30
Total non -
covered
loans
Commercial
Commercial and industrial
. . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,484
—
$138,784
1,328
$ 148,268
1,328
Total commercial . . . . . . . . . . . . . . . . . . . .
9,484
140,112
149,596
Commercial real estate
Commercial construction . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Land and development
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
33,024
136,549
48
—
169,621
8,843
87,144
18,981
3,282
201,347
7,424
13,218
225,271
108,580
430,465
31,347
36,306
337,896
7,472
13,218
394,892
117,423
517,609
50,328
Total non-covered loans . . . . . . . . . . . . . .
$294,073
$935,775
$1,229,848
December 31, 2011
ASC
310-30
Non ASC
310-30
Total non -
covered
loans
Commercial
Commercial and industrial
. . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 31,482
—
$136,765
2,532
$ 168,247
2,532
Total commercial . . . . . . . . . . . . . . . . . . . .
31,482
139,297
170,779
Commercial real estate
Commercial construction . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Land and development
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
62,749
180,548
—
—
243,297
13,989
147,239
44,616
—
216,464
31,568
19,121
267,153
52,040
352,492
29,731
62,749
397,012
31,568
19,121
510,450
66,029
499,731
74,347
Total non-covered loans . . . . . . . . . . . . . .
$480,623
$840,713
$1,321,336
143
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The following tables reflect the carrying value and loan delinquency of non-covered loans at December 31, 2012
and 2011 (in thousands). Pooled loans accounted for under ASC Topic 310-30 that are 90 days or more past due
and still accreting are included in loans 90 days or more past due and still accruing interest and are considered to
be performing.
Non-Covered Loans December 31, 2012
30-59
days
past due
60-89
days
past due
Greater
than 90
days
past due
Total
past due Current Total loans
Loans > 90
days past
due and
still
accruing
Non-
accrual
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
All other commercial and industrial
Total commercial . . . . . . . . . . . . . .
Commercial real estate
1-4 family construction . . . . . . . . . . . . .
1-4 family acquisition/development
. . .
Commercial construction . . . . . . . . . . .
Commercial
acquisition/development . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . . .
Total commercial real estate . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . . .
$ 601
10
—
1
—
—
159
771
—
1,948
—
—
—
97
—
2,045
33
893
70
368
111
Total residential real estate . . . . . .
1,442
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . .
Total non-covered loans excluded
392
16
39
—
447
$ —
—
—
—
—
—
97
97
—
—
—
—
—
106
122
228
40
—
—
119
—
119
39
4
5
—
48
$ — $
33
601 $
43
12,196 $
14,394
13,733
16,979
28,149
1,328
52,320
12,797
14,437
13,733
16,980
28,149
1,328
52,688
$ — $
—
—
—
—
—
—
642
22
—
—
—
—
802
—
1
—
—
368
1,013
139,099
140,112
—
1,948
—
—
34
203
5,245
7,430
73
2,421
97
784
194
3,496
432
20
46
—
498
622
2,437
3,282
2,417
13,184
48,340
147,559
217,841
108,507
321,200
6,502
55,499
43,768
622
4,385
3,282
2,417
13,218
48,543
152,804
225,271
108,580
323,621
6,599
56,283
43,962
426,969
430,465
22,874
2,531
3,850
1,594
30,849
23,306
2,551
3,896
1,594
31,347
—
—
—
—
—
—
—
—
—
—
22
—
—
—
22
1
2
—
—
3
1,466
—
75
—
—
34
2,115
7,992
10,216
207
3,458
337
843
256
4,894
291
—
—
—
291
—
—
—
—
112
145
—
—
—
—
34
—
5,123
5,157
—
1,528
27
297
83
1,935
1
2
—
—
3
from ASC 310-30 . . . . . . . . . . .
4,738
532
7,240
12,510
923,265
935,775
25
17,074
Loans accounted for under ASC 310-30
Commercial . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Consumer
63
1,910
—
1,247
297
—
894
—
207
327
1,382
21,847
197
3,199
3,253
1,445
24,651
197
4,653
3,877
8,039
144,970
8,646
82,491
15,104
9,484
169,621
8,843
87,144
18,981
1,382
21,847
197
3,199
3,253
Total non-covered loans accounted
for under ASC 310-30 . . . . . . . .
3,517
1,428
29,878
34,823
259,250
294,073
29,878
—
—
—
—
—
—
Total non-covered loans . . . . . . . .
$8,255
$1,960
$37,118 $47,333 $1,182,515 $1,229,848
$29,903
$17,074
144
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Non-Covered Loans December 31, 2011
30-59
days
past due
60-89
days
past due
Greater
than 90
days
past due
Total
past due Current Total loans
Loans > 90
days past
due and
still
accruing
Non-
accrual
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . $
Manufacturing . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . .
Finance and insurance . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and
industrial . . . . . . . . . . . . . . . . . . . . .
Total commercial . . . . . . . . . . . .
Commercial real estate
1-4 family construction . . . . . . . . . . .
1-4 family acquisition
development . . . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . .
Commercial
acquisition/development . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . .
Total commercial real estate . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . .
Jr lien 1-4 family closed end . . . . . . .
Sr lien 1-4 family open end . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . .
Total residential real estate . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . .
Total non-covered loans
681
—
—
238
—
—
3,552
4,471
—
—
—
—
—
2,948
2,418
5,366
234
791
1,364
377
193
2,725
389
12
36
—
437
$ — $ — $
33
—
—
—
—
434
467
—
—
—
2,246
195
—
1,234
3,675
31
79
—
258
63
400
4
1
21
—
26
—
—
—
—
—
10
10
—
37
—
4,862
—
—
—
4,899
29
668
5
339
200
1,212
—
—
35
—
35
681 $
33
—
238
—
—
24,660 $
7,162
11,501
15,888
20,510
2,532
25,341
7,195
11,501
16,126
20,510
2,532
$ — $ —
46
—
512
—
—
—
—
—
—
—
3,996
4,948
52,096
56,092
134,349
139,297
—
37
—
7,108
195
2,948
3,652
13,940
294
1,538
1,369
974
456
4,337
393
13
92
—
498
2,757
2,757
13,302
—
8,364
18,926
42,940
166,924
253,213
51,746
238,035
3,650
59,640
46,830
13,339
—
15,472
19,121
45,888
170,576
267,153
52,040
239,573
5,019
60,614
47,286
348,155
352,492
17,935
2,701
6,967
1,630
29,233
18,328
2,714
7,059
1,630
29,731
—
—
—
—
—
—
—
—
—
—
—
—
—
290
—
290
—
—
35
—
35
202
760
—
92
—
4,862
195
758
16,053
21,960
29
1,571
5
50
273
1,899
—
1
—
—
1
excluded from ASC 310-30 . .
13,233
4,599
6,185
24,017
816,696
840,713
325
24,649
Loans accounted for under ASC 310-30
. . . . . . . . . . . . . . . . . . . .
Commercial
Commercial real estate . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . .
1,176
4,486
419
4,109
432
60
630
—
3,727
249
1,334
38,269
772
23,863
478
2,570
43,385
1,191
31,699
1,159
28,912
199,912
12,798
115,540
43,457
31,482
243,297
13,989
147,239
44,616
1,334
38,269
772
23,862
478
Total non-covered loans
accounted for under ASC
310-30 . . . . . . . . . . . . . . . . . . .
10,622
4,666
64,716
80,004
400,619
480,623
64,715
—
—
—
—
—
—
Total non-covered loans . . . . . . . $23,855
$9,265
$70,901 $104,021 $1,217,315 $1,321,336
$65,040
$24,649
145
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Credit exposure for all non-covered loans as determined by the Company’s internal risk rating system was as
follows as of December 31, 2012 and 2011, respectively (in thousands):
Non-Covered Loans December 31, 2012
Pass
Special
Mention
Substandard Doubtful
Total
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
All other commercial and industrial
$ 11,948
12,130
13,733
16,930
28,149
453
42,723
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126,066
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development
. . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . .
622
4,310
3,282
2,417
8,409
39,279
103,814
162,133
105,845
317,844
5,786
52,697
42,305
Total residential real estate . . . . . . . . . . . . . . . . . . . .
418,632
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,009
2,551
3,896
1,594
31,050
$
43
2,285
—
—
—
—
758
3,086
—
—
—
—
3,798
913
29,263
33,974
1,299
922
28
1,318
223
2,491
—
—
—
—
—
$
806
33
—
50
—
875
9,052
10,816
—
75
—
—
1,011
8,351
19,411
28,848
1,436
4,797
780
2,272
1,434
9,283
276
—
—
—
276
Total non-covered loans excluded from
ASC 310-30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
843,726
40,850
50,659
$ —
$
(11)
—
—
—
—
155
144
—
—
—
—
—
—
316
316
—
58
5
(4)
—
59
21
—
—
—
21
540
Loans accounted for under ASC 310-30
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
4,268
68,652
3,130
48,660
14,486
1,342
7,259
—
6,614
723
3,874
92,020
5,713
31,870
3,772
—
1,690
—
—
—
12,797
14,437
13,733
16,980
28,149
1,328
52,688
140,112
622
4,385
3,282
2,417
13,218
48,543
152,804
225,271
108,580
323,621
6,599
56,283
43,962
430,465
23,306
2,551
3,896
1,594
31,347
935,775
9,484
169,621
8,843
87,144
18,981
Total non-covered loans accounted for under
ASC 310-30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,196
15,938
137,249
1,690
294,073
Total non-covered loans . . . . . . . . . . . . . . . . . . . . . .
$982,922
$56,788
$187,908
$2,230
$1,229,848
146
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Non-Covered Loans December 31, 2011
Pass
Special
Mention
Substandard Doubtful
Total
Loans excluded from ASC 310-30
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . .
Oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial . . . . . . . . . . . . .
$ 24,038
7,116
11,234
13,853
20,510
1,519
36,330
$ —
—
—
4
—
—
7,360
$
Total commercial . . . . . . . . . . . . . . . . . . . . . . .
114,600
7,364
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner-occupied . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr lien 1-4 family closed end . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family closed end . . . . . . . . . . . . . . . . . .
Sr lien 1-4 family open end . . . . . . . . . . . . . . . . . . .
Jr lien 1-4 family open end . . . . . . . . . . . . . . . . . . . .
2,757
7,952
—
2,447
16,884
34,611
105,744
170,395
48,116
234,983
4,840
57,853
45,000
Total residential real estate . . . . . . . . . . . . . . . .
342,676
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-covered loans excluded from
18,146
2,713
7,059
1,630
29,548
—
389
—
7,555
1,046
3,438
36,891
49,319
2,421
1,477
127
2,153
637
4,394
172
—
—
—
172
622
79
267
2,269
—
1,013
12,402
16,652
—
4,998
—
5,470
1,191
7,839
27,941
47,439
1,503
3,113
52
608
1,649
5,422
10
1
—
—
11
$ 681
—
—
—
—
—
—
$
25,341
7,195
11,501
16,126
20,510
2,532
56,092
681
139,297
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,757
13,339
—
15,472
19,121
45,888
170,576
267,153
52,040
239,573
5,019
60,614
47,286
352,492
18,328
2,714
7,059
1,630
29,731
ASC 310-30 . . . . . . . . . . . . . . . . . . . . . . . . .
705,335
63,670
71,027
681
840,713
Loans accounted for under ASC 310-30
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,464
83,447
4,315
78,795
41,705
5,491
53,950
7,311
14,986
1,773
6,455
103,779
2,363
53,458
1,138
72
2,121
—
—
—
31,482
243,297
13,989
147,239
44,616
Total non-covered loans accounted for under
ASC 310-30 . . . . . . . . . . . . . . . . . . . . . . . . .
227,726
83,511
167,193
2,193
480,623
Total non-covered loans . . . . . . . . . . . . . . . . . .
$933,061
$147,181
$238,220
$2,874
$1,321,336
147
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Impaired Loans
Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts
due in accordance with the contractual terms of the loan agreement. Included in impaired loans are loans on non-
accrual status and troubled debt restructurings (“TDR’s”) described below. If a specific allowance is warranted
based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted cash
flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs
for collateral dependent loans. Inclusive of TDR’s, the Company’s unpaid principal balance of impaired loans
was $51.5 million and $74.7 million at December 31, 2012 and 2011, respectively.
148
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
At December 31, 2012, the Company’s unpaid principal balance and recorded investment of impaired loans was
$51.5 million and $40.9 million, respectively. Of these impaired loans, 28 were within the commercial real estate
segment, with an unpaid principal balance of $16.9 million and a recorded investment of $15.3 million. Twenty-
three of these commercial real estate loans, with a recorded investment of $13.8 million and an unpaid principal
balance of $15.3 million, were not covered by the FDIC loss sharing agreement, compared to five loans with a
recorded investment of $1.5 million and an unpaid principal balance of $1.6 million that were covered by the
FDIC loss sharing agreement. The commercial loan segment had a total of 44 loans, 31 of which were not
covered by the FDIC loss sharing agreement with an unpaid principal balance of $8.3 million and a recorded
investment of $7.9 million. The 13 commercial loans that were covered by the FDIC loss sharing agreement had
an unpaid principal balance of $15.5 million and a recorded investment of $8.1 million. The residential real estate
loan segment held 119 impaired loans, with an unpaid principal balance of $10.1 million and a recorded
investment of $8.9 million. Of these 119 loans, two were covered by the FDIC loss sharing agreement with an
unpaid principal balance and recorded investment of $1.5 million, leaving 117 loans not covered by the FDIC
loss sharing agreement with an unpaid principal balance of $8.5 million and a recorded investment of $7.4
million. These loans had a collective related allowance for loan losses allocated to them of $2.0 million at
December 31, 2012. The table below shows additional information regarding impaired loans at December 31,
2012 (in thousands):
Impaired Loans December 31, 2012
Allowance
for loan
losses
allocated
Average
recorded
investment
Recorded
investment
Unpaid
principal
balance
Interest
income
recognized
With no related allowance recorded:
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,664
—
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Transportation/warehousing . . . . . . . . . . . . . . . . . . . . . . .
—
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,524
. . . . . . . . . . . . . . . . .
All other commercial and industrial
21,188
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,239
—
—
—
12,280
13,519
$—
—
—
—
—
—
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development
. . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr. lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . .
Sr. lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . .
Total residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
—
—
—
—
—
6,010
3,239
9,249
—
373
—
—
119
492
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with no related allowance recorded . . . . . . . . .
Total consumer
—
—
—
—
—
30,929
—
—
—
—
—
5,757
2,965
8,722
—
365
—
—
—
365
—
—
—
—
—
22,606
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 1,609
—
—
—
15,094
16,703
—
—
—
—
—
5,831
3,116
8,947
—
367
—
—
—
367
—
—
—
—
—
26,017
$
2
—
—
—
281
283
—
—
—
—
—
146
17
163
—
4
—
—
—
4
—
—
—
—
—
450
149
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
Average
recorded
investment
Interest
income
recognized
With a related allowance recorded:
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial . . . . . . . . . . . .
Total commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development
. . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr. lien 1-4 family closed end . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family closed end . . . . . . . . . . . . . . . . .
Sr. lien 1-4 family open end . . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family open end . . . . . . . . . . . . . . . . . .
Total residential real estate . . . . . . . . . . . . . . . . . . . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164
43
—
—
2,374
2,581
—
96
—
—
198
924
6,412
7,630
265
6,356
1,121
1,824
266
9,567
481
12
—
—
493
164
43
—
—
2,263
2,470
—
75
—
—
34
737
5,699
6,545
251
6,038
1,116
1,090
256
8,500
481
1
—
—
482
2
—
—
—
1,058
1,060
—
1
—
—
—
9
335
345
1
568
12
10
2
592
23
—
—
—
23
171
43
—
—
2,472
2,686
—
78
—
—
139
767
5,908
6,892
264
6,176
1,127
1,097
259
8,659
485
1
—
—
486
Total impaired loans with a related allowance recorded . . . .
20,536
18,248
2,021
18,987
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,465 $40,854
$2,021
$45,004
5
—
—
—
14
19
—
—
—
—
—
17
24
41
—
74
6
8
—
88
4
—
—
—
4
152
$602
At December 31, 2011, the Company’s unpaid principal balance and recorded investment of impaired loans was
$74.7 million and $50.1 million, respectively. Of these impaired loans, 26 were within the commercial real estate
segment, with an unpaid principal balance of $58.2 million and a recorded investment of $41.1 million. Of the 26
impaired commercial real estate loans, the FDIC loss sharing agreements covered five of those loans with a
recorded investment of $8.2 million and an unpaid principal balance of $23.3 million and 21 commercial real
estate loans, with a recorded investment of $32.9 million and an unpaid principal balance of $34.9 million, were
not covered by FDIC loss sharing agreements. The commercial loan segment had a total of 20 loans; ten of these
were not covered by the FDIC loss sharing agreements and carried an unpaid principal balance and recorded
150
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
investment of $0.8 million and $0.8 million, respectively. The 10 commercial loans that were covered by the
FDIC loss sharing agreements had an unpaid principal balance and recorded investment of $11.9 million and
$4.6 million, respectively. The residential real estate loan segment held 43 impaired loans, with an unpaid
principal balance of $3.9 million and a recorded investment of $3.6 million. Of these 43 loans, three were
covered by the FDIC loss sharing agreement with an unpaid principal balance and recorded investment of $1.7
million and $1.7 million, respectively, leaving 40 loans not covered by the FDIC loss sharing agreement with an
unpaid principal balance of $2.2 million and a recorded investment of $1.9 million. These loans had a collective
related allowance for loan losses allocated to them of $0.8 million at December 31, 2011. The table below shows
additional information regarding impaired loans at December 31, 2011 (in thousands):
Impaired Loans December 31, 2011
Allowance
for loan
losses
allocated
Average
recorded
investment
Recorded
investment
Unpaid
principal
balance
Interest
income
recognized
With no related allowance recorded:
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,205
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
—
Transportation/warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,412
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,008
. . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial
$ 1,069
46
—
679
3,580
$—
—
—
—
—
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,673
5,374
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development
. . . . . . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr. lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family closed end . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sr. lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family open end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
27,205
—
5,717
203
2,856
9,963
45,944
30
2,756
5
89
468
3,318
1
—
—
—
1
—
12,007
—
5,470
195
2,678
9,335
29,685
29
2,712
5
50
273
3,040
1
—
—
—
1
Total impaired loans with no related allowance recorded . . . . . . . . .
61,966
38,129
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 2,137
46
—
1,044
5,793
9,020
$—
—
—
—
—
—
—
19,484
—
5,579
199
2,746
9,397
37,405
30
2,730
5
70
371
3,176
1
—
—
—
1
—
24
—
3
—
6
17
50
—
5
—
—
—
5
—
—
—
—
—
49,632
55
151
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
With a related allowance recorded:
Commercial
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation/warehousing . . . . . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other commercial and industrial . . . . . . . . . . . . . . . .
Total commercial
. . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate
1-4 family construction . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family acquisition/development . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . .
Commercial acquisition/development
. . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner-occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate
Sr. lien 1-4 family closed end . . . . . . . . . . . . . . . .
Jr. lien 1-4 family closed end . . . . . . . . . . . . . . . .
Sr. lien 1-4 family open end . . . . . . . . . . . . . . . . .
Jr. lien 1-4 family open end . . . . . . . . . . . . . . . . .
Total residential real estate . . . . . . . . . . . . . .
Consumer
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with a related allowance
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
Average
recorded
investment
Interest
income
recognized
—
—
—
—
—
—
—
—
—
—
—
—
12,304
12,304
—
—
—
460
—
460
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,508
11,508
—
—
—
460
—
460
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
608
608
—
—
—
174
—
174
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,508
11,508
—
—
—
460
—
460
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
recorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,764
$74,730
11,968
$50,097
782
$782
11,968
$61,600
—
$ 55
Impaired loans as of and for the year ended December 31, 2010 were insignificant.
Troubled debt restructurings
It is the Company’s policy to review each prospective credit in order to determine the appropriateness and the
adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks
recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and
remediation procedures that may include restructuring a loan to provide a concession by the Company to the
borrower from their original terms due to borrower financial difficulties in order to facilitate repayment.
Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been
reaffirmed by the borrower, regardless of past due status, the loan is considered to be a troubled debt
152
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
restructuring (“TDR”). At December 31, 2012 and 2011, the Company had $17.7 million and $12.3 million,
respectively, of accruing TDR’s that had been restructured from the original terms in order to facilitate
repayment. Of these, $5.0 million and $1.4 million, respectively, were covered by FDIC loss sharing agreements.
Accruing TDR’s in the commercial loan segment at December 31, 2012 were primarily comprised of 19 loans
with a recorded investment of $6.4 million that were not covered by FDIC loss sharing agreements and four loans
with a recorded investment of $5.0 million that were covered by the FDIC loss sharing agreements. The
commercial real estate TDR’s were comprised of six non-covered loans with a recorded investment of $3.6
million. The remaining accruing TDR’s were primarily made up of 37 loans from the single family residential
segment, with a recorded investment of $2.2 million, none of which were covered by the FDIC loss sharing
agreements.
Non-accruing TDR’s at December 31, 2012 and December 31, 2011 totaled $12.9 million and $16.3 million,
respectively. Of these, $3.6 million were covered by the FDIC loss sharing agreements as of December 31, 2012
and none were covered by the FDIC loss sharing agreements as of December 31, 2011. At December 31, 2012
the non-accruing commercial real estate segment was primarily comprised of five loans not covered by the FDIC
loss sharing agreements with a recorded investment of $6.8 million. The commercial loan segment held non-
accruing TDR’s, which included three loans covered by the FDIC loss sharing agreements with a recorded
153
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
investment of $1.7 million and four loans not covered by the FDIC loss sharing agreements with a recorded
investment of $1.2 million. The remaining non-accruing TDR balance was primarily from the single family
residential segment, which included two loans covered by the FDIC loss sharing agreements with a recorded
investment of $1.5 million and six loans not covered by the FDIC loss sharing agreements, with a recorded
investment of $0.9 million.
During the year ended December 31, 2012, the Company restructured 85 loans with a recorded investment of
$27.2 million to facilitate repayment. Substantially all of the loan modifications were an extension of term and
rate modifications. Loan modifications to loans accounted for under ASC Topic 310-30 are not considered
troubled debt restructurings. The table below provides additional information related to accruing TDR’s at
December 31, 2012 and 2011 (in thousands):
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing TDR’s
December 31, 2012
Average
year-to-
date
recorded
investment
$13,171
3,708
—
2,469
195
Unpaid
principal
balance
$11,794
3,734
—
2,460
191
Recorded
investment
$11,474
3,597
—
2,458
191
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,720
$19,543
$18,179
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing TDR’s
December 31, 2011
Average
year-to-
date
recorded
investment
$ —
11,184
—
1,141
—
Unpaid
principal
balance
$ —
11,678
—
1,141
—
Recorded
investment
$ —
11,184
—
1,141
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,325
$12,325
$12,819
Unfunded
commitments
to fund
TDR’s
$6,908
—
—
35
—
$6,943
Unfunded
commitments
to fund
TDR’s
$ 60
24
—
60
—
$144
154
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The following table summarizes the Company’s carrying value of non-accrual TDR’s as of December 31, 2012
and 2011 (in thousands):
Non - Accruing TDR’s
December 31, 2012
December 31, 2011
Covered
Non-covered
Covered
Non-covered
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,736
313
—
1,514
—
$3,563
$1,215
6,823
21
958
291
$9,308
$—
—
—
—
—
$—
$
119
16,108
—
61
—
$16,288
Accrual of interest is resumed on loans that were on non-accrual at the time of restructuring, only after the loan
has performed sufficiently. The Company had three TDR’s that had been modified within the past 12 months that
defaulted on their restructured terms during 2012. For purposes of this disclosure, the Company considers
“default” to mean 90 days or more past due on principal or interest. The defaulted TDRs were comprised of
commercial and industrial loans with a balance of less than $0.5 million.
Loans accounted for under ASC Topic 310-30
Loan pools accounted for under ASC Topic 310-30 are periodically remeasured to determine expected future
cash flows. In determining the expected cash flows, the timing of cash flows and prepayment assumptions for
smaller homogeneous loans are based on statistical models that take into account factors such as the loan interest
rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans are fixed
or variable rate loans. Prepayments may be assumed on large loans if circumstances specific to that loan warrant
a prepayment assumption. No prepayments were presumed for small homogeneous commercial loans; however,
prepayment assumptions are made that consider similar prepayment factors listed above for smaller
homogeneous loans. The re-measurement of loans accounted for under ASC Topic 310-30 resulted in the
following changes in the carrying amount of accretable yield during the year ended December 31, 2012 (in
thousands):
December 31,
2012
December 31,
2011
Accretable yield beginning balance . . . . . . . . . . . . . .
Additions through acquisitions . . . . . . . . . . . . . . . . .
Reclassification from non-accretable difference . . . .
Reclassification to non-accretable difference . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 186,494
—
60,119
(12,621)
(100,407)
$ 74,329
130,321
45,871
(409)
(63,618)
Accretable yield ending balance . . . . . . . . . . . .
$ 133,585
$186,494
155
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Below is the composition of the net book value for loans accounted for under ASC Topic 310-30 at
December 31, 2012 and December 31, 2011 (in thousands):
Contractual cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,444,279 $2,030,374
(536,171)
Non-accretable difference . . . . . . . . . . . . . . . . . . . . . . . . .
(186,494)
Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(488,673)
(133,585)
Loans accounted for under ASC Topic 310-30 . . . . . $ 822,021 $1,307,709
December 31,
2012
December 31,
2011
Note 8 Allowance for Loan Losses
The tables below detail the Company’s allowance for loan losses (“ALL”) and recorded investment in loans as of
and for the years ended December 31, 2012 and 2011 (in thousands):
Year Ended December 31, 2012
Commercial
Commercial
real estate
Agriculture
Residential
real estate
Consumer
Total
Beginning balance . . . . . . . . . . . . . . .
$ 2,959
$ 3,389
$
282
$ 4,121
$
776
$
11,527
Non 310-30 beginning balance . . . . .
Charge-offs . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . .
Non 310-30 ending balance . . . . . . . .
310-30 beginning balance . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . .
1,597
(3,140)
284
4,057
2,798
1,362
(216)
—
(1,146)
310-30 ending balance . . . . . . . . . . . .
—
3,389
(2,605)
126
2,146
3,056
—
(15,578)
275
19,643
4,340
Ending balance . . . . . . . . . . . . . . . . . .
$ 2,798
$ 7,396
$
154
(8)
4
173
323
128
(144)
—
285
269
592
3,423
(1,132)
51
1,669
4,011
698
(872)
—
174
—
776
(1,502)
334
932
540
—
(19)
—
62
43
9,339
(8,387)
799
8,977
10,728
2,188
(16,829)
275
19,018
4,652
$ 4,011
$
583
$
15,380
Ending allowance balance
attributable to:
Non 310-30 loans individually
evaluated for impairment . . . .
$
8
$
15
$
1
$
51
$
2
$
77
Non 310-30 loans collectively
evaluated for impairment . . . .
2,790
310-30 loans acquired
w/deteriorated credit
. . . . . . .
—
3,041
4,340
Total ending allowance balance . . . . .
Loans:
Non 310-30 individually
$
2,798
$ 7,396
evaluated for impairment . . . .
$ 15,988
$ 15,269
Non 310-30 collectively
$
$
322
269
592
3,960
—
538
43
10,651
4,652
$ 4,011
$
583
$
15,380
251
$
8,866
$
482
$
40,856
evaluated for impairment . . . .
171,431
223,695
125,423
423,779
30,865
975,193
310-30 loans acquired w/
deteriorated credit
. . . . . . . . .
83,169
566,035
47,733
106,100
18,984
822,021
Total loans . . . . . . . . . . . . . . . . . . . . .
$270,588
$804,999
$173,407
$538,745
$50,331
$1,838,070
156
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Year Ended December 31, 2011
Commercial
Commercial
real estate
Agriculture
Residential
real estate
Consumer
Total
Beginning balance . . . . . . . . . . . . . . .
$ — $
— $ — $ — $
48
$
48
Non 310-30 beginning balance . . . . .
Charge-offs . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . .
Non 310-30 ending balance . . . . . . .
310-30 beginning balance . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . .
310-30 ending balance . . . . . . . . . . .
—
(1,399)
4
2,992
1,597
—
(3,111)
265
4,208
1,362
—
(3,378)
510
6,257
3,389
—
—
—
—
—
Ending balance . . . . . . . . . . . . . . . . .
$ 2,959
$
3,389
$
—
—
—
154
154
—
—
—
128
128
282
—
(288)
—
3,711
3,423
—
—
23
675
698
48
(1,330)
181
1,877
776
—
—
—
—
—
48
(6,395)
695
14,991
9,339
—
(3,111)
288
5,011
2,188
$ 4,121
$
776
$
11,527
Ending allowance balance
attributable to:
. . .
$ — $
608
$ — $
174
$ — $
782
Non 310-30 loans individually
evaluated for impairment
Non 310-30 loans collectively
evaluated for impairment
. . .
1,597
2,781
310-30 loans acquired
w/deteriorated credit . . . . . . .
1,362
—
Total ending allowance balance . . . .
Loans:
Non 310-30 individually
$ 2,959
$
3,389
$
154
128
282
3,249
698
776
—
8,557
2,188
$ 4,121
$
776
$
11,527
evaluated for impairment
. . .
$ 5,374
$
41,193
$
29
$ 3,500
$
1
$
50,097
Non 310-30 collectively
evaluated for impairment
. . .
212,967
241,899
80,546
351,103
29,730
916,245
310-30 loans acquired
w/deteriorated credit . . . . . . .
154,590
869,386
70,828
168,282
44,623
1,307,709
Total loans . . . . . . . . . . . . . . . . . . . . .
$372,931
$1,152,478
$151,403
$522,885
$74,354
$2,274,051
157
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
During the year ended December 31, 2012, the Company re-estimated the expected cash flows of the loan pools
accounted for under ASC Topic 310-30 utilizing the same cash flow methodology used at the time of acquisition.
The re-measurement resulted in impairment of $19.0 million, which was primarily driven by impairments of
$8.8 million in the land and development pools, $6.9 million of which was in the acquired Community Banks of
Colorado portfolio and $1.9 million of which was in the acquired Hillcrest Bank portfolio, and impairments of
$7.5 million in the commercial real estate portfolio, which included impairments of $6.2 million in the acquired
Hillcrest Bank portfolio, a $0.8 million impairment in the acquired Community Banks of Colorado portfolio, and
$0.4 million impairment in the acquired Bank of Choice portfolio. The commercial construction pool
experienced an impairment of $3.4 million resulting from a $3.0 million impairment in the acquired Bank of
Choice portfolio and a $0.4 million impairment in the acquired Community Banks of Colorado portfolio. Other
notable impairments included a $0.3 million impairment in the agriculture pools and a $0.2 million impairment in
the residential real estate pools. The commercial and industrial pool experienced a reversal of impairment of
$1.1 million which was primarily the result of gross cash flow improvements.
In evaluating the loan portfolio for an appropriate ALL level, non-impaired loans were grouped into segments
based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio
was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of
applying loss ratios and determining applicable subjective adjustments to the ALL. The application of subjective
adjustments was based upon qualitative risk factors, including economic trends and conditions, industry
conditions, asset quality, loss trends, lending management, portfolio growth and loan review/internal audit
results. During the year ended December 31, 2012, the Company recorded $9.0 million of provision for loan
losses for loans not accounted for under ASC Topic 310-30 primarily to provide for changes in credit risk
inherent in the portfolio.
The Company charged off $7.6 million, net of recoveries, of non-ASC Topic 310-30 loans during the year ended
December 31, 2012, $2.4 million of which was the result of an acquired large commercial and industrial loan that
is not considered indicative of future charge-offs in the commercial and industrial loan category. The Company
also charged off $2.6 million of acquired commercial real estate loans, primarily the result of four commercial
real estate loans outside of its core market areas totaling $2.3 million. Consumer charge-offs, net of recoveries,
totaled $1.2 million which is primarily the result of overdrafts on consumer accounts. Charge-offs related to
residential real estate totaled $1.1 million for the year ended December 31, 2012, of which $0.6 million was
related to single family residential properties and $0.5 million was related to home equity lines of credit.
Note 9 FDIC Indemnification Asset
Under the terms of the purchase and assumption agreement with the FDIC with regard to the Hillcrest Bank and
Community Banks of Colorado acquisitions, the Company is reimbursed for a portion of the losses incurred on
covered assets. As covered assets are resolved, whether it be through repayment, short sale of the underlying
collateral, the foreclosure on and sale of collateral, or the sale or charge-off of loans or OREO, any differences
between the carrying value of the covered assets versus the payments received during the resolution process, that
are reimbursable by the FDIC, are recognized in the consolidated statements of operations as FDIC loss sharing
income. Any gains or losses realized from the resolution of covered assets reduce or increase, respectively, the
amount recoverable from the FDIC.
158
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Below is a summary of the activity related to the FDIC indemnification asset during the years ended
December 31, 2012 and 2011 (in thousands):
Balance at beginning of period . . . . . . . . . . . . . . . . .
Additions through acquisitions . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC portion of charge-offs exceeding fair value
marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction for claims filed . . . . . . . . . . . . . . . . . . . . .
For the years ended
December 31,
2012
December 31,
2011
$ 223,402
—
(13,820)
$161,395
150,987
(6,132)
12,554
(135,213)
1,252
(84,100)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . .
$ 86,923
$223,402
During 2012, the Company recognized $13.8 million of negative accretion on the FDIC indemnification asset,
and reduced the carrying value of the FDIC indemnification asset by $135.2 million as a result of claims filed
with the FDIC as discussed below. The negative accretion resulted from an overall increase in actual and
expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the
FDIC. The increase in overall expected cash flows from these underlying assets is reflected in increased
accretion rates on covered loans and is being recognized over the expected remaining lives of the underlying
covered loans as an adjustment to yield. During 2012, the Company submitted $135.2 million of loss share
claims to the FDIC for the reimbursable portion of losses related to the Hillcrest Bank and Community Banks of
Colorado covered assets incurred during the fourth quarter of 2011 through the third quarter of 2012. Included in
the $135.2 million were $12.6 million of claims related to additional losses incurred during the period that were
not previously considered in the carrying amount of the indemnification asset. The loss claims filed are subject to
review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the
terms in the loss sharing agreements. During 2012, the FDIC paid $75.9 million, $33.1 million of which was
related to losses incurred during the fourth quarter of 2011 and $42.8 million of which was related to losses
incurred during the nine months ended September 30, 2012 and submitted to the FDIC during the three months
ended December 31, 2012. Subsequent to December 31, 2012, the Company has received $37.1 million related to
claims filed in 2012 and has one remaining claim of $20.0 million that is expected to be paid during the first
quarter of 2013.
Note 10 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2012 and December 31, 2011 (in
thousands):
December 31,
2012
December 31,
2011
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,699
70,480
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . .
30,976
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment
$25,186
48,933
15,960
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131,155
90,079
Less: accumulated depreciation and amortization . . .
(9,719)
(2,764)
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . $121,436
$87,315
159
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Premises and equipment increased $34.1 million from December 31, 2011 to December 31, 2012, primarily
because the Company purchased 26 banking centers from the FDIC in connection with the Community Banks of
Colorado acquisition. The Company incurred $7.1 million, $2.8 million and $0.1 million of depreciation expense
during the years ended December 31, 2012, 2011 and 2010, respectively, which is included in occupancy and
equipment expense.
Space in certain facilities is leased under operating leases. Below is a summary of future minimum lease
payments for the years following 2012 (in thousands):
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,227
3,167
2,917
2,660
2,032
21,362
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,365
Note 11 Other Real Estate Owned
A summary of the activity in the OREO balances during the years ended December 31, 2012 and 2011 is as
follows (in thousands):
For the years ended December 31,
2012
2011
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . .
Purchases through acquisition, at fair value . . . .
Transfers from loan portfolio, at fair value . . . . .
Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of OREO . . . . . . . . . . . . . . . . . . . . .
$
$
120,636
—
87,765
(20,215)
(102,941)
9,563
54,078
64,084
52,294
(1,138)
(51,745)
3,063
Ending balance . . . . . . . . . . . . . . . . . . . . . .
$
94,808
$
120,636
The OREO balance of $94.8 million at December 31, 2012 includes the interests of several outside participating
banks totaling $5.3 million, for which an offsetting liability is recorded in other liabilities and excludes
$10.6 million of the Company’s minority interests in OREO which are held by outside banks where the Company
was not the lead bank and does not have a controlling interest, for which the Company maintains a receivable in
other assets. Of the $94.8 million of OREO at December 31, 2012, $45.5 million, or 48.0%, was covered by loss
sharing agreements with the FDIC. Any losses on these assets are substantially offset by a corresponding change
in the FDIC indemnification asset. During the year ended December 31, 2012, the Company sold $102.9 million
of OREO and realized net gains on these sales of $9.5 million, and during the year ended December 31, 2011, the
Company sold $51.7 million of OREO and realized net gains of $3.1 million.
160
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 12 Goodwill and Intangible Assets
In connection with the Hillcrest Bank, Bank Midwest, Bank of Choice, and Community Banks of Colorado
transactions, the Company recorded core deposit intangible assets of $5.8 million, $21.7 million, $5.2 million,
and $4.8 million, respectively. The Company is amortizing the core deposit intangibles on a straight line basis
over 7 years from the date of the respective acquisitions, which represents the expected useful life of the assets.
This will result in approximately $5.3 million of core deposit intangible amortization expense each year through
2017 and $1.0 million in 2018. The Company recognized core deposit intangible amortization expense of
$5.3 million, $4.4 million and $0 million during 2012, 2011 and 2010, respectively.
The Company had goodwill of $59.6 million at December 31, 2012 and 2011 and $52.4 million at December 31,
2010. During 2011, the Company recorded goodwill of $7.2 million in connection with the Community Banks of
Colorado acquisition. The goodwill is measured as the excess of the fair value of consideration paid over the fair
value of assets acquired. No goodwill impairment was recorded during 2012, 2011 or 2010.
Note 13 Deposits
As of December 31, 2012 and December 31, 2011, deposits totaled $4.2 billion and $5.1 billion, respectively.
Time deposits decreased from $2.8 billion at December 31, 2011 to $1.8 billion at December 31, 2012. The
following table summarizes the Company’s time deposits, based upon contractual maturity, at December 31,
2012 and 2011, by remaining maturity (in thousands):
December 31, 2012
December 31, 2011
Weighted
Average
Rate
Balance
Weighted
Average
Rate
Three months or less . . . . . . . . . . . . . . . . . . . . . . .
Over 3 months through 6 months . . . . . . . . . . . . .
Over 6 months through 12 months . . . . . . . . . . . .
Over 12 months through 24 months . . . . . . . . . . .
Over 24 months through 36 months . . . . . . . . . . .
Over 36 months through 48 months . . . . . . . . . . .
Over 48 months through 60 months . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance
$ 356,446
259,097
583,209
373,283
111,599
43,967
19,278
5,839
0.78% $ 746,835
554,740
0.68%
1,014,949
0.67%
309,848
0.88%
52,879
1.77%
54,678
1.83%
43,550
1.44%
7,117
2.32%
Total time deposits . . . . . . . . . . . . . . . . . . . . . . . .
$1,752,718
0.85% $2,784,596
1.30%
1.15%
1.23%
1.58%
2.01%
2.65%
1.89%
2.77%
1.33%
In connection with the Company’s FDIC-assisted transactions, the FDIC provided Hillcrest Bank, Bank of
Choice, and Community Banks of Colorado depositors with the right to redeem their time deposits at any time
during the life of the time deposit, without penalty, unless the depositor accepts new terms. At December 31,
2012 and December 31, 2011, the Company had approximately $164.3 million and $1.1 billion, respectively, of
time deposits that were subject to penalty-free withdrawals.
161
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The Company incurred interest expense on deposits as follows during the periods indicated (in thousands):
For the years ended
December 31,
2012
2011
2010
Interest bearing demand deposits . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,230
3,969
283
23,643
$ 1,091
4,540
355
35,588
$
50
414
32
4,987
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,125
$41,574
$5,483
Note 14 Securities Sold Under Agreements to Repurchase
The following table sets forth selected information regarding repurchase agreements during the years ended
2012, 2011 and 2010 (in thousands):
Maximum amount of outstanding agreements at any
month end during the period . . . . . . . . . . . . . . . . . . . . .
Average amount outstanding during the period . . . . . . . . .
Weighted average interest rate for the period . . . . . . . . . .
$74,050
$52,385
$47,597
$31,727
$23,787
$28,739
0.18%
0.31%
0.33%
2012
2011
2010
As of December 31, 2012, 2011 and 2010, the Company had pledged mortgage-backed securities and U.S.
Treasury securities with a fair value of approximately $90.9 million, $71.2 million and $42.7 million,
respectively, for securities sold under agreements to repurchase. Additionally, there was $37.2 million, $20.3
million and $16.5 million of excess collateral pledged for repurchase agreements at December 31, 2012, 2011
and 2010, respectively.
The vast majority of the Company’s repurchase agreements are overnight transactions that mature the day after
the transaction. At December 31, 2012, 2011 and 2010, the overnight agreements had an average interest rate of
0.18%, 0.31% and 0.25%, respectively. At December 31, 2012, 2011 and 2010, $20 thousand, $0.5 million and
$235 thousand of the Company’s repurchase agreements were for periods longer than one day.
The Company does not have any borrowings, unused lines of credit, or short-term financing agreements.
Note 15 Regulatory Capital
NBH Bank, N.A. is subject to the regulatory capital adequacy requirements of the Federal Reserve Board, the
FDIC, and the OCC, as applicable. Failure to meet the minimum capital requirements can initiate certain
mandatory and possibly further discretionary actions by regulators that could have a material adverse effect on
the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, banks must meet specific capital requirements that involve quantitative
162
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The Company and its subsidiary bank are subject to traditional limitations on dividends and limitations through
operating agreements with various regulators established in connection with the Company’s formation and early
acquisitions. NBH Bank is prohibited from paying a dividend to the Company until at least the fourth quarter of
2013. The Company’s regulators did not object to the payment of a quarterly cash dividend to shareholders
because doing so would not weaken the Company’s financial health.
Typically, banks are required to maintain a Tier I risk-based capital ratio of 4.00%, a total risk-based capital ratio
of 8.00% and a Tier 1 leverage ratio of 4.00% in order to meet minimum, adequately capitalized regulatory
requirements. To be considered well-capitalized (under prompt corrective action provisions), banks must
maintain minimum capital ratios of 6.00% for Tier I risk-based capital, 10.00% for total risk-based capital and
5.00% for the Tier 1 leverage ratio. However, in connection with the approval of the de novo charter for NBH
Bank, N.A., the Company has agreed with its regulators to maintain capital levels of at least 10% Tier 1 leverage
ratio, 11% Tier 1 risk-based capital ratio and 12% total risk-based capital ratio through the fourth quarter of
2013.
At December 31, 2012 and December 31, 2011, as applicable, NBH Bank, N.A. and the consolidated holding
company exceeded all capital ratio requirements under prompt corrective action or other regulatory requirements,
as is detailed in the table below (dollars in thousands):
December 31, 2012
Required to be
considered well
capitalized (1)
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
Tier 1 leverage ratio
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
NBH Bank, N.A.
18.2% $962,779 N/A
16.4% 851,365
N/A
10% $518,244
4% $211,439
4% 207,298
Tier 1 risk-based capital ratio (2)
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
NBH Bank, N.A.
51.9% $962,779
46.6% 851,365
6% $111,396
11% 201,147
4% $ 74,264
73,144
4%
Total risk-based capital ratio (2)
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
NBH Bank, N.A.
52.7% $978,535
47.4% 867,121
10% $185,659
12% 219,433
8% $148,527
8% 146,289
163
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
December 31, 2011
Required to be
considered well
capitalized (1)
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
Tier 1 leverage ratio
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
NBH Bank, N.A.
15.1% $949,154 N/A
13.4% 828,321
N/A
10% $616,919
4% $251,514
4% 246,768
Tier 1 risk-based capital ratio (2)
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
NBH Bank, N.A.
49.9% $949,154
44.2% 828,321
6% $114,077
11% 206,258
4% $ 76,051
75,003
4%
Total risk-based capital ratio (2)
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
NBH Bank, N.A.
50.5% $960,681
44.8% 839,848
10% $190,129
12% 225,009
8% $152,103
8% 150,006
(1) These ratio requirements are reflective of the agreements the Company has made with its various regulators
in connection with the approval of the de novo charter for NBH Bank, N.A., as described above.
(2) Due to the conditional guarantee represented by the loss sharing agreements, the FDIC indemnification asset
and covered assets are risk-weighted at 20% for purposes of risk-based capital computations.
Note 16 FDIC Loss Sharing Income
In connection with the loss sharing agreements that the Company has with the FDIC in regard to the Hillcrest
Bank and Community Banks of Colorado transactions, the Company recognizes the actual reimbursement of
costs of resolution of covered assets from the FDIC through the statements of operations. The table below
provides additional details of the Company’s FDIC loss sharing income during the years ended 2012, 2011, and
2010 (in thousands):
Clawback liability amortization . . . . . . . . . . . . . . . . . . . . . . .
Clawback liability remeasurement . . . . . . . . . . . . . . . . . . . . .
Reimbursement to FDIC for gain on sale . . . . . . . . . . . . . . . .
Reimbursement to FDIC for recoveries . . . . . . . . . . . . . . . . .
FDIC reimbursement of costs of resolution of covered
For the years ended
December 31,
2012
2011
2010
(1,377)
100
(3,457)
(3)
(845)
(2,778)
(1,130)
(1,227)
(117)
—
—
—
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,806
7,390
664
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,069
$ 1,410
$ 547
Note 17 Stock-based Compensation and Employee Benefits
The Company provides stock-based compensation in accordance with the NBH Holdings Corp. 2009 Equity
Incentive Plan (the “Plan”). The Plan provides the compensation committee of the board of directors of the
Company the authority to grant, from time to time, awards of options, stock appreciation rights, restricted stock,
restricted stock units, stock awards, or stock bonuses to eligible persons. The aggregate number of shares of stock
which may be granted under the Plan was 5,750,000 and the maximum number of restricted shares and restricted
share units that may be granted was 1,725,000 at December 31, 2012.
164
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
To date, the Company has issued stock options and restricted stock under the Plan. The compensation committee
sets the option exercise price at the time of grant but in no case is the exercise price less than the fair market
value of a share of stock at the date of grant. The Company used information provided by third parties, including
independent valuation specialists, as required by the Plan, to assist in the determination of estimates regarding
fair values associated with the Company’s stock-based compensation issued prior to the Company’s initial public
offering and listing on a national exchange, including contemporaneous valuations of grant date fair values. The
Company is responsible for the assumptions used therein and the resulting values. The Company performed the
valuations of all stock-based compensation grants made subsequent to the Company’s initial public offering.
The Company issued stock options and restricted stock during the year ended December 31, 2012. The expense
associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing
model. The time vesting component of the restricted stock was valued at the same price as the common shares
since they are assumed to be held beyond the vesting period. The market vesting component of the restricted
stock was valued using a Monte Carlo Simulation with 100,000 simulation paths to assess the expected
percentage of vested shares. A Geometric Brownian Motion was used for simulating the equity prices for a
period of 10 years and if the restricted stock were not vested during the 10-year period it was assumed they were
forfeited.
Below are the weighted average assumptions used in the Black-Scholes option pricing model and the Monte
Carlo Simulation to determine fair value of the Company’s stock options and market-vesting portion of the
Company’s restricted stock granted 2012:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.00%
38.19%
5.9
0.12%
1.10%
38.00%
10
0.00%
Black-Scholes Monte Carlo
Prior to September 20, 2012, the Company’s shares were not publicly traded and had limited private trading. As a
private entity, volatility was estimated using the calculated value method, whereby the expected volatility was
calculated based on the median historical volatility of 17 comparable companies that were publicly traded, for a
period commensurate with the expected term of the options. Upon becoming a public entity, the Company was
subject to a change in accounting policy under the provisions of ASC Topic 718 Compensation-Stock
Compensation, whereby expected volatility of grants, modifications, repurchases or cancellations that occur
subsequent to the Company becoming a public entity were calculated using a time-based weighted migration of
the Company’s own stock price volatility coupled with those of the peer group. The weighting will become
increasingly dependent on the Company’s own stock-price volatility as time passes, until such time that the
Company’s stock has a historical volatility equal in length to that of the expected term of the awards being
measured. The risk-free rate for the expected term of the options was based on the U.S. Treasury yield curve at
the date of grant and based on the expected term. The expected term was estimated to be the average of the
contractual vesting term and time to expiration. The dividend yield was assumed to be zero for grants made prior
to the initial public offering and for subsequent grants was assumed to be $0.05 per share per quarter in
accordance with the Company’s dividend policy at the time of grant.
165
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The following table summarizes the material vesting terms of the stock options granted in 2012:
Options are time-vested with 1/3 vesting on each of
the first, second and third anniversary of the date
of grant, and further subject to the Company’s
shares becoming publicly listed . . . . . . . . . . . . . . .
Options are time-vested with 1⁄ 2 vesting in July,
2014 and 1⁄ 2 vesting in July, 2015 . . . . . . . . . . . . .
Total options granted in 2012 . . . . . . . . . . . . . . . . . . .
Number of Options
Granted in 2012
240,000
30,000
270,000
The following table summarizes option activity for the year ended 2011 and 2012:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term in
Years
Options
Outstanding at December 31, 2010 . . . . . . . . . . . .
Granted during the three months ended
2,357,332
$20.00
March 31, 2011 . . . . . . . . . . . . . . . . . . . . . .
203,500
20.00
Granted during the three months ended
June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . .
63,500
20.00
Granted during the three months ended
September 30, 2011 . . . . . . . . . . . . . . . . . .
26,500
20.00
Granted during the three months ended
December 31, 2011 . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrendered . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
993,000
(402,500)
—
—
20.00
20.00
20.00
20.00
Aggregate
Intrinsic
Value
$ —
Outstanding at December 31, 2011 . . . . . . . . . . . .
Granted during the three months ended
3,241,332
$20.00
9.7
$ —
March 31, 2012 . . . . . . . . . . . . . . . . . . . . . .
215,000
20.00
Granted during the three months ended
June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . .
25,000
20.00
Granted during the three months ended
September 30, 2012 . . . . . . . . . . . . . . . . . .
—
—
Granted during the three months ended
December 31, 2012 . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,000
(39,667)
18.23
20.00
Outstanding at December 31, 2012 . . . . . . . . . . . .
Options fully vested and exercisable at
3,471,665
$19.98
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . .
Options expected to vest . . . . . . . . . . . . . . . . . . . . .
2,446,999
972,641
$20.00
$19.95
6.94
7.00
6.81
$22,800
$ —
$21,660
166
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Options granted during the year ended 2012, 2011 and 2010 had weighted average grant date fair values of $8.43,
$5.58 and $6.84. The following table summarizes information about the Company’s outstanding stock options at
December 31, 2012:
Options Outstanding
Options Vested
Exercise Price
$18.23
$20.00
Number
Outstanding
30,000
3,441,665
Weighted Average
Remaining
Contractual Life
(years)
9.55
6.92
Weighted
Average
Exercise
Price
$18.23
$20.00
Number
Vested
—
2,446,999
Weighted
Average
Exercise
Price
$ —
$20.00
Stock option expense is included in salaries and employee benefits in the accompanying consolidated statements
of operations and totaled $6.7 million, $5.9 million, and $8.0 million for 2012, 2011, and 2010, respectively. At
December 31, 2012, there was $2.8 million of total unrecognized compensation cost related to non-vested stock
options granted under the Plan. The cost is expected to be recognized over a weighted average period of 0.7 year.
Restricted stock may also be issued under the Plan as described above. Compensation expense for the portion of
the restricted stock that contains a market vesting condition is recognized over the derived service period based
on the fair value of the awards on the grant date. Compensation expense for the portion of the restricted stock
that contains performance and service vesting conditions is recognized over the requisite service period based on
fair value of the awards on the grant date.
The following table summarizes restricted stock activity for the year ended December 31, 2012:
Unvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrendered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted
Stock
1,108,334
(170,214)
100,000
(5,000)
(81,452)
Unvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . .
951,668
Weighted
Average
Grant
Date Fair
Value
$15.58
$19.21
$16.86
$13.14
$18.97
$14.79
As of December 31, 2012, there was $2.3 million of total unrecognized compensation cost related to non-vested
restricted shares granted under the Plan. The cost is expected to be recognized over a weighted average period of
0.8 years. Expense related to restricted stock totaled $6.3 million, $6.6 million, and $8.6 million during 2012,
2011 and 2010, respectively, and is included in salaries and employee benefits in the Company’s consolidated
statements of operations.
167
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 18 Acquisition Related Costs
The Company incurred certain expenses related to the completion of its acquisitions. The company also incurred
certain expenses related to other potential acquisitions that the Company did not consummate. The following
tables summarize the Company’s acquisition-related costs during 2012, 2011, and 2010 (in thousands):
2012
Bank of
Choice
Community
Banks of
Colorado Other Total
Bank of
Choice
2011
Community
Banks of
Colorado Other Total
2010
Bank
Midwest
Hillcrest
Bank Other Total
Legal and advisory . . . . .
Professional fees . . . . . . .
Due diligence . . . . . . . . . . —
$—
66
Total . . . . . . . . . . . . .
$ 66
Note 19 Warrants
$114
467
223
$804
$— $114 $ 500
892
129
— 533
— 223
$ 584
1,153
1,035
$— $1,084 $4,525
1,310
— 2,045
523
1,806
642
$3,093 $ — $ 7,618
3,591
1,308
2,867
2,086
973
258
$— $870 $1,521
$2,772
$642 $4,935 $6,358
$4,324 $3,394 $14,076
At December 31, 2012 and December 31, 2011, the Company had 830,750 outstanding warrants to purchase
Company stock. The warrants were granted to certain lead stockholders of the Company, all with an exercise
price of $20.00 per share. The term of the warrants is for ten years from the date of grant and the expiration dates
of the warrants range from October 20, 2019 to September 30, 2020. The fair value of the warrants was estimated
to be $5.5 million and $6.8 million at December 31, 2012 and 2011, respectively. The fair value of the warrants
was estimated using a Black-Scholes option pricing model utilizing the following assumptions at the indicated
dates:
December 31, 2012
December 31, 2011
December 31, 2010
Risk-free interest rate . . . . . . . . . .
Expected volatility . . . . . . . . . . . .
Expected term (years) . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . .
1.18%
37.72%
7-8
1.05%
1.56%
34.93%
8-9
0.00%
3.35%
31.32%
9-10
0.00%
The Company’s shares became publicly traded on September 20, 2012 and prior to that, had limited private
trading; therefore, expected volatility was calculated using a time-based weighted migration of the Company’s
own stock price volatility coupled with the median historical volatility, for a period commensurate with the
expected term of the warrants, of those of a peer group. The risk-free rate for the expected term of the warrants
was based on the U.S. Treasury yield curve at the date of grant and based on the expected term. The expected
term was estimated based on the contractual term of the warrants.
The Company recorded a benefit of $1.4 million and $0.1 million during 2012 and 2011, respectively, and a $44
thousand expense in 2010 in the consolidated statements of operations resulting from the change in fair value on
the revaluation of the warrant liability.
Note 20 Common Stock
The Company had 46,368,483 shares of Class A common stock and 5,959,189 shares of Class B common stock
outstanding as of December 31, 2012 and 44,612,344 shares of Class A common stock and 7,545,353 shares of
Class B common stock outstanding as of December 31, 2011. Additionally, as of December 31, 2012 and 2011,
respectively, the Company had 951,668 and 1,108,334 shares of restricted Class A common stock issued but not
168
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
yet vested under the NBH Holdings Corp. 2009 Equity Incentive Plan. Class A common stock possesses all of
the voting power for all matters requiring action by holders of common stock, with certain limited exceptions.
The Company’s certificate of incorporation provides that, except with respect to voting rights and conversion
rights, the Class A common stock and Class B non-voting common stock are treated equally and identically.
Note 21 Income (Loss) Per Share
The Company had 52,327,672 and 52,157,697 shares issued and outstanding (inclusive of Class A & B) as of
December 31, 2012 and 2011, respectively, inclusive of 250,000 shares of founders’ shares that were issued in
2009 at par value. Stock options, certain restricted shares and warrants are potentially dilutive securities, but are
not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for
years ended December 31, 2012, 2011 and 2010.
The following table illustrates the computation of basic and diluted income per share for the years ended 2012,
2011, and 2010 (in thousands, except earnings (loss) per share):
For the years ended
2012
2011
2010
Basic earnings (loss) per share:
Income (loss) available to common
stockholders (numerator)
. . . . . . . . . . . . .
$ (543,000)
$41,963,000
$ 6,051,000
Weighted average common shares
outstanding (denominator)
. . . . . . . . . . . .
52,214,175
51,978,744
53,000,454
Basic earnings (loss) per share . . . . . . .
$
(0.01)
$
0.81
$
0.11
Diluted earnings (loss) per share:
Income (loss) available to common
stockholders (numerator)
. . . . . . . . . . . . .
$ (543,000)
$41,963,000
$ 6,051,000
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . .
Plus: effect of dilutive securities . . . . . .
Restricted stock (with no
52,214,175
51,978,744
53,000,454
performance restrictions)
. . . . .
—
125,277
—
Weighted average shares applicable to
diluted earnings per share
(denominator) . . . . . . . . . . . . . . . . . . . . . .
52,214,175
52,104,021
53,000,454
Diluted earnings (loss) per share . . . . . .
$
(0.01)
$
0.81
$
0.11
The Company had 3,471,665, 3,241,332 and 2,357,332 outstanding stock options to purchase common stock at
weighted average exercise prices of $19.98, $20.00 and $20.00 per share at December 31, 2012, 2011 and 2010,
respectively, which were not included in the computations of diluted income per share because the options’
exercise price was greater than the average market price of the common shares during those periods.
Additionally, the Company had 830,750 outstanding warrants to purchase the Company’s common stock as of
December 31, 2012, 2011 and 2010. The warrants have an exercise price of $20.00, which was out-of-the-money
for purposes of dilution calculations. The Company had 951,668, 1,108,334 and 1,199,168 unvested restricted
shares outstanding as of December 31, 2012, 2011 and 2010, respectively, which have performance, market and
169
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
time-vesting criteria, and as such, any dilution is derived only for the timeframe in which the vesting criteria had
been met and where the inclusion of those restricted shares is dilutive.
Note 22 Income Taxes
(a) Income taxes
Total income taxes for the years ended December 31, 2012, 2011 and 2010 were allocated as follows (in
thousands):
For the years ended
2012
2011
2010
Current expense:
U.S. federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,987
2,826
$ 33,258
4,942
$ 291
401
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27,813
$ 38,200
$ 692
Deferred (benefit) expense:
U.S. federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(21,078)
(2,155)
$(10,344)
(410)
$1,600
661
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(23,233)
(10,754)
2,261
Income tax expense . . . . . . . . . . . . . . . . . .
$ 4,580
$ 27,446
$2,953
(b) Tax Rate Reconciliation
Income tax expense attributable to income before taxes was $4.6 million, $27.4 million, and $3.0 million for
2012, 2011 and 2010, respectively, and differed from the amounts computed by applying the U.S. federal income
tax rate to pretax income as a result of the following (in thousands):
Income tax at federal statutory rate (35%) . . . . . . . . . . . . . . .
State income taxes, net of federal benefits . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Start-up costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrant valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible initial public offering related expenses . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the years ended
2011
2012
2010
$1,413
436
—
49
—
(485)
3,127
40
$24,293
2,946
—
230
—
—
—
(23)
$3,150
690
(720)
—
(178)
—
—
11
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,580
$27,446
$2,953
170
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
(c) Significant Components of Deferred Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2012 and 2011 are presented below (in thousands):
Deferred tax assets:
Excess tax basis of acquired loans over carrying value . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued stock-based compensation . . . . . . . . . . . . . . . . . .
Capitalized start-up costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the years ended
2012
2011
$ 10,408
5,917
20,855
1,788
11,965
6,568
240
142
$ 29,982
4,120
20,705
—
8,517
6,690
1,917
313
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . .
$ 57,883
$ 72,244
Deferred tax liabilities:
FDIC indemnification asset net of clawback liability . . . .
Net unrealized gains on investment securities . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(19,006)
(25,705)
(6,268)
—
(691)
(192)
$(55,660)
(29,646)
(4,264)
(2,498)
(1,185)
(144)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . .
(51,862)
(93,397)
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . .
$ 6,021
$(21,153)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, if any (including the
impact of available carryforward periods), projected future taxable income, and tax-planning strategies in making
this assessment. For the years ended December 31, 2012 and 2011, management believes a valuation allowance
on the deferred tax asset is not necessary based on the current and future projected earnings of the Company. The
Company has no ASC Topic 740-10 unrecognized tax benefits recorded as of December 31, 2012 and 2011 and
does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve
months. The Company and its subsidiary bank are subject to income tax by federal, state and local government
taxing authorities. The Company’s tax returns for the years ended December 31, 2009 through 2012 remain
subject to examination for U.S. federal income tax authorities. The years open to examination by state and local
government authorities vary by jurisdiction.
171
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 23 Commitments and Contingencies
Financial instrument commitments and contingencies
In the normal course of business, the Company enters into various off-balance sheet commitments to help meet
the financing needs of clients. These financial instruments include commitments to extend credit, commercial
and consumer lines of credit and standby letters of credit. The same credit policies are applied to these
commitments as the loans on the consolidated statements of financial condition; however, these commitments
involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of
financial condition. At December 31, 2012 and December 31, 2011, the Company had loan commitments totaling
$305.9 million and $341.1 million, respectively, and standby letters of credit that totaled $10.7 million and $20.0
million, respectively. The total amounts of unused commitments do not necessarily represent future credit
exposure or cash requirements, as commitments often expire without being drawn upon. However, the
contractual amount of these commitments, offset by any additional collateral pledged, represents the Company’s
potential credit loss exposure. Amounts funded at Hillcrest Bank and Community Banks of Colorado under non-
cancelable commitments in effect at the date of acquisition are covered under the respective loss sharing
agreements if certain conditions are met.
Total unfunded commitments at December 31, 2012 and December 31, 2011 were as follows (in thousands):
December 31, 2012
Non
Covered
Covered
Total
Covered
December 31, 2011
Non
Covered
Total
Commitments to fund loans
Residential . . . . . . . . . . . . . . . . . . . . . . . $ — $ 69,892 $ 69,892 $ 1,517 $ 30,194 $ 31,711
Commercial and commercial real
Construction and land development
Consumer
estate . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Credit card lines of credit
Unfunded commitments under lines of
528
426
—
—
48,923
6,256
1,688
16,591
49,451
6,682
1,688
16,591
2,437
3,565
—
—
38,937
776
39,690
20,738
41,374
4,341
39,690
20,738
credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and standby letters of credit . . .
203,224
20,037
. . . . . . . . . . . . . . . . . . . . . . . . . . . $26,689 $284,305 $310,994 $78,793 $282,322 $361,115
135,001
16,986
155,999
10,691
133,859
7,096
22,140
3,595
68,223
3,051
Total
Commitments to fund loans—Commitments to fund loans are legally binding agreements to lend to clients
in accordance with predetermined contractual provisions providing there have been no violations of any
conditions specified in the contract. These commitments are generally at variable interest rates and are for
specific periods or contain termination clauses and may require the payment of a fee. The total amounts of
unused commitments are not necessarily representative of future credit exposure or cash requirements, as
commitments often expire without being drawn upon.
Credit card lines of credit—The Company extends lines of credit to clients through the use of credit cards
issued by the Banks. These lines of credit represent the maximum amounts allowed to be funded, many of which
will not exhaust the established limits, and as such, these amounts are not necessarily representations of future
cash requirements or credit exposure.
172
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Unfunded commitments under lines of credit—In the ordinary course of business, the Company extends
revolving credit to its clients. These arrangements may require the payment of a fee.
Commercial and standby letters of credit—As a provider of financial services, the Company routinely issues
commercial and standby letters of credit, which may be financial standby letters of credit or performance standby
letters of credit. These are various forms of “back-up” commitments to guarantee the performance of a client to a
third party. While these arrangements represent a potential cash outlay for the Company, the majority of these
letters of credit will expire without being drawn upon. Letters of credit are subject to the same underwriting and
credit approval process as traditional loans, and as such, many of them have various forms of collateral securing
the commitment, which may include real estate, personal property, receivables or marketable securities.
Contingencies
In the ordinary course of business, the Company and its Banks may be subject to litigation. Based upon the
available information and advice from the Company’s legal counsel, management does not believe that any
potential, threatened or pending litigation to which it is a party will have a material adverse effect on the
Company’s liquidity, financial condition or results of operations.
Note 24 Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and
to disclose the fair value of its financial instruments. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and
liabilities into three different levels based on the nature of the instrument and the availability and reliability of the
information that is used to determine fair value. The three levels are defined as follows:
• Level 1—Includes assets or liabilities in which the inputs to the valuation methodologies are based on
unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2—Includes assets or liabilities in which the inputs to the valuation methodologies are based on
similar assets or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities
in inactive markets, and inputs other than quoted prices that are observable, such as interest rates, yield
curves, volatilities, prepayment speeds, and other inputs obtained from observable market input.
• Level 3—Includes assets or liabilities in which the inputs to the valuation methodology are based on at
least one significant assumption that is not observable in the marketplace. These valuations may rely on
management’s judgment and may include internally-developed model-based valuation techniques.
Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the
least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of
each particular asset or liability being measured and then considers the assumptions that market participants
would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for
identical assets or liabilities in active markets (level 1 inputs) to value each asset or liability. However, when
inputs from identical assets or liabilities on active markets are not available, the Company utilizes market
observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits
the use of unobservable inputs to occasions when observable inputs are not available. The need to use
unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the
173
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
underlying collateral. Although, in some instances, third party price indications may be available, limited trading
activity can challenge the observability of these quotations.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair
value, as well as the general classification of each instrument under the valuation hierarchy:
Fair Value of Financial Instruments Measured on a Recurring Basis
Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a
recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair
value and, as such, these securities are classified as level 1. The Company classified its U.S. Treasury securities
as level 1 in the fair value hierarchy as of December 31, 2012 and December 31, 2011. When quoted market
prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar
characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the
securities are then classified as level 2. At December 31, 2012 and December 31, 2011, the Company’s level 2
securities included asset backed securities, mortgage-backed securities comprised of residential mortgage pass-
through securities, other residential mortgage-backed securities, and at December 31, 2011 also included other
mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored
enterprises. All other investment securities are classified as level 3. There were no transfers between levels 1, 2
or 3 during the years ended 2012 or 2011.
Value appreciation rights issued to the FDIC—The Company measures the fair value of the VAR on a recurring
basis and is based on the spread between the strike price of the VAR and the average multiple of price to tangible
book value indicated by national and regional bank indices, multiplied by the maximum number of applicable
units.
Warrant liability—The Company measures the fair value of the warrant liability on a recurring basis using a
Black-Scholes option pricing model. The Company’s shares became publicly traded on September 20, 2012 and
prior to that, had limited private trading; therefore, expected volatility was estimated based on the median
historical volatility, for a period commensurate with the expected term of the warrants, of 17 comparable
companies with publicly traded shares, and is deemed a significant unobservable input to the valuation model.
Clawback liability—The Company measures the net present value of expected future cash payments to be made
by the Company to the FDIC that must be made within 45 days of the conclusion of the loss sharing agreements
on a recurring basis. The expected cash flows are calculated in accordance with the loss sharing agreements and
are based primarily on the expected losses on the covered assets, which involve significant inputs that are not
market observable.
174
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31,
2012 and December 31, 2011 on the consolidated statements of financial condition utilizing the hierarchy
structure described above (in thousands):
Level 1
December 31, 2012
Level 3
Level 2
Total
Assets:
Investment Securities available-for-sale:
$ 300
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities issued or
guaranteed by U.S. Government agencies or
sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other residential MBS issued or guaranteed by U.S.
$
— $ — $
90,003
—
300
90,003
678,017
—
678,017
Government agencies or sponsored enterprises . . . . . . —
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 300
949,289
—
$1,717,309
$
949,289
—
419
419
419 $1,718,028
Liabilities:
Warrant liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clawback liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . .
$ — $
$ — $
— $ 5,461 $
—
— $36,732 $
31,271
5,461
31,271
36,732
Level 1
December 31, 2011
Level 3
Level 2
Total
Assets:
Investment Securities available-for-sale:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,300 $
U.S. Government sponsored agency obligations . . . . . . . . . .
Mortgage-backed securities (“MBS”):
3,010
— $ — $
—
—
3,300
3,010
Residential mortgage pass-through securities issued or
guaranteed by U.S. Government agencies or
sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . .
Other residential MBS issued or guaranteed by U.S.
Government agencies or sponsored enterprises . . . . .
Other MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
1,191,537
643,625
20,808
—
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . $6,310 $1,855,970
$
—
—
1,191,537
643,625
20,808
—
419
419
419 $1,862,699
Liabilities:
Value appreciation rights issued to FDIC . . . . . . . . . . . . . . . . $ — $
Warrant liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clawback liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . $ — $
— $ 1,767 $
—
—
— $38,606 $
6,845
29,994
1,767
6,845
29,994
38,606
175
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The table below details the changes in Level 3 financial instruments during the year ended 2012 (in thousands):
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . .
Change in value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement
Value
appreciation
rights issued
to FDIC
$ 1,767
(1,276)
—
(491)
Warrant
liability
Clawback
liability
$ 6,845
(1,384)
—
—
$29,994
(100)
1,377
—
Net change in Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,767)
(1,384)
1,277
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . .
$ —
$ 5,461
$31,271
Fair Value of Financial Instruments Measured on a Non-recurring Basis
The Company records collateral dependent loans that are considered to be impaired at their estimated fair value.
A loan is considered impaired when it is probable that the Company will be unable to collect all contractual
amounts due in accordance with the terms of the loan agreement. Collateral dependent impaired loans are
measured based on the fair value of the collateral. The Company relies on third-party appraisals and internal
assessments in determining the estimated fair values of these loans. The inputs used to determine the fair values
of loans are considered level 3 inputs in the fair value hierarchy. During 2012, the Company measured 20 loans
not accounted for under ASC Topic 310-30 at fair value on a non-recurring basis. These loans carried specific
reserves totaling $1.9 million at December 31, 2012. During 2012, the Company added specific reserves of $2.7
million for 18 loans with carrying balances of $9.4 million at December 31, 2012. The Company also eliminated
specific reserves of $1.5 million for 11 loans during 2012, primarily due to charge offs.
OREO is recorded at the lower of the loan balance or the fair value of the collateral less estimated selling costs.
The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a
new basis. The Company recognized $20.2 million of OREO impairments in its consolidated statements of
financial condition during the year ended 2012, of which $14.2 million, or 70.2%, were on OREO that was
covered by loss sharing agreements with the FDIC. The fair values of OREO are derived from third party price
opinions or appraisals that generally use an income approach or a market value approach. If reasonable
comparable appraisals are not available, then the Company may use internally developed models to determine
fair values. The inputs used to determine the fair values of OREO are considered level 3 inputs in the fair value
hierarchy.
The table below provides information regarding the assets recorded at fair value on a non-recurring basis during
the year ended 2012 (in thousands):
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $— $94,808 $94,808 $(18,530)
$— $— $40,854 $40,854 $ 6,535
December 31, 2012
Level 1 Level 2
Level 3
Total
Losses
From
Fair
Value
Changes
176
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
The Company did not record any liabilities for which the fair value was made on a non-recurring basis during the
year ended 2012.
The following table provides information about the valuation techniques and unobservable inputs used in the
valuation of financial instruments falling within level 3 of the fair value hierarchy as of December 31, 2012. The
table below excludes non-recurring fair value measurements of collateral value used for impairment measures for
OREO. These valuations utilize third party appraisal or broker price opinions, and are classified as level 3 due to
the significant judgment involved. (dollars in thousands):
Fair Value at
December 31,
2012
Valuation Technique
Unobservable Input
Quantitative
measures
Other securities . . . . . . . . .
Impaired loans . . . . . . . . .
419
$
40,854
Clawback liability . . . . . .
31,271
Cash investment in
private equity fund
Appraised value
Contractually defined
Discounted Cash Flows
Cash investment
Appraised values
Discount rate
Intrinsic loss estimates
Expected credit losses
0-25%
$323.3 million -
$405 million
Warrant liability . . . . . . . .
5,461
Black-Scholes
Note 25 Fair Value of Financial Instruments
Asset purchase premium $98 million -
$182.7 million
4%
Discount rate
Discount period
Volatility
27%-67%
The fair value of a financial instrument is the amount that would be exchanged between willing parties, other
than in a forced liquidation. Fair value is determined based upon quoted market prices to the extent possible;
however, in many instances, there are no quoted market prices for the Company’s various financial instruments.
In cases where quoted market prices are not available, fair values are based on estimates using present value or
other valuation techniques that may be significantly impacted by the assumptions used, including the discount
rate and estimates of future cash flows. Changes in any of these assumptions could significantly affect the fair
value estimates. The fair value of the financial instruments listed below does not reflect a premium or discount
that could result from offering all of the Company’s holdings of financial instruments at one time, nor does it
reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. In connection with the Hillcrest Bank, Bank
Midwest, Bank of Choice and Community Banks of Colorado acquisitions, the Company recorded all of the
acquired assets and assumed liabilities at fair value at the respective dates of acquisition. The fair value of
financial instruments at December 31, 2012 and December 31, 2011, including methods and assumptions utilized
for determining fair value of financial instruments, are set forth below (in thousands):
177
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
ASSETS:
Cash and cash equivalents . . . . . . . . . . . .
U.S. Treasury securities available-for-
December 31, 2012
December 31, 2011
Level in Fair
Value
Measurement
Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
$ 769,180 $ 769,180 $1,628,137 $1,628,137
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 1
U.S. Government sponsored agency
obligations available-for-sale . . . . . . .
Level 1
300
—
300
—
3,300
3,300
3,010
3,010
Asset backed securities
available-for-sale . . . . . . . . . . . . . . . . .
Mortgage-backed securities—residential
mortgage pass-through securities
issued or guaranteed by U.S.
Government agencies or sponsored
enterprises available-for-sale . . . . . . . .
Mortgage-backed securities—other
residential mortgage-backed securities
issued or guaranteed by U.S.
Government agencies or sponsored
enterprises available-for-sale . . . . . . . .
Mortgage-backed securities—other
mortgage-backed securities issued or
guaranteed by U.S. Government
agencies or sponsored enterprises
available-for-sale . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities—residential
mortgage pass-through securities
issued or guaranteed by U.S.
Government agencies or sponsored
enterprises held-to-maturity . . . . . . . . .
Capital stock of FHLB . . . . . . . . . . . . . . .
Capital stock of FRB . . . . . . . . . . . . . . . .
Loans receivable . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . .
LIABILITIES:
Deposit transaction accounts . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . .
Due to FDIC . . . . . . . . . . . . . . . . . . . . . .
Warrant liability . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . .
Level 2
90,003
90,003
—
—
Level 2
678,017
678,017
1,191,537
1,191,537
Level 2
949,289
949,289
643,625
643,625
Level 2
Level 3
—
419
—
419
20,808
419
20,808
419
577,486
7,976
25,020
1,822,690
12,673
584,551
7,976
25,020
1,835,355
12,673
6,801
4,097
25,020
2,262,524
16,022
6,829
4,097
25,020
2,272,886
16,022
2,448,001
1,752,718
2,448,001
1,759,886
2,278,457
2,784,596
2,278,457
2,790,314
53,685
31,271
5,461
4,239
53,686
31,271
5,461
4,239
47,597
69,739
6,845
11,017
47,597
69,739
6,845
11,017
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 3
Level 3
Level 2
178
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Cash and cash equivalents
Cash and cash equivalents have a short-term nature and the estimated fair value is equal to the carrying value.
Investment securities
The estimated fair value of investment securities is based on quoted market prices or bid quotations received
from securities dealers. Other investment securities, including securities that are held for regulatory purposes are
carried at cost, less any other than temporary impairment.
Loans and covered loans
The estimated fair value of the loan portfolio is estimated using a discounted cash flow analysis using a discount
rate based on interest rates offered at the respective measurement dates for loans with similar terms to borrowers
of similar credit quality. The allowance for loan losses is considered a reasonable estimate of any required
adjustment to fair value to reflect the impact of credit risk. The estimates of fair value do not incorporate the exit-
price concept prescribed by ASC Topic 820 Fair Value Measurements and Disclosures.
Accrued interest receivable
Accrued interest receivable has a short-term nature and the estimated fair value is equal to the carrying value.
Deposits
The estimated fair value of deposits with no stated maturity, such as non-interest bearing demand deposits,
savings, NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value
of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits,
taking into account the option for early withdrawal. The discount rate is estimated using the rates offered by the
Company, at the respective measurement dates, for deposits of similar remaining maturities.
Securities sold under agreements to repurchase
The vast majority of the Company’s repurchase agreements are overnight transactions that mature the day after
the transaction, and as a result of this short-term nature, the estimated fair value is equal to the carrying value.
Due to FDIC
The amount due to FDIC is specified in the purchase agreements and, as it relates to the clawback liability, is
discounted to reflect the uncertainty in the timing and payment of the amount due by the Company. The amounts
due to the FDIC in connection with the value appreciation rights is fully described in note 4.
Warrant liability
The warrant liability is estimated using a Black-Scholes model, the assumptions of which are detailed in note 19.
Accrued interest payable
Accrued interest payable has a short-term nature and the estimated fair value is equal to the carrying value.
179
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Note 26 Parent Company Only Financial Statements
Parent company only financial information for National Bank Holdings Corporation is summarized as follows:
Condensed Statements of Financial Condition
(In thousands)
2012
2011
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,642 $ 113,602
967,895
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,490
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
979,145
2,203
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,081,990
$1,084,987
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,569)
(3,742)
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,569)
1,090,559
(3,742)
1,088,729
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,081,990
$1,084,987
Condensed Statements of Operations
(In thousands)
2012
2011
2010
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Undistributed equity from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,699
—
255 $
649 $ 2,330
30,798
8
56,076
—
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,954
56,725
33,136
Expenses
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction/due diligence expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,934
9,216
—
25,150
(7,196)
(6,653)
14,675
4,898
1,046
20,619
36,106
(5,857)
22,234
3,435
13,117
38,786
(5,650)
(11,701)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (543) $41,963 $ 6,051
180
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
Condensed Statements of Cash Flows
(In thousands)
2012
2011
2010
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(543) $ 41,963 $
Undistributed equity from subsidiaries . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
(17,699)
13,078
(3,530)
(56,076)
12,564
(3,127)
Net cash used in operating activities . . . . . . . . . . . . . . . . . . .
(8,694)
(4,676)
6,051
(30,798)
16,612
(10,080)
(18,215)
Cash flows from investing activities:
Payments for investments in and advances to subsidiaries . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(10)
(274,000)
(511)
(560,000)
(149)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . .
(10)
(274,511)
(560,149)
Cash flows from financing activities:
Issuance (repurchase) of common stock . . . . . . . . . . . . . . . . . . . .
Issuance of vested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . .
(4)
(1,588)
(2,664)
(4,256)
2
(496)
—
(494)
(127,641)
—
—
(127,641)
Cash and cash equivalents at beginning of the year
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
(12,960)
113,602
(279,681)
393,283
(706,005)
1,099,288
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . $100,642 $ 113,602 $ 393,283
Note 27 Quarterly Results of Operations (unaudited)
The following is a summary of quarterly results (in thousands, except per share data):
December 31, 2012
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
Total
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . $54,708 $56,042 $59,845 $62,890 $233,485
29,234
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,546
9,632
7,932
5,124
Net interest income before provision for loan
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,584
2,670
46,914
8,997
51,367
4,544
1,541
49,496
5,263
44,233
8,063
59,957
(7,661)
230
51,913
12,226
39,687
10,049
45,301
4,435
1,733
53,258
7,836
45,422
10,270
52,973
2,719
1,076
204,251
27,995
176,256
37,379
209,598
4,037
4,580
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,003 $ (7,891) $ 2,702 $ 1,643 $
(543)
Earnings (loss) per common share, basic . . . . . . . . . . . . . . . $ 0.06 $ (0.15) $ 0.05 $ 0.03 $
Earnings (loss) per common share, diluted . . . . . . . . . . . . . $ 0.06 $ (0.15) $ 0.05 $ 0.03 $
(0.01)
(0.01)
181
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
December 31, 2011
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
Total
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . $60,939 $50,567 $44,286 $41,367 $197,159
41,696
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,089
10,948
9,845
9,814
Net interest income before provision for loan
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,991
3,556
46,435
—
5,327
45,731
6,031
3,578
40,753
3,760
36,993
60,520
3,546
46,659
54,400
20,648
34,441
8,791
25,650
—
9,473
32,295
2,828
1,143
30,278
3,895
26,383
—
10,620
30,853
6,150
2,077
155,463
20,002
135,461
60,520
28,966
155,538
69,409
27,446
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,453 $33,752 $ 1,685 $ 4,073 $ 41,963
Earnings per common share, basic . . . . . . . . . . . . . . . . . . . . $ 0.05 $ 0.65 $ 0.03 $ 0.08 $
Earnings per common share, diluted . . . . . . . . . . . . . . . . . . $ 0.05 $ 0.65 $ 0.03 $ 0.08 $
0.81
0.81
Fourth
quarter
December 31, 2010
Second
quarter
First
quarter
Third
quarter
Total
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . $19,609 $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,512
698 $
—
554 $
—
561 $ 21,422
5,512
—
Net interest income before provision for loan
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,097
88
14,009
37,778
4,377
40,296
15,868
2,953
698
—
698
—
—
2,617
554
—
554
—
—
3,960
561
—
561
—
8
2,108
(1,919)
—
(3,406)
—
(1,539)
—
15,910
88
15,822
37,778
4,385
48,981
9,004
2,953
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,915 $ (1,919) $ (3,406) $ (1,539) $ 6,051
Earnings (loss) per common share, basic . . . . . . . . . . . . . . . $ 0.25 $ (0.04) $ (0.07) $ (0.03) $
Earnings (loss) per common share, diluted . . . . . . . . . . . . . $ 0.25 $ (0.04) $ (0.07) $ (0.03) $
0.11
0.11
182
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
There were no changes in or disagreements with accountants on accounting and financial disclosures.
Item 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this
evaluation, our principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this annual report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and
with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control
—Integrated Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2012.
Changes in Internal Control Over Financial Reporting
None.
Item 9B. OTHER INFORMATION.
None
183
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE.
The information required by Items 401, 405 and 407 (d)(4) and (d)(5) of Regulation S-K regarding executive
officers will be included under the captions “Election of Directors”, “Section 16(a) Beneficial Ownership
Reporting Compliance”, “Committees of the Board – Audit and Risk Committee” and “Audit and Risk
Committee Report” in the definitive proxy statement. That information is incorporated herein by reference.
The Company’s Supplemental Code of Ethics for CEO and Senior Financial Officers, which applies to the CEO,
Chief Financial Officer and Principal Accounting Officer, is available at www.nationalbankholdings.com.
Amendments to, and waivers of, the code of ethics are publicly disclosed as required by applicable law,
regulation or rule.
Item 11. EXECUTIVE COMPENSATION.
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K regarding executive
compensation will be included under the captions “Executive Compensation”, “Compensation Committee
Report”, and “Compensation Committee Interlocks and Insider Participation” in the definitive proxy statement.
That information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The information required by Item 201(d) and 403 of Regulation S-K will be included under the caption
“Principal Shareholders” in the definitive proxy statement. That information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information required by Items 404 and 407(a) of Regulation S-K will be included under the captions
“Director Independence” and “Related Person Transactions” in the definitive proxy statement. That information
is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 9(e) of Schedule 14A will be included under the captions “Audit and Risk
Committee Pre-Approval Policies and Procedures” and “KPMG Fees” in the definitive proxy statement. That
information is incorporated herein by reference.
184
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
109
110
113
111
113
115
(2) Financial Statement Schedules:
All schedules are omitted as such information is inapplicable or is included in the financial
statements.
(b) The exhibits filed as part of this report and exhibits incorporated herein by reference to other
documents are listed in the Index to Exhibits (pages E-1 through E-2).
185
Corporate Headquarters
National Bank Holdings Corporation
5570 DTC Parkway
Greenwood Village, CO 80111
Tel: 720-529-3372
www.nationalbankholdings.com
Stock Exchange Listing
NYSE
Symbol: NBHC
Independent Accountants
KPMG LLP
Kansas City, MO
Transfer Agent, Registrar and
Dividend Disbursing Agent
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Tel: 718.921.8275
Fax: 718.765.8717
www.amstock.com
Where Common Sense Lives.
At NBH Bank, N.A., what helps set us apart is our ability
to take what can be a complex experience and distill
it to its simplest, most digestible form. We speak in
plain English. We are friendly and professional, yet
relaxed. We always strive to put the client first.
crave for someone to offer guidance, save them
time and help make sense of it all. Someone they
can trust like a neighbor. Someone who has their
best interests in mind. Someone who approaches
everything with good, old-fashioned common sense.
Successfully navigating the financial world can be
confusing and time-consuming for many. People
That’s the void only we fill. Common sense. That’s us.