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ANNUAL REPORT
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43027cvr.indd 4-6
A LETTER FROM CHAIRMAN, PRESIDENT AND CEO
G. TIMOTHY LANEY
FELLOW SHAREHOLDERS,
2014 was a year marked by significant growth for our young company as we continued on our journey of building a
leading community bank holding company. In our fourth year of banking operations, we achieved a 32% increase
in net income, a 30% increase in strategic loans outstanding and continued to manage toward the end of our FDIC
loss-sharing agreements. We did this while maintaining a high-quality balance sheet and continually cultivating the
relationships that we have with our clients.
These deep client relationships have been a cornerstone of our growth and a catalyst for the strong credit quality
of our loan portfolio. During 2014, we originated $869 million of high-quality loans, a solid 22% increase over the
prior year. The quality of the loan portfolio is evidenced by our 2014 full-year net charge-offs of just six basis points
in our non 310-30 loan portfolio. These results have not happened by chance. We select our clients based on strong
fundamentals, and we support that approach with prudent underwriting.
In addition to loan growth, we have been intensely focused on our path to 1% return on average tangible assets through
increasing productivity and improving efficiencies. To this end, during 2014, we engaged in substantial contract
negotiations, and as a result, will be converting our core operating system in 2015. The result of this conversion will be
more robust product offerings, an enhanced banking experience for our clients and substantial cost savings.
We have also remained committed to managing our capital opportunistically, and during 2014, we continued to
invest in ourselves through the repurchase of 6.1 million of our shares for $119 million. Since early 2013, and through
February 26, 2015, we have repurchased 15.3 million shares at an average price of $19.50.
A unique part of our journey has been the corporate culture that we have been building along the way, and in
particular, our increasing emphasis on corporate social responsibility. Our associates are committed to improving
the lives of others and enriching the communities in which we live and do business. For example, in the Colorado
mountain town of Basalt, one of our associates has studied English for ten years through the non-profit group English
in Action. Now fluent in English and Spanish, this associate gives back to the community through the organization
that helped her succeed by tutoring to help others learn to read, write, and speak English. In our Kansas City market,
another one of our associates provides financial education through Kansas University’s Gear-Up Financial Literacy
Program. Through this program, our associate works to ensure low-income students have the preparation and
resources necessary to pursue college degrees.
I am very proud of the positive impacts so many of our associates are making in our communities, and I want to thank
them for their dedication to improving the lives of others and for their continued commitment to our company. On
behalf of the Board of Directors and the executive management team, I want to also thank all of my teammates for
their unwavering efforts and contributions to our young company. I am proud to lead a company with so much
potential, and greatly appreciate the support of our associates, clients, business partners and shareholders.
SINCERELY,
TIM LANEY
CHAIRMAN, PRESIDENT AND CEO
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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.)
7800 East Orchard Road, Suite 300, Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone, including area code:
(720) 529-3336
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
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
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See 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
(do not check if a smaller reporting company)
Accelerated filer
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately
$825,000,000 based on the closing sale price as reported on the New York Stock Exchange.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of February 26, 2015, NBHC had outstanding 36,822,179 shares of Class A voting common stock and 385,729 shares of Class B non-voting
common stock, each with $0.01 par value per share, excluding 956,585 shares of restricted Class A common stock issued but not yet vested.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2015 Annual Meeting of Shareholders to be filed within 120 days of December 31, 2014
will be incorporated by reference into Part III of this form 10-K.
INDEX
Cautionary Notes Regarding Forward Looking Statements
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 Shareholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV Item 15.
Exhibits and Financial Statement Schedules
Signatures
Index to Exhibits
Page
1
3
19
31
31
31
31
32
34
41
79
80
133
133
135
135
135
135
135
135
136
137
138
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, notwithstanding that such statements are not specifically identified. 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,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,”
“target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are
only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these
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.
Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause
actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue
reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to execute our business strategy, as well as changes in our business strategy or development plans;
business and economic conditions generally and in the financial services industry;
economic, market, operational, liquidity, credit and interest rate risks associated with our business;
effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the
Federal Reserve Board;
changes imposed by regulatory agencies to increase our capital to a level greater than the current level required
for well-capitalized financial institutions (including the impact of the joint final rules promulgated by the Federal
Reserve Board, Office of the Comptroller of the Currency and the FDIC revising certain regulatory capital
requirements to align with the Basel III capital standards and meet certain requirements of the Dodd-Frank Wall
Street Reform and Consumer Protection Act);
effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations;
changes in the economy or supply-demand imbalances affecting local real estate values;
changes in consumer spending, borrowings and savings habits;
our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions of
financial institutions 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 financial institutions;
our ability to achieve organic loan and deposit growth and the composition of such growth;
changes in sources and uses of funds, including loans, deposits and borrowings;
increased competition in the financial services industry, nationally, regionally or locally, resulting in, among
other things, lower returns;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well
as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other
accounting standard setters;
the trading price of shares of the Company's stock;
our ability to realize deferred tax assets or the need for a valuation allowance;
1
•
•
•
•
•
•
•
•
•
continued consolidation in the financial services industry;
our ability to maintain or increase market share and control expenses;
costs and effects of changes in laws and regulations and of other legal and regulatory developments, including,
but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or
regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries;
technological changes;
the timely development and acceptance of new products and services and perceived overall value of these
products and services by our clients;
changes in our management personnel and our continued ability to hire and retain qualified personnel;
ability to implement and/or improve operational management and other internal risk controls and processes and
our reporting system and procedures;
regulatory limitations on dividends from our bank subsidiary;
changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant
regulatory and accounting requirements;
• widespread natural and other disasters, dislocations, political instability, acts of war or terrorist activities,
cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us
or our counterparties specifically;
•
•
impact of reputational risk on such matters as business generation and retention;
other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the
Securities and Exchange Commission; and
•
our success at managing the risks involved in the foregoing items.
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.
2
Item 1. BUSINESS.
Summary
PART I: FINANCIAL INFORMATION
National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the
State of Delaware in June 2009 and is headquartered immediately south of Denver, in Greenwood Village, Colorado. Our
primary operations are conducted through our wholly owned subsidiary, NBH Bank, N.A., referred to as the "Bank", or
"NBH Bank", through which we provide a variety of banking products to both commercial and consumer clients. We
service our clients through a network of 97 banking centers, with the majority of those banking centers located in the
greater Kansas City area and Colorado, and through online and mobile banking products. As of December 31, 2014, we
had $4.8 billion in assets,$2.2 billion in loans, $3.8 billion in deposits and $794.6 million in shareholders’ equity.
The Company was formed through a private offering of our common stock in October 2009. As part of our goal of
becoming a leading regional community bank holding company, we are pursuing a strategy of strong organic growth
complemented by selective acquisitions of financial institutions and other complementary businesses. In October 2010, we
acquired the failed Hillcrest Bank from the FDIC and began banking operations. To date, we have completed four
acquisitions of troubled or failed banks, three of which were FDIC-assisted. We have transformed these four troubled
banks into one collective banking operation with strong organic growth, prudent underwriting, and meaningful market
share with continued opportunity for expansion. Our focus is on building organic growth through strong banking
relationships with small- and mid-sized businesses and consumers in our markets. Our long-term business model utilizes
our organic development infrastructure, low-risk balance sheet, continuous operational development and a disciplined
acquisition strategy to create value and provide attractive returns.
We have a management team consisting of experienced banking executives led by Chairman, President and Chief
Executive Officer G. Timothy Laney. Mr. Laney brings over 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 operating banks and completing and
integrating mergers and acquisitions. Additionally, our board of directors 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
Our banking operations commenced on October 22, 2010, when we acquired selected assets and assumed selected
liabilities of Hillcrest Bank of Overland Park, Kansas from the FDIC. Through this transaction, we acquired nine banking
centers, which were predominantly located in the greater Kansas City region but also included one banking center in
Colorado and two banking centers in Texas. This transaction also included 32 retirement center locations that offered
limited-service banking services to residents in retirement communities. On December 31, 2013, we closed all retirement
center locations and integrated the servicing of these clients into our banking center network.
On December 10, 2010, we completed our acquisition, without FDIC assistance, of a portion of the franchise of Bank
Midwest from Dickinson Financial Corporation, that consisted of select performing loans and client deposits, and included
39 banking centers, 25 of which are in the greater Kansas City region and 14 of which are located elsewhere in Missouri.
As a result of these acquisitions, at June 30, 2014 (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 3.6% deposit market share according to SNL
Financial.
We expanded into the Colorado market through two complementary acquisitions beginning with the purchase of selected
assets and the 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 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. In connection with this transaction, we acquired 36
banking centers in Colorado and four in California (and later exited the California banking centers on December 31, 2013).
The Community Banks of Colorado acquisition enhanced our penetration into the Colorado market, giving us a combined
network of 50 banking centers in that state and ranking us as the 14th largest depository institution by deposits with a 1.4%
deposit market share as of June 30, 2014 (the last date as of which data are available) according to SNL Financial.
On January 30, 2015, we announced the signing of a definitive merger agreement with Pine River Bank Corporation, the
parent company of Pine River Bank. This Colorado market fill-in transaction consists of four banking centers with $135
3
million in assets in southwest Colorado. The Pine River transaction is currently expected to close in the third quarter of
2015.
The following table summarizes certain highlights of our four completed acquisitions to date, including deposits and assets
at fair value as of each acquisition date:
Community Banks
of Colorado
October 21, 2011
Bank of Choice
July 22, 2011
Bank Midwest
December 10, 2010
Hillcrest Bank
October 22, 2010
Date acquired
FDIC-assisted
Loss share
Banking centers(3)
Deposits (millions)
Assets (millions)
Yes
Yes(1)
40
$1,195
$1,228
Yes
No
16
$760
$950
Primary Market
Colorado
Colorado
No
No
39
$2,386
$2,426
Yes
Yes(2)
9 (and 32
retirement centers)
$1,234
$1,377
Greater Kansas
City Region
Greater Kansas
City Region
(1) Commercial Shared-Loss Agreement.
(2) Single Family Shared-Loss Agreement and Commercial Shared-Loss Agreement.
(3) During the fourth quarter of 2013, the four California banking centers acquired with the Community Banks of
Colorado acquisition and 32 retirement centers acquired with the Hillcrest Bank acquisition were closed.
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 returns. Further details of our acquisitions appear below.
Hillcrest Bank
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.
The FDIC 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). 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. The coverage amounts are subject to loss thresholds as follows (in thousands):
Commercial
Single family
Tranche
1
2
3
Loss Threshold
Up to $295,592
$295,593-405,293
>$405,293
Loss-Coverage
Percentage
60%
—%
80%
Tranche
1
2
3
Loss Threshold
Up to $4,618
$4,618-8,191
>$8,191
Loss-
Coverage
Percentage
60%
30%
80%
Bank Midwest
Through the Bank Midwest acquisition, we acquired 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. We did not acquire any non-accrual loans
or OREO in this transaction. 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 a
newly chartered national bank, NBH Bank, N.A., originally with the name “Bank Midwest, N.A.,” to hold the acquired
assets.
4
Bank of Choice
Through the Bank of Choice acquisition, we acquired 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
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 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. As of the date of acquisition, 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.The loss sharing arrangement does not cover any
losses on single-family residential loans or selected commercial real estate loans. The loss sharing thresholds on the
Community Banks of Colorado covered assets are summarized as follows (in thousands):
Tranche
1
2
3
Loss Threshold
Up to $204,194
$204,195-308,020
>$308,020
Loss-Coverage
Percentage
80%
30%
80%
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 and 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. The Hillcrest Bank commercial loss sharing agreement
with the FDIC is scheduled to expire during the fourth quarter of 2015 and the Community Banks of Colorado loss sharing
agreement is scheduled to expire during the fourth quarter of 2016. The individual indemnification assets associated with
each loss sharing agreement must be reduced to zero by the end of the loss sharing agreements, either through claims for
losses or through write-downs of the indemnification asset. Additionally, within 45 days of the end of each loss sharing
agreement, we may be required to reimburse the FDIC in the event that our losses on covered assets do not reach specified
thresholds, which is recorded on our consolidated statements of financial condition as a clawback liability. Both the
application of the acquisition method of accounting and the loss sharing agreements with the FDIC are discussed in more
detail in "Management's Discussion and Analysis" and in the notes to the consolidated financial statements.
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 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.
Market Area
We completed two acquisitions during the fourth quarter of 2010 and two acquisitions in 2011 and entered our markets,
which are broadly defined as Colorado and the greater Kansas City region, and we have signed a definitive merger
5
agreement to acquire four additional banking centers in southwest Colorado through the Pine River transaction that is
expected to close in the third quarter of 2015. We are the fifth largest banking center network among Colorado-based banks
ranked by deposits as of June 30, 2014 (the last date as of which data are available), according to SNL Financial. In the
greater Kansas City MSA, we are the seventh largest banking center network. Other major MSAs in which we operate
include Dallas-Fort Worth-Arlington, Texas and Austin-Round Rock, Texas. The table below describes certain key
statistics regarding our presence in these markets as of June 30, 2014 (the last date as of which data are available).
States
Missouri
Colorado
Kansas
MSAs
Kansas City, MO-KS
Denver-Aurora-Lakewood, CO
Saint Joseph, MO-KS
Greeley, CO
Maryville, MO
Kirksville, MO
Glenwood Springs, CO
Deposit Market
Share Rank(1)
Banking Centers(1)
Deposits
(millions)(1)
Deposit Market
Share(1)
Deposit Market
Share Rank(1)
10
14
24
7
16
3
6
2
2
6
33
50
12
Banking Centers(1)
30
13
4
5
3
2
3
$
$
1,852.2
1,528.2
569.2
1.4%
1.4
0.9
Deposits
(millions)(1)
Deposit Market
Share(1)
1,681.4
642.3
227.2
186.5
150.5
121.5
112.7
3.6%
1.0
10.7
5.7
27.9
18.7
5.0
(1) Note: Excludes our Texas operations and MSAs in which we have less than $100 million in deposits.
Source: SNL Financial as of June 30, 2014, except Banking Centers, which reflects the most recently available data.
We believe that our established presence positions us well for growth opportunities in our markets. We believe that these
markets have highly attractive demographic, economic and competitive dynamics that are consistent with our objectives
and favorable to executing our organic growth strategy and provide attractive acquisition opportunities. The table below
describes certain key demographic statistics regarding our markets.
Deposits
(billions)
# of
Businesses
(thousands)
Population
(millions)
Unemployment
Rate(1)
Population
Growth(2)
Median
Household
Income
Top 3
Competitor
Combined
Deposit
Market Share
Denver, CO
Front Range, CO(3)
Kansas City, MO-KS MSA
U.S.
$
65.2
89.0
46.6
115
183
76
2.7
4.3
2.1
3.9%
4.0
5.0
5.8
24.3% $ 60,887
26.0
12.1
12.7
60,282
55,763
51,579
55%
54
40
52(4)
(1) Unemployment data is as of November 30, 2014.
(2) For the period 2000 through 2014.
(3) CO Front Range is a population weighted average of the following Colorado MSAs: Denver, Boulder, Colorado
Springs, Fort Collins and Greeley.
(4) Based on U.S. Top 20 MSAs (determined by population).
Source: SNL Financial as of December 31, 2014, except Deposits and Top 3 Competitor Combined Deposit Market Shares,
which reflects data as of June 30, 2014.
An integral component of our foundation and growth strategy has been to capitalize on market opportunities and acquire
financial services franchises. Our primary focus has been 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
6
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.
We believe there are opportunities for us to continue to execute our acquisition strategy over the next several years. We also
believe there are a number of banks and financial institutions in these markets and complementary markets that would
complement our breadth of products and services and benefit from our leadership, operating infrastructure and scale while
welcoming our approach to local branding and leadership. The table below highlights potential in-footprint acquisition
opportunities:
Asset Size Range
$1 billion - $5 billion
$500 million - $1 billion
$250 million - $500 million
Total opportunities
# of
Banks
Assets
($billion)
# of
Private
Banks
Private
Assets
($billion)
$
28
41
79
52.5
27.9
26.3
$
19
37
79
148
$
106.7
135
$
34.1
25.3
14.1
73.5
Source: SNL Financial based on financial information as of September 30, 2014. Includes opportunities in CO, KS and
MO.
Our Business Strategy
As part of our goal of becoming a leading regional community bank holding company, we seek to continue to generate
strong organic growth, as well as pursue selective acquisitions of financial institutions and other complementary
businesses. Our focus is on building organic growth through strong banking relationships with small- and mid-sized
businesses and consumers in our primary markets, while maintaining a low-risk profile designed to generate reliable
income streams and attractive returns. We view our market areas as the greater Kansas City region and Colorado. The key
components of our strategic plan are:
• Focus on client-centered, relationship-driven banking strategy. Our commercial relationship managers 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. Our commercial
relationship managers are supported by treasury management teams in each of their markets, which allows us to
more effectively deliver a comprehensive suite of products and services to our clients and further deepen our
banking relationships. 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.
• Expansion of commercial banking, small business banking and specialty businesses. We have made significant
investments in our commercial relationship managers, as well as developed significant capabilities across our
small business banking and several specialty commercial banking offerings. Our specialized commercial banking
teams are focused on structured and asset-based loans to middle market companies, as well as the energy,
agriculture, government and non-profit sectors. Our strategy is to originate a high-quality loan portfolio that is
diversified across industries and granular in loan size. We believe we are well-positioned to leverage our
operating and risk management infrastructure through organic growth and we intend to continue to add or
repurpose our commercial relationship managers to higher growth opportunities and markets in order to drive
increased profitability.
• Expansion through organic growth and enhanced product offerings. We 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. We conduct regular market and competitive analysis to
determine which products and services are best suited for our clients. Our teams also continue to enhance cross-
selling strategies in order to deepen client relationships, which we believe will further increase our organic loan
origination volumes and attract new transaction accounts that offer lower cost of funds and higher fee generating
activity.
• Continue to strengthen profitability through organic growth and operating efficiencies. We have consolidated our
acquired banks under one charter and continue to utilize our comprehensive underwriting and risk management
processes while maintaining local branding, leadership and decision making. We have integrated all of our
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acquired banks onto one operating platform that that has allowed us to support growth and realize operating
efficiencies throughout our enterprise. Our growth strategy is focused on organic initiatives in order to accelerate
our growth in profitability. Key priorities to strengthen profitability include the continued ramp-up of loan
production, lowering our cost of funds, implementing additional fee-based business initiatives and further
enhancing operational efficiencies.
• Pursue disciplined acquisitions. We expect that acquisitions will continue to be a component of our growth
strategy and we intend to carefully select acquisition opportunities that we believe have stable core franchises,
have significant local market share or will add asset generation capabilities or fee income streams while
structuring the transactions to limit risk. Further, we seek transactions that offer opportunities for clear financial
benefits with valuations that have acceptable levels of earnings accretion, tangible book value dilution/earn-back,
and internal rates of return. We believe that we are a skilled acquirer with a team of executives and board
members that have significant experience completing and integrating mergers and acquisitions. We believe that
we utilize a comprehensive and conservative due diligence process that is strongly focused on areas of risk and
opportunity. We seek to acquire financial services franchises in markets that exhibit attractive demographic
attributes and we believe that our focus on attractive markets will provide long-term opportunities for organic
growth. Our focus is on our primary markets of Colorado, Missouri and Kansas, including whole banks and
banking center divestitures. Additionally, we seek specialty businesses to complement our asset generation and
fee income business while leveraging our risk management, operational and control infrastructure. We may utilize
our stock in addition to cash as consideration in future acquisitions.
We believe our strategy of strong organic growth through the retention, expansion and development of client-centered
relationships and growth through selective acquisitions in attractive markets provides flexibility regardless of economic
conditions. We also believe that our established platform for assessing, executing and integrating acquisitions creates
opportunities in an 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, our primary business is to offer a full range of traditional banking products and financial services to
both our commercial and consumer clients, who are predominantly located in Colorado, Missouri, Kansas and Texas. We
conduct our banking business through 97 banking centers, with 50 of those located in Colorado, 45 in the greater Kansas
City region and two in Texas. Our distribution network also includes 106 ATMs, fully integrated online banking and
mobile banking services. We offer a full array of lending products to cater to our clients’ needs, including, but not limited
to, small business loans, equipment loans, term loans, asset-backed loans, letters of credit, commercial lines of credit,
commercial real estate loans, small business loans, 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 treasury management services.
We offer a high level of personalized service to our clients through our relationship managers and banking center
associates. We believe that a banking relationship that includes multiple services, such as loan and deposit services, online
and mobile banking solutions and treasury management products and services, is the key to profitable and long-lasting
client relationships and that our local focus and 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 markets with a variety of unique and
useful services, including a full array of commercial, mortgage and non-mortgage loans, while maintaining a strong and
disciplined credit culture. 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. We have invested significantly in our commercial banking capabilities, attracting
experienced commercial bankers from competing institutions in our markets, which has resulted in significant growth in
our strategic loan portfolio. To complement these efforts, we created a focused specialty banking group, which includes
NBH Capital Finance (providing structured and asset-based loans to middle market companies), energy, agriculture,
treasury management, government and non-profit banking. 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 and mobile
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 clients 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
economic and competitive environment, changes to supply or demand, threat of substitutes and barriers to entry and exit. 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. 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. 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.”
Commercial and Industrial Loans. We originate commercial and industrial loans and leases, including working capital
loans, equipment loans, structured and asset-based loans, government and non-profit loans, energy 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 generally have terms of up to one year, are usually secured by accounts receivable and inventory and
carry the personal guarantees of the principals of the business. Equipment loans are generally secured by the financed
equipment at advance rates that we believe are appropriate for the equipment type. As of December 31, 2014, substantially
all of our commercial and industrial loans were secured.
Real Estate Loans. Our real estate loans consist of commercial real estate loans and residential real estate loans.
Commercial real estate loans, or CRE loans, consist of loans to finance the purchase of commercial real estate, loans to
support working capital needs of businesses 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.
CRE 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.
We seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our primary markets.
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.
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. We do not originate or purchase negatively
amortizing or sub-prime residential loans.
9
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-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.
Consumer Loans. We offer a variety of consumer loans, including loans to banking center clients for consumer and
business purposes, to meet client 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.
Deposit Products and Other Funding Sources
We offer a variety of deposit products to our clients, including checking accounts, savings accounts, money market
accounts and other deposit accounts, including fixed-rate, fixed maturity time deposits ranging in terms from 30 days to ten
years, and individual retirement accounts. We view deposits as an important part of the overall client relationship and
believe they provide opportunities to cross-sell other products and services. We intend to continue our efforts to attract low
cost transaction deposits from our consumer and business banking relationships. 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 competitively priced high-quality service and introducing new products and services that meet our
clients' needs.
Financial Products & Services
In addition to traditional banking activities, we provide a wide array of treasury management solutions to our clients,
including: online and mobile 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 other auxiliary services (including account reconciliation, collections, repurchase accounts, zero balance accounts and
sweep accounts).
Competition
The banking landscape in our primary markets of Colorado, Kansas, Missouri and Texas is highly competitive and quite
fragmented, with many small banks having limited market share while the large out-of-state national and super-
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 primary banking competitors in the Kansas City MSA are UMB Bank, Commerce Bank, Bank of America,
US Bank, Valley View, Capitol Federal, Central Bancompany, Country Club Bank, Wells Fargo, Lauritzen (First National
Bank), NASB Financial Inc., and Enterprise Financial Services Corp., and our largest competitors in Colorado are Wells
Fargo, FirstBank, U.S. Bank, JPMorgan Chase, BNP Paribas (Bank of the West), KeyBank, Zions Bank (Vectra Bank of
Colorado), Lauritzen (First National Bank), Pinnacle Bancorp (Bank of Colorado), Alpine Bank, Compass Bank (BBVA
Compass) and CoBiz Financial.
Competition among providers of financial products and services continues to increase, with consumers having the
opportunity to select from a 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, client service levels and the range of products and services offered. In addition, other
competitive factors include the location and hours of our banking centers and client service orientation of our associates.
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
10
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, 2014, our NBH Bank, N.A. legal lending limit to any one client relationship was $88.8 million
and our house limit to any one client relationship was $30.0 million.
Associates
At December 31, 2014, we had 943 full-time associates and 113 part-time associates.
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 shareholders.
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 Office of the Comptroller of the Currency (“OCC”). In
addition, we expect that any additional businesses that we may invest in or acquire will be regulated by various state and/or
federal banking regulators, including the 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.
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
NBH Bank, N.A. or other depository institutions we control.
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.
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 may directly or indirectly control, such
as non-bank subsidiaries and other companies in which we have a controlling interest. 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.
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 (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.
11
NBH Bank, N.A. as a National Bank
NBH Bank, N.A. (the “Bank” or “NBH Bank”, formerly Bank Midwest, N.A.) is a national association, 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 (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 (“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 (the “OCC Operating Agreement”). The OCC Operating Agreement,
among other things, requires NBH Bank to 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. Since the fourth
quarter of 2013, the OCC Operating Agreement has permitted us to seek the OCC’s non-objection to reduce capital levels
and to pay dividends. The OCC Operating Agreement also requires that NBH Bank provide notice to, and obtain non-
objection from, the OCC with respect to any additional failed bank acquisitions from the FDIC or other types of
acquisitions. 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 non-objection.
NBH Bank (and, with respect to certain provisions, the Company) is also subject to a FDIC Order, dated November 4,
2010 (the “FDIC Order”), issued in connection with the FDIC’s approval of our application for deposit insurance following
the Bank Midwest acquisition. The FDIC Order currently requires, among other things, that NBH Bank have 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, and make disclosures to proposed directors and shareholders 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, 2014, NBH Bank was in compliance with all of the material terms of the OCC Operating Agreement and
FDIC Order.
We filed a comprehensive three-year business plan with the OCC in connection with the organization and operation of
Bank Midwest, N.A. (now NBH Bank, N.A.). The OCC issued supervisory non-objection with respect to the plan on
March 22, 2011 and our board of directors subsequently adopted the plan. We have provided to the OCC updates to the
plan each subsequent year.
We have implemented a quarterly monitoring and reporting process to remain in compliance with the comprehensive
business plan and the requirements of the OCC Operating Agreement and FDIC Order. We also file a written quarterly
status report to the OCC regarding our compliance with the OCC Operating Agreement.
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
12
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.
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.
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.
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
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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.
The federal banking agencies recently revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to
effect the implementation of Basel III Accords. The quantitative measures, established by the regulators to ensure capital
adequacy, require that banking organizations 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. Common equity tier 1 capital, a new category,
includes only common stock, related surplus, retained earnings and qualified minority investments. Additional tier 1 capital
includes non-cumulative perpetual preferred stock, certain qualifying minority interests, and for bank holding companies
with less than $15 billion in consolidated assets, cumulative perpetual preferred stock and grandfathered trust preferred
securities. Tier 2 capital includes subordinated debt, certain qualifying minority investments, and for bank holding
companies with less than $15 billion in consolidated assets, non-qualifying capital instruments issued before May 19, 2010
that exceed 25% of tier 1.
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. The revised capital rules also modified the risk-weights applied to
particular on and off balance sheet assets.
The revised capital rules require banks and bank holding companies to maintain a minimum common equity tier 1 capital
ratio of 4.5%, a total tier 1 capital ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%. Bank holding
companies will ultimately be required to hold a capital conservation buffer of common equity tier 1 capital of 2.5% to
avoid limitations on capital distributions and executive compensation payments. Most of these new capital ratios became
effective as of January 1, 2015.
Further, 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 be considered well-capitalized, 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.
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. The revised capital rules require banks to maintain a common equity
tier 1 capital ratio of 6.5%, a total tier 1 capital ratio of 8%, a total capital ratio of 10%, and a leverage ratio of 5% to be
deemed “well capitalized.” Federal banking regulators are required to take various mandatory supervisory 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.
Our regulatory capital ratios and those of NBH Bank are in excess of the levels established for “well-capitalized”
institutions.
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.
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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 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 shareholders.
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 NBH Bank should it
experience financial distress. If the capital of NBH 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 NBH
Bank to cover the deficiency.
In addition, capital loans by us to NBH Bank will be subordinate in right of payment to deposits and certain other
indebtedness of NBH Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to
maintain the capital of NBH Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiaries. Because the Company’s consolidated net income
consists largely of the net income of NBH 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.
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. Non-bank 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 imposes certain restrictions on payment of dividends by NBH Bank to the
Company, including by 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.
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
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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).
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 non-bank 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 (which were revised in 2013), 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. As of December 31, 2014, the Company did not have any
outstanding Covered Transactions.
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 5% or more of any class of voting securities of a bank or another bank
holding company. In acting on such applications, the Federal Reserve 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.
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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 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 associate 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, client identification, and recordkeeping, including in
their dealings with non-U.S. financial institutions and non-U.S. clients. 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.
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, Flood Disaster Protection 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 clients 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, client rescission rights, action by state and local attorneys general and civil or criminal liability.
The Dodd-Frank Act created a new independent Consumer Finance Protection Bureau (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 applications to establish a banking
center 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.
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.
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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 Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. Beginning
January 1, 2013, all of a depositor’s accounts at an insured bank, including all non-interest bearing transaction accounts,
were insured by the FDIC up to $250,000.
The Dodd-Frank Act changed 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, shifting a greater portion of the
aggregate assessments to large banks, as described in detail below. The Dodd-Frank Act also eliminated the upper limit for
the reserve ratio designated by the FDIC each year, increased 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 eliminated 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 the 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.
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 clients, 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.
Interstate Banking for State and National Banks
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (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). Bank holding companies must 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. A
national or state bank, with the approval of its regulator, may open a de novo banking center in any state if the law of the
state in which the banking center is proposed would permit the establishment of the banking center 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.
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
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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 in 2010, continues to have 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 shareholders 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 U.S. Securities and Exchange Commission (the “SEC”) with authority to adopt proxy access rules
that would allow shareholders 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 continue to 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 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.
More Information
Our website is www.nationalbankholdings.com. We make available free of charge, through our website, annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after we electronically file such material with, or furnish such material to, the SEC. In addition, the public may
read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-
SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at www.sec.gov.
Item 1A. RISK FACTORS.
Risks Relating to Our Banking Operations
We are a relatively young Company with a limited and complex operating history from which investors can evaluate our past
financial and operating performance and future prospects.
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.
In January 2015, we announced our agreement to acquire Pine River Bank Corporation, which acquisition we currently expect
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to complete in the third quarter of 2015. Because our banking operations began in late 2010, we have a limited operating
history upon which investors can evaluate our operational performance or compare our recent performance to historical
performance. The business models and experiences of the depository institutions we have acquired to date and may acquire
in the future may not be reflective of our plans. Moreover, because a 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
acquisitions, 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 continue to undertake
organic loan origination and banking activities and pursue future acquisitions;
a portion of our loans and OREO have been, and continue to be, 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 discounts and accretable yield may 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 excess cash reserves and liquid investment securities portfolio, may not be representative of our future cash
position;
our historical cost structure and capital expenditure requirements are not necessarily reflective of our anticipated
cost structure and capital spending as we continue to identify efficiencies 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.
Changes in general business and economic conditions could materially and adversely affect us.
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 continue to steadily emerge from the recession that began in 2007 or we experience
worsening economic conditions, including industry-specific 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, and further or
prolonged pressure on energy prices. 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, acquisition method of accounting, or other significant
accounting estimates could affect our financial information and have a material adverse effect on us.
A material portion of our financial results is based on, and subject to, significant assumptions and judgments made by us
and our regulators. As a result of our acquisitions, our financial information is heavily influenced by the application of the
acquisition method of accounting and loss share accounting. Both methodologies require us to make complex assumptions,
and these assumptions materially affect our financial 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. Additionally, a change in our accounting estimates, such as our ability to realize deferred tax assets, the
need for a valuation allowance or the recoverability of the goodwill recorded at the time of our acquisitions, could have a
material adverse effect on our financial results.
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Our business is highly susceptible to credit risk and fluctuations in the value of real estate and other collateral securing
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. A 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. 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.
The execution of our strategy depends 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 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. Our
success also depends on the experience of our banking center managers and relationship managers 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 the real estate markets deteriorate, we expect that we will 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 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.
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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 us. 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 an amount of OREO from time to time, which may lead to increased operating expenses and vulnerability
to declines in real property values.
When necessary, we foreclose on and take title to the real estate (some of which is covered by our FDIC loss-sharing
arrangements) serving as collateral for our loans as part of our business. Real estate that we own but do not use in the
ordinary course of our operations is referred to as “other real estate owned,” or “OREO” property. Higher OREO balances
as a result of our acquisitions 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 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.
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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 associates 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 overall 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 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.
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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 Federal Reserve.
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 providers, and systems
failures or interruptions 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 providers. 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 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.
A failure in or breach of our security systems or infrastructure, or those of our third-party providers, could result in
financial losses to us or in the disclosure or misuse of confidential or proprietary information, including client information.
As a financial institution, we may be the target of fraudulent activity that may result in financial losses to us or our clients,
privacy breaches against our clients or damage to our reputation. Such fraudulent activity may take many forms, including
check fraud, electronic fraud, wire fraud, phishing, unauthorized intrusion into or use of our systems, and other dishonest acts.
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. Given the increasingly high volume of our
transactions, certain errors may be repeated or compounded before they can be discovered and rectified. To the extent that
our activities or the activities of our clients involve the storage and transmission of confidential information, security breaches
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and viruses could expose us to reputational damage, 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. Our risk and exposure to these matters remains heightened because of the
evolving nature and complexity of the threats from organized cybercriminals and hackers, and our plans to continue to provide
electronic banking services to our clients.
Information security risks for financial institutions like us have increased recently in part because of new technologies, the
use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business
transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and
others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information,
hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, that are
designed to disrupt key business services, such as client-facing web sites. We are not able to anticipate or implement effective
preventive measures against all security breaches of these types, especially because the techniques used change frequently
and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed
to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed
to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with credit card transactions that typically
involve the transmission of sensitive information regarding our clients through various third parties, including merchant
acquiring banks, payment processors, payment card networks (e.g., Visa, MasterCard) and our processors. Some of these
parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties
and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting
any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer
losses for breaches or attacks relating to them. We also rely on numerous other third party service providers to conduct other
aspects of our business operations and face similar risks relating to them. While we regularly conduct security assessments
on these third parties, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or
other security breach.
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 also are 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 common stock.
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 common stock. Moreover, effective 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, legal, 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 lines of 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 financial services 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 financial services 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”); and
the effectiveness of the applicant in combating money laundering activities.
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. In addition, prior to the submission of an application our regulators could discourage
us from pursuing strategic acquisitions or indicate that regulatory approvals may not be granted on terms that would be
acceptable to us, which could have the same effect of restricting our growth or reducing the benefit of any acquisitions.
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.
There are significant risks associated with our strategy to identify and successfully consummate 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
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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 continue to 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. As our acquired loan portfolio,
which generally produces higher yields than our originated loans due to loan discounts and accretable yield, 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.
We will generally establish the pricing of transactions and the capital structure of financial services franchises to be acquired
by us on the basis of financial projections for such financial services 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 returns than we believed our purchase price
supported. Furthermore, our due diligence investigation may not reveal all material issues. 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. Economic conditions may create 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, there may be limited 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 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 continues to materially affect our business.
In 2010, the President signed into law 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;
creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which oversees
systemic risk, and the Consumer Bureau, which develops and enforces 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;
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changes in retail banking regulations, including potential limitations on certain fees we may charge; and
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 (i.e., the Volcker Rule). 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, while many others have come into
effect over the last few years. Many provisions, however, still require regulations to be promulgated by various federal agencies
in order to be implemented, 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 DIF, these laws and regulations, among other matters, prescribe minimum capital
requirements, impose limitations on the business activities in which we can engage (including foreclosure and collection
practices), 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, 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 provide notice to, and obtain non-objection from, the OCC with respect to any potential acquisition
transactions (a) from the FDIC as a receiver of failed institution, (b) as part of a transaction in which the FDIC provides
assistance, (c) as part of a transaction pursuant to the Bank Merger Act (which we refer to as the “BMA”), involving the
probable failure of one or more depository institutions, (d) as part of a transaction pursuant to the 10-day/5-day emergency
provisions of the BMA, or (e) in any other manner. Additionally, the OCC Operating Agreement imposes certain restrictions
on payment of dividends by the Bank to the Company, including by 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.
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.
28
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. 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 we or our 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.
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
29
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.
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 shareholders 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 without
receiving a prior non-objection from the OCC before any distribution is made. 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 shareholders
in the future.
30
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, 2014, we
operated 50 banking centers in Colorado, 45 in Kansas and Missouri, and two in Texas. Of these banking centers, 21
locations were leased and 76 were owned. Prior to their closure at the conclusion of business on December 31, 2013, we
also operated four banking centers in California and 32 limited-service retirement center locations, 20 locations in Kansas
and Missouri and six locations each in Texas and Colorado. See note 25 to our consolidated financial statements for further
information regarding banking center closures.
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.
31
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
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:
Year
2014
2013
2012
Quarter
First
Second
Third
Fourth
First
Second
Third
Fourth
First
Second
Third
Fourth
$
$
$
$
$
$
$
$
$
$
$
$
High
Low
Cash
Dividends
21.48
20.61
20.89
19.95
19.75
19.82
21.39
21.88
$
$
$
$
$
$
$
$
— $
— $
$
$
20.25
19.92
18.77
18.50
18.94
18.11
17.85
17.69
18.55
19.86
$
$
$
$
$
$
$
$
— $
— $
$
$
19.23
17.90
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
—
—
—
0.05
The last sale price of our common stock on the NYSE was $18.54 per share on February 26, 2015. The Company had 112
shareholders of record as of February 26, 2015. 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. The OCC Operating
Agreement imposes certain restrictions on payment of dividends by the Bank to the Company, including requiring prior
non-objection from the OCC before any distribution is made. During the fourth quarter of 2013, the OCC permitted the
Bank to pay a dividend of $313.0 million to the Company. Other than dividends from the Bank paid as noted above, the
cash held by the Company and 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 shareholders. 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.”
32
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
NBH
KBW Regional Banking Index
Russell 2000 Index
150
145
140
135
130
125
120
115
110
105
100
95
90
e
u
l
a
V
x
e
d
n
I
85
09/19/12
12/31/12
06/28/13
12/31/13
06/30/14
12/31/14
Index
NBH
KBW Regional Banking Index
Russell 2000 Index
9/19/2012
100.00
100.00
100.00
12/31/2012
98.92
95.19
99.74
Period Ending
6/28/2013
103.17
113.65
115.56
12/31/2013
112.63
139.76
138.46
6/30/2014
105.47
138.29
142.88
12/31/2014
103.18
143.16
145.24
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2014:
Period
October 1-October 31, 2014 (1)
November 1-November 30, 2014 (2)
November 1-November 30, 2014 (1)
December 1-December 31, 2014
Total
(a) Total Number
of Shares (or
Units) Purchased
3,284
991,100
$
7,104
—
1,001,488
$
(b) Average
Price Paid Per
Share (or Unit)
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
18.46
19.43
19.18
—
19.15
— $
991,100
—
—
991,100
$
50,017,342
30,741,121
30,741,121
30,741,121
30,741,121
(1) These represent shares surrendered to the Company as part of a net vesting of restricted stock awards.
(2) These share repurchases were part of publicly announced, Board approved, stock repurchase authorizations.
33
Item 6.
SELECTED FINANCIAL DATA.
The following table sets forth summary selected historical financial information as of and for the five years ended
December 31, 2014. 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. 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. All acquisitions were accounted for using the acquisition method. Due to the timing of the
acquisitions and the acquisition method of accounting, comparability may be limited. 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.
Summary of Selected Historical Consolidated Financial Data
Consolidated Balance Sheet Information
(unaudited, $ in thousands):
Cash and cash equivalents
$
256,979
$
189,460
$
769,180
$ 1,628,137
$ 1,907,730
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
December 31,
2010
Investment securities available-for-sale (at fair
value)
Investment securities held-to-maturity
Non-marketable securities
Loans (including covered loans) (1)
Allowance for loan losses
Loans, net
Loans held for sale
FDIC indemnification asset, net
Other real estate owned
Premises and equipment, net
Goodwill and other intangible assets, net
Other assets
Total assets
Deposits
Other liabilities
Total liabilities
1,479,214
1,785,528
1,718,028
1,862,699
1,254,595
530,590
27,045
2,162,409
(17,613)
2,144,796
641,907
31,663
1,854,094
(12,521)
1,841,573
577,486
32,996
1,832,702
(15,380)
1,817,322
6,801
29,117
2,268,435
(11,527)
2,256,908
5,146
39,082
29,120
106,341
76,513
124,820
5,787
64,447
70,125
115,219
81,859
86,547
5,368
86,923
94,808
121,436
87,205
100,023
5,616
223,402
120,636
87,315
92,553
38,842
—
17,800
1,563,561
(48)
1,563,513
5,309
161,395
54,078
37,320
79,715
24,066
4,819,646
3,766,188
4,914,115
3,838,309
5,410,775
4,200,719
6,352,026
5,063,053
5,105,521
3,473,339
258,883
178,014
119,497
200,244
638,423
4,025,071
4,016,323
4,320,216
5,263,297
4,111,762
Total shareholders’ equity
794,575
897,792
1,090,559
1,088,729
993,759
Total liabilities and shareholders’ equity
$ 4,819,646
$ 4,914,115
$ 5,410,775
$ 6,352,026
$ 5,105,521
34
As of and for the years ended December 31,
2014
2013
2012
2011
2010
$
184,662
$
195,475
$
233,485
$
197,159
$
14,413
170,249
6,209
16,514
178,961
4,296
164,040
174,665
—
(1,696)
150,003
12,341
3,165
9,176
0.22
0.22
20.43
18.63
$
$
$
$
$
—
20,177
183,965
10,877
3,950
6,927
0.14
0.14
19.99
18.27
29,234
204,251
27,995
176,256
—
37,379
209,598
4,037
4,580
(543)
(0.01)
(0.01)
20.84
19.23
$
$
$
$
$
$
$
$
$
$
41,696
155,463
20,002
135,461
60,520
28,966
155,538
69,409
27,446
41,963
0.81
0.81
20.87
19.13
$
$
$
$
$
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
15.25%
16.97%
18.89%
15.94%
18.19%
42,404,609
50,790,410
52,214,175
51,978,744
53,000,454
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 before income taxes
Provision for income before
taxes
Net income (loss)
Share Information (2):
Earnings (loss) per share, basic
$
$
Earnings (loss) per share, diluted $
$
$
Book value per share
Tangible book value per share (3)
Tangible common equity to
tangible assets (3)
Weighted average common
shares outstanding, basic
Weighted average common
shares outstanding, diluted
Common shares outstanding
38,884,953
44,918,336
42,421,014
50,824,422
52,214,175
52,327,672
52,104,021
52,157,697
53,000,454
51,936,280
(1) Total loans are net of unearned discounts and deferred fees and costs.
(2) Per share information is calculated based on the aggregate number of our shares of Class A common stock and Class
B non-voting common stock outstanding.
(3) 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 shareholders’ equity less goodwill (adjusted for deferred taxes)
and other 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
shareholders’ equity less goodwill (adjusted for deferred taxes) and other intangible assets, net, and tangible assets is
calculated as total assets less goodwill (adjusted for deferred taxes) and other intangible assets, net. We believe that
the most directly comparable GAAP financial measures are book value per share and total shareholders’ equity to
total assets. See the reconciliation under “About Non-GAAP Financial Measures.”
35
Key Ratios
Return on average assets
Return on average tangible assets (1)
Return on average equity
Return on average tangible common equity (1)
Return on risk weighted assets
Interest-earning assets to interest-bearing liabilities
(end of period) (2)
Loans to deposits ratio (end of period)
Average equity to average assets
Non-interest bearing deposits to total deposits (end
of period)
Net interest margin (3)
Net interest margin(fully taxable equivalent)(1)(3)
Interest rate spread (4)
Yield on earning assets
Yield on earning assets (fully taxable equivalent) (1)(2)
Cost of interest bearing liabilities (2)
Cost of deposits
Non-interest expense to average assets
Efficiency ratio (1)(5)
Efficiency ratio (fully taxable equivalent)(1)
Dividend payout ratio
Asset Quality Data (6) (7) (8)
Non-performing loans to total loans
Covered non-performing loans to total non-
performing loans
Non-performing assets to total assets
Covered non-performing assets to total non-
performing assets
Allowance for loan losses to total loans
Allowance for loan losses to total non-covered loans
Allowance for loan losses to non-performing loans
Net charge-offs to average loans
As of and for the years ended
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
December 31,
2010
0.19 %
0.26 %
1.07 %
1.58 %
0.37 %
0.13%
0.20%
0.67%
1.06%
0.33%
(0.01)%
0.05 %
(0.05)%
0.27 %
(0.03)%
0.81%
0.88%
4.01%
4.62%
2.21%
0.44 %
0.44 %
0.62 %
0.62 %
0.46 %
137.36 %
137.05%
134.44 %
127.91%
129.91 %
57.55 %
17.68 %
48.46%
20.07%
43.76 %
18.91 %
44.91%
20.26%
19.45 %
17.59%
16.14 %
13.41%
3.83 %
3.85 %
3.72 %
4.15 %
4.17 %
0.45 %
0.37 %
3.08 %
85.82 %
85.35 %
90.91 %
3.81%
3.81%
3.68%
4.16%
4.16%
0.48%
0.41%
3.55%
89.70%
89.70%
142.86%
3.98 %
3.98 %
3.81 %
4.55 %
4.55 %
0.74 %
0.64 %
3.62 %
84.53 %
84.53 %
NM
3.40%
3.40%
3.17%
4.31%
4.31%
1.15%
1.05%
3.01%
61.72%
61.72%
0.00%
45.17 %
71.45 %
9.39 %
1.21 %
1.21 %
(0.02)%
1.63 %
1.63 %
1.65 %
1.51 %
3.56 %
84.34 %
84.34 %
0.00 %
0.50 %
1.31%
1.26 %
1.66%
0.00 %
12.18 %
0.85 %
48.56 %
0.81 %
0.89 %
162.89 %
0.05 %
68.89%
1.94%
58.50%
0.68%
0.81%
51.43%
0.41%
26.15 %
2.20 %
43.68 %
0.84 %
1.26 %
66.53 %
1.20 %
34.74%
2.52%
0.00 %
1.06 %
56.83%
100.00 %
0.51%
0.88%
30.52%
0.51%
0.00 %
0.01 %
0.00 %
0.00 %
(1) Ratio represents non-GAAP financial measure. See non-GAAP reconciliation on page 37.
(2)
Interest earning assets include assets that earn interest/accretion or dividends, except for the FDIC indemnification
asset, which is not part of interest earning assets. Any market value adjustments on investment securities are
excluded from interest-earning assets. Interest bearing liabilities include liabilities that must be paid interest.
(3) Net interest margin represents net interest income, including accretion income on interest earning assets, as a
(4)
percentage of average interest earning assets.
Interest rate spread represents the difference between the weighted average yield on interest earning assets and the
weighted average cost of interest bearing liabilities.
(5) The efficiency ratio represents non-interest expense, less intangible asset amortization, as a percentage of net
interest income plus non-interest income on a fully taxable basis.
(6) Non-performing loans were redefined during the third quarter of 2014 to only include non-accrual loans and
restructured loans on non-accrual, and exclude any loans accounted for under ASC 310-30 in which the pool is still
performing. All previous periods have been restated.
(7) Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
(8) Total loans are net of unearned discounts and fees.
36
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible assets,” “return on average tangible assets,” “return
on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible
common equity,” "tangible common equity to tangible assets," and "fully taxable equivalent" metrics are supplemental
measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles
(GAAP). We refer to these financial measures and ratios as “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 or by presenting certain metrics on a fully taxable equivalent basis. 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.
These non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered
a substitute for financial information presented in accordance with GAAP. The non-GAAP financial measures we present may
differ from non-GAAP financial measures used by our peers or other companies. In particular, 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 a 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.
A reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures is as follows (in
thousands, except share and per share information).
37
Total shareholders’ equity
Less: goodwill and intangible assets,
net
Add: deferred tax liability related to
goodwill
As of and for the years ended
December 31,
2014
794,575
$
December 31,
2013
897,792
$
December 31,
2012
$ 1,090,559
December 31,
2011
$ 1,088,729
December 31,
2010
993,759
$
(76,513)
(81,859)
(87,205)
(92,553)
(79,715)
6,222
4,671
3,121
1,571
113
Tangible common equity (non-GAAP) $
724,284
$
820,604
$ 1,006,475
$
997,747
$
914,157
Total assets
$ 4,819,646
$ 4,914,115
$ 5,410,775
$ 6,352,026
$ 5,105,521
Less: goodwill and intangible assets,
net
Add: deferred tax liability related to
goodwill
(76,513)
(81,859)
(87,205)
(92,553)
(79,715)
6,222
4,671
3,121
1,571
113
Tangible assets (non-GAAP)
$ 4,749,355
$ 4,836,927
$ 5,326,691
$ 6,261,044
$ 5,025,919
Tangible common equity to tangible
assets calculations:
Total shareholders’ equity to total
assets
Less: impact of goodwill and
intangible assets, net
Tangible common equity to tangible
assets (non-GAAP)
Common book value per share
calculations:
16.49 %
18.27 %
20.16 %
17.14 %
19.46 %
(1.24)%
(1.30)%
(1.27)%
(1.20)%
(1.27)%
15.25 %
16.97 %
18.89 %
15.94 %
18.19 %
Total shareholders' equity
$
794,575
$
897,792
$ 1,090,559
$ 1,088,729
$
993,759
Divided by: ending shares outstanding
38,884,953
44,918,336
52,327,672
52,157,697
51,936,280
Common book value per share
$
20.43
$
19.99
$
20.84
$
20.87
$
19.13
Tangible common book value per
share calculations:
Tangible common equity (non-GAAP) $
724,284
$
820,604
$ 1,006,475
$
997,747
$
914,157
Divided by: ending shares outstanding
38,884,953
44,918,336
52,327,672
52,157,697
51,936,280
Tangible common book value per share
(non-GAAP)
$
Tangible common book value per
share, excluding accumulated other
comprehensive income (loss)
calculations:
18.63
$
18.27
$
19.23
$
19.13
$
17.60
Tangible common equity (non-GAAP) $
724,284
$
820,604
$ 1,006,475
$
997,747
$
914,157
Less: accumulated other
comprehensive (income) loss, net of
tax
Tangible common book value,
excluding accumulated other
comprehensive income (loss), net of
tax (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per
share, excluding accumulated other
comprehensive income (loss), net of
tax (non-GAAP)
(5,839)
6,756
(40,573)
(47,022)
(6,085)
718,445
827,360
965,902
950,725
908,072
38,884,953
44,918,336
52,327,672
52,157,697
51,936,280
$
18.48
$
18.42
$
18.46
$
18.23
$
17.48
38
Return on Average Tangible Assets and Return on Average Tangible Equity
As of and for the years ended
Net income
$
9,176
$
6,927
$
(543)
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
41,963
$
December 31,
2010
$
6,051
Add: impact of core deposit
intangible amortization expense,
after tax
Net income adjusted for impact of
core deposit intangible
amortization expense, after tax
Average assets
Less: average goodwill and
intangible assets, net of deferred
tax asset related to goodwill
$
12,436
$ 4,867,929
(73,074)
Average tangible assets (non-
GAAP)
$ 4,794,855
Average shareholder's equity
$
860,691
3,260
3,235
3,233
2,635
—
$
$
$
$
10,162
$
2,690
$
44,598
5,175,210
$ 5,786,762
$ 5,166,172
(79,964)
(86,841)
(80,248)
5,095,246
$ 5,699,921
$ 5,085,924
1,038,753
$ 1,093,998
$ 1,045,459
$
$
$
$
6,051
1,376,163
(6,637)
1,369,526
983,270
Less: average goodwill and
intangible assets, net of deferred
tax asset related to goodwill
Average tangible common equity
(non-GAAP)
Return on average assets
Return on average tangible assets
(non-GAAP)
Return on average equity
Return on average tangible
common equity (non-GAAP)
(73,074)
(79,964)
(86,841)
(80,248)
(6,637)
$
787,617
$
958,789
$ 1,007,157
$
965,211
$
976,633
0.19 %
0.26 %
1.07 %
1.58 %
0.13%
(0.01)%
0.20%
0.67%
1.06%
0.05 %
(0.05)%
0.27 %
0.81 %
0.88 %
4.01 %
4.62 %
0.44%
0.44%
0.62%
0.62%
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
Interest income
Add: impact of taxable equivalent
adjustment
Interest income, fully taxable
equivalent (non-GAAP)
Net interest income
Add: impact of taxable equivalent
adjustment
Net interest income, fully taxable
equivalent (non-GAAP)
Average earning assets
Yield on earning assets
Yield on earning assets, fully
taxable equivalent (non-GAAP)
Net interest margin
Net interest margin, fully taxable
equivalent (non-GAAP)
As of and for the years ended
December 31,
2014
184,662
$
December 31,
2013
195,475
$
December 31,
2012
233,485
$
December 31,
2011
197,159
$
930
—
—
—
$
$
185,592
170,249
$
$
195,475
178,961
$
$
233,485
204,251
$
$
197,159
155,463
930
—
—
—
December 31,
2010
$
$
$
21,422
—
21,422
15,910
—
$
171,179
$
178,961
$
204,251
$
155,463
$
15,910
4,446,903
4,698,552
5,130,836
4,571,331
1,310,348
4.15 %
4.17 %
3.83 %
3.85 %
4.16%
4.16%
3.81%
3.81%
39
4.55 %
4.55 %
3.98 %
3.98 %
4.31 %
4.31 %
3.40 %
3.40 %
1.63%
1.63%
1.21%
1.21%
Adjusted Efficiency Ratio
Net interest income
Add: impact of taxable
equivalent adjustment
Net interest income, fully taxable
equivalent (non-GAAP)
Non-interest income (expense)
Non-interest expense
Less: core deposit intangible
asset amortization
Non-interest expense, adjusted
for core deposit intangible asset
amortization
As of and for the years ended
December 31,
2014
170,249
$
December 31,
2013
178,961
$
December 31,
2012
204,251
$
930
—
—
$
$
$
171,179
(1,696)
150,003
$
$
$
178,961
20,177
183,965
$
$
$
204,251
37,379
209,598
December 31,
2011
155,463
—
155,463
89,486
155,538
$
$
$
$
$
$
$
$
(5,344)
(5,346)
(5,344)
(4,359)
December 31,
2010
15,910
—
15,910
42,163
48,981
—
$
144,659
$
178,619
$
204,254
$
151,179
$
48,981
Efficiency ratio
85.82%
89.70%
84.53%
61.72 %
84.34%
Efficiency ratio, fully taxable
equivalent (non-GAAP)
85.35%
89.70%
84.53%
61.72 %
84.34%
40
Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following management's discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes as of and for the years ended December 31, 2014,
2013, and 2012, 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
section 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 may be
limited. Following our Hillcrest Bank acquisition on October 22, 2010, 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. Additionally, 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. The comparability of data is compromised 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 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 Bank Midwest, N.A. prior to the name
change.
Overview
National Bank Holdings Corporation is a bank holding company formed in 2009. Through our subsidiary, NBH Bank, we
provide a variety of banking products to both commercial and consumer clients through a network of 97 banking centers,
located in Colorado, the greater Kansas City area and Texas, and through online and mobile banking products. We operate
under the following brand names: Community Banks of Colorado in Colorado, Bank Midwest in Kansas and Missouri,
and Hillcrest Bank in Texas.
In just over four years, we have completed the acquisition and integration of four problem or failed banks, three of which
were FDIC-assisted. We have transformed these four banks into one collective banking operation with steadily increasing
organic growth, prudent underwriting, and meaningful market share with continued opportunity for expansion. Our long-
term business model utilizes our organic development infrastructure, low-risk balance sheet, continuous operational
development and a disciplined acquisition strategy to create value and provide opportunities for growth.
As of December 31, 2014, we had $4.8 billion in assets, $2.2 billion in loans, $3.8 billion in deposits and $0.8 billion in
equity. We believe that our established presence positions us well for growth opportunities. 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 returns. Through our acquisitions, we have established a solid financial
services franchise with a sizable presence for deposit gathering and client relationship building necessary for growth.
Operating Highlights and Key Challenges
Our operations resulted in the following highlights as of and for the year ended December 31, 2014 (except as noted):
Strategy execution
•
Strong organic growth - increased loan originations 21.7% over the prior year.
• Maintained a conservatively structured loan portfolio - credit quality is strong.
• Opportunistic capital management - repurchased 6.1 million shares at attractive prices.
• Announced in January 2015 the Colorado market fill-in acquisition of Pine River Bank Corporation, which is
expected to close in the third quarter of 2015.
• Maintained focus on expenses and enhancing operational efficiencies - 2014 non-interest expenses down
18.5% from prior year.
Loan portfolio
•
Total loans ended 2014 at $2.2 billion, a 16.6% increase since December 31, 2013.
• Organic loan originations totaled $869.2 million, a 21.7% increase from 2013.
41
•
•
•
Strategic loans at December 31, 2014 increased a strong $456.6 million, or 30.4%, since December 31, 2013.
Strategic loans comprised $2.0 billion, or 90.7% of loans outstanding.
Successfully exited $148.2 million, or 42.4%, of the non-strategic loan portfolio during 2014.
Credit quality
• Non 310-30 loans
Net charge-offs in the non 310-30 loan portfolio declined to just 0.06% during 2014.
Credit quality remained strong, as 90 days past dues and non-accruing loans decreased to just 0.59%.
Loss-share coverage on 12.2% of non-performing non 310-30 loans.
• ASC 310-30 loans
Added a net $43.7 million to accretable yield for the acquired loans accounted for under ASC 310-30.
A $14.8 million covered commercial and industrial loan pool that had previously been on non-accrual
status at December 31, 2013 was returned to accrual status during the first quarter of 2014 due to
improved performance and predictability of cash flows within that pool.
Client deposit funded balance sheet
• Average demand deposits continued solid growth, increasing $40.6 million, or 6.1%, as a result of our strategic
focus on relationship banking.
• Average transaction deposits and client repurchase agreements increased $37.1 million, or 1.5%, from
December 31, 2013.
•
•
Transaction account balances improved to 64.0% of total deposits as of December 31, 2014 from 61.0% at
December 31, 2013.
Total deposits decreased $72.1 million, or 1.9%, as higher-cost time deposits declined $138.6 million, or 9.3%.
• Continued a strongly client-funded balance sheet, with total deposits and client repurchase agreements
comprising 96.9% of total liabilities as of December 31, 2014.
Revenues and expenses
• Net interest margin widened to 3.85% on a fully taxable equivalent basis during 2014, from 3.81% during 2013,
driven by a three basis point decrease in the cost of interest bearing liabilities coupled with a one basis point
widening in the yield on interest earning assets.
•
The yield on our loan portfolio was 6.60% during 2014, compared to 7.92% during 2013, as a result of the declining
balances of higher-yielding purchased loans.
• Cost of deposits decreased four basis points to 0.37% during 2014 from 0.41% during 2013, due to a $186.0
million decrease in time deposits as we focused on market-rate time deposits and in developing banking
relationships.
• Non-interest income for 2014 totaled a negative $1.7 million as a result of $27.7 million of FDIC indemnification
asset amortization and $8.9 million of FDIC loss-share related expenses, attributable to strong covered asset
performance.
• Operating costs (defined as non-interest expenses before problem loan/OREO workout expenses/(income), the
benefit of the change in the warrant liability, contract termination expenses and banking center closure related
expenses) declined $12.4 million, or 7.6%, during 2014, compared to 2013. The decrease in operating costs was
attributable to operating efficiency improvements and banking center closures.
•
Problem loan/OREO expenses/(income) resulted in income of $(1.9) million for 2014, decreasing $18.5 million
from the same period in 2013. The decline is a result of strong OREO property sales and lower problem asset
balances.
Strong capital position
• As of December 31, 2014, our consolidated tier 1 leverage ratio was 15.0% and our consolidated tier 1 risk-based
capital ratio was 28.9%.
•
The after-tax accretable yield on ASC 310-30 loans plus the after-tax yield on the FDIC indemnification asset,
net, in excess of 4.0%, an approximate yield on new loan originations, and discounted at 5%, adds $0.83 per share
to our tangible book value per share as of December 31, 2014.
42
•
Tangible common book value per share was $18.63 at December 31, 2014, before consideration of the excess
accretable yield value of $0.83 per share.
• During 2014, we repurchased 6.1 million shares, or 13.53% of outstanding shares, at a weighted average price of
$19.63 per share. Since early 2013 and through February 26, 2015, we have repurchased 15.3 million shares, or
29.2% of outstanding shares, at an attractive weighted average price of $19.50 per share.
• On February 11, 2015, we announced that the board of directors approved a new authorization to repurchase from
time to time another $50.0 million of the Company’s common stock.
Key Challenges
There are a number of significant challenges confronting us and our industry. In our short history, we have acquired
distressed financial institutions, rebuilt them, and implemented operational efficiencies across the enterprise as a whole.
We face continual challenges implementing our business strategy, including growing the assets and deposits of our business
amidst intense competition, particularly for loans, low interest rates, changes in the regulatory environment and identifying
and consummating disciplined merger and acquisition opportunities in a very competitive environment.
General economic conditions improved modestly during 2014, but were somewhat dampened by the uncertainty about the
strength of the recovery, both nationally and in our markets. Residential real estate values have largely recovered from
their lows and commercial real estate property fundamentals continued to improve in our markets and nationally across all
property types and classes. We consider this with guarded optimism. A significant portion of our loan portfolio is secured
by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would
ultimately have a negative impact on the quality of our loan portfolio.
Oil and gas prices declined significantly during 2014, and the full impact to the broad economy, to banks in general, and to
us, is yet to be determined. Energy loans comprise 8.1% of our total loans and prolonged or further pricing pressure on oil
and gas could lead to increased credit stress in our energy portfolio. Suppressed energy prices are putting more money into
consumers pockets in the short term, but the decline could have unpredictable secondary impacts such as job losses in
industries tied to energy, increased spending habits, lower borrowing needs, higher transaction deposit balances or a
number of other effects that are difficult to isolate or quantify.
Our total loan balances increased $308.3 million during 2014, or 16.6%, on the strength of $869.2 million of loan
originations, partially offset by loan paydowns, particularly in our non-strategic portfolio. 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. The tepid economic recovery and intense loan competition have kept interest rates low during 2014,
limiting the yields we have been able to obtain on originated loans. During 2014, our weighted average yield on loan
originations was 3.78%, which is significantly lower than our 2014 weighted average yield of our loan portfolio of 6.60%.
We expect downward pressure on the yields on our total loan portfolio to the extent that our originated loan portfolio does
not provide sufficient yields to replace the high yields on the acquired loan portfolio as they pay down or pay off. Growth
in our interest income will ultimately be dependent on our ability to generate sufficient volumes of high-quality originated
loans.
Increased regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are
adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market
may offer increased competition as non-bank payment businesses are expanding into traditional banking products. While
certain external factors are out of our control and may provide obstacles to our business strategy, we believe that we are
prepared to deal with these challenges. We seek to remain flexible, yet methodical and proactive, 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.
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, concentrations 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.
43
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 through payoffs, pay
downs, troubled debt restructurings 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.
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 are accounted for under ASC Topic
310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. This guidance 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,
certain of these assets are covered by 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 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 access to borrowings. 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 share repurchases and potential acquisitions, to
ensure continued compliance with regulatory requirements and with the OCC Operating Agreement that we entered into 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 regular 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
loans, investment securities and interest bearing bank deposits. Our acquired loans have generally provided higher yields
than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield, and as a result,
we have historically had downward pressure on our interest income. While there is still some volatility in our interest
income due to the nature of our portfolio, solid loan originations are helping to stabilize interest income by offsetting the
decrease in interest income from the higher yielding purchased loans with the interest income earned on new loan
originations. We incur interest expense on our interest bearing deposits, repurchase agreements and on our FHLB advances,
and we 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.
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 non 310-30 loan portfolio at the balance sheet date.
Additionally, we incur a provision for loan losses on loans accounted for under ASC 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 of service charges, bank card fees, gains on sales of mortgages, gains
on sales of investment securities, gains on previously charged-off acquired loans, OREO related write-ups and other
income and other non-interest income. Also included in non-interest income is FDIC indemnification asset amortization
and other FDIC loss sharing income (expense), which consists of 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 amortization rates on the FDIC
indemnification asset and the amortization of the clawback liability and due to varying levels of expenses and income
related to the resolution of covered assets, the FDIC loss sharing income is not consistent on a period-to-period basis.
44
Non-interest expense - The primary components of our non-interest expense are salaries and benefits, occupancy and
equipment, telecommunications and data processing and intangible asset amortization. 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 tangible assets,
return on average equity, return on average tangible 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. The 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 and the determination of the ALL. 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 our consolidated financial statements for
the year ended December 31, 2014.
Valuation of Assets Acquired and Liabilities Assumed and Acquisition Accounting Application
We account for business combinations under the acquisition method of accounting in accordance with ASC 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 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 loans based on the accounting treatment into (a) loans
accounted for under ASC 310-30 and (b) loans excluded from ASC 310-30, which also includes our originated loans. We
further 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.
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 management's 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 client 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
45
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 amortization that is recognized through FDIC loss sharing income in the consolidated statements of operations
until the contingency is resolved.
Accounting for Acquired Loans and the Related FDIC Indemnification Asset
Included in our loan portfolio are 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 covered loan portfolio has significantly
different risk characteristics due to the financial statement implications, which are summarized below.
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 310-30 (with the exception of loans with revolving privileges which were outside the
scope of ASC 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. Contractual fees not expected to be
collected are not included in ASC 310-30 contractual cash flows. Should fees be subsequently collected, the cash flows are
accounted for as non 310-30 fee income in the period they are received. 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 client 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. If the timing and expected cash flows of a pool can not be
reasonably estimated, that pool may be placed on non-accrual status, the accretion of income will cease, and interest
income will be recognized on a cash basis.
Loan pools accounted for under ASC 310-30 are periodically remeasured to determine expected future cash flows. In
determining the expected cash flows, we evaluate the credit profile, contractual interest rates, collateral values and
expected prepayments of the loan pools. Prepayment assumptions 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. 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, 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 once any previously
recorded impairment expense has been recouped. 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 310-30 are accounted for under ASC 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 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 measured and
46
recorded separately in the FDIC indemnification asset. The indemnification assets were recorded at fair value on the
respective dates of acquisition, and considered 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 was 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
amortized using the effective interest method in connection with the expected speed of reimbursements and is limited to the
lesser of the contractual term of the indemnification agreement or the remaining life of the indemnified assets. This
amortization is included in FDIC indemnification asset amortization in the consolidated statements of operations. The
expected indemnification asset cash flows are remeasured in conjunction with the periodic remeasurement 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 from the FDIC and are recognized immediately in
earnings to the extent that they relate to a reversal of a previously recorded valuation allowance related to the covered
assets. Any remaining decreases in expected cash flows are reflected prospectively as a negative yield adjustment on the
indemnification asset consistent with the approach taken to recognize increases in expected cash flows on the covered
loans accounted for under ASC 310-30. Conversely, declines in cash flow expectations on covered loans and covered
OREO generally result in an increase in the expected indemnification asset cash flows from the FDIC and are reflected as
both a decrease in the FDIC indemnification asset amortization 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 claimed by us
from 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.
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 7 to our consolidated financial statements.
Financial Condition
Total assets were $4.8 billion at December 31, 2014 compared to $4.9 billion at December 31, 2013, a decrease of $0.1
billion, or 1.9%. The decrease in total assets was primarily attributable to the successful repurchase of 6.1 million of our
outstanding shares for $119.4 million. We continued our strategy of remixing our earning assets during 2014, using the
run-off from the investment securities portfolio and non-strategic loans to fund loan growth. Total loans were $2.2 billion
at December 31, 2014, and grew $308.3 million, or 16.6%, from December 31, 2013. We originated $869.2 million of
loans during 2014, which grew the balances in our strategic portfolio $456.6 million from December 31, 2013 to
December 31, 2014, or 30.4%. We reduced our non-strategic loan portfolio to $201.7 million at December 31, 2014, a
decrease of $148.2 million from December 31, 2013, or 42.4%, which was a reflection of our successful workout progress
on acquired problem loans (many of which were covered). Our FDIC indemnification asset decreased $25.4 million during
2014, primarily as a result of amortization that resulted from an increase in actual and expected cash flows on the
underlying covered assets, resulting in lower expected reimbursements from the FDIC. Strong OREO sales late in the
fourth quarter of 2014, coupled with a relatively flat loan growth during that quarter, resulted in a $67.5 million increase in
cash and cash equivalents at December 31, 2014 compared to December 31, 2013. Other assets increased $38.3 million
due to the purchase of $44.2 million of bank-owned life insurance during 2014. Total deposits of $3.8 billion at
December 31, 2014 decreased $72.1 million from December 31, 2013. Lower-cost demand, savings, and money market
("transaction") deposits increased $66.5 million and was more than offset by a $138.6 million decrease in time deposits as
we continued to focus our deposit base on clients who were interested in market-rate time deposits and in developing a
banking relationship, coupled with the California banking center and limited-service retirement center exits on December
31, 2013.
Total assets at December 31, 2013 were $4.9 billion compared to $5.4 billion at December 31, 2012, a decrease of $0.5
billion. The decrease in total assets was driven by a $0.6 billion decrease in cash and cash equivalents, as we utilized cash
to repurchase $146.7 million of our common stock. Also contributing to the decrease in cash was the run-off of $0.3
billion of time deposits, as many of these clients were single-service, highly rate-sensitive clients of the problem banks we
acquired. We also utilized available cash and purchased $945.8 million of investment securities during 2013. Total non-
47
strategic loan balances decreased $360.6 million, which was a reflection of our workout progress on acquired troubled
loans (many of which were covered). We also originated $714.0 million loans during 2013, which offset normal client
payments and grew the loan balances in our strategic portfolio at an annualized rate of 34.0%. As a result, total loan
balances increased $21.4 million, after having reached an important loan balance inflection point during the third quarter of
2013, whereby total loan balances began growing for the first time in our Company's short history, as organic loan
originations began outpacing the resolution of acquired troubled loans. Our FDIC indemnification asset decreased
$22.5 million during 2013 as a result of $17.6 million of payments from and claims submitted to the FDIC for
reimbursement on continued workout progress on our covered loans and OREO. The actual and expected cash flows
increased on covered assets, and resulted in a net reclassification of $73.7 million of non-accretable difference to accretable
yield during the period, which is being accreted to income over the remaining life of the loan pools. Total deposits
decreased $362.4 million, driven by a $257.0 million decline in time deposits, as we sought to retain only those depositors
who were interested in market-rate deposits and developing a banking relationship and as we continued our focus on
migrating toward a client-based deposit mix with higher concentrations of lower cost demand, savings and money market
(“transaction”) deposits. Also contributing to the decline in total deposits was our exit of four California banking centers
and 32 limited-service retirement centers during the fourth quarter of 2013. Shareholders' equity declined $192.8 million
during 2013 and was primarily impacted by the repurchase of 7.4 million of our shares outstanding, or 14.2%, at a
weighted average price of $19.77. Also contributing to the decrease in total equity was a $47.3 million decline in
accumulated other comprehensive income (loss), net of tax, as a result of market value fluctuations.
Investment Securities
Available-for-sale
Total investment securities available-for-sale were $1.5 billion at December 31, 2014, compared to $1.8 billion at
December 31, 2013, a decrease of $306.3 million, or 17.2%. During 2014, maturities and pay downs of available-for-sale
securities totaled $327.4 million. There were no purchases of available-for-sale securities during 2014.
Total investment securities available-for-sale were $1.8 billion at December 31, 2013, compared to $1.7 billion at
December 31, 2012, an increase of $0.1 billion, or 3.9%. During 2013, we purchased $694.0 million of available-for-sale
mortgage backed securities, which was largely funded by $550.0 million of maturities and paydowns during 2013.
Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated (in thousands):
December 31, 2014
December 31, 2013
Amortized
cost
Fair
value
Percent of
portfolio
Weighted
average
yield
Amortized
cost
Fair
value
Percent of
portfolio
Weighted
average
yield
Asset-backed securities
$
— $
—
0.00%
0.00% $
4,534
$
4,537
0.26%
0.61%
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
Total investment securities
available-for-sale
395,244
404,215
27.33%
2.11%
490,321
494,990
27.72%
2.22%
1,088,834
1,074,580
419
419
72.64%
0.03%
1.75% 1,320,998
1,285,582
0.00%
419
419
72.00%
0.02%
1.83%
0.00%
$ 1,484,497
$ 1,479,214
100.00%
1.85% $ 1,816,272
$1,785,528
100.00%
1.94%
As of December 31, 2014, 100.0% of the available-for-sale investment portfolio was backed by mortgages as compared to
99.7% at December 31, 2013. 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, 2014 and December 31, 2013, adjustable rate securities comprised 7.4% and 7.8%, respectively, of the
available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10
to 30 year contractual maturities, with a weighted average coupon of 2.2% per annum, at December 31, 2014 and
December 31, 2013.
48
The available-for-sale investment portfolio included $21.8 million and $49.2 million of gross unrealized losses at
December 31, 2014 and December 31, 2013, respectively, which were partially offset by $16.5 million and $18.4 million of
gross unrealized gains, respectively. In addition to the U.S. Government agency or sponsored enterprise backings of our
MBS portfolio, we believe any unrecognized losses are a result of prevailing interest rates, and as such, we do not believe
that any of the securities with unrealized losses were other-than-temporarily-impaired.
The estimated weighted average life of the available-for-sale MBS portfolio as of December 31, 2014 and December 31,
2013 was 3.5 years and 3.9 years, respectively, the decrease of which is due to an adjustment in expected prepayment
speeds and aging of the portfolio. This estimate is based on various assumptions, including repayment characteristics and
portfolio aging, and actual results may differ. As of December 31, 2014, the duration of the total available-for-sale
investment portfolio was 3.2 years. As of December 31, 2013, the duration of the total available-for-sale investment
portfolio was 3.6 years.
Held-to-maturity
At December 31, 2014, we held $530.6 million of held-to-maturity investment securities, compared to $641.9 million at
December 31, 2013, a decrease of $111.3 million, or 17.3%. During 2014, we did not purchase any held-to-maturity
securities, however, during 2013 we purchased $251.8 million of held-to-maturity securities.
Held-to-maturity investment securities are summarized as follows as of the date indicated (in thousands):
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
Total investment securities held-to-maturity
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
Total investment securities held-to-maturity
December 31, 2014
Amortized
cost
Fair
value
Percent of
portfolio
Weighted
average yield
422,622
$
428,323
79.65%
107,968
530,590
$
106,314
534,637
20.35%
100.00%
3.25%
1.68%
2.93%
December 31, 2013
Amortized
cost
Fair
value
Percent of
portfolio
Weighted
average yield
513,090
$
511,489
79.93%
128,817
641,907
$
124,916
636,405
20.07%
100.00%
3.31%
1.70%
2.99%
$
$
$
$
The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of
fixed rate FHLMC, FNMA and GNMA securities.
The fair value of the held-to-maturity investment portfolio was $534.6 million and $636.4 million, at December 31, 2014
and December 31, 2013, respectively, and included $4.0 million of net unrealized gains and $5.5 million of net unrealized
losses for the respective periods.
The estimated weighted average life of the held-to-maturity investment portfolio was 3.4 years as of December 31, 2014
and 3.8 years as of December 31, 2013. As of December 31, 2014, the duration of the total held-to-maturity investment
portfolio was 3.2 years and the duration of the entire investment securities portfolio was 3.2 years. As of December 31,
2013, the duration of the total held-to-maturity investment portfolio was 3.5 years and the duration of the entire investment
securities portfolio was 3.6 years.
49
Non-marketable securities
Non-marketable securities include Federal Reserve Bank ("FRB") stock and FHLB stock. At December 31, 2014 and
December 31, 2013, we held $19.5 million and $25.0 million, respectively, of FRB stock. At December 31, 2014 and
December 31, 2013 we held $7.6 million and $6.6 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
At December 31, 2014, our loan portfolio was comprised of new loans that we have originated and loans that were
acquired in connection with our four acquisitions to date. 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.
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 contractual interest rate 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 310-30, with the exception of loans with revolving privileges, which were outside the scope of
ASC 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 310-30.
Consistent with differences in the accounting, the loan portfolio is presented in two categories: (i) ASC 310-30 loans and
(ii) non 310-30 loans. The portfolio is further stratified based on (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.”
Additionally, inherent in the nature of acquiring problem banks, only certain of our acquired clients conform to our long-
term business model of in-market, relationship-oriented banking clients. We have developed a management tool to
evaluate the progress of working out the problem loans acquired in our FDIC-assisted acquisitions and the progress of
organic loan growth, whereby we have designated loans as “strategic” or “non-strategic.” Strategic loans include all
originated loans in addition to those acquired loans inside our operating markets that meet our credit risk profile.
Identification as strategic for acquired loans was made at the time of acquisition. 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, 2014, strategic loans totaled $2.0 billion and had strong credit quality as
represented by a non-accrual loans ratio of 0.4%. We believe this presentation of our loan portfolio provides a meaningful
basis to understand the underlying drivers of changes in our loan portfolio balances.
Due to the unique structure and accounting treatment in our loan portfolio, we utilize four primary presentations to analyze
our loan portfolio, depending on the purpose of the analysis. Those are:
To analyze:
Loan growth and production efforts
Workout efforts of our purchased non-strategic portfolio Non-strategic balances and accretable yield
Risk mitigants of our non-performing loans
We look at:
Strategic balances and loan originations
FDIC loss-share coverage and fair value marks
Interest income
Non 310-30 yields and 310-30 yields
For information regarding the loan portfolio composition and the breakdown of the portfolio between ASC 310-30 loans,
non 310-30 loans, along with the amounts that are covered and non-covered, see note 6.
Strategic loans comprised 90.7% of the total loan portfolio at December 31, 2014, compared to 81.1% at December 31,
2013. The table below shows the loan portfolio composition categorized between strategic and non-strategic at the
respective dates (in thousands):
50
December 31, 2014
December 31, 2013
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total
Strategic
Non-strategic
Total
Strategic
Non-strategic
Total
$
765,114
$
30,282
$
795,396
$
411,589
$
71,906
$
483,495
135,559
140,729
275,311
610,583
33,371
1,972
19,228
126,326
22,117
1,817
137,531
159,957
401,637
632,700
35,188
154,811
123,386
210,265
570,455
33,599
5,141
30,306
210,263
29,469
2,904
159,952
153,692
420,528
599,924
36,503
$1,960,667
$
201,742
$2,162,409
$1,504,105
$
349,989
$1,854,094
Our loan portfolio totaled $2.2 billion at December 31, 2014 and increased $308.3 million from December 31, 2013. The
16.6% increase in total loans was primarily driven by a $456.6 million increase in our strategic loan portfolio, partially
offset by a $148.2 million decrease in our non-strategic loan portfolio. The increase in strategic loans of $456.6 million, or
30.4%, at December 31, 2014 compared to December 31, 2013, was driven by strong loan originations. We have
successfully continued to generate new relationships with individuals and small to mid-sized businesses. We have
experienced particularly strong loan growth in our commercial portfolio, which at December 31, 2014, was comprised of
energy-related loans of $175.5 million, public administration-related loans of $106.9 million, manufacturing-related loans
of $103.8 million, finance and insurance-related loans of $82.4 million, and a variety of smaller subcategories of
commercial and industrial loans. Our enterprise-level, dedicated special asset resolution team has had continued success
working out non-strategic loans acquired in our FDIC-assisted transactions, which complimented the repayment of non-
strategic loans that do not conform to our business model of in-market, relationship-oriented loans with credit metrics
commensurate with our current underwriting standards.
Included in our commercial loans are energy related loans that comprised 8.1% of total loans and 4.0% of interest earning
assets at December 31, 2014. Energy production (loans to companies engaged in exploration and production), energy
midstream (loans to companies that engage in consolidation, storage, and transportation of oil and gas) and energy services
(loans to companies that provide products and services to oil/gas companies), made up 44.2%, 26.4% and 29.4%,
respectively, of the total energy related portfolio at December 31, 2014. We have an experienced energy banking team,
which includes an in-house petroleum geologist and we have maintained a disciplined approach to energy lending that
includes carefully selected clients based on strong balance sheets, low leverage and quality management and we perform
regular reviews. The average loan balance per relationship in the energy sector was $7.0 million and these loans had strong
credit quality at December 31, 2014. Energy prices declined significantly during 2014 and prolonged or further pricing
pressure could increase stress on our energy clients and ultimately the credit quality of this portfolio. However, the capital
and liquidity of our energy clients, as well as the conservative loan structures, should protect us against significant credit
loss.
Our loan origination strategy involves lending primarily to clients within our markets; however, our acquired loans include
clients in various geographies. Additionally, our specialty commercial banking groups, and in particular, our capital finance
and government and non-profit banking, cover regional markets including adjacent states. These specialty lending groups
drove the year-over-year increase in loans noted as “other” in the table below.
The table below shows the geographic breakout of our loan portfolio at December 31, 2014 and December 31, 2013, based
on the domicile of the borrower or, in the case of collateral-dependent loans, the geographic location of the collateral (in
thousands):
December 31, 2014
December 31, 2013
Loan balance
Percent of loan portfolio
Loan balance
Percent of loan portfolio
Colorado
Missouri
Texas
Kansas
California
Other
Total
$
$
850,778
518,623
248,262
228,612
44,694
271,440
2,162,409
51
39.3% $
24.0%
11.5%
10.6%
2.1%
12.5%
100.0% $
710,967
537,267
186,870
194,044
45,370
179,576
1,854,094
38.3%
29.0%
10.1%
10.5%
2.4%
9.7%
100.0%
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 of $869.2 million during 2014, were up
$155.2 million, or 21.7% from the same period of the prior year as a result of continued market penetration. The following
table represents new loan originations during 2014 and 2013 (in thousands):
Commercial
Agriculture
Owner-occupied
commercial real estate
Commercial real estate
Residential real estate
Consumer
Total
Commercial
Agriculture
Owner-occupied
commercial real estate
Commercial real estate
Residential real estate
Consumer
Total
Fourth quarter
Third quarter
Second quarter
First quarter
2014
2014
2014
2014
$
102,732
$
110,083
$
133,671
$
130,096
$
4,952
11,139
27,617
31,680
4,111
7,014
10,293
33,817
35,404
6,678
10,288
28,803
45,903
44,539
3,556
4,959
21,002
29,633
27,812
3,461
$
182,231
$
203,289
$
266,760
$
216,963
$
Fourth quarter
Third quarter
Second quarter
First quarter
2013
2013
2013
2013
$
159,931
$
80,833
$
24,982
$
15,150
$
23,610
6,380
14,579
36,113
3,594
5,689
21,226
28,855
51,749
3,326
22,901
7,577
23,976
86,161
3,157
9,446
18,236
18,513
45,808
2,211
$
244,207
$
191,678
$
168,754
$
109,364
$
The tables below show the contractual maturities of our loans for the dates indicated (in thousands):
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans
Covered
Non-covered
Total loans
December 31, 2014
Due within
1 Year
Due after 1 but
within 5 Years
Due after
5 Years
$
118,569
$
502,622
$
174,205
$
36,769
19,048
93,040
22,678
12,899
303,003
112,202
190,801
303,003
$
$
$
49,032
65,963
222,984
37,900
16,115
894,616
46,152
848,464
894,616
$
$
$
51,730
74,946
85,613
572,122
6,174
964,790
35,343
929,447
964,790
$
$
$
$
$
$
Total
2014
476,582
27,213
71,237
136,970
139,435
17,806
869,243
Total
2013
280,896
61,646
53,419
85,923
219,831
12,288
714,003
Total
795,396
137,531
159,957
401,637
632,700
35,188
2,162,409
193,697
1,968,712
2,162,409
52
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans
Covered
Non-covered
Total loans
December 31, 2013
Due within
1 Year
Due after 1 but
within 5 Years
Due after
5 Years
$
128,368
$
297,120
$
58,007
$
32,258
20,382
135,673
36,085
14,284
367,050
175,452
191,598
367,050
$
$
$
80,681
72,839
205,046
52,079
15,281
723,046
96,216
626,830
723,046
$
$
$
47,013
60,472
79,808
511,760
6,938
763,998
37,729
726,269
763,998
$
$
$
$
$
$
Total
483,495
159,952
153,693
420,527
599,924
36,503
1,854,094
309,397
1,544,697
1,854,094
The stated interest rate sensitivity (which excludes the effects of non-refundable loan origination and commitment fees, net
of costs and the accretion of fair value marks) of non 310-30 loans with maturities over one year is as follows at the dates
indicated (in thousands):
Fixed
December 31, 2014
Variable
Total
Weighted
average rate
Balance
Weighted
average rate
Balance
3.80% $ 443,305
3.63% $ 665,753
Weighted
average rate
3.68%
Balance
$ 222,448
45,721
68,723
118,724
341,833
13,828
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans with > 1 year maturity
Covered
Non-covered
4.83%
4.31%
4.59%
3.48%
5.32%
37,533
44,482
109,117
236,365
4,591
4.58%
4.10%
3.41%
3.59%
3.95%
83,254
113,205
227,841
578,198
18,419
$ 811,277
$
814
3.91% $ 875,393
3.66% $1,686,670
3.47% $
13,873
2.87% $
14,687
810,463
3.91%
861,520
3.67% 1,671,983
Total loans with > 1 year maturity
$ 811,277
3.91% $ 875,393
3.66% $1,686,670
Fixed
December 31, 2013
Variable
Total
Balance
Weighted
average rate
Balance
Weighted
average rate
Balance
$
76,521
4.36% $ 248,795
3.79% $ 325,316
Weighted
average rate
3.93%
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans with > 1 year maturity
Covered
Non-covered
68,701
59,939
92,418
316,083
10,683
5.02%
4.61%
4.62%
3.49%
6.24%
35,898
31,492
83,678
208,361
4,617
4.47%
4.19%
3.81%
3.64%
4.20%
104,599
91,431
176,096
524,444
15,300
$ 624,345
$
11,044
4.11% $ 612,841
3.80% $1,237,186
3.74% $
7,057
5.97% $
18,101
613,301
4.11%
605,784
3.78% 1,219,085
Total loans with > 1 year maturity
$ 624,345
4.11% $ 612,841
3.80% $1,237,186
53
4.72%
4.23%
4.02%
3.53%
4.97%
3.78%
2.91%
3.79%
3.78%
4.83%
4.46%
4.29%
3.55%
5.63%
3.96%
4.54%
3.95%
3.96%
Accretable Yield
At December 31, 2014, the accretable yield balance was $113.5 million compared to $130.6 million at December 31, 2013.
We re-measure the expected cash flows of all 28 remaining loan pools accounted for under ASC 310-30 utilizing the same
cash flow methodology used at the time of acquisition. During 2014 and 2013, we reclassified a net $43.7 million and
$73.7 million, respectively, from non-accretable difference to accretable yield, as a result of these remeasurements. The
accretable yield balance at December 31, 2013 includes $1.6 million of accretable yield related to a loan pool that was put
on non-accrual status during 2013. During 2014, a full recovery of the carrying value of this pool was realized and resulted
in this pool being returned to accrual status after improved performance and predictability of cash flows within that pool.
During 2013, two of the loan pools accounted for under ASC 310-30 paid-off early. The early pay-off of one of these
pools resulted in an immediate recognition of $2.5 million of accretion on loans accounted for under ASC 310-30. During
2014, none of the loan pools accounted for under ASC 310-30 paid off early.
In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on loans outside
the scope of ASC 310-30 are also accreted to interest income over the life of the loans. Total remaining accretable yield and
fair value mark was as follows for the dates indicated (in thousands):
Remaining accretable yield on loans accounted for under ASC 310-30
Remaining accretable fair value mark on loans not accounted for under ASC 310-30
Total remaining accretable yield and fair value mark
December 31,
2014
December 31,
2013
$
$
113,463
7,618
121,081
$
$
130,624
10,755
141,379
Loss Share Coverage
We have 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 and expenses incurred as a result of the resolution and disposition of the
covered assets of these banks. The categories, and the respective loss thresholds and coverage amounts related to the
Hillcrest Bank loss sharing agreement are as follows (in thousands):
Tranche
1
2
3
Commercial
Loss Threshold
Up to $295,592
$295,593-405,293
>$405,293
Loss-Coverage
Percentage
60%
0%
80%
Tranche
1
2
3
Single family
Loss Threshold
Up to $4,618
$4,618-8,191
>$8,191
Loss-Coverage
Percentage
60%
30%
80%
The categories, and the respective loss thresholds and coverage amounts related to the Community Banks of Colorado
commercial loss sharing agreement are as follows (in thousands):
Tranche
1
2
3
Loss Threshold
Up to $204,194
$204,195-308,020
>$308,020
Loss-Coverage Percentage
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 assets at fair value at the date of acquisition in accordance with applicable accounting guidance.
As of December 31, 2014, we had incurred $201.3 million of estimated 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. The Hillcrest Bank loss sharing agreement covers losses incurred through the fourth quarter of
2015. As of December 31, 2014, there were 140 remaining covered assets totaling $76.3 million. Of these, there were 48
covered loans with carrying values of $32.9 million that were either past due or that have scheduled maturities after the end
of the loss share term, and there were eight covered OREO assets with carrying values of $5.9 million. With regard to our
Community Banks of Colorado loss sharing agreement, as of December 31, 2014, we had incurred approximately $134.9
million of estimated losses. The claims filed are subject to review and approval, including extensive audits, by the FDIC or
54
its assigned agents for compliance with the terms in the loss sharing agreements. The Community Banks of Colorado loss
sharing agreement covers losses through the fourth quarter of 2016.
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. 48.6% of our non-performing assets (by dollar amount) at December 31, 2014 were 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, 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 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” or "TDRs" in accordance with ASC 310-40 Troubled Debt Restructurings by Creditors. Under this
guidance, modifications to loans that fall within the scope of ASC 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, troubled debt restructurings on non-accrual,
OREO and other repossessed assets. Non-accrual loans and troubled debt restructurings on non-accrual accounted for
under ASC 310-30, as described below, may be excluded from our non-performing assets to the extent that the cash flows
of the loan pools are still estimable. During the third quarter of 2014, we revised our definition of non-performing assets
and non-performing loans to exclude accruing loans 90 days past due and accruing troubled debt restructurings to more
55
accurately align the financial metrics related to non-performing assets and non-performing loans with our financial results.
Prior period information has been modified for this revision.
Our non-performing assets included $1.3 million and $16.8 million of covered loans and $18.5 million and $38.8 million of
covered OREO at December 31, 2014 and December 31, 2013, 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.
Loans accounted for under ASC 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-measurement 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 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.
During 2013, we identified one covered commercial and industrial loan pool accounted for under ASC 310-30, that had a
balance of $14.8 million at December 31, 2013, for which the cash flows were not reasonably estimable. In accordance
with the guidance in ASC 310-30, this pool was put on non-accrual status. During 2014, this loan pool was returned to
accrual status due to improved performance and predictability of cash flows within that pool. All other loans accounted for
under ASC 310-30 were classified as performing assets at December 31, 2013.
All loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2014, as the carrying
values of the respective loan or pool of loans cash flows were considered estimable 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 310-30.
56
The following table sets forth the non-performing assets as of the dates presented (in thousands):
December 31, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
Non-
covered
Covered
Total
Non-
covered
Covered
Total
Non-
covered
Covered
Total
Non-
covered
Covered
Total
Non-
covered
Covered
Total
$
474
$15,098
$ 15,572
$
276
$ 1,271
$ 1,547
$
641
$ 4,614
$ 5,255
$ —
$ —
$
Non-accrual
loans:
Commercial
$
110
$
111
$
130
385
222
2,845
37
—
—
—
—
—
221
130
385
222
153
467
1,131
2,845
3,437
37
10
—
—
—
—
—
153
186
44
230
29
—
29
467
1,994
1,141
3,135
758
1,038
1,796
1,131
3,437
3,936
10
—
—
—
—
1,400
5,094
7,009
12,103
3,936
1,838
—
1
460
—
2,298
1
3,729
111
3,840
5,672
15,098
20,770
7,792
2,456
10,248
8,361
13,121
21,482
5,767
1,206
6,973
1,901
1,673
3,574
9,308
3,563
12,871
16,288
—
16,288
9,496
1,317
10,813
7,573
16,771
24,344
17,100
6,019
23,119
24,649
13,121
37,770
OREO
10,653
18,467
29,120
31,300
38,825
70,125
49,297
45,511
94,808
43,530
77,106
120,636
829
20
849
784
302
1,086
800
531
1,331
873
680
1,553
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
54,078
54,078
—
—
—
—
—
—
—
—
—
—
—
—
$20,978
$19,804
$ 40,782
$39,657
$55,898
$ 95,555
$67,197
$52,061
$119,258
$69,052
$90,907
$159,959
$ —
$54,078
$ 54,078
$
188
$
75
$
263
$
14
$
115
$
129
$
25
$ —
$
25
$
325
$
327
$
652
$ —
$14,540
$ 14,540
$ 9,489
$ 9,786
$ 19,275
$ 5,891
$ 5,714
$ 11,605
$12,673
$ 5,047
$ 17,720
$10,958
$ 1,367
$ 12,325
$
431
$ —
$
431
$ 17,613
$ 12,521
$ 15,380
$ 11,527
$ 12,521
0.48%
0.68%
0.50%
0.49%
5.42%
1.31%
1.11%
1.95%
1.26%
2.00%
1.38%
1.66%
0.00%
0.00%
0.00%
0.01%
0.04%
0.01%
0.00%
0.04%
0.01%
0.00%
0.00%
0.00%
0.03%
0.03%
0.03%
0.00%
2.07%
0.93%
0.85%
162.89%
1.94%
51.43%
2.20%
66.53%
2.52%
30.52%
1.06%
0.00%
Agriculture
Owner-
occupied
commercial
real estate
Commercial
real estate
Residential
real estate
Consumer
Total non-
accrual
loans
Restructured
loans on non-
accrual
Total non-
performing
loans
Other
repossessed
assets
Total non-
performing
assets
Loans 90 days
or more past
due and still
accruing
interest
Accruing
restructured
loans(1)
ALL
Total non-
performing
loans to non-
covered,
covered and
total loans,
respectively
Loans 90 days
or more past
due and still
accruing
interest to non-
covered,
covered and
total loans,
respectively
Total non-
performing
assets to total
assets
ALL to non-
performing
loans
(1) Includes restructured loans less than 90 days past due and still accruing.
From December 31, 2013 to December 31, 2014, total non-performing loans decreased $13.5 million. Non-covered non-
performing loans increased $1.9 million from December 31, 2013 to December 31, 2014, primarily due to an increase of
$3.9 million in non-covered restructured loans on non-accrual. The primary driver was one restructured non 310-30 loan
relationship in the commercial segment, totaling $3.6 million at December 31, 2014, that was placed on non-accrual status
during 2014. The loans in this relationship were fully secured and current as to principal and interest payments at
December 31, 2014. The increase in non-covered non-performing loans was more than offset by a $15.5 million decrease
in covered non-performing loans as a result of the previously mentioned 310-30 loan pool that was returned to accrual
status during 2014.
During 2014, accruing TDRs increased $7.7 million. The increase was primarily attributable to two loans in the
commercial segment with a recorded balance of $10.9 million and two loans in the agriculture segment with a recorded
balance of $2.7 million, all of which have been granted an extension of maturity.
57
OREO balances were $29.1 million at December 31, 2014 and exclude $8.1 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. During 2014, $4.5 million of OREO was
foreclosed on or otherwise repossessed and $56.5 million of OREO was sold. The OREO sales resulted in $1.1 million of
net non-covered gains and $12.0 million of net covered gains that are subject to reimbursement to the FDIC at the
applicable loss-share coverage percentage. OREO write-downs of $2.1 million were recorded during 2014, of which $1.2
million, or 56.7%, were covered by FDIC loss sharing agreements.
OREO balances were $70.1 million at December 31, 2013 and include $4.2 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 controlling interest
and exclude $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 do not have a controlling interest. During 2013, $40.0 million of OREO
was foreclosed on or otherwise repossessed and $61.3 million of OREO was sold. The OREO sales resulted in $1.2
million of non-covered gains and $5.7 million of covered gains that are subject to reimbursement to the FDIC at the
applicable loss-share coverage percentage. OREO write-downs of $10.3 million were recorded during 2013, of which $6.8
million, or 66.2%, were covered by FDIC loss sharing agreements.
The following tables represents the carrying value of our accruing and non-accrual loans compared to the unpaid principal
balance ("UPB") as of December 31, 2014 (in thousands):
Unpaid
principal
balance
Accruing
Carrying
value
Non-accrual
Carrying
value/
UPB
Unpaid
principa
l balance
Carrying
value
Carrying
value/
UPB
Unpaid
principal
balance
Total
Carrying
value
Carrying
value/
UPB
Non 310-30 loans
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Covered non 310-30
loans
Non-covered non 310-30
loans
$
771,655
$
768,226
99.6% $
7,333
$
4,214
57.5% $
778,988
$
772,440
118,401
371,245
589,871
30,426
117,973
368,198
587,128
99.6%
99.2%
99.5%
30,426
100.0%
526
45,943
8,089
311
495
1,066
4,811
227
Total non 310-30 loans
1,881,598
1,871,951
99.5%
62,202
10,813
94.1%
2.3%
59.5%
73.0%
17.4%
118,927
417,188
597,960
30,737
118,468
369,264
591,939
30,653
1,943,800
1,882,764
99.2%
99.6%
88.5%
99.0%
99.7%
96.9%
32,656
31,505
96.5%
37,220
1,316
3.5%
69,876
32,821
47.0%
1,848,942
1,840,446
99.5%
99.5%
24,982
62,202
9,497
10,813
38.0%
17.4%
1,873,924
1,849,943
1,943,800
1,882,764
98.7%
96.9%
Total non 310-30 loans
1,881,598
1,871,951
Loans accounted for under
ASC 310-30
Commercial
Agriculture
53,636
23,477
22,956
19,063
Commercial real estate
317,677
192,330
Residential real estate
Consumer
Total loans accounted
for under ASC 310-30
Covered loans accounted
for under ASC 310-30
Non-covered loans
accounted for under
ASC 310-30
Total loans accounted
for under ASC 310-30
54,667
12,149
40,761
4,535
461,606
279,645
60.6%
288,597
160,876
55.7%
173,009
118,769
68.6%
461,606
279,645
60.6%
42.8%
81.2%
60.5%
74.6%
37.3%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.0%
0.0%
0.0%
0.0%
0.0%
53,636
23,477
22,956
19,063
317,677
192,330
54,667
12,149
40,761
4,535
42.8%
81.2%
60.5%
74.6%
37.3%
0.0%
461,606
279,645
60.6%
0.0%
288,597
160,876
55.7%
0.0%
173,009
118,769
68.6%
0.0%
461,606
279,645
Total loans
$ 2,343,204
$ 2,151,596
91.8% $ 62,202
$ 10,813
17.4% $ 2,405,406
$ 2,162,409
Total covered
$
321,253
$
192,381
59.9% $ 37,220
$
1,316
3.5% $
358,473
$
193,697
Total non-covered
2,021,951
1,959,215
96.9%
24,982
9,497
38.0%
2,046,933
1,968,712
Total loans
$ 2,343,204
$ 2,151,596
91.8% $ 62,202
$ 10,813
17.4% $ 2,405,406
$ 2,162,409
58
60.6%
89.9%
54.0%
96.2%
89.9%
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 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 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 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 generally considered to be performing as is further described above under “Non-
Performing Assets.” One covered loan pool accounted for under ASC 310-30 that was put on non-accrual during 2013 was
included in non-accrual loans at December 31, 2013, but was excluded from non-accrual loans at December 31, 2014 as the
pool was again considered performing. The table below shows the past due status of loans accounted for under ASC 310-30
and loans not accounted for under ASC 310-30, based on contractual terms of the loans as of December 31, 2014 and
December 31, 2013 (in thousands):
Loans 30-89 days past due and still
accruing interest
Loans 90 days past due and still accruing
interest
Non-accrual loans
Restructured loans on non-accrual
Total past due and non-accrual loans
Total past due covered loans
Total 90 days past due and still accruing
interest and non-accrual loans to
310-30 loans, non 310-30 loans and
total loans, respectively
Total non-accrual loans to 310-30 loans,
non 310-30 loans 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
agreements
December 31, 2014
December 31, 2013
ASC 310-30
loans
Non ASC
310-30 loans
Total
loans
ASC 310-30
loans
Non ASC
310-30 loans
Total
loans
$
7,016
$
1,142
$
8,158
$
11,245
$
2,854
$
14,099
33,834
—
—
263
3,840
6,973
34,097
3,840
6,973
55,864
14,827
—
129
5,943
3,574
$
$
40,850
35,707
$
$
12,218
1,392
$
$
53,068
37,099
$
$
81,936
63,603
$
$
12,500
2,284
$
$
55,993
20,770
3,574
94,436
65,887
12.10%
0.59%
2.08%
15.68%
0.69%
4.33%
0.00%
0.57%
0.50%
3.29%
0.68%
1.31%
100.00%
34.66%
84.96%
100.00%
52.23%
93.68%
87.41%
11.39%
69.91%
77.63%
18.27%
69.77%
Loans 30-89 days past due and still accruing interest decreased by $5.9 million from December 31, 2013 to December 31,
2014 and loans 90 days or more past due and still accruing interest decreased $21.9 million at December 31, 2014
compared to December 31, 2013, for a collective decrease in total past due loans of $27.8 million. Non-accrual loans
(including restructured loans on non-accrual) decreased $13.5 million from December 31, 2013 to December 31, 2014.
The decrease in non-accrual loans was primarily because of the covered commercial and industrial loan pool accounted for
under ASC 310-30 that was on non-accrual status at December 31, 2013, with a balance $14.8 million, was returned to
accrual status during 2014. This decrease was partially offset by the addition to non-accrual status of one restructured loan
relationship in the commercial segment, totaling $3.6 million at December 31, 2014. The loans in this relationship were
fully secured and current as to principal and interest payments at December 31, 2014.
Loans 30-89 days past due and still accruing interest decreased $8.9 million at December 31, 2013 compared to
December 31, 2012. Loans 90 days or more past due and still accruing interest decreased $90.8 million at December 31,
2013 compared to December 31, 2012. The collective decrease in past due loans of $99.7 million is reflective of improved
credit quality in the broader loan portfolio and the successful workout strategies employed by our special assets division
during the period. Non-accrual loans (including restructured loans on non-accrual) increased just $1.2 million from
December 31, 2012 to December 31, 2013 primarily due to the addition of the covered commercial and industrial loan pool
accounted for under ASC 310-30, totaling $14.8 million, to non-accrual status during the period. Non-accrual loans not
accounted for under ASC 310-30 decreased $13.6 million during the period primarily due to resolution of certain assets and
foreclosures during the period.
59
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 ALL is based on an
evaluation of the collectability of loans, the realizable value of underlying collateral, economic conditions, historical net
loan losses, the estimated loss emergence period, estimated default rates, any declines in cash flow assumptions from
acquisition, loan structures, growth factors and other elements that warrant recognition.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 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 remeasured 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 remeasured expected future cash flows are
greater than the book value of the pools, then the improvement in the expected future cash flows is accreted into interest
income over the remaining expected life of the loan pool. During 2014 and 2013, these re-measurements resulted in overall
increases in expected cash flows in certain loan pools, which, absent previous valuation allowances within the same pool,
are reflected in increased accretion as well as an increased amount of accretable yield and are recognized over the expected
remaining lives of the underlying loans as an adjustment to yield.
For all loans not accounted for under ASC 310-30, the determination of the ALL follows a process to determine the
appropriate level of ALL that is designed to account for changes in credit quality and other risk factors. 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.
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. We have identified five primary loan segments that are
further stratified into ten 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:
60
Commercial
Commercial real estate
Agriculture
Residential real estate
Consumer
Total commercial
Construction
Total agriculture
Senior lien
Total consumer
Acquisition and development
Multi-family
Owner-occupied
Non-owner occupied
Junior lien
Appropriate ALL levels are determined by segment and class utilizing risk ratings, loss history, peer loss history and
qualitative adjustments. The qualitative adjustments consider the following risk factors:
•
•
•
•
•
•
•
economic/external conditions;
loan administration, loan structure and procedures;
risk tolerance/experience;
loan growth;
trends;
concentrations; and
other.
Management derives an estimated annual loss rate adjusted for an estimated loss emergence period based on historical loss
data categorized by segment and class. The loss rates are applied at the loan segment and class level. Our historical loss
history began in 2012 and has resulted in minimal losses in our originated portfolio. In order to address this lack of
historical data, we incorporate not only our own historical loss rates since the beginning of 2012, but we also utilize peer
historical loss data, including a 20-quarter historical average net charge-off ratio on each loan type, relying on the Uniform
Bank Performance Reports compiled by the Federal Financial Institutions Examinations Council (“FFIEC”). We may also
apply a long-term estimated default rate to pass rated credits as necessary to account for inherent risks to the portfolio.
While we use our own loss history and peer loss history for both purchased and originated loans, we assign a higher portion
of our own loss history to our purchased loans, because those loans are more seasoned and more of the actual losses in the
portfolio have historically been in the purchased portfolio. For originated loans, we assign an equal portion of the peer loss
history, as we believe that this is likely more indicative of losses inherent in the portfolio.
The collective resulting ALL for loans not accounted for under ASC 310-30 is calculated as the sum of the specific reserves
and the general reserves. While these amounts are calculated by individual loan or segment and class, the entire ALL is
available for any loan that, in our judgment, should be charged-off.
Non 310-30 ALL
During 2014, we recorded $6.7 million of provision for loan losses for loans not accounted for under ASC 310-30, which
primarily reflects reserves to support loan growth. Net charge-offs for non ASC 310-30 loans during 2014 totaled $1.1
million and were primarily from the consumer, residential real estate, and commercial loan segments. At December 31,
2014, there were five impaired loans that carried specific reserves totaling $0.3 million.
During 2013, we recorded $3.5 million of provision for loan losses for loans not accounted for under ASC 310-30, as we
provided for $3.0 million of net loan charge-offs and loan growth. During the year, $1.5 million, $0.5 million, and $0.4
million, of the $3.0 million of net charge-offs were from the commercial, residential real estate, and commercial real estate
segments, respectively. At December 31, 2013, there were eight impaired loans that carried specific reserves totaling $0.9
million.
310-30 ALL
During 2014, several loan pools accounted for under ASC 310-30 had previous valuation allowances of $559 thousand that
were reversed as a result of an increase in expected cash flows. The remaining pools had minimal impairments during
2014, as a result of decreases in expected cash flows. The result of this activity resulted in net provision reversals of $520
thousand during 2014.
The ALL for ASC 310-30 loans totaled $1.3 million at December 31, 2013, compared to $4.7 million at December 31,
2012. During 2013, loans accounted for under ASC 310-30 and associated with the commercial real estate and consumer
loan pools that had previous valuation allowances of $1.3 million were reversed as a result of increases in expected cash
flows. In addition, loans associated with the commercial, agriculture, and residential real estate pools experienced net
impairments of $2.1 million as a result of decreases in expected cash flows. The aforementioned activity resulted in a net
61
provision of $0.8 million during 2013 for loans accounted for under ASC 310-30. Additionally, $4.1 million of 310-30
loans were charged-off during 2013, $2.8 million of which was from the commercial real estate segment.
After considering the above mentioned factors, we believe that the ALL of $17.6 million and $12.5 million was adequate to
cover probable losses inherent in the loan portfolio at December 31, 2014 and December 31, 2013, 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.
The following schedule presents, by class stratification, the changes in the ALL during the periods listed (in thousands).
We began operations in 2010 and did not record an ALL during that time period.
December 31, 2014
December 31, 2013
December 31, 2012
December 31, 2011
ASC
310-30
loans
Non 310-30
loans
Total
ASC
310-30
loans
Non 310-30
loans
Total
ASC
310-30
loans
Non 310-30
loans
Total
ASC
310-30
loans
Non 310-30
loans
Total
As of and for the years ended
Beginning ALL
$ 1,280
$
11,241
$
12,521
$
4,652
$
10,728
$
15,380
$
2,188
$
9,339
$
11,527
$
—
$
48
$
48
Charge-offs:
Commercial
Agriculture
Commercial real
estate
Residential real
estate
Consumer
Total charge-
offs
Recoveries
Net charge-offs
Provision
(recoupment) for
loan loss
(3)
—
—
—
(36)
(39)
—
(39)
(507)
(510)
—
—
(739)
(783)
—
—
(739)
(819)
(496)
(221)
(1,654)
—
(2,150)
(221)
(216)
(144)
(8)
(152)
(3,140)
(3,356)
(3,111)
(1,399)
(4,510)
(2,801)
(943)
(3,744)
(15,578)
(2,605)
(18,183)
(623)
—
(1,505)
(1,001)
(872)
(19)
(1,132)
(1,502)
(2,004)
(1,521)
—
—
—
—
—
—
(3,378)
(3,378)
(288)
(288)
(1,330)
(1,330)
(2,029)
(2,068)
(4,141)
951
951
—
(1,078)
(1,117)
(4,141)
(8,621)
(16,829)
(8,387)
(25,216)
(3,111)
(6,395)
(9,506)
1,466
275
799
1,074
288
695
983
(7,155)
(16,554)
(7,588)
(24,142)
(2,823)
(5,700)
(8,523)
(882)
(1,001)
(4,480)
1,466
(3,014)
(520)
6,729
6,209
769
3,527
4,296
19,018
8,977
27,995
5,011
14,991
20,002
Ending ALL
$
721
$
16,892
$
17,613
$
1,280
$
11,241
$
12,521
$
4,652
$
10,728
$
15,380
$
2,188
$
9,339
$
11,527
Ratio of annualized
net charge-offs to
average total loans
during the period,
respectively
Ratio of ALL to total
loans outstanding
at period end,
respectively
Ratio of ALL to total
non-covered loans
outstanding at
period end,
respectively
Ratio of ALL to total
non-performing
loans at period end,
respectively
Ratio of ALL to total
non-performing,
non-covered loans
at period end,
respectively
0.01%
0.06%
0.05%
0.67%
0.27%
0.41%
1.56%
0.79%
1.20%
0.34%
0.68%
0.51%
0.26%
0.90%
0.81%
0.28%
0.80%
0.68%
0.57%
1.06%
0.84%
0.17%
0.97%
0.51%
0.61%
0.91%
0.89%
0.67%
0.83%
0.81%
1.58%
1.15%
1.26%
0.46%
1.12%
0.88%
0.00%
156.22%
162.89%
8.63%
118.11%
51.43%
0.00%
46.40%
66.53%
0.00%
24.73%
30.52%
0.00%
177.89%
185.48%
0.00%
148.44%
165.34%
0.00%
62.83%
90.08%
0.00%
37.89%
46.76%
Total loans
$279,645
$ 1,882,764
$ 2,162,409
$ 450,880
$ 1,403,214
$ 1,854,094
$ 822,021
$ 1,010,681
$ 1,832,702
$1,307,709
$
960,726
$2,268,435
Average total loans
outstanding during
the period
Total non-covered
loans
Total non-performing
loans
Total non-performing,
covered loans
$361,806
$ 1,688,197
$ 2,050,003
$ 620,709
$ 1,128,545
$ 1,749,254
$ 1,058,092
$118,769
$ 1,849,943
$ 1,968,712
$ 191,516
$ 1,353,181
$ 1,544,697
$ 294,073
$
$
—
—
$
$
10,813
1,317
$
$
10,813
$ 14,827
1,317
$ 14,827
$
$
9,517
1,944
$
$
24,344
16,771
$
$
—
—
$
$
$
$
962,147
$ 2,020,239
$ 823,598
930,407
$ 1,224,480
$ 480,623
23,119
6,045
$
$
23,119
6,045
$
$
—
—
$
$
$
$
834,580
$1,658,178
835,097
$1,315,720
37,770
13,121
$
$
37,770
13,121
62
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 (in thousands):
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer and overdrafts
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer and overdrafts
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer and overdrafts
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer and overdrafts
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer and overdrafts
Total
Total loans
% of total loans
Related ALL
% of ALL
December 31, 2014
$
795,396
137,531
561,594
632,700
35,188
36.8% $
6.4%
26.0%
29.2%
1.6%
8,598
1,009
3,819
3,771
416
48.8%
5.7%
21.7%
21.4%
2.4%
$
2,162,409
100.0% $
17,613
100.0%
Total loans
% of total loans
Related ALL
% of ALL
December 31, 2013
$
483,495
159,952
574,220
599,924
36,503
26.1% $
8.6%
31.0%
32.3%
2.0%
4,258
1,237
2,276
4,259
491
34.0%
9.9%
18.2%
34.0%
3.9%
$
1,854,094
100.0% $
12,521
100.0%
Total loans
% of total loans
Related ALL
% of ALL
December 31, 2012
$
270,588
173,407
804,999
533,377
50,331
14.8% $
9.5%
43.9%
29.1%
2.7%
2,798
592
7,396
4,011
583
18.2%
3.8%
48.1%
26.1%
3.8%
$
1,832,702
100.0% $
15,380
100.0%
Total loans
% of total loans
Related ALL
% of ALL
December 31, 2011
$
372,931
151,403
1,152,478
522,885
74,354
16.4% $
6.7%
50.6%
23.0%
3.3%
2,959
282
3,389
4,121
776
25.7%
2.4%
29.4%
35.8%
6.7%
$
2,274,051
100.0% $
11,527
100.0%
Total loans
% of total loans
Related ALL
% of ALL
December 31, 2010
$
256,003
61,278
927,543
295,910
28,136
16.3% $
3.9%
59.1%
18.9%
1.8%
$
1,568,870
100.0% $
—
—
—
—
48
48
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
63
The ALL allocated to commercial loans increased to 48.8% at December 31, 2014 from 34.0% at December 31, 2013
largely due to provisions of $6.7 million added during the period for loan growth in the non 310-30 commercial portfolio.
FDIC Indemnification Asset and Clawback Liability
At December 31, 2014, the FDIC indemnification asset was $39.1 million, compared to $64.4 million at December 31,
2013. In 2014, we recognized $27.7 million of amortization on the FDIC indemnification asset as the performance of our
covered assets improved. The amortization 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 primarily reflected in the increased accretable yield on loans accounted for under ASC 310-30, as most
of the FDIC covered assets are accounted for under this guidance. The carrying value of the FDIC indemnification asset
was increased by $2.0 million during 2014 as a result of FDIC loss share submissions. During 2014, we paid a net $2.0
million in net loss-share payments to the FDIC for the aforementioned submissions. 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 2013, we recognized $19.0 million of amortization related to the FDIC indemnification asset as a result of
improved performance of our covered assets. We also reduced the carrying value of the FDIC indemnification asset by
$17.6 million as a result of claims filed with the FDIC. During 2013, we received $77.0 million in loss-share payments
from the FDIC.
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 our 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,
2014 and December 31, 2013, this clawback liability was carried at $36.3 million and $32.5 million, respectively, and is
included in Due to FDIC in our consolidated statements of financial condition.
Other Assets
Significant components of other assets were as follows as of the periods indicated (in thousands):
Deferred tax asset
Accrued income taxes receivable
Bank-owned life insurance
Minority interest in participated other real estate owned
Accrued interest on loans
Accrued interest on interest bearing bank deposits and investment securities
Other assets
Total other assets
December 31, 2014
45,506
$
December 31, 2013
37,474
$
5,743
44,242
8,082
7,199
4,266
9,782
$
124,820
$
16,558
—
10,627
6,134
5,221
10,533
86,547
Other assets totaled $124.8 million and $86.5 million at December 31, 2014 and December 31, 2013, respectively, and
increased $38.3 million, or 44.2%, from December 31, 2013 to December 31, 2014. The increase was primarily due to the
purchase of bank-owned life insurance during 2014, which totaled $44.2 million at December 31, 2014. Accrued income
taxes receivable decreased $10.8 million due to tax payments made during the year. The deferred tax asset increased $8.0
million, or 21.4%, during 2014, which was primarily attributable to a reduction in deferred tax liabilities related to
purchased assets during the year, an increase in the allowance for loan loss and an offsetting adjustment for the decrease in
the tax effect of unrealized gains on available-for-sale securities.
Other assets decreased $13.5 million, or 13.5%, during 2013. The decrease was largely attributable to a $59.3 million
decline in FDIC indemnification-claimed, as the 2012 claims were paid and no billings were outstanding at December 31,
2013. Accrued income taxes receivable and the deferred tax assets increased $46.8 million from December 31, 2012 to
December 31, 2013 primarily as a result of unrealized losses on our available-for-sale securities portfolio, the decline in the
FDIC indemnification-claimed asset and the deferral of deductions for certain costs into future periods in accordance with
applicable tax laws.
64
Other Liabilities
Significant components of other liabilities were as follows as of the dates indicated (in thousands):
Accrued expenses
Pending loan purchase settlement
Accrued contract termination expenses
Accrued interest payable
Warrant liability
Participant interest in other real estate owned
Other liabilities
Total other liabilities
December 31, 2014
15,192
$
10,038
4,110
3,608
3,328
—
7,044
43,320
$
December 31, 2013
15,425
$
5,063
—
3,058
6,281
4,243
2,515
36,585
$
Other liabilities totaled $43.3 million and $36.6 million at December 31, 2014 and December 31, 2013, respectively, and
increased $6.7 million during 2014. Pending loan purchase settlements increased $5.0 million from December 31, 2013 to
December 31, 2014 primarily due to loan purchases that have not yet settled. Accrued contract termination expenses
totaled $4.1 million at December 31, 2014, due to notification of our intent to terminate the existing core processing
agreement. Participant interest in other real estate owned decreased $4.2 million due to the sale of an OREO property
during 2014, in which we had a controlling interest and had recorded a corresponding payable in other liabilities. Other
liabilities increased $4.5 million during 2014 primarily due to a $4.7 million increase in derivative liabilities.
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. 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 $3.0 million during 2014 to $3.3 million. The value of the warrant liability, and
the expense that results from an increase to this liability, is correlated to our stock price. Accordingly, an increase in our
stock price generally results in an increase in the warrant liability and the associated expense and vice versa. More
information on the accounting and measurement of the warrant liability can be found in notes 2 and 17 in our consolidated
financial statements.
Other liabilities increased $2.0 million during 2013, or 5.9%. Included in total other liabilities is accrued income taxes
payable which decreased by $5.0 million, primarily due to tax payments made during the period. During 2013, we
continued to lower the interest rates paid 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 $1.2 million,
or 27.9%, during the period. Accrued expenses ended December 31, 2013 at $15.4 million and increased $3.2 million, or
25.8%, from December 31, 2012, primarily due to expenses accrued in connection with our announcement to integrate 32
limited-service retirement center locations (acquired in our 2010 purchase of Hillcrest Bank) and exit of four banking
centers in Northern California (acquired in our 2011 purchase of Community Banks of Colorado).
Deposits
Deposits from banking clients serve as a primary funding source for our banking operations and 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 client relationships that are critical to future loan growth. The following table presents
information regarding our deposit composition at December 31, 2014 and December 31, 2013 (in thousands):
65
Non-interest bearing demand deposits
Interest bearing demand deposits
Savings accounts
Money market accounts
Total transaction deposits
Time deposits < $100,000
Time deposits > $100,000
Total time deposits
Total deposits
December 31, 2014
732,580
$
19.5% $
December 31, 2013
674,989
386,121
255,246
1,035,190
2,409,137
859,910
497,141
1,357,051
10.3%
6.8%
27.4%
64.0%
22.8%
13.2%
36.0%
386,762
198,444
1,082,427
2,342,622
971,431
524,256
1,495,687
17.6%
10.1%
5.1%
28.2%
61.0%
25.3%
13.7%
39.0%
$
3,766,188
100.0% $
3,838,309
100.0%
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to
$100,000 as of December 31, 2014 (in thousands):
Three months or less
Over 3 months through 6 months
Over 6 months through 12 months
Thereafter
Total time deposits > $100,000
December 31, 2014
78,593
$
81,938
160,610
176,000
497,141
$
During 2014, our total deposits decreased $72.1 million, or 1.9%. Non-interest bearing demand deposits increased to
$732.6 million at December 31, 2014, an increase of 8.5%, from December 31, 2013 and time deposits decreased $138.6
million, or 9.3%, during 2014. As a result, the mix of transaction deposits to total deposits improved to 64.0% at
December 31, 2014, from 61.0% at December 31, 2013 as we continued to focus our deposit base on clients who were
interested in market-rate time deposits and in developing a banking relationship, coupled with the California banking
center and limited-service retirement center exits on December 31, 2013. At December 31, 2014 and December 31, 2013,
we had $0.9 billion and $1.0 billion, respectively, of time deposits that were scheduled to mature within 12 months. Of the
$0.9 billion in time deposits scheduled to mature within 12 months, $0.3 billion were in denominations of $100,000 or
more, and $0.6 billion were in denominations less than $100,000. Note 12 to the consolidated financial statements
provides a maturity schedule and weighted average rates of time deposits outstanding at December 31, 2014 and
December 31, 2013.
During 2013, our total deposits decreased $362.4 million, or 8.6%. During 2013 we continued to focus our deposit base on
clients who were interested in market rate deposits and developing a banking relationship, rather than the highly rate-
sensitive time deposit clients of the predecessor banks. As a result, our time deposits decreased $257.0 million, or 14.7%,
during 2013. At December 31, 2013, the mix of transaction deposits to total deposits improved to 61.0% from 58.3% at
December 31, 2012. At December 31, 2013 and December 31, 2012, we had $1.0 billion and $1.2 billion, respectively, of
time deposits that were scheduled to mature within 12 months. Of the $1.0 billion in time deposits scheduled to mature
within 12 months of December 31, 2013, $0.3 billion of which were in denominations of $100,000 or more, and $0.7
billion of which were in denominations less than $100,000.
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.
At December 31, 2014 and at December 31, 2013, our subsidiary bank and the consolidated holding company exceeded all
capital ratio requirements under prompt corrective action and other regulatory requirements, as further detailed in note 14
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, FDIC indemnification asset
66
amortization and FDIC loss sharing (expense) income. Our primary operating expenses, aside from interest expense,
consist of salaries and benefits, occupancy costs, telecommunications data processing expense and intangible asset
amortization. Any expenses related to the resolution of covered assets are also included in non-interest expense.
Overview of Results of Operations
Year ended 2014
We recorded net income of $9.2 million, or $0.22 per diluted share, during 2014, compared to net income of $6.9 million,
or $0.14 per diluted share, during 2013. Net interest income totaled $170.2 million during 2014 and decreased $8.7
million, or 4.9%, from 2013. The decrease in interest income was largely attributable to a decrease in average interest
earning assets of $251.6 million, or 5.4%, from the prior year, as we successfully repurchased 6.1 million of our shares
outstanding and reduced the investment portfolio. The decrease in the interest earning assets was partially offset by a four
basis point widening of the net interest margin to 3.85% from 3.81% in the prior year (fully taxable equivalent). The
continued resolution of the higher-yielding acquired non-strategic loan portfolio was mostly offset by strong organic
growth in the strategic loan portfolio. As a result, the yield on interest earning assets increased by one basis point and was
complemented by a three basis point decrease in the cost of interest bearing liabilities.
Provision for loan loss expense was $6.2 million during 2014 compared to $4.3 million during 2013. The $1.9 million
increase in provision was primarily due to loan growth as credit quality remained strong and non 310-30 net charge-offs
were significantly lower at only 0.06% during 2014 compared to 0.27% during the prior year.
Non-interest income was a negative $1.7 million during 2014 compared to income of $20.2 million during 2013, a decrease
of $21.9 million. The decrease was largely due to $20.5 million lower FDIC loss-share related income. An additional $8.8
million of non-cash FDIC indemnification asset amortization and an $11.7 million decline in other FDIC loss-sharing
income from the same period in 2013 was due to better performance of the underlying covered assets coupled with lower
problem loan and OREO expenses. Banking fees of $30.4 million during 2014 were up $0.2 million compared to the same
period in 2013 as a result of increases in bank card fees, swap fees and bank owned life insurance income and were
somewhat offset by a decrease in service charges.
Non-interest expense totaled $150.0 million during 2014 compared to $184.0 million during 2013, a decrease of $34.0
million, or 18.5%. Operating expenses of $150.7 million during 2014 decreased $12.4 million. The 7.6% year-over-year
decrease in operating expenses was primarily due to lower salaries and benefits of $7.2 million as we continue to focus on
operational efficiencies. During 2014, OREO and problem loan expenses declined $18.5 million and were driven by $6.2
million higher net gains on OREO sales coupled with lower levels of OREO and problem loan expenses of $12.3 million.
Expenses for 2014 include a $4.1 million contract termination accrual related to a change in our core system provider and
2013 included $3.4 million of expenses related to banking center closures. The change in the warrant liability contributed
$3.8 million to the year-over-year decline in non-interest expenses.
Years ended 2013 and 2012
We recorded net income of $6.9 million during 2013, compared to a net loss of $0.5 million during 2012. Net interest
income declined $25.3 million from 2012 to 2013, which resulted from the lower purchased loan balances as non-strategic
loans were paid off or paid down, coupled with lower yields earned on the non 310-30 loan portfolio and on the investment
portfolio.
Provision for loan loss expense was $4.3 million during 2013 compared to $28.0 million during 2012, a decrease of $23.7
million. The decrease in provision was due to lower impairment charges on the ASC 310-30 loan pools due to gross cash
flow improvements resulting from the Company's re-measurement of expected future cash flows on those underlying
pools, coupled with improved credit quality metrics in the non 310-30 portfolio. Non-interest income was $20.2 million
during 2013 compared to $37.4 million in 2012. The decrease of $17.2 million during 2013 was largely due to a $14.4
million decrease in collective FDIC indemnification asset amortization and FDIC-related loss share income as a result of
lower covered OREO expenses and higher amortization of the FDIC indemnification asset, coupled with a $3.0 million
decrease in gain on previously charged-off acquired loans, and a $0.7 million decrease in gain on sale of securities.
Non-interest expense totaled $184.0 million during 2013 compared to $209.6 million during 2012, a decrease of $25.6
million. Operating expense, which excludes problem loan/OREO workout expenses, warrant liability changes, IPO
related expenses in 2012, and banking center closure charges in 2013, decreased $11.0 million during 2013. The year-over-
year decrease in operating expenses was primarily due to lower professional fees of $7.4 million, lower salaries and
benefits of $4.1 million, and lower telecommunications and data processing expenses of $1.8 million, as management
continues to realize efficiencies in the business. Occupancy and equipment increased $4.1 million from 2012 to 2013
primarily because of the settlement of premises and equipment purchased from the FDIC in the first half of 2012 related to
our Bank of Choice and Community Banks of Colorado acquisitions.
67
OREO and problem loan expenses decreased $12.2 million during 2013. The expenses have been steadily trending
downward due to the resolution of purchased troubled assets throughout the year. The increase in the warrant liability
expense of $2.2 million was primarily attributable to the increase in our stock price during 2013.
We recorded a net loss of $0.5 million during 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.
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 loan mix and the yield on loans; (ii) the investment portfolio and the
related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast
periods.
The following tables present the components of net interest income for the periods indicated. 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 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 time frames 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.
68
The table below presents the components of net interest income on a fully taxable equivalent basis for the years ended
December 31, 2014, 2013, and 2012 (in thousands):
For the year ended December 31,
2014
For the year ended December 31,
2013
For the year ended December 31,
2012
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
Average
Balance
Interest
Average
Rate
$ 361,806
$ 60,841
16.82% $ 620,709
$ 76,661
12.35% $ 1,058,092
$100,407
1,691,253
74,565
4.41% 1,133,895
62,387
5.50%
968,345
69,249
9.49%
7.15%
1,655,730
31,887
1.93% 1,951,039
35,460
1.82% 1,785,785
42,590
2.38%
588,909
25,855
16,764
1,206
2.85%
4.66%
597,920
32,135
18,485
1,559
3.09%
4.85%
516,490
31,796
17,752
1,535
3.44%
4.83%
123,350
329
0.27%
362,854
923
0.25%
770,328
1,952
0.25%
$ 4,446,903
$185,592
4.17% $ 4,698,552
$195,475
4.16% $ 5,130,836
$233,485
4.55%
Interest earning assets:
ASC 310-30 loans
Non 310-30 loans (1)(2)(3)(4)
Investment securities
available-for-sale
Investment securities held-to-
maturity
Other securities
Interest earning deposits and
securities purchased under
agreements to resell
Total interest earning
assets(4)
Cash and due from banks
Other assets
Allowance for loan losses
57,763
378,723
(15,460)
60,922
428,426
(12,690)
$ 5,175,210
69,129
599,327
(12,531)
$ 5,786,761
Total assets
$ 4,867,929
Interest bearing liabilities:
Interest bearing demand,
savings and money market
deposits
$ 1,701,344
$
4,323
0.25% $ 1,719,507
$
4,271
0.25% $ 1,691,645
$
5,482
Time deposits
1,421,726
9,797
0.69% 1,607,676
12,122
0.75% 2,192,469
23,643
0.32%
1.08%
Securities sold under
agreements to repurchase
Federal Home Loan Bank
advances
Total interest bearing
liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Interest rate spread
Net interest earning assets
Net interest margin(4)
Ratio of average interest
earning assets to average
interest bearing liabilities
99,057
9,975
129
164
0.13%
84,354
121
0.14%
52,385
109
0.21%
1.64%
—
—
0.00%
—
—
0.00%
$ 3,232,102
$ 14,413
0.45% $ 3,411,537
$ 16,514
0.48% $ 3,936,499
$ 29,234
0.74%
700,809
74,327
4,007,238
860,691
$ 4,867,929
$ 1,214,801
660,254
64,666
4,136,457
1,038,753
$ 5,175,210
641,890
114,374
4,692,763
1,093,998
$ 5,786,761
$171,179
$178,961
$204,251
3.72%
3.85%
$ 1,287,015
3.68%
3.81%
$ 1,194,337
3.81%
3.98%
137.59%
137.73%
130.34%
(1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the
(2)
loan.
Includes originated loans with average balances of $1.4 billion, $734.0 million, and $305.5 million, interest income
of $58.1 million, $33.6 million, and $16.7 million and yields of 4.10%, 4.57%, and 5.48% for the years ended 2014,
2013, and 2012, respectively.
(3) Non 310-30 loans include loans held-for-sale. Average balances during 2014, 2013, and 2012 were $3.1 million,
$5.4 million, and $6.2 million, and interest income was $267 thousand, $329 thousand, and $368 thousand for the
same periods, respectively.
(4) Presented on a fully taxable equivalent basis using the statutory tax rate of 35%. The taxable equivalent adjustments
included above are $930 thousand, $0, and $0 for the years ended 2014, 2013, and 2012, respectively.
69
Net interest income totaled $170.2 million, $179.0 million, and $204.3 million for the years ended 2014, 2013, and 2012,
respectively. On a fully tax equivalent basis, net interest income totaled $171.2 million, $179.0 million, and $204.3 million
for the years ended 2014, 2013, and 2012, respectively. Average interest earning assets decreased $251.6 million, or 5.4%,
from 2013, largely due to the successful repurchase of $119.4 million of our shares outstanding during 2014, coupled with
a reduction in the investment portfolio. A one basis point widening in the yield on interest earning assets coupled with a
three basis point decrease in the cost of interest bearing liabilities, resulted in a four basis point widening of the net interest
margin to 3.85% (fully taxable equivalent) during 2014 compared to 2013.
Average loans comprised $2.1 billion, or 46.2%, of total average interest earning assets during 2014, compared to $1.8
billion, or 37.3%, during 2013, and $2.0 billion, or 39.5% during 2012. The continued resolution of the acquired non-
strategic loan portfolio was more than offset by strong organic growth in the strategic loan portfolio during 2014. The
yield on the ASC 310-30 loan portfolio was 16.82% during 2014, compared to 12.35% during 2013, and 9.49% during
2012. This increase in yield was attributable to the effects of the favorable life-to-date transfers of non-accretable
difference to accretable yield that are being accreted to interest income over the remaining life of these loan pools.
Average investment securities comprised 50.5% of total interest earning assets during 2014, compared to 54.2% during
2013, and 44.9% during 2012. The lower average balances were somewhat offset by a five basis point widening of the
yields earned on the total investment portfolio during 2014. Short-term investments, comprised of the interest earning
deposits and securities purchased under agreements to resell, also decreased substantially to 2.8% of interest earning assets
during 2014, compared to 7.7% during 2013 and 15.0% during 2012. The decreases in the investment portfolio and short-
term investments reflect the re-mixing of the interest-earning assets as we have utilized the run-off of the investment
portfolio to fund loan originations and have reduced our short-term investments to fund significant share repurchases.
Average balances of interest bearing liabilities during 2014 declined $179.4 million to $3.2 billion from $3.4 billion during
2013, driven by a $186.0 million decrease in average time deposits and partially offset by a $14.7 million increase in
securities sold under agreements to repurchase. During 2014, total interest expense related to interest bearing liabilities
was $14.4 million, compared to $16.5 million during 2013 and $29.2 million during 2012. The $2.1 million decrease in
interest expense from 2013 to 2014 was attributable to a combination of lower average balances of time deposits and lower
rates paid on time deposits as we continued our strategy of transitioning high-priced time deposits to lower-cost transaction
accounts coupled with our exit of the four California and 32 retirement center banking locations on December 31, 2013.
We have increased our average transaction deposits (defined as total deposits less time deposits) and client repurchase
agreements as a percentage of average total deposits and client repurchase agreements to 63.8% during 2014 from 60.5%
during 2013. This strategy benefited the average cost of interest bearing liabilities, which decreased three basis points to
0.45% during 2014 from 0.48% during 2013.
70
The following table summarizes the changes in net interest income on a taxable equivalent basis by major category of
interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for
2014, 2013, and 2012 (in thousands):
The year ended December 31, 2014
compared to
the year ended December 31, 2013
The year ended December 31, 2013
compared to
the year ended December 31, 2012
Increase (decrease) due to
Increase (decrease) due to
Volume
Rate
Net
Volume
Rate
Net
Interest income:
ASC 310-30 loans
Non 310-30 loans(1)(2)(3)
Investment securities available-for-sale
Investment securities held-to-maturity
Other securities
Interest earning deposits and securities
purchased under agreements to resell
Total interest income
Interest expense:
24,573
$ (43,537) $ 27,717
(12,395)
2,114
(1,464)
(60)
(5,687)
(293)
(257)
9,109
$ (15,820) $ (54,019) $ 30,273
(15,971)
(10,133)
(1,784)
8
12,178
(3,573)
(1,721)
(353)
3,003
2,517
16
(639)
45
$ (25,840) $ 15,957
$
(594)
8
(9,883) $ (40,411) $ 2,401
(1,037)
$ (23,746)
(6,862)
(7,130)
733
24
(1,029)
$ (38,010)
Interest bearing demand, savings and money
market deposits
$
Time deposits
Securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Total interest expense
Net change in net interest income
(46) $
(1,281)
$
98
(1,044)
$
52
(2,325)
69
(4,409)
$ (1,280) $
(7,112)
(1,211)
(11,521)
19
164
(11)
—
(957)
$ (24,696) $ 16,914
(1,144)
$
8
46
(34)
—
164
(2,101)
(8,426)
(7,782) $ (36,117) $ 10,827
—
(4,294)
12
—
(12,720)
$ (25,290)
(1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the
loan.
(2) Non 310-30 loans include loans held-for-sale. Average balances during 2014 and 2013 were $3.1 million and $5.4
million, and interest income was $267 thousand and $329 thousand for the same periods, respectively.
(3) Presented on a fully taxable equivalent basis using the statutory tax rate of 35%. The taxable equivalent adjustments
included above are $930 thousand and $0 for the years ended 2014 and 2013, respectively.
Below is a breakdown of deposits and the average rates paid during the periods indicated (in thousands):
For the three months ended
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
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
$ 728,345
0.00% $ 715,198
0.00% $ 691,851
0.00% $ 667,009
0.00% $ 676,959
Interest bearing demand
372,085
0.08%
375,761
0.08%
389,187
0.08%
394,452
0.09%
379,052
Money market accounts
1,055,280
0.32% 1,062,060
0.32% 1,078,682
0.32% 1,098,041
0.32% 1,097,009
Savings accounts
Time deposits
250,129
0.22%
251,871
0.23%
254,242
0.24%
224,145
0.18%
191,592
1,375,779
0.70% 1,412,916
0.69% 1,435,155
0.69% 1,464,120
0.68% 1,544,223
Total average deposits
$ 3,781,618
0.37% $ 3,817,806
0.37% $ 3,849,117
0.37% $ 3,847,767
0.37% $ 3,888,835
0.00%
0.09%
0.32%
0.12%
0.70%
0.38%
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 ALL is in addition to
the remaining purchase accounting marks of $7.6 million on purchased non 310-30 loans that were established at the time
of acquisition. The determination of the ALL, and the resultant provision for loan losses, is subjective and involves
significant estimates and assumptions.
71
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 (recoupments) made that relate to covered loans are
partially offset by a corresponding increase (decrease) 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 (recoupment) of loans accounted for under ASC 310-30 $
Provision for loan losses
(520) $
6,729
Total provision for loan losses
$
6,209
$
769
3,527
4,296
$
$
2014
2013
2012
19,018
8,977
27,995
For the years ended December 31,
Provision for loan loss expense was $6.2 million during 2014, compared to $4.3 million during 2013, an increase of $1.9
million. The increase was primarily due to loan growth in our non ASC 310-30 loan portfolio as credit quality remained
strong and net-charge offs on non ASC 310-30 loans were significantly lower at 0.06% during 2014 compared to 0.27%
during 2013.
During 2014 and 2013, we recouped $0.5 million and recorded $0.8 million, respectively, of provision for loan losses for
loans accounted for under ASC 310-30 in connection with our re-measurements of expected cash flows. The net
recoupments on loans accounted for under ASC 310-30 reflect $0.6 million in recoupments during 2014 across several loan
pools. Decreased expected future cash flows in our consumer pools were more than offset by provision recoupments and
resulted in the net recoupment for the year. The decreases in expected future cash flows are reflected immediately in our
financial statements through increased provisions for loan losses. Increases in expected future cash flows are reflected
through an increase in accretable yield that is accreted to income in future periods once any previously recorded provision
expense has been reversed.
The net provision for impairment on loans accounted for under ASC 310-30 during 2013 reflect $1.3 million of provision
recoupment as a result of increased cash flows primarily across the commercial real estate state pool. Decreases in
expected future cash flows, which result in a charge to the provision for loan losses, were experienced by the commercial,
residential real estate, and agriculture pools and totaled $2.1 million. The provision recoupment of $1.3 million, when
coupled with the impairment of $2.1 million related to decreased expected future cash flows, resulted in the net provision
of $0.8 million for 2013.
Non-Interest Income (Expense)
The table below details the components of non-interest income during 2014, 2013, and 2012, respectively (in thousands):
FDIC indemnification asset amortization
FDIC loss sharing income (expense)
Service charges
Bank card fees
Gain on sale of mortgages, net
Gain on sale of securities, net
Other non-interest income
Gain on previously charged-off acquired loans
OREO related write-ups and other income
Total non-interest income (expense)
Year ended 2014
For the years ended December 31,
2013
2012
2014
$ (27,741) $ (18,960) $ (13,820)
12,069
2,811
(8,862)
15,430
10,123
1,000
—
3,810
737
3,807
(1,696) $
$
15,955
17,392
9,956
1,358
—
2,901
1,339
4,817
9,699
1,214
674
2,912
4,298
2,941
20,177
$
37,379
Non-interest income for 2014 was a negative $1.7 million compared to $20.2 million during 2013, a decrease of $21.9
million. The decrease was largely due to $20.5 million lower FDIC loss-share related income. An additional $8.8 million
of non-cash FDIC indemnification asset amortization and an $11.7 million decline in other FDIC loss-sharing income
(expense) from the same period in 2013 was the result of improved performance of the underlying covered assets coupled
with higher OREO gains, both of which resulted in lower expected reimbursements from the FDIC. Most of the FDIC
covered assets are accounted for in the ASC 310-30 loan pools and the benefit of the increased client cash flows is
primarily captured in the corresponding increased accretion rates on ASC 310-30 loans.
72
FDIC loss sharing income (expense) represents the income recognized in connection with the actual reimbursement of
costs/recoveries related to the resolution of covered assets by the FDIC. FDIC loss sharing income (expense) activity
during 2014, 2013, and 2012 was as follows (in thousands):
Clawback liability amortization
Clawback liability remeasurement
Reimbursement to FDIC for gain on sale of and income from covered OREO
Reimbursement to FDIC for recoveries
FDIC reimbursement of covered asset resolution costs
FDIC loss sharing income (expense)
For the years ended December 31,
2012
2013
2014
$
$
(1,364) $
(2,509)
(10,053)
(193)
5,257
(8,862) $
(1,259) $
65
(5,235)
(87)
9,327
(1,377)
100
(3,457)
(3)
16,806
2,811
$
12,069
Other FDIC loss sharing income (expense) contributed to a decrease of $11.7 million to total non-interest income for 2014
from 2013. Other FDIC loss sharing income (expense) was primarily comprised of FDIC reimbursements of costs of
resolution of covered assets of $5.3 million during 2014, offset with reimbursements to the FDIC for gains on sales of and
income from covered OREO of $10.1 million. The activity in the FDIC loss sharing income line fluctuates based on
specific loan and OREO workout circumstances and may not be consistent from period to period.
Banking-related non-interest income (excludes FDIC-related non-interest income, gain on previously charged-off acquired
loans and OREO related income) totaled $30.4 million during 2014, and increased $0.2 million from the same period in
2013. Service charges, which represent various fees charged to clients for banking services, including fees such as non-
sufficient funds (“NSF”) charges and service charges on deposit accounts, decreased $0.5 million, or 3.3%, during 2014
compared to 2013. The decrease was largely due to declines in NSF/overdraft charges. Bank card fees are comprised
primarily of interchange fees on the debit cards that we have issued to our clients. Bank card fees totaled $10.1 million
during 2014 and $10.0 million during 2013, an increase of 1.7% for the respective periods.
Gain on previously charged-off acquired loans represents recoveries on loans that were previously charged-off by the
predecessor bank prior to takeover by the FDIC. During 2014, these gains were $0.7 million, compared to $1.3 million
during the same period in the prior year.
OREO related write-ups and other income include rental income and insurance proceeds received on OREO properties and
write-ups to the fair-value of collateral that exceed the loan balance at the time of foreclosure. During 2014 and 2013, this
income totaled $3.8 million and $4.8 million, respectively.
Years ended 2013 and 2012
Non-interest income for 2013 totaled $20.2 million compared to $37.4 million during 2012. We recognized amortization of
$19.0 million during 2013 and $13.8 million during 2012, related to the FDIC indemnification asset. The amortization 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.
Other FDIC loss sharing income in our statement of operations was primarily comprised of FDIC reimbursements of costs
of resolution of covered assets of $9.3 million and $16.8 million during 2013 and 2012, respectively, offset with
reimbursements to the FDIC for gains on sales of and income from covered OREO of $5.2 million and $3.5 million,
coupled with the clawback liability remeasurement and clawback liability amortization of $1.2 million and $1.3 million,
for the aforementioned periods. The activity in the FDIC loss sharing income line fluctuates based on specific loan and
OREO workout circumstances and may not be consistent from period to period.
Service charges represent various fees charged to clients for banking services, including fees such as non-sufficient funds
(“NSF”) charges and service charges on deposit accounts. Service charges decreased $1.4 million, or 8.3%, during 2013
compared to 2012. The decrease was largely due to declines in NSF charges.
Bank card fees are comprised primarily of interchange fees on the debit cards that we have issued to our clients. Bank card
fees increased slightly to $10.0 million during 2013, as compared to $9.7 million during 2012.
Gain on previously charged-off acquired loans represents recoveries on loans that were previously charged-off by the
predecessor bank prior to takeover by the FDIC. During 2013, these gains totaled $1.3 million, compared to $4.3 million
during 2012.
73
OREO related write-ups and other income include rental income and insurance proceeds received on OREO properties and
write-ups to the fair-value of collateral that exceeded the loan balance at the time of foreclosure. During 2013, OREO
related write-ups and other income totaled $4.8 million compared to $2.9 million during 2012. The primary reason for the
increase was a $1.9 million increase in collective rent income and insurance proceeds.
Non-Interest Expense
The table below details non-interest expense for the periods presented (in thousands):
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
ATM/debit card expenses
Professional fees
Supplies and printing
Other non-interest expense
(Gain) loss from change in fair value of warrant liability
Intangible asset amortization
Other real estate owned expenses (income)
Problem loan expenses
Contract termination expenses
Banking center closure related expenses
Initial public offering related expenses
Acquisition related costs
Total non-interest expense
Year ended 2014
For the years ended December 31,
2014
2013
2012
$
82,834
$
90,002
$
25,101
11,927
4,571
4,130
3,079
3,257
963
9,508
(2,953)
5,344
(5,350)
3,482
4,110
—
—
—
24,700
13,073
5,280
4,122
4,262
3,734
1,575
11,061
820
5,346
10,957
5,644
—
3,389
—
—
94,111
20,558
14,857
5,540
4,731
4,269
11,156
2,967
9,761
(1,385)
5,344
20,313
8,532
—
—
7,974
870
$
150,003
$
183,965
$
209,598
Non-interest expense totaled $150.0 million during 2014 compared to $184.0 million for 2013, a decrease of $34.0 million,
or 18.5%. Operating expenses, which exclude OREO expenses, problem loan expense, the impact from the change in the
warrant liability, contract termination expenses, and banking center closure related expenses, totaled $150.7 million and
decreased $12.4 million, or 7.6%, from 2013. We have been focused on operational streamlining and continue to seek
additional efficiencies, particularly through vendor consolidations and contract negotiations. Salaries and benefits is our
largest component of non-interest expense and totaled $82.8 million in 2014, compared to $90.0 million for 2013. The
8.0% decrease in salaries and benefits during 2014 was attributable to a decrease in salaries as a result of efficiency
initiatives and the exits of the California banking centers and limited-service retirement centers at December 31, 2013.
Occupancy and equipment expense totaled $25.1 million for 2014, an increase of $0.4 million over 2013. The increase
over the prior period was primarily due to software licensing.
Marketing and business development expense totaled $4.6 million for 2014, compared to $5.3 million during 2013. The
decrease of $0.7 million from 2013 was due to reduced levels of marketing campaigns.
Significant components of our non-interest expense are problem loan expenses and OREO related expenses. We incur these
expenses in connection with the resolution process of our acquired problem loan portfolios. During 2014, we incurred $3.5
million of problem loan expense, a decrease of $2.2 million, or 38.3%, from 2013. Of these $3.5 million in problem loan
expenses incurred during 2014, $2.6 million were covered by loss sharing agreements with the FDIC. Other real estate
owned expenses (income) resulted in net income of $5.4 million during 2014, an increase in income of $16.3 million
compared to 2013, primarily because of gains on sales of other real estate owned. Included in this $5.4 million of other
real estate owned expenses (income) was $5.2 million of covered expenses related to OREO properties and a net $11.9
million of covered gains on sale of other real estate owned. Collectively, these OREO and problem loan expenses
74
decreased $18.5 million from 2013. The overall decline of the volume of problem assets is a result of persistent workout
efforts on the acquired problem loan portfolio.
Years ended 2013 and 2012
Non-interest expense totaled $184.0 million during 2013, compared to $209.6 million during 2012. During 2012, we
incurred certain expenses in connection with our initial public offering. 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,$4.9 million stock-based compensation on awards that had a public listing vesting requirement.
Salaries and benefits totaled $90.0 million during 2013, compared to $94.1 million for 2012. The 4.4% decrease was
primarily due to an $8.2 million decrease in stock-based compensation expense during 2013 compared to 2012. Stock-
based compensation expense during 2012 was elevated because we incurred $4.9 million of stock-based compensation
expense related to our initial public offering.
Occupancy and equipment expense totaled $24.7 million for 2013, an increase of $4.1 million over 2012. The increase was
driven by an increase in depreciation expense as a result of the purchase and subsequent depreciation of the premises and
equipment purchased from the FDIC in the first half of 2012 related to our Bank of Choice and Community Banks of
Colorado acquisitions.
Professional fees totaled $3.7 million during 2013 and decreased $7.4 million from 2012. Professional fees were elevated
during 2012 primarily due to professional fees incurred in conjunction with our acquisitions of Bank of Choice in the third
quarter of 2011 and Community Banks of Colorado during the fourth quarter of 2011. Additionally, we have outsourced
fewer professional functions as we have built out our internal management functions.
Telecommunications and data processing expense totaled $13.1 million during 2013, compared to $14.9 million for 2012, a
decrease of $1.8 million. During 2012, telecommunications and data processing expense was elevated due to the
conversions of Bank of Choice and Community Banks of Colorado to our data processing platforms.
During 2013, we incurred $11.0 million of OREO related expenses and $5.6 million of problem loan expenses. Of the
collective OREO and problem loan expenses incurred during 2013, $10.3 million were covered by loss sharing agreements
with the FDIC. During 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 2012, $15.0 million was
covered by loss sharing agreements with the FDIC.
On September 30, 2013, the Company announced plans to integrate 32 limited-service retirement center locations and exit
four banking centers as of December 31, 2013. Included in the 2013 operating results are $3.4 million of expenses in
connection with the closures, including $3.3 million related to facilities expense. Valuation adjustments to banking center
properties and fixed assets account for $2.5 million of the facilities expense and $0.8 million of the facilities expense
relates to lease costs.
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. We believe that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax assets.
Certain stock-based compensation awards have market-based vesting/exercisability criteria. For restricted stock with
market-based vesting, the target share prices of the Company's stock that is required for vesting range from $25.00 to
$34.00 per share. The strike prices for options range from $18.09 to $20.54, with a large portion of the awards having
strike prices of $20.00. Due to our current stock price, these stock-based compensation awards may expire unexercised or
may be exercised at an intrinsic value that is less than the fair value recorded at the time of grant, and therefore, the related
tax benefits may not be realizable in future periods. In this case, upon the expiration or exercise (or forfeiture in the case of
75
the restricted stock with market-based vesting criteria) of these awards, any related remaining deferred tax asset would be
written off through a charge to income tax expense. In particular, certain awards granted to former executives are expected
to expire in 2015 and may result in the write-off of the related deferred tax asset of up to $2.0 million, with the majority of
these awards expiring in the second quarter of 2015. Similar expirations resulted in the write-off of $1.0 million of deferred
tax assets to income tax expense in 2014. As of December 31, 2014, we had $13.5 million of deferred tax assets related to
stock-based compensation, $9.7 million of which is associated with executive officers still employed by the Company.
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 other non-interest 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. As of
December 31, 2014 and 2013, we have not identified any uncertain tax positions.
Income tax expense totaled $3.2 million for 2014, as compared to $4.0 million for 2013, and $4.6 million for 2012. These
amounts equate to effective tax rates of 25.6%, 36.3%, and 113.4% for the respective periods.
The decrease in the effective tax rate for 2014 compared to 2013 was attributable to the non-taxable changes in the fair
value of the warrant liability, continued increases in tax-exempt lending and a reduction in our state tax rate associated with
tax planning implemented during the third quarter of 2014, somewhat offset by an increase in tax expense related to the
write-off of deferred tax assets related to expired stock-based compensation. The decrease in the effective tax rate for 2013
compared to 2012 is primarily attributable to the non-deductibility of $8.0 million of initial public offering related charges
incurred in 2012. Additional information regarding income taxes can be found in note 20 of our consolidated financial
statements.
Our marginal tax rate (the rate we pay on each incremental dollar of earnings) is approximately 38%. 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 expense. Due to the
impact of the non-deductible expenses discussed above, our effective tax rate of 113.4% at December 31, 2012 was inflated
and therefore not comparable to subsequent years.
In September 2013, the Internal Revenue Service enacted final guidance regarding the deduction and capitalization of
expenditures related to tangible property ("tangible property regulations"). The tangible property regulations clarify and
expand sections 162(a) and 263(a) of the Internal Revenue Code which relate to amounts paid to acquire, produce, or
improve tangible property. Additionally, the tangible property regulations provide final guidance under section 167 of the
Internal Revenue Code regarding accounting for, and retirement of, depreciable property and regulations under section 168
relating to the accounting for property under the Modified Accelerated Cost Recovery System. The tangible property
regulations affect all taxpayers that acquire, produce, or improve tangible property, which includes the Company, and
generally apply to taxable years beginning on or after January 1, 2014. We have evaluated the tangible property
regulations and have determined the regulations will not have a material impact on our financial condition or results of
operations.
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. On-balance sheet liquidity is represented by our cash and cash equivalents and unencumbered investment
securities, and is detailed in the table below as of December 31, 2014 and December 31, 2013 (in thousands):
Cash and due from banks
Due from Federal Reserve Bank of Kansas City
Interest bearing bank deposits
Unencumbered investment securities, at fair value
Total
December 31, 2014 December 31, 2013
67,420
$
61,461
$
185,463
10,055
1,651,395
$
1,908,374
$
107,894
14,146
2,177,239
2,366,699
Cash and cash equivalents increased $67.5 million from December 31, 2013 to December 31, 2014, largely as a result of
several OREO sales late in the fourth quarter and relatively flat loans, coupled with the cash provided by routine
investment securities pay downs. Total on-balance sheet liquidity decreased $458.3 million from December 31, 2013 to
76
December 31, 2014. The decrease was largely due to a reduction in unencumbered available-for-sale and held-to-maturity
securities balances.
Our primary sources of funds are deposits from clients, prepayments and maturities of loans and investment securities, the
sale of investment securities, FHLB advances and the funds provided from operations. As a member of the Des Moines
FHLB, the Bank has access to term financing. During 2014, we borrowed $40.0 million from the Des Moines FHLB.
During 2013, we entered into a master repurchase agreement with a large financial institution and we anticipate that,
through this agreement, we would have access to a significant amount of liquidity. We anticipate having access to other
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 will 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, stock repurchases, and debt payments, particularly
subsequent to acquisitions and share repurchases. For additional information regarding our operating, investing, and
financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements.
Our primary investing activities are originations and pay-offs and pay downs of loans and purchases and sales of
investment securities. At December 31, 2014, pledgeable investment securities represented our largest source of liquidity.
Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at
amortized cost. Our collective investment securities portfolio totaled $2.0 billion at December 31, 2014, inclusive of pre-
tax net unrealized losses of $5.3 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity
securities portfolio had $4.0 million of pre-tax net unrealized gains at December 31, 2014. The gross unrealized gains and
losses are detailed in note 4 of our consolidated financial statements. As of December 31, 2014, our investment securities
portfolio consisted primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government
agencies or sponsored enterprises. 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.
Our capital outlays were $1.6 million during 2014, which were primarily for the general upkeep of our facilities and the
purchase of software that will aid our associates as we grow our business. During 2013, we had $6.8 million of capital
outlays that were primarily for the build out of our corporate headquarters in Greenwood Village, Colorado. During 2012,
we had $41.1 million of capital outlays related to the development and implementation of an operating platform and the
purchase of banking center assets from the FDIC subsequent to our acquisitions.
At present, financing activities primarily consist of changes in deposits and repurchase agreements, and advances from
FHLB, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent
a potential use of funds. As of December 31, 2014, $0.9 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 with transaction deposits and market-rate time deposits.
We are members of the FHLB of Des Moines and hold $7.6 million of FHLB stock in order to meet the requirements of
our membership agreement. Through this relationship, we have pledged qualifying loans allowing us to obtain additional
liquidity through FHLB advances. These FHLB advances totaled $40.0 million at December 31, 2014, and we can obtain
additional liquidity through FHLB advances if required.
NBH Bank is subject to specific dividend restrictions pursuant to the Operating Agreement with the OCC, which are
further discussed under "Supervision and Regulation." At December 31, 2014, the holding company sources of funds were
comprised of cash and cash equivalents on hand, which totaled $123.1 million. 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.
Our shareholders' equity is impacted by the retention of earnings, changes in unrealized gains on securities, net of tax,
share repurchases and the payment of dividends. 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 under the OCC Operating
Agreement. At December 31, 2014 and December 31, 2013, NBH Bank and the consolidated holding company exceeded
all capital requirements to which they were subject.
During 2014, the Board of Directors authorized multiple programs to repurchase shares of the Company's common stock
from time to time either in open market or in privately negotiated transactions in accordance with applicable regulations of
the SEC. During 2014, we repurchased 6.1 million shares of our common stock at a weighted average price of $19.63, and
all such shares are held as treasury shares. On February 11, 2015, our board of directors approved a new authorization to
repurchase from time to time another $50.0 million of the Company’s common stock, which is expected to be purchased
77
with excess cash. Subsequent to December 31, 2014 and through February 26, 2015, we repurchased an additional 1.7
million shares. These repurchases have brought our cumulative repurchases to 29.2% of shares outstanding since we
started repurchasing our shares in early 2013, at a weighted average price of $19.50 per share. We believe that our
repurchases could serve to offset any future share issuances for future acquisitions. On January 22, 2015, our board of
directors declared a quarterly dividend of $0.05 per common share, payable on March 13, 2015 to shareholders of record at
the close of business on February 27, 2015.
Asset/Liability Management and Interest Rate Risk
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 and securities, deposit decay rates, pricing decisions on
loans and deposits, and reinvestment/replacement of asset and liability cash flows.
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.
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, 2014. During 2014, we increased our asset sensitivity as a result of the balance sheet mix towards more
variable rate assets, even after adjusting our models for the excess capital deployment. 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, 2014 and December 31, 2013:
Hypothetical
shift in interest
rates (in bps)
200
100
-50
% change in projected net interest income
December 31, 2014
4.72%
2.94%
-0.88%
December 31, 2013
4.09%
2.32%
-1.11%
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.
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 0.00%-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 to manage primary market risk exposures expected to be in effect in
future reporting periods, 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
78
sensitive to changes in interest rates. In response to this strategy, non-maturing deposit accounts have grown $66.5 million
during 2014, and totaled 64.0% of total deposits at December 31, 2014 compared to 61.0% at December 31, 2013. We
currently have no brokered time deposits and intend to continue to focus on our strategy of increasing non-interest or low-
cost interest bearing non-maturing deposit accounts.
Off-Balance Sheet Activities
In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance
sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated
financial statements. The most significant of these are the loan 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.
As of December 31, 2014 and December 31, 2013, we had loan commitments totaling $485.5 million and $383.9 million,
respectively, and standby letters of credit that totaled $10.0 million and $5.9 million, respectively. 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.
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, 2014 and the expected timing of those payments (in thousands):
Less than 1
year
1-3 years
3-5 years
More than 5
years
Federal Home Loan Bank advances
Operating lease obligations
Purchase obligations
Time deposits
Clawback liability
Total
$
$
— $
3,656
6,951
934,721
—
945,328
$
15,000
6,160
10,128
384,879
—
416,167
$
$
10,000
4,173
7,790
32,215
—
54,178
$
$
15,000
13,804
13,985
5,236
36,338
84,363
$
$
Total
40,000
27,793
38,854
1,357,051
36,338
1,500,036
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, nor 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 page 78 of Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
79
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 Shareholders
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, 2014 and 2013, and the related consolidated statements of operations,
period ended
comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the
December 31, 2014. 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, 2014 and 2013, and the results of their
operations and their cash flows for each of the years in the
period ended December 31, 2014, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal
Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 27, 2015 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Denver, Colorado
February 27, 2015
80
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2014 and 2013
(In thousands, except share and per share data)
ASSETS
Cash and due from banks
Due from Federal Reserve Bank of Kansas City
Interest bearing bank deposits
Cash and cash equivalents
December 31, 2014
December 31, 2013
$
61,461
$
185,463
10,055
256,979
67,420
107,894
14,146
189,460
Investment securities available-for-sale (at fair value)
1,479,214
1,785,528
Investment securities held-to-maturity (fair value of $534,637 and $636,405 at
December 31, 2014 and December 31, 2013, respectively)
Non-marketable securities
Loans (including covered loans of $193,697 and $309,397 at December 31, 2014 and
December 31, 2013, respectively)
Allowance for loan losses
Loans, net
Loans held for sale
Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, net
Other real estate owned
Premises and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits
Interest bearing demand deposits
Savings and money market
Time deposits
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Due to FDIC
Other liabilities
Total liabilities
Shareholders’ equity:
530,590
27,045
2,162,409
(17,613)
2,144,796
5,146
39,082
29,120
106,341
59,630
16,883
124,820
641,907
31,663
1,854,094
(12,521)
1,841,573
5,787
64,447
70,125
115,219
59,630
22,229
86,547
$
$
4,819,646
$
4,914,115
732,580
$
386,121
1,290,436
1,357,051
3,766,188
133,552
40,000
42,011
43,320
674,989
386,762
1,280,871
1,495,687
3,838,309
99,547
—
41,882
36,585
4,025,071
4,016,323
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 52,223,460 and
52,289,347 shares issued; 38,884,953 and 44,918,336 shares outstanding at December
31, 2014 and December 31, 2013, respectively
Additional paid in capital
Retained earnings
Treasury stock of 12,383,109 and 6,306,551 shares at December 31, 2014 and
December 31, 2013, respectively, at cost
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
512
993,212
40,528
(245,516)
5,839
794,575
$
4,819,646
$
512
990,216
39,966
(126,146)
(6,756)
897,792
4,914,115
See accompanying notes to the consolidated financial statements.
81
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2014, 2013, 2012
(In thousands, except share and per share data)
2014
2013
2012
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
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 amortization
FDIC loss sharing income (expense)
Service charges
Bank card fees
Gain on sales of mortgages, net
Gain on sale of securities, net
Other non-interest income
Gain on previously charged-off acquired loans
OREO related write-ups and other income
Total non-interest income (expense)
Non-interest expense:
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
ATM/debit card expenses
Professional fees
Supplies and printing
Other non-interest expense
(Gain) loss from the change in fair value of warrant liability
Intangible asset amortization
Other real estate owned expenses (income)
Problem loan expenses
Contract termination expenses
Banking center closure related expenses
Initial public offering related expenses
Acquisition related costs
Total non-interest expense
Income before income taxes
Income tax expense
Net income (loss)
Income (loss) per share—basic
Income (loss) per share—diluted
Weighted average number of common shares outstanding:
Basic
Diluted
$
$
$
$
134,476
48,651
1,206
329
184,662
14,120
293
14,413
170,249
6,209
164,040
(27,741)
(8,862)
15,430
10,123
1,000
—
3,810
737
3,807
(1,696)
82,834
25,101
11,927
4,571
4,130
3,079
3,257
963
9,508
(2,953)
5,344
(5,350)
3,482
4,110
—
—
—
150,003
12,341
3,165
9,176
0.22
0.22
$
$
$
$
139,048
53,945
1,559
923
195,475
16,393
121
16,514
178,961
4,296
174,665
(18,960)
2,811
15,955
9,956
1,358
—
2,901
1,339
4,817
20,177
90,002
24,700
13,073
5,280
4,122
4,262
3,734
1,575
11,061
820
5,346
10,957
5,644
—
3,389
—
—
183,965
10,877
3,950
6,927
0.14
0.14
$
$
$
$
169,656
60,342
1,535
1,952
233,485
29,125
109
29,234
204,251
27,995
176,256
(13,820)
12,069
17,392
9,699
1,214
674
2,912
4,298
2,941
37,379
94,111
20,558
14,857
5,540
4,731
4,269
11,156
2,967
9,761
(1,385)
5,344
20,313
8,532
—
—
7,974
870
209,598
4,037
4,580
(543)
(0.01)
(0.01)
42,404,609
42,421,014
50,790,410
50,824,422
52,214,175
52,214,175
See accompanying notes to the consolidated financial statements.
82
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2014, 2013, 2012
(In thousands)
Net income (loss)
Other comprehensive income, net of tax:
Securities available-for-sale:
Net unrealized gains (losses) arising during the period, net of tax
(expense) benefit of ($9,694), $26,294, and $(75) for the years ended
2014, 2013, 2012, respectively.
Reclassification adjustment for net securities losses included in net
income, net of tax benefit of $263 for the year ended 2012.
Reclassification adjustment for net unrealized holding gains on
securities transferred between available-for-sale and held-to-maturity,
net of tax expense of $15,159 for the year ended 2012.
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 expense
of $15,159 for the year ended 2012.
Less: amortization of net unrealized holding gains to income, net of tax
benefit of $1,950, $3,567, and $3,571 for the years ended 2014, 2013,
and 2012, respectively.
Other comprehensive income (loss)
Comprehensive income (loss)
2014
2013
2012
$
9,176
$
6,927
$
(543)
15,765
(41,731)
83
—
—
15,765
—
(411)
—
(41,731)
(23,711)
(24,039)
—
—
23,711
(3,170)
(3,170)
12,595
$
21,771
$
(5,598)
(5,598)
(47,329)
(40,402) $
(6,121)
17,590
(6,449)
(6,992)
See accompanying notes to the consolidated financial statements.
83
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Year Ended 2014, 2013, and 2012
(In thousands, except share and per share data)
Common
stock
Additional
paid-in
capital
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
income (loss),
net
Balance, December 31, 2011
$
522
$ 994,705
$
Net loss
Stock-based compensation
Restricted stock vesting
Issuance under equity
compensation plan
Repurchase of shares (240 shares)
Dividends paid ($0.05 per share)
Other comprehensive income
Balance, December 31, 2012
Net income
Stock-based compensation
Issuance under equity
compensation plan
(Repurchase of 7,421,179 shares)/
retirement of 7,421,419 treasury
shares
Dividends paid ($.20 per share)
Other comprehensive loss
Balance, December 31, 2013
Net income
Stock-based compensation
Issuance under equity
compensation plan
Repurchase of 6,076,558 shares
Dividends paid ($.20 per share)
Other comprehensive income
—
—
1
—
—
—
—
523
—
—
—
(11)
—
—
512
—
—
—
—
—
—
—
13,078
—
(1,589)
—
—
—
1,006,194
—
4,861
(256)
(20,583)
—
—
990,216
—
3,572
(576)
—
—
—
46,480
(543)
—
—
—
—
(2,664)
—
43,273
6,927
—
—
—
(10,234)
—
39,966
9,176
—
—
—
(8,614)
—
$
— $
47,022
—
—
—
—
(4)
—
—
(4)
—
—
—
(126,142)
—
—
(126,146)
—
—
—
(119,370)
—
—
—
—
—
—
—
(6,449)
40,573
—
—
—
—
—
(47,329)
(6,756)
—
—
—
—
—
—
12,595
Total
$ 1,088,729
(543)
13,078
1
(1,589)
(4)
(2,664)
(6,449)
1,090,559
6,927
4,861
(256)
(146,736)
(10,234)
(47,329)
897,792
9,176
3,572
(576)
(119,370)
(8,614)
12,595
Balance, December 31, 2014
$
512
$ 993,212
$
40,528
$ (245,516) $
5,839
$ 794,575
See accompanying notes to the consolidated financial statements.
84
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2014, 2013, 2012
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses
Depreciation and amortization
Gain on sale of securities, net
Current income tax receivable
Deferred income tax asset
Discount accretion, net of premium amortization on securities
Loan accretion
Net gain on sale of mortgage loans
Origination of loans held for sale, net of repayments
Proceeds from sales of loans held for sale
Amortization of indemnification asset
Gain on the sale of other real estate owned, net
Impairment on other real estate owned
Impairment on fixed assets related to banking center closures
Gain on sale of fixed assets
Stock-based compensation
Increase (decrease) in due to FDIC, net
Decrease in other assets
Increase (decrease) in other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchase of Federal Home Loan Bank of Des Moines stock
Proceeds from redemption of Federal Home Loan Bank of Des Moines stock
Proceeds from redemption of Federal Reserve Bank stock
Sales of investment securities available-for-sale
Maturities of investment securities held-to-maturity
Maturities of investment securities available-for-sale
Purchase of investment securities held-to-maturity
Purchase of investment securities available-for-sale
Net (increase) decrease in loans
Purchase of premises and equipment, net
Purchase of bank-owned life insurance
Proceeds from sales of loans
Proceeds from sales of other real estate owned
(Decrease) increase in FDIC indemnification asset
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net decrease in deposits
Increase in repurchase agreements
Advances from the Federal Home Loan Bank of Des Moines
Issuance under equity compensation plan
Payment of dividends
Repurchase of shares
Excess tax benefit on stock-based compensation
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid during the period for taxes
Supplemental schedule of non-cash investing activities:
Loans transferred to other real estate owned at fair value
FDIC submissions transferred to (other liabilities) other assets
Available-for-sale investment securities transferred to investment securities held-to-maturity
Loans purchased but not settled
2014
2013
2012
$
9,176
$
6,927
$
(543)
6,209
15,930
—
10,815
(15,776)
5,010
(63,881)
(1,000)
(44,490)
45,584
27,741
(13,126)
2,103
—
(123)
3,572
129
2,737
6,628
(2,762)
(952)
—
5,570
—
105,594
327,368
—
—
(253,102)
(1,585)
(43,800)
3,607
56,519
(2,376)
196,843
(72,121)
34,005
40,000
(576)
(8,507)
(119,370)
7
(126,562)
67,519
189,460
256,979
13,863
8,119
$
$
$
4,491
$
(5,673) $
— $
$
10,038
4,296
15,833
—
(20,498)
(1,618)
8,285
(85,447)
(1,358)
(58,391)
57,947
18,960
(6,953)
10,349
2,531
—
4,861
10,611
945
7,142
(25,578)
—
1,333
—
—
178,420
549,857
(251,792)
(693,881)
(26,648)
(6,801)
—
44,958
61,260
62,807
(80,487)
(362,410)
45,862
—
(256)
(10,139)
(146,736)
24
(473,655)
(579,720)
769,180
189,460
17,694
26,211
39,973
17,605
—
5,063
27,995
12,300
(674)
(17,825)
(23,233)
17,459
(120,034)
(1,214)
(52,965)
49,312
13,820
(9,563)
20,215
—
—
13,078
(36,701)
2,143
(24,407)
(130,837)
(4,018)
139
—
20,794
176,650
493,224
(2,234)
(1,131,749)
454,296
(41,077)
—
—
102,941
63,368
132,334
(862,334)
6,088
—
(1,588)
(2,616)
(4)
—
(860,454)
(858,957)
1,628,137
769,180
36,012
45,652
82,444
135,213
754,063
—
$
$
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
85
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 1 Basis of Presentation
National Bank Holdings Corporation ("NBHC" or 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 financial services franchises and other
complementary businesses in targeted markets. The Company is headquartered immediately south of Denver, in
Greenwood Village, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank,
N.A. (the "Bank"). The Company provides a variety of banking products to both commercial and consumer clients through
a network of 97 banking centers located in Colorado, the greater Kansas City area and Texas, and through online and
mobile banking products.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned
subsidiary, NBH Bank, N.A. The accompanying consolidated 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 (“OREO”), the fair value adjustments on assets acquired and liabilities assumed, the
valuation of core deposit intangible assets, the evaluation of investment securities for other-than-temporary impairment
(“OTTI”), the valuation of stock-based compensation, 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.
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.
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.
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, 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
86
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
value. Unrealized gains or losses on securities available-for-sale are reported as accumulated other comprehensive income
(“AOCI”), a component of shareholders’ 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 ("FRB") stock and Federal Home
Loan Bank ("FHLB") stock. These securities have been acquired for debt or regulatory purposes and are carried at cost.
e) Loans receivable— Loans receivable include loans originated by the Company and loans that are acquired through
acquisitions. Loans originated by the Company are carried at the principal amount outstanding, net of premiums, discounts,
unearned income, and deferred loan fees and costs. Acquired loans are initially recorded at fair value and are accounted for
under either Accounting Standards Codification (“ASC”) 310-30 (see additional information below) or ASC 310,
Receivables. 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 over the remaining lives of the related loans in
accordance with ASC 310-20.
Acquired loans are recorded at their estimated fair value at the time of acquisition and accounted for under either ASC
310-30 or ASC 310. Estimated fair values of acquired 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. Acquired 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. 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
originated loans described below, the accrual of interest income on acquired loans that are not accounted for under ASC
310-30 is discontinued when the collection of principal or interest, in whole or in part, is doubtful.
Interest income on acquired loans that are accounted for under ASC 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
87
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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.
In the event of borrower default, 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 310-40 Troubled Debt Restructurings by Creditors. Under this
guidance, modifications to loans that fall within the scope of ASC 310-30 are not considered troubled debt restructurings,
regardless of otherwise meeting the definition of a troubled debt restructuring.
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 during the stated loss sharing coverage period. 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 and for certain recoveries or gains realized during the recovery sharing
periods, which generally last longer than the loss sharing coverage periods.
Loans receivable accounted for under ASC 310-30
The Company accounts for and evaluates acquired loans in accordance with the provisions of ASC 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. Contractual fees
not expected to be collected are not included in ASC 310-30 contractual cash flows. Should fees be subsequently
collected, the cash flows are accounted for as non 310-30 fee income in the period they are received. Loans that are
accounted for under ASC 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 client 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 310-30 are periodically remeasured 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.
f) 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.
g) 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, the estimated loss emergence period, estimated default rates, any
declines in cash flow assumptions from acquisition, loan structures, growth factors and other elements that warrant
88
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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 all 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 310-30, despite being 90 days or more past due or internally adversely classified, may be
classified as performing upon and subsequent to acquisition, regardless of whether the client 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 310-30, as is more fully discussed in note 6.
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
originated and 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 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.
h) 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. 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 indemnification assets were
recorded at fair value on the respective dates of acquisition, and considered 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 was estimated using the net present value of projected cash flows
related to the loss sharing agreements based on the expected reimbursements for losses multiplied by the applicable loss
sharing percentages.
The expected indemnification asset cash flows are remeasured in conjunction with the periodic remeasurement 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 from the FDIC and are recognized
immediately in earnings to the extent that they relate to a reversal of a previously recorded valuation allowance related to
89
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
the covered assets. Any remaining decreases in expected cash flows are reflected prospectively as a negative yield
adjustment on the indemnification asset consistent with the approach taken to recognize increases in expected cash flows
on the covered loans accounted for under ASC 310-30. Any prospective negative yield adjustment is amortized using the
effective interest method in connection with the expected speed of future FDIC reimbursements and is limited to the lesser
of the contractual term of the indemnification agreement or the remaining life of the indemnified assets. This amortization
is included in FDIC indemnification asset amortization in the consolidated statements of operations.
Conversely, declines in cash flow expectations on covered loans and covered OREO generally result in an increase in the
expected indemnification asset cash flows from the FDIC and are reflected as both a decrease in the FDIC indemnification
asset amortization 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 claimed by us from 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. Depending on the timing of claims and covered asset resolution, the Company may also owe payments to the FDIC
for the recovery of prior claims. The liability for these payments is recorded in other liabilities in the consolidated
statements of financial condition until cash is paid to the FDIC.
i) 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 was 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 amortization that is recognized through other FDIC loss sharing income in the
consolidated statements of operations until the contingency is resolved.
j) 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 was tied to the Company’s stock
price and was 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. The Company settled the VAR in 2012.
k) 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 to15 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. In the case of a property that is subject to an operating lease that the Company no
longer expects to use, a liability is recorded equal to the remaining lease rentals, adjusted for the effects of any prepaid or
deferred items recognized under the lease, and reduced by estimated sublease rentals that could be reasonably obtained for
the property, even if the entity does not intend to enter into a sublease. A ratable portion of the sublease allocation is then
expensed until the property is subleased.
l) 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. Such
events or circumstances may include deterioration in general economic conditions, deterioration in industry or market
conditions, an increased competitive environment, a decline in market-dependent multiples or metrics, declining financial
performance, entity-specific events or circumstances or a sustained decrease in share price (either in absolute terms or
relative to peers). 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
90
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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 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.
m) 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 downward valuation adjustments, if any, in addition to gains and
losses realized on sales and net operating expenses, are recorded in other non-interest expense, while any subsequent write-
ups are recorded in non-interest income. 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 for the same coverage periods, as
the covered loans.
n) Bank owned life insurance— The Company purchased bank-owned life insurance ("BOLI") policies on certain
associates of the Company. The Company is the owner and beneficiary of these policies. The BOLI is carried at net
realizable value with changes in net realizable value recorded in non-interest income.
o) Securities purchased under agreements to resell and securities sold under agreements to repurchase—The Company
periodically enters into purchases or sales of securities under agreements to resell or repurchase as of a specified future
date. The securities purchased under agreements to resell are accounted for as collateralized financing transactions and are
reflected as an asset in the consolidated statements of financial condition. The securities pledged by the counterparties are
held by a third party custodian and valued daily. The Company may require additional collateral to ensure full
collateralization for these transactions. The 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 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 associates 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 may have multiple
vesting qualifications which can include time vesting of a set portion of the restricted shares, performance criterion, such
as a qualified investment transaction, 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. Compensation expense for the portion of the awards that contain 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 awards that contain performance and service vesting conditions is recognized
over the requisite service period based on the fair value of the awards on the grant date. In accordance with ASC 718, the
91
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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 carry a maximum contractual term of 10 years and restricted
shares carry contractual terms that range from 7-10 years, with certain awards having no defined contractual term. 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.
q) Warrants—The Company issued warrants to certain lead shareholders. 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 are subject to certain down-round provisions, whereby certain 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) Income (loss) per share — The Company applies the two-class method of computing income (loss) per share as certain
of the Company's restricted shares are entitled to non-forfeitable dividends and are therefore considered to be a class of
participating securities. The two-class method allocates income (loss) according to dividends declared and participation
rights in undistributed income (loss). Basic income (loss) per share is computed by dividing income (loss) allocated to
common shareholders by the weighted average number of common shares outstanding during each period. Diluted income
(loss) per common share is computed by dividing income (loss) allocated to common shareholders by the weighted average
common shares outstanding during the period, plus amounts representing the dilutive effect of stock options outstanding,
certain 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.
t) Derivatives — The Company carries all derivatives on the statement of financial condition at fair value. All derivative
instruments are recognized as either assets or liabilities depending on the rights or obligations under the contracts. All
gains and losses on the derivatives due to changes in fair value are recognized in earnings each period.
The Company offers interest rate swap products to certain of its clients to manage potential changes in interest rates. Each
contract between the Company and a client is offset with a contract between the Company and an institutional counterparty,
thus minimizing the Company's exposure to rate changes. The Company's portfolio consists of a “matched book,” and as
such, changes in fair value of the swap pairs will largely offset in earnings. In accordance with applicable accounting
guidance, if certain conditions are met, a derivative may be designated as (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk
(referred to as a fair value hedge) or (2) a hedge of the exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that is attributable to a particular risk (referred to as a cash flow hedge). The
Company documents all hedging relationships at the inception of each hedging relationship and uses industry accepted
92
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
methodologies and ranges to determine the effectiveness of each hedge. The fair value of the hedged item is calculated
using the estimated future cash flows of the hedged item and applying discount rates equal to the market interest rate for
the hedged item at the inception of the hedging relationship (inception benchmark interest rate plus an inception credit
spread), adjusted for changes in the designated benchmark interest rate thereafter.
Note 3 Recent Accounting Pronouncements
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure - In January
2014, the FASB issued Accounting Standards Update ("ASU") 2014-04, “Reclassification of Residential Real Estate
Collateralized Consumer Mortgage Loans upon Foreclosure.” This update amends ASC Topic 310-40 and clarifies that an
“in substance repossession or foreclosure” has occurred upon the creditor obtaining either legal title to the property upon
completion of foreclosure, or the borrower conveying all interest in the property through completion of a deed in lieu of
foreclosure. Upon occurrence, the creditor derecognizes the loan receivable and recognizes the collateralized real estate
property. The amendments in the ASU will be effective for the Company for interim and annual periods beginning after
December 15, 2014. Early adoption is permitted. Adoption of this amendment can be made using either a modified
retrospective transition method or a prospective transition method. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated financial statements, results of operations or liquidity.
Revenue from Contracts with Customers - In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with
Customers." This update supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most
industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The new guidance
stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The guidance provides specific steps that entities should apply in order to achieve this principle. The amendments are
effective for interim and annual periods beginning January 1, 2017 and must be applied retrospectively. The Company is in
the process of evaluating the impact of the ASU's adoption on the Company's consolidated financial statements.
Note 4 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment
securities. These investment securities totaled $2.0 billion at December 31, 2014 and $2.4 billion at December 31, 2013.
Included in the aforementioned $2.0 billion were $1.5 billion of available-for-sale securities and $0.5 billion of held-to-
maturity securities.
Available-for-sale
Available-for-sale investment securities are summarized as follows as of the dates indicated (in thousands):
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
Total
December 31, 2014
Amortized
cost
Gross
unrealized gains
Gross
unrealized losses
Fair value
$
— $
— $
— $
—
(43)
404,215
1,074,580
(21,718)
—
419
(21,761) $ 1,479,214
395,244
1,088,834
419
9,014
7,464
—
$ 1,484,497
$
16,478
$
93
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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
Total
December 31, 2013
Amortized
cost
$
4,534
Gross
unrealized gains
3
$
Gross
unrealized losses
$
— $
Fair value
4,537
490,321
7,670
(3,001)
494,990
1,320,998
419
10,764
—
$ 1,816,272
$
18,437
$
1,285,582
(46,180)
—
419
(49,181) $ 1,785,528
At December 31, 2014 and December 31, 2013, mortgage-backed securities represented 100.0% and 99.7%, 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):
December 31, 2014
Less than 12 months
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
Other residential MBS issued or
guaranteed by U.S. Government
agencies or sponsored enterprises
Total
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
Total
$
17
$
— $
89,749
$
(43) $
89,766
$
(43)
88,854
$
88,871
$
(2,053)
667,368
(2,053) $ 757,117
(19,665)
756,222
$ (19,708) $ 845,988
(21,718)
$ (21,761)
December 31, 2013
Less than 12 months
12 months or more
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
$
283,177
$
(3,000) $
13
$
(1) $ 283,190
$
(3,001)
876,225
$ 1,159,402
(44,101)
$ (47,101) $
40,740
40,753
$
(2,079)
916,965
(2,080) $1,200,155
(46,180)
$ (49,181)
Management evaluated all of the available-for-sale securities in an unrealized loss position and concluded that no OTTI
existed at December 31, 2014 or December 31, 2013. The unrealized losses in the Company's investments issued or
guaranteed by U.S. government agencies or sponsored enterprises at December 31, 2014 were caused by changes in
94
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
interest rates. 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.
Certain securities are pledged 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 $274.4 million at December 31, 2014 and $177.6 million December 31, 2013. The increase in
pledged available-for-sale investment securities was primarily attributable to an increase in average deposit account
balances during 2014, an increase in pledged securities for derivative instruments, as well as an increase in securities
pledged to the Federal Reserve Bank. Certain investment securities may also be pledged as collateral for the line of credit
at the FHLB of Des Moines; however, no investment securities were pledged for this purpose at December 31, 2014 or
December 31, 2013.
Mortgage-backed securities do not have a single maturity date and actual maturities 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 3.5 years as of December 31, 2014 and 3.9
years as of December 31, 2013. This estimate is based on assumptions and actual results may differ. Other securities of
$0.4 million have no stated contractual maturity date as of December 31, 2014.
Held-to-maturity
At December 31, 2014 and December 31, 2013, the Company held $530.6 million and $641.9 million of held-to-maturity
investment securities, respectively. Held-to-maturity investment securities are summarized as follows as of the dates
indicated (in thousands):
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
Total investment securities held-to-maturity
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
Total investment securities held-to-maturity
Amortized
cost
December 31, 2014
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
422,622
$
5,773
$
(72) $
428,323
107,968
217
530,590
$
5,990
$
(1,871)
(1,943) $
106,314
534,637
Amortized
cost
December 31, 2013
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
513,090
$
175
$
(1,776) $
511,489
128,817
641,907
$
104
279
$
(4,005)
(5,781) $
124,916
636,405
$
$
$
$
95
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
The table below summarizes the unrealized losses as of the dates shown, along with the length of the impairment period (in
thousands):
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
Total
$
$
December 31, 2014
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
— $
— $
35,139
$
(72) $
35,139
$
(72)
—
—
75,139
— $
— $ 110,278
$
(1,871)
75,139
(1,943) $ 110,278
$
(1,871)
(1,943)
December 31, 2013
Less than 12 months
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
Other residential MBS issued or
guaranteed by U.S. Government
agencies or sponsored enterprises
Total
$
472,973
$
(1,776) $
— $
— $ 472,973
$
(1,776)
105,124
$
578,097
$
(4,005)
(5,781) $
—
—
105,124
— $
— $ 578,097
$
(4,005)
(5,781)
Management evaluated all of the held-to-maturity securities in an unrealized loss position and concluded that no OTTI
existed at December 31, 2014 or December 31, 2013. The unrealized losses in the Company's investments issued or
guaranteed by U.S. government agencies or sponsored enterprises at December 31, 2014 were caused by changes in
interest rates. 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 carrying value of held-to-maturity investment securities pledged as collateral totaled $88.3 million and $68.5 million at
December 31, 2014 and December 31, 2013, respectively.
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, 2014 and December 31, 2013 was 3.4 years and
3.8 years, respectively. This estimate is based on assumptions and actual results may differ.
Note 5 Non-marketable Securities
Non-marketable securities include Federal Reserve Bank stock and FHLB stock. At December 31, 2014, the Company held
$19.5 million of Federal Reserve Bank stock, $7.5 million of FHLB Des Moines stock, and $0.1 million of FHLB San
Francisco stock, for regulatory or debt facility purposes. At December 31, 2013, the Company held $25.0 million of
Federal Reserve Bank stock, $6.4 million of FHLB Des Moines stock, and $0.3 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, 2014 or December 31, 2013.
96
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 6 Loans
The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the
Company’s acquisitions of Bank of Choice and Community Banks of Colorado in 2011, and Hillcrest Bank and Bank
Midwest in 2010. 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 9.0% of the total loan
portfolio at December 31, 2014, compared to 16.7% of the total loan portfolio at December 31, 2013.
The table below shows the loan portfolio composition including carrying value by segment of loans accounted for under
ASC Topic 310-30 Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality and loans not
accounted for under this guidance, which includes our originated loans. The table also shows the amounts covered by the
FDIC loss sharing agreements as of December 31, 2014 and December 31, 2013. The carrying value of loans are net of
discounts on loans excluded from Accounting Standards Codification (“ASC”) Topic 310-30, and fees and costs of $10.5
million and $13.3 million as of December 31, 2014 and December 31, 2013, respectively (in thousands):
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Covered
Non-covered
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Covered
Non-covered
Total
December 31, 2014
Non 310-30 loans
Total loans
% of total
ASC 310-30 loans
22,956
$
$
19,063
192,330
40,761
4,535
279,645
160,876
118,769
279,645
$
$
$
772,440
$
118,468
369,264
591,939
30,653
795,396
137,531
561,594
632,700
35,188
$
$
$
1,882,764
32,821
1,849,943
1,882,764
$
$
$
2,162,409
193,697
1,968,712
2,162,409
36.8%
6.4%
26.0%
29.2%
1.6%
100.0%
9.0%
91.0%
100.0%
ASC 310-30 loans
61,511
$
$
27,000
291,198
63,011
8,160
450,880
259,364
191,516
450,880
$
$
$
$
$
$
December 31, 2013
Non 310-30 loans
Total loans
% of total
421,984
$
132,952
283,022
536,913
28,343
483,495
159,952
574,220
599,924
36,503
1,403,214
50,033
1,353,181
1,403,214
$
$
$
1,854,094
309,397
1,544,697
1,854,094
26.1%
8.6%
31.0%
32.3%
2.0%
100.0%
16.7%
83.3%
100.0%
Included in commercial loans are $175.5 million of energy-related loans at December 31, 2014. Energy prices declined
significantly during 2014 and prolonged or further pricing pressure could increase stress on energy clients and ultimately
the credit quality of this portfolio. However, the capital and liquidity of the borrowers, as well as the loan structures,
should protect against significant credit loss.
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. During 2013, the Company determined
that the cash flows of one covered commercial and industrial loan pool were no longer reasonably estimable, and in
accordance with the guidance in ASC 310-30, this pool was put on non-accrual status. During 2014, this loan pool was
returned to accrual status due to improved performance and predictability of cash flows within that pool. At December 31,
2014, this loan pool had a carrying value of $2.5 million. Interest income is recognized on all accruing loans accounted for
under ASC 310-30 through accretion of the difference between the carrying value of the loans and the expected cash flows.
97
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Pooled loans accounted for under ASC 310-30 that are 90 days or more past due and still accreting are generally considered
to be performing and are included in loans 90 days or more past due and still accruing. Non-accrual loans include troubled
debt restructurings on non-accrual status. At December 31, 2014 and December 31, 2013, $10.8 million and $9.5 million,
respectively, of loans excluded from the scope of ASC 310-30 were on non-accrual and $14.8 million of loans accounted
for under ASC 310-30 were on non-accrual status at December 31, 2013. Loan delinquency for all loans is shown in the
following tables at December 31, 2014 and December 31, 2013, respectively (in thousands):
Total Loans December 31, 2014
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
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non owner-occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans excluded from ASC
310-30
Covered loans excluded from ASC
310-30
Non-covered loans excluded from
ASC 310-30
Total loans excluded from ASC
310-30
Loans accounted for under ASC
310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total loans accounted for under
ASC 310-30
Covered loans accounted for under
ASC 310-30
Non-covered loans accounted for
under ASC 310-30
Total loans accounted for under
ASC 310-30
Total loans
Covered loans
Non-covered loans
Total loans
$
$
$
$
$
$
$
$
$
$
$
83
47
—
41
—
336
158
535
378
133
511
266
$
97
—
—
—
—
78
—
78
1,403
1
1,404
21
$
318
$
498
$
771,942
$
772,440
$
215
$ 4,215
10
—
—
—
101
222
323
732
101
833
39
57
—
41
—
515
380
936
2,513
235
2,748
326
118,411
118,468
11,748
4,532
10,856
119,710
221,482
368,328
537,022
52,169
589,191
30,327
11,748
4,573
10,856
120,225
221,862
369,264
539,535
52,404
591,939
30,653
10
—
—
(1)
—
—
(1)
—
—
—
39
495
—
—
—
843
222
1,065
4,335
476
4,811
227
1,442
$ 1,600
17
$ 1,016
$
$
1,523
152
$
$
4,565
$ 1,878,199
$ 1,882,764
1,185
$
31,636
$
32,821
$
$
263
$ 10,813
75
$ 1,317
1,425
584
1,371
3,380
1,846,563
1,849,943
188
9,496
1,442
$ 1,600
$
1,523
$
4,565
$ 1,878,199
$ 1,882,764
$
263
$ 10,813
152
$
— $
1,755
$
1,907
$
21,049
$
22,956
$
1,754
$
—
564
2,014
369
—
92
3,826
—
3,099
$ 3,918
576
$ 3,892
2,523
26
3,099
$ 3,918
4,541
$ 5,518
593
$ 4,908
3,948
610
4,541
$ 5,518
$
$
$
$
$
$
367
31,013
646
54
33,835
31,239
2,596
33,835
35,358
31,391
3,967
35,358
98
$
$
$
$
$
$
367
31,669
6,486
423
18,696
160,661
34,275
4,112
19,063
192,330
40,761
4,535
40,852
35,707
$
$
238,793
125,169
$
$
279,645
160,876
5,145
113,624
118,769
40,852
$
238,793
$
279,645
45,417
$ 2,116,992
$ 2,162,409
36,892
$
156,805
$
193,697
8,525
1,960,187
1,968,712
45,417
$ 2,116,992
$ 2,162,409
$
$
$
$
$
$
367
31,013
646
54
33,834
31,238
$
$
2,596
33,834
$
—
—
—
—
—
—
—
—
—
34,097
$ 10,813
31,313
$ 1,317
2,784
9,496
34,097
$ 10,813
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Total Loans December 31, 2013
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
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non owner-occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans excluded from ASC
310-30
Covered loans excluded from ASC
310-30
Non-covered loans excluded from
ASC 310-30
Total loans excluded from ASC
310-30
Loans accounted for under ASC
310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total loans accounted for under
ASC 310-30
Covered loans accounted for under
ASC 310-30
Non-covered loans accounted for
under ASC 310-30
Total loans accounted for under
ASC 310-30
Total loans
Covered loans
Non-covered loans
Total loans
$
$
$
$
$
$
$
$
$
$
$
897
188
316
45
1,003
52
329
1,745
733
204
937
191
3,958
194
3,764
$
156
$
555
$
1,608
$
420,376
$
421,984
$
115
$ 1,280
7
—
—
—
7
—
7
415
—
415
21
606
60
546
$
$
$
$
—
—
—
—
21
203
224
1,062
80
1,142
23
1,944
155
195
132,757
132,952
316
45
1,003
80
532
1,976
2,210
284
2,494
235
5,023
7,975
9,681
93,367
165,000
281,046
482,381
52,038
534,419
28,108
5,339
8,020
10,684
93,447
165,532
283,022
484,591
52,322
536,913
28,343
—
—
—
—
—
—
—
—
—
—
14
153
—
1
1,096
692
203
1,992
5,326
519
5,845
247
$
$
6,508
$ 1,396,706
$ 1,403,214
409
$
49,624
$
50,033
$
$
129
$ 9,517
115
$ 1,944
1,789
6,099
1,347,082
1,353,181
14
7,573
3,958
$
606
$
1,944
$
6,508
$ 1,396,706
$ 1,403,214
$
129
$ 9,517
$
322
$
4,505
$
5,409
$
56,102
$
61,511
$
4,505
$ 14,827
582
714
—
1,902
5,179
977
327
977
265
4,502
$ 6,743
1,471
$ 4,949
3,031
1,794
4,502
$ 6,743
8,460
$ 7,349
1,665
$ 5,009
6,795
2,340
8,460
$ 7,349
$
$
$
$
$
$
1,010
56,309
3,771
611
25,990
234,889
59,240
7,549
27,000
291,198
63,011
8,160
296
49,227
1,817
19
—
—
—
—
$
$
$
$
$
$
67,110
48,776
$
$
383,770
210,588
$
$
450,880
259,364
18,334
173,182
191,516
67,110
$
383,770
$
450,880
73,618
$ 1,780,476
$ 1,854,094
49,185
$
260,212
$
309,397
24,433
1,520,264
1,544,697
73,618
$ 1,780,476
$ 1,854,094
$
$
$
$
$
$
55,864
$ 14,827
42,355
$ 14,827
13,509
—
55,864
$ 14,827
55,993
$ 24,344
42,470
$ 16,771
13,523
7,573
55,993
$ 24,344
296
49,228
1,817
19
55,865
42,356
13,509
55,865
57,809
42,511
15,298
57,809
99
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows as of
December 31, 2014 and December 31, 2013, respectively (in thousands):
Total Loans December 31, 2014
Pass
Special
mention
Substandard
Doubtful
Total
$ 742,944
$
10,166
$
19,250
$
114,642
11,748
4,573
10,856
115,178
199,817
342,172
533,630
51,059
584,689
30,426
85
—
—
—
158
17,607
17,765
23
—
23
—
28,039
171
27,868
28,039
282
30
3,770
1,403
105
3,741
—
—
—
4,889
4,430
9,319
5,744
1,345
7,089
227
39,626
11,301
28,325
39,626
11,092
2,179
101,966
10,289
789
$
$
$
$
5,590
$ 126,315
3,036
$ 103,451
2,554
22,864
5,590
$ 126,315
33,629
$ 165,941
3,207
$ 114,752
30,422
51,189
33,629
$ 165,941
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
80
—
—
—
—
—
8
8
138
—
138
—
226
109
117
226
$
772,440
118,468
11,748
4,573
10,856
120,225
221,862
369,264
539,535
52,404
591,939
30,653
$ 1,882,764
$
32,821
1,849,943
$ 1,882,764
544
$
—
3,991
—
—
22,956
19,063
192,330
40,761
4,535
4,535
4,533
$
$
279,645
160,876
2
118,769
4,535
$
279,645
4,761
$ 2,162,409
4,642
$
193,697
119
1,968,712
4,761
$ 2,162,409
Loans excluded from ASC 310-30
Commercial
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non owner-occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans excluded from ASC 310-30
Covered loans excluded from ASC 310-30
$ 1,814,873
$
21,240
Non-covered loans excluded from ASC 310-30
1,793,633
Total loans excluded from ASC 310-30
$ 1,814,873
Loans accounted for under ASC 310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
$
11,038
16,854
82,603
29,069
3,641
Total loans accounted for under ASC 310-30
$ 143,205
Covered loans accounted for under ASC 310-30
$
49,856
Non-covered loans accounted for under ASC
310-30
93,349
Total loans accounted for under ASC 310-30
$ 143,205
Total loans
Total covered
Total non-covered
Total loans
$ 1,958,078
$
71,096
1,886,982
$ 1,958,078
100
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Total Loans December 31, 2013
Pass
Special
mention
Substandard
Doubtful
Total
$ 374,281
$
9,882
$
37,414
$
407
$
421,984
123,216
9,049
687
5,339
1,366
9,588
87,984
142,159
246,436
475,041
49,874
524,915
28,092
—
2,247
—
169
18,536
20,952
1,495
200
1,695
—
41,578
3,439
38,139
41,578
3,221
1,117
12,493
1,098
244
—
4,407
1,068
5,294
4,837
15,606
7,620
2,248
9,868
251
63,826
24,005
39,821
63,826
34,440
3,983
157,748
18,009
995
$
$
$
$
18,173
$ 215,175
8,498
$ 145,041
9,675
70,134
18,173
$ 215,175
59,751
$ 279,001
11,937
$ 169,046
47,814
109,955
59,751
$ 279,001
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
—
—
28
—
—
28
435
—
435
—
870
414
456
870
132,952
5,339
8,020
10,684
93,447
165,532
283,022
484,591
52,322
536,913
28,343
$ 1,403,214
$
50,033
1,353,181
$ 1,403,214
721
$
—
5,054
—
—
61,511
27,000
291,198
63,011
8,160
5,775
5,775
$
$
450,880
259,364
—
191,516
5,775
$
450,880
6,645
$ 1,854,094
6,189
$
309,397
456
1,544,697
6,645
$ 1,854,094
Loans excluded from ASC 310-30
Commercial
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non owner-occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans excluded from ASC 310-30
Covered loans excluded from ASC 310-30
$ 1,296,940
$
22,175
Non-covered loans excluded from ASC 310-30
1,274,765
Total loans excluded from ASC 310-30
$ 1,296,940
Loans accounted for under ASC 310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
$
23,129
21,900
115,903
43,904
6,921
Total loans accounted for under ASC 310-30
$ 211,757
Covered loans accounted for under ASC 310-30
$ 100,050
Non-covered loans accounted for under ASC
310-30
111,707
Total loans accounted for under ASC 310-30
$ 211,757
Total loans
Total covered
Total non-covered
Total loans
$ 1,508,697
$ 122,225
1,386,472
$ 1,508,697
101
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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. Impaired loans are comprised of loans excluded from ASC
310-30 on non-accrual status and troubled debt restructurings (“TDRs”) 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. At December 31, 2014, the Company measured $15.1 million of impaired loans using
discounted cash flows and the loan’s initial contractual effective interest rate and $8.1 million of impaired loans based on
the fair value of the collateral less selling costs. Impaired loans totaling $8.9 million that individually were less than $250
thousand each, were measured through our general ALL reserves due to their relatively small size.
At December 31, 2014 and December 31, 2013, the Company’s recorded investments in impaired loans was $32.1 million
and $21.6 million, respectively, of which $11.1 million and $7.7 million were covered by loss sharing agreements, for the
aforementioned periods. The increase in impaired loans was primarily in the commercial loan segment, and largely the
result of two relationships, the first of which totaled $3.6 million and was fully secured and current as to principal and
interest payments as of December 31, 2014. The second relationship totaled $7.9 million, is covered by loss-share and is
also current as to principal and interest payments as of December 31, 2014. Impaired loans had a collective related
allowance for loan losses allocated to them of $0.3 million and $0.9 million at December 31, 2014 and December 31, 2013,
respectively. Additional information regarding impaired loans at December 31, 2014 and December 31, 2013 is set forth in
the table below (in thousands):
102
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Impaired Loans
December 31, 2014
December 31, 2013
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
$ 16,953
$
16,771
$
— $
4,981
$
4,981
$
3,065
3,061
With no related allowance recorded:
Commercial
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non-owner occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total impaired loans with no related
allowance recorded
$ 21,876
With a related allowance recorded:
Commercial
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non-owner occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
$
894
177
—
—
—
1,321
1,140
2,461
7,360
1,768
9,128
277
—
—
—
1,164
—
1,164
694
—
694
—
$
$
$
$
—
—
—
970
—
970
248
—
248
—
21,050
693
145
—
—
—
1,024
1,060
2,084
6,359
1,515
7,874
245
—
—
—
—
—
—
—
—
—
—
—
—
—
—
987
1,872
561
3,420
506
—
506
—
— $
8,907
$
2,529
191
—
—
178
825
640
—
—
—
929
1,655
488
3,072
494
—
494
—
$
$
$
$
8,547
2,379
173
—
1
168
607
628
1,643
1,404
8,147
1,815
9,962
290
7,266
1,605
8,871
273
$ 14,615
$ 23,522
$
$
13,100
21,647
$
$
82
—
—
—
—
5
9
14
172
9
181
2
279
279
—
—
—
—
—
—
—
—
—
—
—
—
—
416
1
—
—
28
4
4
36
474
16
490
3
946
946
Total impaired loans with a related
allowance recorded
Total impaired loans
$ 12,937
$ 34,813
$
$
11,041
32,091
$
$
103
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
The table below shows additional information regarding the average recorded investment and interest income recognized
on impaired loans for the periods presented (in thousands):
For the years ended
December 31, 2014
December 31, 2013
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
With no related allowance recorded:
Commercial
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non-owner occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total impaired loans with no related
allowance recorded
With a related allowance recorded:
Commercial
Agriculture
Commercial real estate
Construction
Acquisition/development
Multifamily
Owner-occupied
Non-owner occupied
Total commercial real estate
Residential real estate
Senior lien
Junior lien
Total residential real estate
Consumer
Total impaired loans with a related
allowance recorded
Total impaired loans
414
126
—
—
—
51
—
51
7
—
7
—
598
7
—
—
—
—
40
56
96
101
60
161
1
265
863
$
5,722
$
—
—
—
947
1,914
513
3,374
497
—
497
—
9,593
2,830
210
—
1
182
651
634
1,468
7,455
1,649
9,104
297
$
$
$
$
$
$
13,909
23,502
$
$
355
—
—
—
—
136
33
169
5
—
5
—
529
90
—
—
—
—
14
28
42
110
54
164
2
298
827
$
21,827
$
3,458
—
—
—
1,018
—
1,018
605
—
605
—
26,908
893
158
—
—
—
1,166
1,095
2,261
6,594
1,568
8,162
265
$
$
$
$
$
$
11,739
38,647
$
$
104
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
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 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 TDR. At December 31, 2014 and December 31, 2013, the Company had $19.3 million and $11.6
million, respectively, of accruing TDRs that had been restructured from the original terms in order to facilitate repayment.
Of these, $9.8 million and $5.7 million, respectively, were covered by FDIC loss sharing agreements.
Non-accruing TDRs at December 31, 2014 and December 31, 2013 totaled $7.0 million and $3.6 million, respectively. Of
these, $1.2 million and $1.7 million were covered by the FDIC loss sharing agreements as of December 31, 2014 and
December 31, 2013, respectively.
During 2014, the Company restructured 15 loans with a recorded investment of $15.0 million to facilitate repayment.
Substantially all of the loan modifications were an extension of term. Loan modifications to loans accounted for under
ASC 310-30 are not considered TDRs. The table below provides additional information related to accruing TDRs at
December 31, 2014 and December 31, 2013 (in thousands):
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Accruing TDRs
December 31, 2014
Recorded
investment
Average
year-to-
date
recorded
investment
Unpaid
principal
balance
Unfunded
commitments
to fund
TDRs
$
13,249
$
12,496
$
13,249
$
2,711
610
2,687
18
3,110
627
2,767
20
2,715
622
2,714
18
$
19,275
$
19,020
$
19,318
$
375
—
—
2
—
377
Accruing TDRs
December 31, 2013
Recorded
investment
Average
year-to-
date
recorded
investment
Unpaid
principal
balance
Unfunded
commitments
to fund
TDRs
$
6,079
$
7,113
$
6,084
$
20
2,484
2,995
27
20
2,759
3,055
30
20
2,743
3,023
27
$
11,605
$
12,977
$
11,897
$
144
—
—
12
12
168
105
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
The following table summarizes the Company’s carrying value of non-accrual TDRs as of December 31, 2014 and
December 31, 2013 (in thousands):
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Non - Accruing TDRs
December 31, 2014
December 31, 2013
Covered
Non-covered
Covered
Non-covered
$
$
1
$
3,993
$
— $
201
94
910
—
164
364
1,056
190
—
296
1,377
—
1,206
$
5,767
$
1,673
$
535
—
98
1,031
237
1,901
Accrual of interest is resumed on loans that were on non-accrual only after the loan has performed sufficiently. The
Company had two TDRs that were modified within the past 12 months and had defaulted on their restructured terms. The
defaulted TDRs consisted of a commercial loan and a consumer loan totaling $112 thousand.
During 2013, the Company had two TDRs that had been modified within the past 12 months that defaulted on its
restructured terms. The defaulted TDRs were a consumer loan and a residential real estate loan totaling $51 thousand. For
purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest.
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
310-30 resulted in the following changes in the carrying amount of accretable yield during 2014 and 2013 (in thousands):
Accretable yield beginning balance
Reclassification from non-accretable difference
Reclassification to non-accretable difference
Accretion
Accretable yield ending balance
December 31,
2014
December 31,
2013
$
130,624
$
47,252
(3,572)
(60,841)
113,463
$
$
133,585
80,694
(6,994)
(76,661)
130,624
Below is the composition of the net book value for loans accounted for under ASC 310-30 at December 31, 2014 and
December 31, 2013 (in thousands):
Contractual cash flows
Non-accretable difference
Accretable yield
Loans accounted for under ASC 310-30
December 31,
2014
December 31,
2013
$
$
751,932
(358,824)
(113,463)
279,645
$
$
984,019
(402,515)
(130,624)
450,880
106
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 7 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, 2014 and 2013 (in thousands):
Beginning balance
Non 310-30 beginning balance
Charge-offs
Recoveries
Provision (recoupment)
Non 310-30 ending balance
ASC 310-30 beginning balance
Charge-offs
Recoveries
Provision (recoupment)
ASC 310-30 ending balance
Ending balance
Ending allowance balance
attributable to:
Non 310-30 loans individually
evaluated for impairment
Non 310-30 loans collectively
evaluated for impairment
ASC 310-30 loans
Commercial
4,258
$
Agriculture
1,237
$
Year ended December 31, 2014
Commercial
real estate
Residential
real estate
Consumer
$
2,276
$
4,259
$
491
$
4,029
(507)
315
4,761
8,598
229
(3)
—
(226)
—
572
—
8
(39)
541
665
—
—
(197)
468
1,984
—
146
1,467
3,597
292
—
—
(70)
222
4,165
(739)
212
105
3,743
94
—
—
(66)
28
491
(783)
270
435
413
—
(36)
—
39
3
Total
12,521
11,241
(2,029)
951
6,729
16,892
1,280
(39)
—
(520)
721
$
8,598
$
1,009
$
3,819
$
3,771
$
416
$
17,613
$
82
$
— $
14
$
181
$
2
$
279
8,516
—
541
468
3,583
222
3,562
28
411
3
16,613
721
Total ending allowance balance
$
8,598
$
1,009
$
3,819
$
3,771
$
416
$
17,613
Loans:
Non 310-30 individually evaluated
for impairment
Non 310-30 collectively evaluated
for impairment
ASC 310-30 loans
Total loans
$
17,468
$
3,206
$
3,054
$
8,133
$
245
$
32,106
754,972
22,956
115,262
19,063
366,210
192,330
583,806
40,761
30,408
1,850,658
4,535
279,645
$ 795,396
$ 137,531
$
561,594
$ 632,700
$
35,188
$ 2,162,409
107
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Beginning balance
Non 310-30 beginning balance
Charge-offs
Recoveries
Provision (recoupment)
Non 310-30 ending balance
ASC 310-30 beginning balance
Charge-offs
Recoveries
Provision (recoupment)
ASC 310-30 ending balance
Ending balance
Ending allowance balance
attributable to:
Non 310-30 loans individually
evaluated for impairment
Non 310-30 loans collectively
evaluated for impairment
ASC 310-30 loans
Total ending allowance balance
Loans:
Non 310-30 individually evaluated
for impairment
Non 310-30 collectively evaluated
for impairment
ASC 310-30 loans
Total loans
$
$
$
$
Commercial
2,798
$
Agriculture
592
$
Year ended December 31, 2013
Commercial
real estate
Residential
real estate
Consumer
$
7,396
$
4,011
$
583
$
2,798
(1,654)
203
2,682
4,029
—
(496)
—
725
323
—
13
236
572
269
(221)
—
617
229
4,258
$
665
1,237
$
3,056
(943)
567
(696)
1,984
4,340
(2,801)
—
(1,247)
292
2,276
4,011
(882)
397
639
4,165
—
(623)
—
717
94
4,259
$
$
540
(1,001)
286
666
491
43
—
—
(43)
—
491
$
Total
15,380
10,728
(4,480)
1,466
3,527
11,241
4,652
(4,141)
—
769
1,280
12,521
416
$
1
$
36
$
490
$
3
$
946
3,613
229
571
665
1,948
292
3,675
94
488
—
10,295
1,280
4,258
$
1,237
$
2,276
$
4,259
$
491
$
12,521
7,360
$
173
$
4,476
$
9,365
$
273
$
21,647
414,624
61,511
132,779
27,000
278,546
291,198
527,548
63,011
28,070
1,381,567
8,160
450,880
$ 483,495
$ 159,952
$
574,220
$ 599,924
$
36,503
$ 1,854,094
In evaluating the loan portfolio for an appropriate ALL level, non-impaired loans that were not accounted for under ASC
310-30 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.
The Company had $1.1 million net charge-offs of non 310-30 loans during 2014. Strong credit quality trends of the non
310-30 loan portfolio continued during 2014, and, through management's evaluation, resulted in a provision for loan losses
on the non 310-30 loans of $6.7 million during 2014.
During 2014, the Company remeasured the expected cash flows of the loan pools accounted for under ASC 310-30
utilizing the same cash flow methodology used at the time of acquisition. The re-measurement resulted in net recoupment
of impairment of $520 thousand for 2014, which was comprised primarily of recoupment of previous valuation allowances
of $197 thousand in the agriculture segment and $226 thousand in the commercial segment.
The Company charged off $3.0 million, net of recoveries, of non ASC 310-30 loans during 2013. The Company had
previously provided specific reserves for $1.7 million of the net charge-offs realized during 2013. Improvements in credit
quality trends of the non 310-30 portfolio were seen in both past due and non-performing loans during 2013, and through
management's evaluation, resulted in a provision for loan losses on non 310-30 loans of $3.5 million.
108
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
During 2013, the Company remeasured the expected cash flows of the loans pools accounted for under ASC 310-30
utilizing the same cash flow methodology used at the time of acquisition. The re-measurement resulted in a net impairment
of $0.8 million for 2013. During 2013, the re-measurements resulted in a reversal of previous valuation allowances of
$1.2 million in the commercial real estate segment and net impairments of $0.7 million, $0.6 million and $0.7 million in
the residential real estate, agriculture, and commercial segments, respectively.
Note 8 FDIC Indemnification Asset
Under the terms of the purchase and assumption agreements 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. Covered assets may be resolved 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 gains or losses realized from the resolution of covered
assets reduce or increase, respectively, the amount recoverable from the FDIC. Covered gains or losses that are incurred in
excess of the expected reimbursements (which are reflected in the FDIC indemnification asset balance), are recognized in
the consolidated statements of operations as FDIC loss sharing income in the period in which they occur.
Below is a summary of the activity related to the FDIC indemnification asset during 2014 and 2013 (in thousands):
Balance at beginning of period
Amortization
FDIC portion of charge-offs exceeding fair value marks
Changes for FDIC loss share submissions
Balance at end of period
For the years ended December 31,
2014
2013
$
$
64,447
(27,741)
332
2,044
39,082
$
$
86,923
(18,960)
14,089
(17,605)
64,447
The $27.7 million of amortization of the FDIC indemnification asset recognized during 2014 resulted from an overall
increase in actual and expected cash flows of 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. The loss claims filed with the FDIC 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 2014, the Company
paid a net $2.0 million to the FDIC.
During 2013, the Company recognized $19.0 million of amortization on the FDIC indemnification asset, and further
reduced the carrying value of the FDIC indemnification asset by $17.6 million as a result of claims filed with the FDIC.
During 2013, the Company received $77.0 million in payments from the FDIC.
Note 9 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2014 and December 31, 2013 (in thousands):
Land
Buildings and improvements
Equipment
Total
Less: accumulated depreciation and amortization
Premises and equipment, net
December 31, 2014
30,106
$
69,046
37,732
136,884
(30,543)
106,341
$
December 31, 2013
29,238
$
69,446
36,692
135,376
(20,157)
115,219
$
The Company incurred $10.6 million, $10.5 million, and $7.1 million of depreciation expense during 2014, 2013, and
2012, respectively, which is included in occupancy and equipment expense. The Company disposed of $1.0 million, $3.4
million, and $0.1 million of premises and equipment, net, during 2014, 2013, and 2012, respectively. See note 25 for more
information on the Company's banking center closures in 2013.
109
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Space in certain facilities is leased under operating leases. Below is a summary of future minimum lease payments for the
years following 2014 (in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
$
$
3,656
3,400
2,760
2,254
1,919
13,804
27,793
Note 10 Other Real Estate Owned
A summary of the activity in the OREO balances during 2014 and 2013 is as follows (in thousands):
Beginning balance
Transfers from loan portfolio, at fair value
Impairments
Sales
Gain on sale of OREO, net
Ending balance
For the years ended December 31,
2014
2013
$
$
70,125
$
4,491
(2,103)
(56,519)
13,126
29,120
$
94,808
39,973
(10,349)
(61,260)
6,953
70,125
Of the $29.1 million of OREO at December 31, 2014, $18.5 million, or 63.4%, was covered by loss sharing agreements
with the FDIC. At December 31, 2013, $38.8 million, or 55.4%, of the $70.1 million of OREO was covered by loss sharing
agreements. Any losses on these assets are substantially offset by a corresponding change in the FDIC indemnification
asset.
The OREO balance at December 31, 2013 includes the interests of several outside participating banks totaling $4.2 million,
for which an offsetting liability is recorded in other liabilities. At December 31, 2014, the Company did not own property
that contained the interest of outside participating banks. The OREO balances exclude $8.1 million and $10.6 million at
December 31, 2014 and December 31, 2013, respectively, 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. The Company maintains
a receivable in other assets for these minority interests.
Note 11 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 is expected to 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 in each of 2014, 2013, and
2012. The accumulated amortization of the core deposit intangible assets was $20.4 million and $15.0 million at
December 31, 2014 and December 31, 2013, respectively.
The Company had goodwill of $59.6 million at December 31, 2014, 2013, and 2012. 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 2014, 2013, or 2012.
Note 12 Deposits
Total deposits were $3.8 billion at both December 31, 2014 and December 31, 2013. Time deposits decreased from $1.5
billion at December 31, 2013 to $1.4 billion at December 31, 2014. The following table summarizes the Company’s time
110
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
deposits, based upon contractual maturity, at December 31, 2014 and December 31, 2013, by remaining maturity (in
thousands):
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
Total time deposits
December 31, 2014
December 31, 2013
Balance
256,091
255,301
423,329
321,073
63,806
24,467
7,748
5,236
1,357,051
$
$
Weighted
Average
Rate
0.46% $
0.56%
0.71%
0.89%
1.05%
1.24%
1.22%
1.47%
0.71% $
Balance
361,454
258,715
402,791
365,100
63,290
21,362
17,519
5,456
1,495,687
Weighted
Average
Rate
0.55%
0.49%
0.54%
0.92%
1.46%
1.35%
1.29%
1.62%
0.69%
The Company incurred interest expense on deposits as follows during the periods indicated (in thousands):
Interest bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Total
For the years ended December 31,
2014
2013
2012
$
$
317
$
620
$
3,467
539
9,797
3,424
227
12,122
14,120
$
16,393
$
1,230
3,969
283
23,643
29,125
The Federal Reserve System requires cash balances to be maintained at the Federal Reserve Bank based on certain deposit
levels. The minimum reserve requirement for the Bank at December 31, 2014 was $24.9 million.
Note 13 Borrowings
The following table sets forth selected information regarding repurchase agreements during 2014, 2013, and 2012 (in
thousands):
As of and for the year ended December 31,
2013
2012
2014
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
$
$
133,552
99,057
$
$
0.13%
122,879
84,355
$
$
0.14%
74,050
52,385
0.18%
As of December 31, 2014, 2013, and 2012, the Company had pledged mortgage-backed securities with a fair value of
approximately $152.4 million, $119.1 million, and $90.9 million, respectively, for securities sold under agreements to
repurchase. Additionally, there was $18.8 million, $19.5 million, and $37.2 million of excess collateral pledged for
repurchase agreements at December 31, 2014, 2013, and 2012, respectively.
The vast majority of the Company’s repurchase agreements are overnight transactions with clients that mature the day after
the transaction. During 2014, 2013, and 2012, the overnight agreements had a weighted average interest rate of 0.13%,
0.14%, and 0.18%, respectively. At December 31, 2014, none of the Company’s repurchase agreements were for periods
longer than one day. At December 31, 2013 and 2012, $20.0 million and $20 thousand, respectively, of the Company’s
repurchase agreements were for periods longer than one day. The repurchase agreements are subject to a master netting
arrangement; however, the Company has not offset any of the amounts shown in the consolidated financial statements.
111
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
As a member of the Des Moines FHLB, the Bank has access to term financing from the FHLB. These borrowing are
secured under an advance, pledge and securities agreement, which includes primarily real estate loans. Total advances at
December 31, 2014 were $40.0 million. All of the outstanding advances have fixed interest rates. At December 31, 2013,
the Company had no FHLB advances. More information about FHLB advances at December 31, 2014 is detailed in the
table below (dollars in thousands):
Maturity Year
December 31, 2014 balance
Rate
2016
2018
2020
$
$
$
15,000
10,000
15,000
0.84%
1.81%
2.33%
Note 14 Regulatory Capital
The Company and its subsidiary bank 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. 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, 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. Effective
January 2015, the minimum capital ratio of 6.00% for tier 1 risk-based capital will increase to 8.00%. In connection with
the approval of the de novo charter for NBH Bank, the Company agreed to maintain capital levels of at least 10.00% tier 1
leverage ratio, 11.00% tier 1 risk-based capital ratio and 12.00% total risk-based capital ratio at our subsidiary bank. In
October 2013, NBH Bank received approval and a waiver from the OCC under the OCC Operating Agreement to
permanently reduce the bank's capital by $313.00 million. As a result, the bank paid a $313.00 million cash dividend to the
Company.
112
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
At December 31, 2014 and December 31, 2013, NBH Bank 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 (in
thousands):
December 31, 2014
Required to be
considered well
capitalized (1)
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
15.0% $
712,222
12.1%
573,934
N/A
N/A
10% $
473,478
4% $
190,148
4%
189,391
28.9% $
712,222
23.5%
573,934
6% $
147,796
11%
268,855
4% $
4%
98,530
97,766
29.6% $
730,086
24.2%
591,799
10% $
246,326
12%
293,297
8% $
197,061
8%
195,531
December 31, 2013
Required to be
considered well
capitalized (1)
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
16.6% $
11.3%
822,688
556,876
N/A
10% $
N/A
491,294
4% $
4%
197,906
196,518
38.9% $
26.6%
822,688
556,876
6% $
11%
126,865
230,334
4% $
4%
84,577
83,758
39.5% $
27.2%
835,810
569,998
10% $
12%
211,442
251,273
8% $
8%
169,153
167,515
Tier 1 leverage ratio
Consolidated
NBH Bank, N.A.
Tier 1 risk-based capital ratio (2)
Consolidated
NBH Bank, N.A.
Total risk-based capital ratio (2)
Consolidated
NBH Bank, N.A.
Tier 1 leverage ratio
Consolidated
NBH Bank, N.A.
Tier 1 risk-based capital ratio (2)
Consolidated
NBH Bank, N.A.
Total risk-based capital ratio (2)
Consolidated
NBH Bank, N.A.
(1) These ratio requirements for NBH Bank are reflective of the agreements NBH Bank has made with its regulators in
connection with the approval of its de novo charter.
(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 15 FDIC Loss Sharing (Expense) Income
In connection with the loss sharing agreements that the Company has with the FDIC with 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
113
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Company’s FDIC loss sharing (expense) income during 2014, 2013, and 2012 (in thousands):
Clawback liability amortization
Clawback liability remeasurement
Reimbursement to FDIC for gain on sale of and income from
covered OREO
Reimbursement to FDIC for recoveries
FDIC reimbursement of covered asset resolution costs
Total
Note 16 Stock-based Compensation and Benefits
For the years ended December 31,
2014
2013
2012
$
$
(1,364) $
(2,509)
(10,053)
(193)
5,257
(8,862) $
(1,259) $
65
(5,235)
(87)
9,327
2,811
$
(1,377)
100
(3,457)
(3)
16,806
12,069
The Company provides stock-based compensation in accordance with shareholder-approved plans. During the second
quarter of 2014, shareholders approved the 2014 Omnibus Incentive Plan (the "2014 Plan"). The 2014 Plan replaces the
NBH Holdings Corp. 2009 Equity Incentive Plan (the "Prior Plan"), pursuant to which the Company granted equity awards
prior to the approval of the 2014 Plan. Pursuant to the 2014 Plan, the compensation committee of the board of directors
has the authority to grant, from time to time, awards of options, stock appreciation rights, restricted stock, restricted stock
units, performance units, other stock-based awards, or any combination thereof to eligible persons.
The aggregate number of Class A common stock available for issuance under the 2014 Plan is 5,129,670 shares. Any
shares that are subject to stock options or stock appreciation rights under the 2014 Plan will be counted against the amount
available for issuance as one share for every one share granted, and any shares that are subject to awards under the 2014
Plan other than stock options or stock appreciation rights will be counted against the amount available for issuance as 3.25
shares for every one share granted. The 2014 Plan provides for recycling of shares from both the Prior Plan and the 2014
Plan, the terms of which are further described in the Company's Proxy Statement for its 2014 Annual Meeting of
Shareholders.
To date, the Company has issued stock options and restricted stock under the plans. 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 issued stock options and restricted stock during 2014, 2013, and 2012. The expense associated with the
awarded stock options was measured at fair value using a Black-Scholes option-pricing model. Restricted stock with time-
based vesting was valued at the fair value of the shares on the date of grant since they are assumed to be held beyond the
vesting period. Restricted stock awards with market vesting components (granted in 2012) were 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.
The option awards vest on a graded basis over 1-4 years of continuous service and have 7-10 year contractual terms.
Below are the weighted average assumptions used in the Black-Scholes option pricing model to determine fair value of the
Company’s stock options granted in 2014:
Risk-free interest rate
Expected volatility
Expected term (years)
Dividend yield
Black-Scholes
2.02%
33.94%
6.01
1.06%
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 publicly traded 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,
114
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
modifications, repurchases or cancellations that occur subsequent to the Company becoming a publicly traded 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. For awards granted after the Company became a publicly traded entity, expected volatility was calculated
using a time-based weighted migration of the Company’s own stock price volatility coupled with those of a peer group of
eight comparable publicly traded companies for a period commensurate with the expected term of the options. 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.
During 2014, the Company granted 114,668 options. The options are time-vesting with 1/3 vesting on each of the first,
second, and third anniversary of the date of grant or date of hire.
The Company issued stock options and restricted stock in accordance with the plans during 2014. The following table
summarizes stock option activity for 2014:
Outstanding at December 31, 2013
Granted
Forfeited
Surrendered
Exercised
Expired
Outstanding at December 31, 2014
Options fully vested and exercisable at December 31, 2014
Options expected to vest
Weighted
Average
Exercise
Price
19.92
18.93
18.15
20.00
20.00
20.00
19.90
19.99
19.09
Options
3,515,486
114,668
(19,460)
(9,705)
(295)
(3,583)
3,597,111
3,254,331
331,176
$
$
$
$
Weighted
Average
Remaining
Contractual
Term in
Years
6.13
Aggregate
Intrinsic
Value
$ 5,183,567
4.46
4.04
8.18
$
$
$
223,211
—
191,914
Options granted during 2014, 2013, and 2012 had weighted average grant date fair values of $6.08, $5.56, and $8.43. The
following table summarizes information about the Company's outstanding stock options at December 31, 2014:
Options outstanding
Options vested
Exercise price
18.09
18.23
18.92
19.39
19.56
20.00
20.48
20.54
$
$
$
$
$
$
$
$
Number outstanding
101,700
30,000
109,300
520
1,168
3,325,222
2,801
26,400
Weighted average
remaining contractual
life (years)
Weighted average
exercise price
Number vested
Weighted average
exercise price
8.25
7.55
9.42
9.85
9.36
$
$
$
$
$
4.11 $
8.85
8.60
$
$
18.09
18.23
18.92
19.39
19.56
20.00
20.48
20.54
— $
15,000
$
— $
— $
— $
—
18.23
—
—
—
3,239,331
$
20.00
— $
— $
—
—
Stock option expense is included in salaries and benefits in the accompanying consolidated statements of operations and
totaled $1.2 million, $2.2 million, and $6.7 million for 2014, 2013, and 2012, respectively. At December 31, 2014, there
115
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
was $0.8 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. The
cost is expected to be recognized over a weighted average period of 0.6 years.
Expense related to non-vested restricted stock totaled $2.3 million, $2.7 million, and $6.3 million during 2014, 2013, and
2012, respectively, and is included in salaries and benefits in the Company’s consolidated statements of operations. As of
December 31, 2014, there was $2.0 million of total unrecognized compensation cost related to non-vested restricted shares
granted under the plans, which is expected to be recognized over a weighted average period of 0.9 years. The following
table summarizes restricted stock activity for 2014:
Unvested at December 31, 2013
Vested
Granted
Forfeited
Surrendered
Unvested at December 31, 2014
Note 17 Warrants
Total
Restricted
Shares
1,064,460
(42,880)
147,606
(184,790)
(28,998)
955,398
Weighted
Average Grant-
Date Fair Value
15.16
$
19.32
18.98
19.49
19.08
14.61
$
At December 31, 2014 and December 31, 2013, the Company had 830,750 issued and outstanding warrants to purchase
Company stock. The warrants were granted to certain lead shareholders 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 $3.3 million and
$6.3 million at December 31, 2014 and December 31, 2013, respectively. The fair value of the warrants was estimated
using a Black-Scholes option pricing model utilizing the following assumptions at the indicated dates:
Risk-free interest rate
Expected volatility
Expected term (years)
Dividend yield
December 31, 2014 December 31, 2013 December 31, 2012
1.18%
37.72%
7-8
1.05%
1.67%
24.18%
5-6
1.03%
2.16%
33.80%
6-7
0.93%
The Company’s shares became publicly traded on September 20, 2012 and prior to that, had limited private trading. Due to
the limited historical volatility of the Company's own stock, 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 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 $3.0 million during 2014, expense of $0.8 million in 2013, and a benefit of $1.4
million during 2012, respectively, in the consolidated statements of operations resulting from the change in fair value of the
warrant liability.
Note 18 Common Stock
During 2014, the Company repurchased 6,076,558 shares for $119.4 million at a weighted average price of $19.63 per
share. On October 21, 2014, the Board of Directors authorized a share repurchase program for up to $50.0 million in share
repurchases from time to time in either the open market or through privately negotiated transactions. As of December 31,
2014, the Company has repurchased $19.3 million of shares under the $50.0 million share repurchase program approved by
the Board of Directors on October 21, 2014. On February 11, 2015, the Board of Directors authorized a new share
repurchase program for up to $50.0 million from time to time in either the open market or through privately negotiated
transactions.
The Company had 38,017,179 shares of Class A common stock and 867,774 shares of Class B common stock outstanding
as of December 31, 2014, and 41,890,562 shares of Class A common stock and 3,027,774 shares of Class B common stock
116
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
outstanding as of December 31, 2013. Additionally, as of December 31, 2014 and December 31, 2013, the Company had
955,398 and 1,064,460 shares, respectively, of restricted Class A common stock issued but not yet vested under the 2014
Plan and the Prior Plan.
Note 19 Income (Loss) Per Share
The Company calculates income (loss) per share under the two-class method, as certain non-vested share awards contain
non-forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the
Company. Non-vested shares are discussed further in note 16.
The Company had 38,884,953 and 44,918,336 shares outstanding (inclusive of Class A and B) as of December 31, 2014
and 2013, respectively. Certain stock options and non-vested restricted shares 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 2014, 2013, and
2012.
The following table illustrates the computation of basic and diluted income per share for 2014, 2013, and 2012 (in
thousands, except share and earnings per share information):
For the years ended December 31,
2013
2012
2014
Distributed earnings
Undistributed earnings (distributions in excess of earnings)
Net income (loss)
Less: earnings allocated to participating securities
Earnings allocated to common shareholders
$
$
$
8,614
562
9,176
(38)
9,138
$
$
$
10,234
(3,307)
6,927
(17)
6,910
Weighted average shares outstanding for basic earnings per common share
42,404,609
50,790,410
$
$
$
2,664
(3,207)
(543)
—
(543)
52,214,175
Dilutive effect of equity awards
Dilutive effect of warrants
16,405
—
34,012
—
—
—
Weighted average shares outstanding for diluted earnings per common share
42,421,014
50,824,422
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
0.22
0.22
$
$
0.14
0.14
52,214,175
(0.01)
(0.01)
$
$
The Company had 3,597,111, 3,515,486, and 3,471,665 outstanding stock options to purchase common stock at weighted
average exercise prices of $19.90, $19.92, and $19.98 per share at December 31, 2014, 2013, and 2012, respectively, which
have time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had
been met and where the inclusion of those stock options is dilutive. Additionally, the Company had 830,750 outstanding
warrants to purchase the Company’s common stock as of December 31, 2014, 2013, and 2012. The warrants have an
exercise price of $20.00, which was out-of-the-money for purposes of dilution calculations during all of the years presented
above. The Company had 955,398, 1,064,460, and 951,668 unvested restricted shares outstanding as of December 31,
2014, 2013, and 2012, respectively, which have performance, market and/or time-vesting criteria, and as such, any dilution
is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those restricted
shares is dilutive.
117
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 20 Income Taxes
(a) Income taxes
Total income taxes for 2014, 2013, and 2012 were allocated as follows (in thousands):
Current expense:
U.S. federal
State and local
Total
Deferred (benefit) expense:
U.S. federal
State and local
Total
Income tax expense
(b) Tax Rate Reconciliation
For the years ended December 31,
2013
2012
2014
$
$
$
$
17,032
1,909
18,941
$
$
(13,830) $
(1,946)
(15,776)
3,165
$
5,058
486
5,544
$
$
(1,278) $
(316)
(1,594)
3,950
$
24,987
2,826
27,813
(21,078)
(2,155)
(23,233)
4,580
Income tax expense attributable to income before taxes was $3.2 million, $4.0 million, and $4.6 million for 2014, 2013,
and 2012, 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
Tax-exempt loan interest income
Bank-owned life insurance income
Stock-based compensation
Warrant valuation
Nondeductible initial public offering related expenses
Other
Income tax expense
For the years ended December 31,
2013
2012
2014
$
$
4,319
(24)
(889)
(177)
930
(1,034)
—
40
3,165
$
$
3,807
111
(64)
—
130
287
—
(321)
3,950
$
$
1,413
436
(82)
—
49
(485)
3,127
122
4,580
118
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
(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, 2014 and 2013 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
Accrued compensation
Capitalized start-up costs
Accrued expenses
Net deferred loan fees
Net unrealized losses on investment securities
Other
Total deferred tax assets
Deferred tax liabilities:
FDIC indemnification asset net of clawback liability
Net unrealized gains on investment securities
Premises and equipment
Prepaid expenses
Other
Total deferred tax liabilities
Net deferred tax asset
December 31, 2014
December 31, 2013
$
$
$
$
6,787
6,707
16,660
1,411
13,527
1,519
5,576
1,917
997
—
549
55,650
$
$
(2,064) $
(3,590)
(4,040)
(450)
—
(10,144)
45,506
$
5,437
4,767
18,681
2,088
13,734
1,056
6,098
1,851
832
4,154
283
58,981
(14,486)
—
(6,437)
(569)
(15)
(21,507)
37,474
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, 2014 and 2013, 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, 2014 and 2013 and does not expect the total amount of
unrecognized tax benefits to significantly increase within the next 12 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, 2011 through 2014 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.
Certain stock-based compensation awards granted by the Company have market-based vesting/exercisability criteria. For
restricted stock with market-based vesting, the target share prices of the Company's stock that is required for vesting range
from $25.00 to $34.00 per share. The strike prices for options range from $18.09 to $20.54, with a large portion of the
awards having strike prices of $20.00. Due to the Company's stock price, these stock-based compensation awards may
expire unexercised or may be exercised at an intrinsic value that is less than the fair value recorded at the time of grant, and
therefore, the related tax benefits may not be realizable in future periods. In this case, upon the expiration or exercise (or
forfeiture in the case of the restricted stock with market-based vesting criteria) of these awards, any related remaining
deferred tax asset would be written off through a charge to income tax expense. In particular, certain awards granted to
former executives are expected to expire in 2015 and may result in the write-off of the related deferred tax asset of up to
$2.0 million. Of the $13.5 million deferred tax asset related to stock-based compensation at December 31, 2014, $9.7
million is associated with executive officers still employed by the Company.
119
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 21 Derivatives
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company
has established policies that neither carrying value nor fair value at risk should exceed established guidelines. The
Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in
the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help
achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently the
Company employs certain interest rate swaps that are designated as fair value hedges as well as economic hedges. The
Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure
resulting from such transactions.
Fair values of derivative instruments on the balance sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on
the Consolidated Statements of Financial Condition as of December 31, 2014 and December 31, 2013 (in thousands).
Information about the valuation methods used to measure fair value is provided in note 23.
Asset Derivatives
Fair Value
Liability Derivatives
Fair Value
Balance Sheet
Location
December 31,
2014
December 31,
2013
Balance Sheet
Location
December 31,
2014
December 31,
2013
Derivatives designated as
hedging instruments
Interest rate products
Other assets
Total derivatives designated as
hedging instruments
Derivatives not designated as
hedging instruments
Interest rate products
Other assets
Total derivatives not designated
as hedging instruments
Fair value hedges of interest rate risk
$
$
$
$
10
10
1,418
1,418
$
$
$
$
129
129
73
73
Other
liabilities
Other
liabilities
$
$
$
$
3,206
3,206
1,522
1,522
$
$
$
$
—
—
74
74
Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in
exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the
underlying notional amount. As of December 31, 2014, the Company had eleven interest rate swaps with a notional
amount of $68.8 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed-
rate loans. The Company had one outstanding interest rate swap with a notional amount of $10.0 million that was
designated as a fair value hedge as of December 31, 2013.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain
or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During 2014, the
Company recognized a net loss of $354.2 thousand in non-interest expense related to hedge ineffectiveness. During 2013,
the Company recognized a net gain of $10 thousand in non-interest income related to hedge ineffectiveness.
Non-designated hedges
Derivatives not designated as hedges are not speculative and consist of interest rate swaps with commercial banking clients
that facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by
offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk
exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict
120
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized
directly in earnings. As of December 31, 2014, the Company had eleven matched interest rate swap transactions with an
aggregate notional amount of $35.9 million related to this program. As of December 31, 2013, the Company had three
matched interest rate swap transactions with an aggregate notional amount of $7.3 million related to this program.
Effect of derivative instruments on the consolidated statements of operations
The tables below present the effect of the Company’s derivative financial instruments on the consolidated statement of
operations for 2014 and 2013 (in thousands):
Derivatives in fair value
hedging relationships
Interest rate products
Total
Location of (loss) or gain
recognized in income on
derivatives
Interest income
Amount of (loss) or gain recognized in income on derivatives
For the years ended December 31,
2014
2013
$
$
(3,325) $
— $
129
129
Derivatives in fair value
hedging relationships
Interest rate products
Total
Location of gain or (loss)
recognized in income on
derivatives
Interest income
Derivatives not designated as
hedging instruments
Interest rate products
Total
Location of gain or loss
recognized in income on
derivatives
Other non-interest income
Credit-risk-related contingent features
Amount of gain or (loss) recognized in income on hedged items
For the years ended December 31,
2014
2013
$
$
$
$
2,971
2,971
$
$
(120)
(120)
Amount of gain or loss recognized in income on derivatives
For the years ended December 31,
2014
2013
(103) $
(103) $
(1)
(1)
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on
any of its indebtedness for reasons other than an error or omission of an administrative or operational nature,
including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could
also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the
Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to
terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of December 31, 2014, the termination value of derivatives in a net liability position related to these agreements was
$1.9 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has
minimum collateral posting thresholds with certain of its derivative counterparties and as of December 31, 2014, the
Company had posted $5.5 million in eligible collateral.
Note 22 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
121
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
excess of the amount recognized in the consolidated statements of financial condition. At December 31, 2014 and
December 31, 2013, the Company had loan commitments totaling $485.5 million and $383.9 million, respectively, and
standby letters of credit that totaled $10.0 million and $5.9 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 under non-cancelable commitments in effect at the date of
acquisition are covered under the applicable loss sharing agreements if certain conditions are met.
Total unfunded commitments at December 31, 2014 and December 31, 2013 were as follows (in thousands):
December 31, 2014
December 31, 2013
Covered
Non-covered
Total
Covered
Non-covered
Total
Commitments to fund loans
Residential
Commercial and commercial real estate
Construction and land development
Consumer
Credit card lines of credit
Unfunded commitments under lines of credit
Commercial and standby letters of credit
$
— $
1,683
$
1,683
$
— $
1,303
$
1,303
11
—
—
—
7,645
234
202,593
35,814
4,376
18,065
202,604
35,814
4,376
18,065
415
—
—
—
169,214
2,911
4,435
17,322
169,629
2,911
4,435
17,322
215,305
222,950
13,162
175,177
188,339
9,731
9,965
443
5,487
5,930
Total
$
7,890
$ 487,567
$ 495,457
$ 14,020
$ 375,849
$ 389,869
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
Bank. 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.
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 the Bank 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.
122
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 23 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 underlying collateral. Although, in some instances, third party price indications may be available,
limited trading activity can challenge the observability of these quotations.
Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in
current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another
level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting
period that the transfer occurs. During 2014 and 2013, there were no transfers of financial instruments between the
hierarchy levels.
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. At December 31, 2014 and December 31, 2013, the Company did not hold any
level 1 securities. 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, 2014, the Company’s level 2 securities
included mortgage-backed securities comprised of residential mortgage pass-through securities and other residential
mortgage-backed securities. At December 31, 2013, the Company’s level 2 securities included asset backed securities,
mortgage-backed securities comprised of residential mortgage pass-through securities, and other residential mortgage-
backed securities. All other investment securities are classified as level 3.
Derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as fair
value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to
appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar
amount of the fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the
potential loss over the life of the trade. The credit valuation adjustments are calculated by determining the total expected
exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the
respective counterparties’ credit spreads to the exposure offset by marketable collateral posted, if any. Certain derrivative
123
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
transactions are executed with counterparties who are large financial institutions ("dealers"). International Swaps and
Derivative Association Master Agreements ("ISDA") and Credit Support Annexes ("CSA") are employed for all contracts
with dealers. These contracts contain bilateral collateral arrangements. The fair value inputs of these financial instruments
are determined using discounted cash flow analysis through the use of third-party models whose significant inputs are
readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk, and
are classified as level 2.
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 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 eight comparable companies with publicly traded shares, and is deemed a significant unobservable input
to the valuation model, as such these investments are classified as level 3.
Clawback liability—The Company periodically 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. 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, as such these investments are classified
as level 3.
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31, 2014 and
December 31, 2013 on the consolidated statements of financial condition utilizing the hierarchy structure described above
(in thousands):
December 31, 2014
Level 1
Level 2
Level 3
Total
Assets:
Investment securities available-for-sale:
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
Derivatives
Total assets at fair value
Liabilities:
Warrant liability
Clawback liability
Derivatives
Total liabilities at fair value
$
$
$
$
— $
404,215
$
— $
404,215
—
—
—
1,074,580
—
1,428
—
419
—
1,074,580
419
1,428
— $ 1,480,223
$
419
$ 1,480,642
— $
— $
3,328
$
—
—
—
4,728
36,338
—
— $
4,728
$
39,666
$
3,328
36,338
4,728
44,394
124
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Assets:
Investment securities available-for-sale:
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
Derivatives
Total assets at fair value
Liabilities:
Warrant liability
Clawback liability
Derivatives
Total liabilities at fair value
$
$
$
December 31, 2013
Level 1
Level 2
Level 3
Total
$
— $
4,537
$
— $
4,537
—
—
—
—
494,990
1,285,582
—
202
—
—
419
—
494,990
1,285,582
419
202
— $ 1,785,311
$
419
$ 1,785,730
— $
— $
6,281
$
—
—
— $
—
74
74
32,465
—
6,281
32,465
74
$
38,746
$
38,820
The table below details the changes in level 3 financial instruments during 2014 and 2013 (in thousands):
Balance at December 31, 2012
Change in value
Amortization
Net change in level 3
Balance at December 31, 2013
Change in value
Amortization
Net change in Level 3
Balance at December 31, 2014
Warrant
liability
Clawback
liability
5,461
820
—
820
6,281
(2,953)
—
(2,953)
3,328
$
$
$
31,271
(65)
1,259
1,194
32,465
2,509
1,364
3,873
36,338
$
$
$
Fair Value of Financial Instruments Measured on a Non-recurring Basis
Certain assets may be recorded at fair value on a non-recurring basis as conditions warrant. These non-recurring fair value
measurements typically result from the application of lower of cost or fair value accounting or a write-down occurring
during the period.
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 2014, the Company measured 19 loans not accounted for under ASC 310-30 at fair value on a non-
recurring basis. These loans carried specific reserves totaling $0.2 million at December 31, 2014. During 2014, the
Company added specific reserves of $0.3 million for nine loans with carrying balances of $2.4 million at December 31,
2014. The Company also eliminated specific reserves of $1.0 million for 13 loans during 2014, primarily due to paydowns,
charge offs, or transfers to OREO.
125
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
During 2013, the Company measured 31 loans not accounted for under ASC 310-30 at fair value on a non-recurring basis.
These loans carried specific reserves totaling $0.9 million at December 31, 2013. During 2013, the Company added
specific reserves of $0.9 million for 13 loans with carrying balances of $4.3 million at December 31, 2013. The Company
also eliminated specific reserves of $2.0 million for 35 loans during 2013, primarily due to paydowns on these loans.
The Company may be required to record fair value adjustments on loans held-for-sale on a non-recurring basis. The non-
recurring fair value adjustments could involve lower of cost or fair value accounting and may include write-downs.
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 $2.1 million of OREO impairments in its consolidated statements of operations during 2014, of
which $1.2 million, or 56.7%, were on OREO that was covered by loss sharing agreements with the FDIC. During 2013,
the Company recognized $10.3 million of OREO impairments in its consolidated statements of operations, of which $6.8
million, or 66.1% , 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 at December 31,
2014 and 2013 (in thousands):
Other real estate owned
Impaired loans
Other real estate owned
Impaired loans
$
$
December 31, 2014
Level 1
Level 2
Level 3
Total
Losses from fair
value changes
— $
—
— $
—
$
29,120
32,091
$
29,120
32,091
2,103
552
December 31, 2013
Level 1
Level 2
Level 3
Total
Losses from fair
value changes
— $
—
— $
70,125
$
70,125
$
10,349
—
21,647
21,647
133
The Company did not record any liabilities for which the fair value was made on a non-recurring basis during 2014 and
2013.
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, 2014. 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
(in thousands):
Fair value at
December 31,
2014
Valuation Technique
Unobservable Input
Quantitative
Measures
Other securities
$
Cash investment in private
equity fund
419
Cash investment
Impaired loans
32,091 Appraised value
Clawback liability
36,338
Contractually defined
discounted cash flows
Warrant liability
3,328 Black-Scholes
Appraised values
Discount rate
Intrinsic loss estimates
Expected credit losses
Discount rate
Volatility
0-25%
$323.3 million -
$405 million
—
4%
18%-30%
126
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 24 Fair Value of Financial Instruments
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, 2014 and December 31, 2013, including methods and assumptions utilized for determining
fair value of financial instruments, are set forth below (in thousands):
127
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Level in fair
value
measurement
hierarchy
Level 1
Level 2
December 31, 2014
December 31, 2013
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
$
256,979
$
256,979
$
189,460
$
189,460
—
—
4,537
4,537
Level 2
404,215
404,215
494,990
494,990
Level 2
Level 3
1,074,580
419
1,074,580
419
1,285,582
419
1,285,582
419
Level 2
422,622
428,323
513,090
511,489
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
Level 3
Level 2
Level 2
107,968
106,314
128,817
124,916
7,595
19,450
7,595
19,450
6,643
25,020
6,643
25,020
2,144,796
2,193,222
1,841,573
1,923,888
5,146
11,465
1,428
5,146
11,465
1,428
5,787
11,355
202
5,787
11,355
202
2,409,137
1,357,051
2,409,137
1,357,885
2,342,622
1,495,687
2,342,622
1,498,798
133,552
133,552
40,000
42,011
3,328
3,608
4,728
40,465
42,011
3,328
3,608
4,728
99,547
—
41,882
6,281
3,058
74
99,547
—
41,882
6,281
3,058
74
ASSETS
Cash and cash equivalents
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
Other securities
Mortgage-backed securities—residential
mortgage pass-through securities issued or
guaranteed by U.S. Government agencies or
sponsored enterprises held-to-maturity
Mortgage-backed securities—other
residential mortgage-backed 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, net
Loans held-for-sale
Accrued interest receivable
Derivatives
LIABILITIES
Deposit transaction accounts
Time deposits
Securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Due to FDIC
Warrant liability
Accrued interest payable
Derivatives
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.
128
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Loans receivable
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.
Loans held-for-sale
Loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. The portfolio consists primarily of
fixed rate residential mortgage loans that are sold within 45 days. The estimated fair value is based on quoted market prices
for similar loans in the secondary market and are classified as level 2.
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.
Derivative assets and liabilities
Fair values for derivative assets and liabilities are fully described in note 23.
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.
Warrant liability
The warrant liability is estimated using a Black-Scholes model, the assumptions of which are detailed in note 17 of our
audited consolidated financial statements.
Accrued interest payable
Accrued interest payable has a short-term nature and the estimated fair value is equal to the carrying value.
129
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 25 Banking Center Closures
On September 30, 2013, the Company announced plans to integrate 32 limited-service retirement center locations
(acquired in its 2010 purchase of Hillcrest Bank) and exit four banking centers in Northern California (acquired in its 2011
purchase of Community Banks of Colorado). The affected centers were closed at the conclusion of business on
December 31, 2013. Included in the year ended December 31, 2013 operating results are $3.4 million of expenses incurred
in connection with the closures, including $3.3 million related to facilities expense, which are included in the Banking
center closure related expenses line on the consolidated statement of operations in the accompanying financial statements.
Valuation adjustments to banking center properties and fixed assets were based on prices for similar assets and account for
$2.5 million of the facilities expense and $0.8 million of the facilities expense relates to lease costs. No additional material
charges or future cash expenditures are expected at this time.
Prior to the announcement, the impacted centers had $0.2 million loans outstanding, the limited-service retirement center
locations had $94.0 million in total deposits and the California banking centers had $65.8 million in total deposits.
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)
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31, 2014 December 31, 2013
$
$
$
$
123,144
656,287
19,121
798,552
3,977
3,977
794,575
798,552
$
$
$
$
252,848
631,980
3,024
887,852
(9,940)
(9,940)
897,792
887,852
Condensed Statements of Operations
(In thousands)
Interest income
Undistributed equity from subsidiaries
Dividends from subsidiaries
Other income
Total income
Expenses
Salaries and benefits
Other expenses
Total expenses
Operating income (loss)
Income tax benefit
Net income (loss)
For the years ended December 31,
2013
2012
2014
$
$
2
11,712
—
—
11,714
3,572
751
4,323
7,391
(1,785)
9,176
$
$
98
(299,836)
313,000
3
13,265
4,861
4,521
9,382
3,883
(3,044)
6,927
$
$
255
17,699
—
—
17,954
15,934
9,216
25,150
(7,196)
(6,653)
(543)
130
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Condensed Statements of Cash Flows
(In thousands)
For the years ended December 31,
2013
2012
2014
Cash flows from operating activities:
Net income (loss)
Undistributed equity from subsidiaries
Stock-based compensation expense
Other
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Repurchase of common stock
Issuance of vested restricted stock
Payment of dividends
Excess tax benefit on stock-based compensation
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
$
$
$
9,176
(11,712)
3,572
(2,325)
(1,289)
$
6,927
299,836
4,861
(2,311)
309,313
—
—
—
—
(119,370)
(576)
(8,476)
7
(128,415)
(129,704)
252,848
123,144
$
(146,736)
(256)
(10,139)
24
(157,107)
152,206
100,642
252,848
$
Note 27 Quarterly Results of Operations (unaudited)
The following is a summary of quarterly results (in thousands, except per share data):
Interest and dividend income
$
46,280
$
45,492
$
46,005
$
46,885
$
Interest expense
3,696
3,597
3,582
3,538
December 31, 2014
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
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 before income taxes
Income tax expense
Net income
Income per share-basic
Income per share-diluted
42,584
1,265
41,319
(5,117)
33,149
3,053
774
2,279
0.06
0.06
$
$
$
131
$
$
$
41,895
1,515
40,380
1,614
37,981
4,013
676
3,337
0.08
0.08
$
$
$
42,423
1,660
40,763
2,161
39,855
3,069
940
2,129
0.05
0.05
$
$
$
43,347
1,769
41,578
(354)
39,018
2,206
775
1,431
0.03
0.03
$
$
$
(543)
(17,699)
13,078
(3,530)
(8,694)
(10)
(10)
(4)
(1,588)
(2,664)
—
(4,256)
(12,960)
113,602
100,642
Total
184,662
14,413
170,249
6,209
164,040
(1,696)
150,003
12,341
3,165
9,176
0.22
0.22
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Fourth
quarter
Third
quarter
December 31, 2013
Second
quarter
First
quarter
Interest and dividend income
$
47,377
$
49,522
$
48,478
$
50,098
$
Interest expense
3,787
4,007
4,191
4,529
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 before income taxes
Income tax expense (benefit)
Net income
Income per share-basic
Income per share-diluted
43,590
772
42,818
2,364
44,238
944
(56)
1,000
0.02
0.02
$
$
$
45,515
437
45,078
3,338
46,613
1,803
856
947
0.02
0.02
$
$
$
44,287
1,670
42,617
7,324
45,230
4,711
1,813
2,898
0.06
0.06
$
$
$
45,569
1,417
44,152
7,151
47,884
3,419
1,337
2,082
0.04
0.04
$
$
$
$
$
$
Interest and dividend income
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
Non-interest expense
Income (loss) before income taxes
Income tax expense
Net income (loss)
Income (loss) per share-basic
Income (loss) per share-diluted
December 31, 2012
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
$
54,708
$
56,042
$
59,845
$
62,890
$
5,124
6,546
7,932
9,632
49,584
2,670
46,914
8,997
51,367
4,544
1,541
3,003
0.06
0.06
$
$
$
49,496
5,263
44,233
8,063
59,957
(7,661)
230
(7,891) $
(0.15) $
(0.15) $
51,913
12,226
39,687
10,049
45,301
4,435
1,733
2,702
0.05
0.05
$
$
$
53,258
7,836
45,422
10,270
52,973
2,719
1,076
1,643
0.03
0.03
$
$
$
$
$
$
Total
195,475
16,514
178,961
4,296
174,665
20,177
183,965
10,877
3,950
6,927
0.14
0.14
Total
233,485
29,234
204,251
27,995
176,256
37,379
209,598
4,037
4,580
(543)
(0.01)
(0.01)
132
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, 2013, and 2012
Note 28 Subsequent Event
On January 30, 2015, the Company announced the signing of a definitive merger agreement with Pine River Bank
Corporation, the parent company of Pine River Valley Bank. Under the terms of the merger agreement, the Company will
acquire all of the outstanding common stock of Pine River Bank Corporation in exchange for approximately $14.0 million
in cash, subject to adjustment. The transaction is expected to be completed during the third quarter of 2015 and is subject
to regulatory approvals and customary closing conditions, including the approval of Pine River Bank Corporation
shareholders. Upon the closing of the transaction, Pine River Valley Bank, the bank subsidiary of Pine River Bank
Corporation, will be merged into NBH Bank and operated as part of its Community Banks of Colorado division.
Item 9.
FINANCIAL DISCLOSURES.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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
Our management, with the participation of our principal executive officer and principal financial officer, conducted an
evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as of December 31, 2014. Based on this evaluation, our principal executive officer
and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31,
2014.
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 Rule 13a-15(f). Our management, with the participation of our principal executive officer
and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2014 based on the framework in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2014. KPMG LLP, the
independent registered public accounting firm that audited our consolidated financial statements included in this Annual
Report on Form 10-K, has issued a report on our internal control over financial reporting as of December 31, 2014, which
report is included in this Item 9A below.
We intend to implement the new “Internal Control - Integrated Framework,” issued in May 2013 by the Committee of
Sponsoring Organizations of the Treadway Commission, during our fiscal year 2015.
Changes in Internal Control Over Financial Reporting
None.
133
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Bank Holdings Corporation:
We have audited National Bank Holdings Corporation and subsidiaries’ (the Company) internal control over financial reporting
as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, National Bank Holdings Corporation and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated statements of financial condition of National Bank Holdings Corporation and subsidiaries as of December 31,
2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated February 27,
2015 expressed an unqualified opinion on those consolidated financial statements.
Denver, Colorado
February 27, 2015
134
Item 9B. OTHER INFORMATION.
None.
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2015 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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 this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2015 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 12.
RELATED SHAREHOLDER MATTERS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2015 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 13.
INDEPENDENCE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2015 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2015 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
135
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
PART IV
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Page
81
82
83
84
85
86
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.
136
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on February 27, 2015, on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
National Bank Holdings Corporation
By
/s/ G. Timothy Laney
G. Timothy Laney
Chairman, President Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 27,
2015, by the following persons on behalf of the registrant and in the capacities indicated.
/s/ G. TIMOTHY LANEY
G. Timothy Laney,
Chairman, President, Chief Executive Officer and Director
(principal executive officer)
/s/ BRIAN F. LILLY
Brian F. Lilly,
Chief Financial Officer
(principal financial officer)
/s/ H. WAYNE MCGAUGH
H. Wayne McGaugh,
Chief Accounting Officer
(principal accounting officer)
/s/ RALPH W. CLERMONT
Ralph W. Clermont, Lead Director
/s/ FRANK V. CAHOUET
Frank V. Cahouet, Director
/s/ ROBERT E. DEAN
Robert E. Dean, Director
/s/ LAWRENCE K. FISH
Lawrence K. Fish, Director
/s/ FRED J. JOSEPH
Fred J. Joseph, Director
/s/ MICHO F. SPRING
Micho F. Spring, Director
/s/ BURNEY S. WARREN, III
Burney S. Warren, III, Director
137
2.1
2.2
2.3
2.4
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
INDEX TO EXHIBITS
Purchase and Assumption Agreement, dated as of July 6, 2010, among the Federal Deposit Insurance
Corporation, Receiver of Hillcrest Bank, Overland Park, Kansas, the Federal Deposit Insurance Corporation and
Hillcrest Bank, National Association (Single Family Shared-Loss Agreement and Commercial Shared-Loss
Agreement included as Exhibits 4.15A and 4.15B thereto, respectively) (incorporated herein by reference to
Exhibit 2.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
†
Amended and Restated Purchase Agreement by and among Dickinson Financial Corporation, Bank Midwest,
N.A. and NBH Holdings Corp. (on behalf of itself and its to-be-formed national banking association subsidiary),
dated as of August 31, 2010 (incorporated herein by reference to Exhibit 2.2 to our Form S-1 Registration
Statement (Registration No. 333-177971), filed on November 14, 2011)†
Purchase and Assumption Agreement, dated as of July 22, 2011, among the Federal Deposit Insurance
Corporation, Receiver of Bank of Choice, Greeley Colorado, the Federal Deposit Insurance Corporation and
Bank Midwest, National Association (incorporated herein by reference to Exhibit 2.3 to our Form S-1
Registration Statement (Registration No. 333-177971), filed on November 14, 2011)†
Purchase and Assumption Agreement, dated as of October 21, 2011, among the Federal Deposit Insurance
Corporation, Receiver of Community Banks of Colorado, the Federal Deposit Insurance Corporation and Bank
Midwest, National Association (incorporated herein by reference to Exhibit 2.4 to our Form S-1 Registration
Statement (Registration No. 333-177971), filed on November 14, 2011)†
Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our
Form S-1 Registration Statement (Registration No. 333-177971), filed on August 22, 2012)
Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to our Form 10-Q, filed
on November 7, 2014)
Specimen common stock certificate (incorporated herein by reference to Exhibit 4.1 to our Form S-1 Registration
Statement (Registration No. 333-177971), filed on August 22, 2012)
Registration Rights Agreement, dated as of October 20, 2009, by and between NBH Holdings Corp. and FBR
Capital Markets, Inc. (incorporated herein by reference to Exhibit 4.2 to our Form S-1 Registration Statement
(Registration No. 333-177971), filed on November 14, 2011)
Amendment No. 1, dated as of July 20, 2011, to the Registration Rights Agreement, dated as of October 20, 2009
by and between NBH Holdings Corp. and FBR Capital Markets, Inc. (incorporated herein by reference to Exhibit
4.3 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
Value Appreciation Instrument Agreement, dated as of October 22, 2010 by and between NBH Holdings Corp.
and the Federal Deposit Insurance Corporation (incorporated herein by reference to Exhibit 10.3 to our Form S-1
Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
Value Appreciation Instrument Agreement, dated as of July 22, 2011 by and between NBH Holdings Corp. and
the Federal Deposit Insurance Corporation (incorporated herein by reference to Exhibit 10.4 to our Form S-1
Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
Value Appreciation Instrument Agreement, dated as of October 21, 2011 by and among NBH Holdings Corp.,
Bank Midwest, National Association and the Federal Deposit Insurance Corporation (incorporated herein by
reference to Exhibit 10.5 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on
November 14, 2011)
Form of Indemnification Agreement by and between NBH Holdings Corp. and each of its directors and executive
officers (incorporated herein by reference to Exhibit 10.6 to our Form S-1 Registration Statement (Registration
Statement No. 333-177971), filed on September 10, 2012)^
Employment Agreement, dated May 22, 2010, by and between G. Timothy Laney and NBH Holdings Corp.
(incorporated herein by reference to Exhibit 10.1 to our Form S-1 Registration Statement (Registration Statement
No. 333-177971), filed on September 10, 2012)^
Employment Agreement, October 15, 2011, by and between Thomas M. Metzger and NBH Holdings Corp.
(incorporated herein by reference to Exhibit 10.8 to our Form S-1 Registration Statement (Registration Statement
No. 333-177971), filed on September 10, 2012)^
Employment Agreement, dated October 24, 2011, by and between Richard U. Newfield and NBH Holdings Corp.
(incorporated herein by reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration Statement
No. 333-177971), filed on September 10, 2012)^
138
10.8
10.9
Letter Agreement dated February 13, 2012, between Brian F. Lilly and National Bank Holdings Corporation
(incorporated herein by reference to Exhibit 10.9 to our Form S-1 Registration Statement (Registration Statement
No. 333-177971), filed on September 10, 2012)^
Letter Agreement dated June 5, 2013, between Zsolt K. Besskó, National Bank Holdings Corporation and NBH
Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to our Form 10-Q, filed on November 12, 2013)^
10.10 Transition and Consulting Agreement, dated April 7, 2014, by and among NBH Bank, N.A., National Bank
Holdings Corporation, and Donald Gaiter (incorporated herein by reference to Exhibit 10.1 to our Form 8-K,
filed on April 8, 2014)^
10.11 Senior Executive Bonus Plan (incorporated herein by reference to Exhibit 10.11 to our Form S-1 Registration
Statement (Registration No. 333-177971), filed on August 22, 2012)^
10.12 NBH Holdings Corp. 2009 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to our Form
S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)^
10.13 National Bank Holdings Corporation 2014 Omnibus Incentive Plan (incorporated herein by reference to Annex A
to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 31, 2014)^
10.14 Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Restricted Stock Award Agreement
(For Management) (incorporated herein by reference to Exhibit 10.2 to our Form 10-Q, filed on May 9, 2014)^
10.15 Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Nonqualified Stock Option
Agreement (For Management) (incorporated herein by reference to Exhibit 10.3 to our Form 10-Q, filed on May
9, 2014)^
10.16 Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Restricted Stock Award Agreement
(For Non-Employee Directors) (incorporated herein by reference to Exhibit 10.4 to our Form 10-Q, filed on May
9, 2014)^
21.1
23.1
31.1
31.2
32
101
†
*
^
Subsidiaries of National Bank Holdings Corporation
Consent of KPMG LLP
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operation, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv)
the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the
Notes to Consolidated Financial Statements, tagged as blocks of text and in detail*
Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
registrant will furnish supplementally a copy of any omitted schedules or similar attachment to the SEC upon
request.
This information is deemed furnished, not filed.
Indicates a management contract or compensatory plan.
139
Corporate Headquarters
National Bank Holdings Corporation
7800 East Orchard Road, Suite 300
Greenwood Village, CO 80111
Tel: 720.554.6680
www.nationalbankholdings.com
Stock Exchange Listings
NYSE
Symbol: NBHC
Independent Accountants
KPMG LLP
Denver, CO
Transfer Agent, Registrar and
Dividend Disbursing Agent
American Stock Exchange &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Tel: 718.921.8275
Fax: 718.765.8717
www.amstock.com
140
ABOUT NATIONAL BANK HOLDINGS CORPORATION
AT
AT
National Bank Holdings Corporation is a bank holding company created to build a leading community bank
franchise delivering high-quality client service and committed to shareholder results. We operate a network
of 97 banking centers located in Colorado, the greater Kansas City region and Texas. Through our subsidiary,
NBH Bank, N.A., we operate under the following brand names: Bank Midwest in Kansas and Missouri,
Community Banks of Colorado in Colorado and Hillcrest Bank in Texas. Additional information about us can
be found at www.nationalbankholdings.com.
HISTORY &
HIGHLIGHTS
LOCATIONS AND
MARKET SHARE2
Began banking operations in 2010/2011 with four
acquisitions in 12 months (three failed banks)
Created meaningful scale and market share in attractive
markets of Colorado and Kansas City MSA
Completed initial public offering in 2012
Executing successful organic loan growth strategy
Maintaining low-risk operating model and excellent
credit quality
Exiting non-strategic assets with attractive returns
Intensifying our focus on industry specialization and
small business
Opportunistic manager of capital
OUR FAMILY OF
BRANDS 1
BANK MIDWEST
45 banking centers
3.6% deposit market share in
Kansas City MSA
Ranks 6th in banking centers in
Kansas City MSA
COMMUNITY BANKS
OF COLORADO
50 banking centers
1.4% deposit market share
across Colorado
Ranks 5th in market share of
Colorado headquartered banks
HILLCREST BANK
2 banking centers, including
commercial and private banking
offices, located in Austin and
Dallas, TX
1 NBH, Bank Midwest, Community Banks of Colorado, Hillcrest Bank,
and the corresponding logo marks, are registered trademarks and
service marks, as applicable, of National Bank Holdings Corporation.
© 2015, National Bank Holdings Corporation. All rights reserved.
2Source: SNL Financial. Financial information and rank as of June 30, 2014.
NBH Bank, N.A. banking centers as of December 31, 2014.
3/18/15 6:11 PM
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