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K
DELIVERING COMMON SENSE RESULTS
2015
ANNUAL REPORT
AND FORM 10-K
3/16/16 3:55 PM
2015 STRATEGIC EXECUTION HIGHLIGHTS
ACCELERATED
ORGANIC GROWTH:
POSITIONED NBH BANK TO
CONTINUE ITS MOMENTUM:
$425 million in total loan growth,
a 20% increase
Grew originated loans 32% year-over-year
Loan originations of $967 million,
an 11% increase
Grew banking related non-interest income
by 9%
Increased transaction deposit balances 10%
year over year, improving the mix of transaction
deposits to 69% of total deposits from 64%
Maintained excellent credit quality with
12 bps of net charge-offs
Terminated operating agreement
with the OCC
Converted our bank charter to become a
Colorado state-regulated bank
Terminated loss-share agreements
with the FDIC at a gain
Increased emphasis on corporate social
responsibility
Finalized plans to launch flagship banking
center in Boulder, CO in 2016
Expanded Specialty Banking with seasoned
SBA, ABL, Energy, Agribusiness and Treasury
Management teams
CONTINUED TO STRATEGICALLY
MANAGE CAPITAL:
FURTHER EXPANDED
EFFICIENCY INITIATIVES:
Continued share repurchase programs,
repurchasing 8.6 million shares ($175 million),
including the successful completion of a $100
million self-tender of our common stock
Lifetime through 2015, repurchased 42% of
shares at a weighted average price of $19.88
Completed acquisition and integration of
Pine River Valley Bank, recognizing a
$1 million bargain purchase gain
Maintained strong capital position with $135
million of excess capital at year-end 2015
Delivered a 5 cent quarterly dividend
Maintained intense focus on expenses and
enhancing operational efficiencies
Successfully converted our core
processing system
Lowered operating expenses by 3%
Aggressively reduced problem asset
workout expenses
Enhanced our enterprise risk
management capabilities
Consolidated 4 banking centers in 2015,
with 7 additional banking centers to be
consolidated in 2Q 2016
45573.indd 3-4
A LETTER FROM CHAIRMAN, PRESIDENT AND CEO
TIM LANEY
FELLOW SHAREHOLDERS,
2015 was a very productive year for our Company. We continued to build on our momentum with robust organic growth in
our core businesses and completed a number of high-impact initiatives that proved to be some of the most noteworthy in our
Company’s short history. Our key strategic actions in 2015 included:
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importantly, positions us to further build on our strong growth to date.
Our Company is deeply rooted in our common sense approach to banking, with a strong focus on building long-term
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infrastructure position us well for future growth and will allow us to further leverage our platform to drive increased revenue while
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M&A growth plans. As we go forward, we continue to focus on compounding our momentum and delivering on our top strategic
priorities, which include the acquisition of new client relationships, thereby driving loan growth across diverse segments
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strategic and disciplined manner, while continuing to maintain a strong risk management capability and culture.
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(cid:35)(cid:44)(cid:47)(cid:1)(cid:37)(cid:38)(cid:48)(cid:1)(cid:48)(cid:49)(cid:30)(cid:41)(cid:52)(cid:30)(cid:47)(cid:49)(cid:1)(cid:41)(cid:34)(cid:30)(cid:33)(cid:34)(cid:47)(cid:48)(cid:37)(cid:38)(cid:45)(cid:1)(cid:30)(cid:43)(cid:33)(cid:1)(cid:36)(cid:50)(cid:38)(cid:33)(cid:30)(cid:43)(cid:32)(cid:34)(cid:1)(cid:38)(cid:43)(cid:1)(cid:31)(cid:47)(cid:38)(cid:43)(cid:36)(cid:38)(cid:43)(cid:36)(cid:1)(cid:44)(cid:50)(cid:47)(cid:1)(cid:6)(cid:44)(cid:42)(cid:45)(cid:30)(cid:43)(cid:54)(cid:1)(cid:49)(cid:44)(cid:1)(cid:52)(cid:37)(cid:34)(cid:47)(cid:34)(cid:1)(cid:38)(cid:49)(cid:1)(cid:38)(cid:48)(cid:1)(cid:49)(cid:44)(cid:33)(cid:30)(cid:54)(cid:1)(cid:38)(cid:43)(cid:1)(cid:49)(cid:37)(cid:34)(cid:1)(cid:48)(cid:37)(cid:44)(cid:47)(cid:49)(cid:1)(cid:57)(cid:51)(cid:34)(cid:1)(cid:54)(cid:34)(cid:30)(cid:47)(cid:48)(cid:1)(cid:52)(cid:34)(cid:1)(cid:37)(cid:30)(cid:51)(cid:34)(cid:1)(cid:31)(cid:34)(cid:34)(cid:43)(cid:1)(cid:38)(cid:43)(cid:1)
(cid:34)(cid:53)(cid:38)(cid:48)(cid:49)(cid:34)(cid:43)(cid:32)(cid:34)(cid:310)(cid:1)(cid:1)(cid:26)(cid:34)(cid:1)(cid:52)(cid:38)(cid:41)(cid:41)(cid:1)(cid:50)(cid:43)(cid:33)(cid:44)(cid:50)(cid:31)(cid:49)(cid:34)(cid:33)(cid:41)(cid:54)(cid:1)(cid:32)(cid:30)(cid:47)(cid:47)(cid:54)(cid:1)(cid:35)(cid:44)(cid:47)(cid:52)(cid:30)(cid:47)(cid:33)(cid:1)(cid:49)(cid:37)(cid:34)(cid:1)(cid:51)(cid:30)(cid:41)(cid:50)(cid:30)(cid:31)(cid:41)(cid:34)(cid:1)(cid:30)(cid:33)(cid:51)(cid:38)(cid:32)(cid:34)(cid:1)(cid:30)(cid:43)(cid:33)(cid:1)(cid:32)(cid:44)(cid:50)(cid:43)(cid:48)(cid:34)(cid:41)(cid:1)(cid:37)(cid:34)(cid:1)(cid:37)(cid:30)(cid:48)(cid:1)(cid:45)(cid:47)(cid:44)(cid:51)(cid:38)(cid:33)(cid:34)(cid:33)(cid:1)(cid:50)(cid:48)(cid:1)(cid:44)(cid:51)(cid:34)(cid:47)(cid:1)(cid:49)(cid:37)(cid:34)(cid:48)(cid:34)(cid:1)(cid:54)(cid:34)(cid:30)(cid:47)(cid:48)(cid:310)
(cid:12)(cid:43)(cid:1)(cid:32)(cid:41)(cid:44)(cid:48)(cid:38)(cid:43)(cid:36)(cid:311)(cid:1)(cid:12)(cid:1)(cid:30)(cid:42)(cid:1)(cid:36)(cid:47)(cid:30)(cid:49)(cid:34)(cid:35)(cid:50)(cid:41)(cid:1)(cid:35)(cid:44)(cid:47)(cid:1)(cid:49)(cid:37)(cid:34)(cid:1)(cid:37)(cid:30)(cid:47)(cid:33)(cid:1)(cid:52)(cid:44)(cid:47)(cid:40)(cid:1)(cid:30)(cid:43)(cid:33)(cid:1)(cid:33)(cid:34)(cid:33)(cid:38)(cid:32)(cid:30)(cid:49)(cid:38)(cid:44)(cid:43)(cid:1)(cid:44)(cid:35)(cid:1)(cid:44)(cid:50)(cid:47)(cid:1)(cid:30)(cid:48)(cid:48)(cid:44)(cid:32)(cid:38)(cid:30)(cid:49)(cid:34)(cid:48)(cid:311)(cid:1)(cid:30)(cid:48)(cid:1)(cid:49)(cid:37)(cid:34)(cid:54)(cid:1)(cid:30)(cid:47)(cid:34)(cid:1)(cid:52)(cid:38)(cid:49)(cid:37)(cid:44)(cid:50)(cid:49)(cid:1)(cid:30)(cid:1)(cid:33)(cid:44)(cid:50)(cid:31)(cid:49)(cid:1)(cid:49)(cid:37)(cid:34)(cid:1)(cid:282)(cid:265)(cid:1)(cid:40)(cid:34)(cid:54)(cid:1)(cid:49)(cid:44)(cid:1)(cid:44)(cid:50)(cid:47)(cid:1)(cid:48)(cid:50)(cid:32)(cid:32)(cid:34)(cid:48)(cid:48)(cid:310)(cid:1)(cid:12)(cid:1)(cid:30)(cid:41)(cid:48)(cid:44)(cid:1)
(cid:48)(cid:38)(cid:43)(cid:32)(cid:34)(cid:47)(cid:34)(cid:41)(cid:54)(cid:1)(cid:30)(cid:45)(cid:45)(cid:47)(cid:34)(cid:32)(cid:38)(cid:30)(cid:49)(cid:34)(cid:1)(cid:49)(cid:37)(cid:34)(cid:1)(cid:32)(cid:44)(cid:43)(cid:49)(cid:38)(cid:43)(cid:50)(cid:34)(cid:33)(cid:1)(cid:48)(cid:50)(cid:45)(cid:45)(cid:44)(cid:47)(cid:49)(cid:1)(cid:44)(cid:35)(cid:1)(cid:44)(cid:50)(cid:47)(cid:1)(cid:32)(cid:41)(cid:38)(cid:34)(cid:43)(cid:49)(cid:48)(cid:311)(cid:1)(cid:31)(cid:50)(cid:48)(cid:38)(cid:43)(cid:34)(cid:48)(cid:48)(cid:1)(cid:45)(cid:30)(cid:47)(cid:49)(cid:43)(cid:34)(cid:47)(cid:48)(cid:1)(cid:30)(cid:43)(cid:33)(cid:1)(cid:48)(cid:37)(cid:30)(cid:47)(cid:34)(cid:37)(cid:44)(cid:41)(cid:33)(cid:34)(cid:47)(cid:48)(cid:1)(cid:30)(cid:43)(cid:33)(cid:1)(cid:41)(cid:44)(cid:44)(cid:40)(cid:1)(cid:35)(cid:44)(cid:47)(cid:52)(cid:30)(cid:47)(cid:33)(cid:1)(cid:49)(cid:44)(cid:1)(cid:30)(cid:1)(cid:45)(cid:47)(cid:44)(cid:48)(cid:45)(cid:34)(cid:47)(cid:44)(cid:50)(cid:48)(cid:1)(cid:266)(cid:264)(cid:265)(cid:270)(cid:310)
(cid:22)(cid:12)(cid:17)(cid:6)(cid:8)(cid:21)(cid:8)(cid:15)(cid:28)(cid:311)
(cid:23)(cid:12)(cid:16)(cid:1)(cid:15)(cid:4)(cid:17)(cid:8)(cid:28)
(cid:6)(cid:11)(cid:4)(cid:12)(cid:21)(cid:16)(cid:4)(cid:17)(cid:311)(cid:1)(cid:19)(cid:21)(cid:8)(cid:22)(cid:12)(cid:7)(cid:8)(cid:17)(cid:23)(cid:1)(cid:4)(cid:17)(cid:7)(cid:1)(cid:6)(cid:8)(cid:18)(cid:1)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(cid:95)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended December 31, 2015
OR
(cid:133)(cid:3) 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 (cid:133) No (cid:95)
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 (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
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 (cid:95) No (cid:133)
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
(cid:95)(cid:3)
Accelerated filer
Non-accelerated filer
(cid:133)(cid:3)(do not check if a smaller reporting company)
Smaller Reporting Company
(cid:133)
(cid:133)
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. (cid:95)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95)
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $724,000,000
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 25, 2016, NBHC had outstanding 29,463,715 shares of Class A voting common stock with $0.01 par value per share, excluding 834,664
shares of restricted Class A common stock issued but not yet vested.
Portions of the Registrant’s definitive proxy statement for its 2016 Annual Meeting of Shareholders to be filed within 120 days of December 31, 2015 will be
incorporated by reference into Part III of this form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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
3
5
21
33
33
33
33
34
37
43
81
82
139
139
141
141
141
141
141
141
142
143
145
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 (the “OCC”) 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 realize the anticipated benefits from converted core operating systems without significant change in
our client service or risk to our control environment;
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;
3
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
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;
and changes in regulations that apply to us due to the conversion of our bank subsidiary to a Colorado state-
chartered bank;
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.
4
PART I: FINANCIAL INFORMATION
Item 1. BUSINESS.
Summary
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, 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, 2015, we had $4.7 billion in assets,
$2.6 billion in loans, $3.8 billion in deposits and $0.6 billion 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 five acquisitions of banks, three of
which were FDIC-assisted. During 2015, we completed the acquisition of Pine River Bank Corporation and its bank
subsidiary, Pine River Valley Bank (“Pine River”). We have transformed these five 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 medium-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. During
2015, we consolidated three of those banking centers within our network.
5
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 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). On August 1, 2015, we completed
our acquisition of Pine River, a whole bank acquisition, adding 4 additional banking centers to our Community Banks of
Colorado network. The Pine River acquisition continued to enhance our penetration into the Colorado market, giving us a
combined network of 53 banking centers in that state. During the first quarter of 2016, we announced plans to consolidate seven
banking centers in our Community Banks of Colorado footprint during the second quarter of 2016.
The following table summarizes certain highlights of our five completed acquisitions to date, including deposits and assets at fair
value as of each acquisition date:
Date acquired
FDIC-assisted
Loss share
Banking centers(3)
Deposits (millions)
Assets (millions)
Primary Market
Pine River
August 1, 2015
No
No
4
130
142
$
$
Community Banks
of Colorado
October 21, 2011
Yes
Yes(1)
40
1,195
1,228
$
$
$
$
Colorado
Colorado
Bank of Choice
Bank Midwest
Hillcrest Bank
July 22, 2011 December 10, 2010
No
No
39
2,386
2,426
Greater Kansas City
Region
Yes
No
16
760
950
Colorado
$
$
October 22, 2010
Yes
Yes(2)
9 (and 32 retirement centers)
1,234
1,377
$
$
Greater Kansas City Region
(1) Commercial loss-share agreement (terminated November 5, 2015).
(2) Single Family loss-share agreement and Commercial Shared-Loss Agreement (terminated November 5, 2015).
(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. During 2015, we consolidated three banking centers in our Bank Midwest network,
and in the first quarter of 2016 we announced the consolidation of seven banking centers in our Community Banks of Colorado network during the
second quarter of 2016.
We believe that we have established critical mass in our current markets and have structured acquisitions that limit our credit
risk, which positions us for attractive returns.
Pine River Valley Bank
Through the Pine River acquisition, we acquired assets with a fair value of $142.1 million, including $64.3 million of loans,
$64.4 million of cash and investments and $13.4 million of other assets. Liabilities with a fair value of $131.5 million were also
assumed, including $130.1 million of deposits and $1.4 million of other liabilities.
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/premiums on loans
are being accreted over the lives of the loans.
Our Corporate Restructurings
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. On March 26, 2012, we changed our legal name from NBH Holdings Corp. to National Bank Holdings
Corporation. We changed the legal name of Bank Midwest, N.A. to NBH Bank, N.A. on May 20, 2012. On October 9, 2015, we
announced the termination of the operating agreement between NBH Bank, N.A., and its primary regulator, the OCC. On
December 31, 2015, NBH Bank, N.A. converted into a Colorado state-chartered bank while maintaining membership with the
Federal Reserve Bank of Kansas City and we changed the legal name of NBH Bank, N.A. to NBH Bank, which we refer to as
“NBH Bank” or the “Bank”. 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 state charter streamlines our operations and enables us to more effectively and efficiently
execute our growth strategy.
6
Our Market Area
Our core markets are broadly defined as Colorado and the greater Kansas City region. We are the fifth largest banking center
network among Colorado-based banks ranked by deposits as of June 30, 2015 (the last date as of which data are available),
according to SNL Financial. In the greater Kansas City MSA, we are the sixth 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, 2015 (the last date as
of which data are available).
States
Missouri
Colorado
Kansas
Deposit Market
Share Rank(1)
Banking Centers(1)
10
15
22
31
53
11
Deposit Market
Share Rank(1)
Deposits
(millions)(1)
$
1,768.5
1,406.7
579.2
Deposit Market
Share(1)
1.3 %
1.2
1.0
Deposits Deposit Market
Banking Centers(1) (millions)(1)
26 $ 1,617.3
524.8
13
222.3
4
188.5
5
141.9
3
127.6
2
107.5
3
6
17
4
7
2
2
7
Share(1)
3.6 %
0.8
10.9
5.6
26.0
20.2
4.4
MSAs
Kansas City, MO-KS
Denver-Aurora-Lakewood, CO
Saint Joseph, MO-KS
Greeley, CO
Maryville, MO
Kirksville, MO
Glenwood Springs, CO
(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, 2015, 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.
# of
Top 3
Competitor
Combined
Median
Denver, CO
Front Range, CO(3)
Kansas City, MO-KS MSA
U.S.
Deposits Businesses Population Unemployment
(billions)
$ 67.5
93.3
44.6
(thousands)
115
183
76
(millions)
2.8
4.5
2.1
Rate(1)
Population Household
Growth(2)
Income
3.2 %
3.3
3.9
4.8
11.3 % $ 66,682
65,747
10.8
59,028
4.2
55,551
4.4
Deposit
Market Share
53 %
53
42
55 (4)
(1) Unemployment data is as of November 30, 2015.
(2) For the period 2010 through 2015.
(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, 2015, except Deposits and Top 3 Competitor Combined Deposit Market Shares,
which reflects data as of June 30, 2015.
7
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
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. We believe private banks are more likely acquisition opportunities
for us given the ability to structure a transaction that is aligned with the needs of a closely held company. 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)
24
33
88
145
$
$
50.3
23.6
30.4
104.3
# of
Private
Banks
Private
Assets
($ billion)
15
32
88
135
$
$
30.5
22.7
30
83.6
Source: SNL Financial based on financial information as of September 30, 2015. 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 medium-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 core 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 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. 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 obtained preferred lender status with the Small Business Administration
(“SBA”) providing a leveraged platform for growth in the small business lending segment. 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.
8
• Expansion through organic growth and enhanced product offerings. We believe that our focus on serving consumers
and small- to medium-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 acquired
banks onto one operating platform 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 53 of those located in Colorado, 42 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.
9
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 small business bankers and 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 small business and commercial
banking capabilities, attracting experienced small business and commercial bankers from competing institutions in our
markets, which have 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, and SBA lending. 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.
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, where appropriate. 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.
An integral element of our credit risk management strategy is the establishment and adherence to concentration limits for our
portfolio. We have established concentration limits that apply to our portfolio based on product types such as commercial real
estate, consumer lending, and various categories of C&I lending. 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, 2015, substantially all
of our commercial and industrial loans were secured.
10
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,
retail centers, 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 primary focus in our lending strategy. Although non-owner occupied commercial
real estate is not a primary focus of our lending strategy, we have developed teams in each our markets of dedicated CRE
bankers who possess the depth and breadth of both market knowledge and industry expertise, which serves to further mitigate
risk of this product type.
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.
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. Crop
production loans are typically revolving lines of credit generally with maturities of one year. 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 five 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.
11
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, U.S. 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
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, 2015, our NBH Bank legal lending limit to any one client relationship was $82.2 million and our
house limit to any one client relationship was $30.0 million.
Associates
At December 31, 2015, we had 956 full-time associates and 86 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 Board of Governors
of the Federal Reserve System (the “Federal Reserve”). Our bank subsidiary, NBH Bank, is a Colorado state-chartered bank
and a member of the Federal Reserve Bank of Kansas City. As such, NBH Bank is subject to examination, supervision and
regulation by both the Colorado Division of Banking and the Federal Reserve. 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.
12
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, 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 then newly chartered bank subsidiary, Hillcrest Bank, N.A. (which is now a predecessor of NBH Bank). 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 being a non-controlling
investor) broadens the investment opportunities available to us among public and private financial institutions.
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.
NBH Bank as a Colorado State-Chartered Bank
On December 31, 2015, NBH Bank, N.A., a national association, chartered under federal law and supervised and regulated
by the OCC, converted to a Colorado state-chartered bank operating under the name of NBH Bank. NBH Bank is also a
member of the Federal Reserve Bank of Kansas City. As such, NBH Bank is subject to examination, supervision and
regulation by both the Colorado Division of Banking and the Federal Reserve. 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.
13
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.
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 FDIC and state bank regulators have broad
regulatory, examination and enforcement authority over bank holding companies and banks, as applicable. This authority serves to
ensure compliance with banking statutes, regulations, and regulatory guidance, orders, and agreements and safe and sound
operation, including the power to issue cease and desist orders, impose fines and other civil and criminal penalties, terminate deposit
insurance and appoint a conservator or receiver. Bank regulators regularly examine the operations of banks and bank holding
companies. In addition, banks and bank holding companies are subject to periodic reporting and filing requirements.
Bank regulators have various remedies available if they determine that a banking organization has violated any law or
regulation, that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other
aspects of a banking organization’s operations are unsatisfactory, or that the banking organization is operating in an unsafe or
unsound manner. The bank regulators have the power to, among other things: enjoin “unsafe or unsound” practices, require
affirmative actions to correct any violation or practice, issue administrative orders that can be judicially enforced, direct
increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil
monetary penalties, remove officers and directors, terminate deposit insurance, and appoint a conservator or receiver.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements
could subject the Company, its subsidiaries and their respective officers, directors and institution-affiliated parties to the
remedies described above and other sanctions. In addition, the FDIC could terminate NBH Bank’s deposit insurance if it
determined that the Bank’s financial condition was unsafe or unsound or that the bank engaged in unsafe or unsound practices or
violated an applicable rule, regulation, order or condition enacted or imposed by the bank’s regulators.
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.
The FDIC Policy Statement imposes several requirements on those institutions and investors to which it applies. Many of these
requirements sunset after a three year time period or do no present ongoing requirements. However, some are related to the
continuing presence of certain investors. Institutions are required to maintain a capital level sufficient to be “well capitalized”
under regulatory standards during the remaining period of ownership of the investors. 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. Institutions are
prohibited from extending credit to investors and to affiliates of investors.
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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. The federal
banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects
the degree of risk associated with a banking organization’s operations. Under these guidelines, assets are assigned to one of
several risk categories, and nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are
multiplied by a risk adjustment percentage for the category. NBH Bank also is, and other depository institution subsidiaries
that we may acquire or control in the future will be, subject to capital adequacy guidelines as implemented by the relevant
federal banking agency. In the case of the Company and NBH Bank, applicable capital guidelines can be found in the
Federal Reserve’s Regulations H and Q.
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.
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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.
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.
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.
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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. As a member of the Federal Reserve System, NBH Bank is subject to
Regulation H, which, among other things, provides that a member bank may not declare or pay a dividend if the total of all
dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank’s net income
during the current calendar year and its retained net income for the prior two calendar years, without the prior approval of the
Federal Reserve. Regulation H also states that a member bank may not declare or pay a dividend if the dividend would
exceed the bank’s undivided profits, unless approved by the Federal Reserve and holders of at least two-thirds of the
outstanding shares of each class of the bank’s stock. 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.
As a Colorado state-chartered bank, NBH Bank is subject to limitations under Colorado law with respect to the payment of
dividends. The Colorado Banking Code states that a bank may declare dividends from retained earnings and other
components of capital specifically approved by the Banking Board so long as the declaration is make in compliance with
established rules. 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.
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
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).
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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, 2015, 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 Consumer Finance Protection Bureau (the “CFPB”) has broad rulemaking authority for a wide range of consumer
financial laws that apply to all banks. The CFPB is authorized to issue rules for both bank and nonbank companies that offer
consumer financial products and services, subject to consultation with the prudential banking regulators. 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.
Much of the CFPB’s rulemaking has focused on mortgage lending and servicing, including an important rule requiring
lenders to ensure that prospective buyers have the ability to repay their mortgages. Other areas of current CFPB focus include
consumer protections for prepaid cards, payday lending, debt collection, overdraft services and privacy notices. The CFPB
has been particularly active in issuing rules and guidelines concerning residential mortgage lending and servicing, issuing
numerous rules and guidance related to residential mortgages. Perhaps the most significant of these guidelines is the “Ability-
to-Repay and Qualified Mortgage Standards under the Truth in Lending Act” portions of Regulation Z. Under the Dodd-
Frank Act, creditors must make a reasonable and good faith determination, based on verified and documented information,
that the consumer has a reasonable “ability to repay” a residential mortgage according to its terms. There is a statutory
presumption of compliance with this requirement for mortgages that meet the requirements to be deemed “qualified
mortgages.” The CFPB rule defines the key threshold terms “ability to repay” and “qualified mortgage.”
The CFPB has actively issued enforcement actions against both large and small entities and to entities across the entire
financial service industry. The CFPB has relied upon “unfair, deceptive, or abusive acts” prohibitions as its primary
enforcement tool. However, the CFPB and DOJ continue to be focused on fair lending in taking enforcement actions again
banks with renewed emphasis on alleged redlining practices.
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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.
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 made permanent the general $250,000 deposit insurance limit for insured deposits. As of January 1,
2013, all of a depositor’s accounts at an insured bank, including all non-interest bearing transaction accounts, are insured by
the FDIC up to $250,000.
The Dodd-Frank Act 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.
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Interstate Banking
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.
Changes in Laws, Regulations or Policies
Congress and state legislatures may introduce from time to time measures or take actions that would modify the regulation of
banks or bank holding companies. In addition, federal and state regulatory agencies also periodically propose and adopt
changes to their regulations or change the manner in which existing regulations are applied. Such changes could increase or
decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks and
other financial institutions, all of which could affect our investment opportunities and our assessment of how attractive such
opportunities may be. We cannot predict whether potential legislation will be enacted and, if enacted, the effect that it or any
implementing regulations would have on our business, results of operations, liquidity or financial condition.
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, and acquired Pine River Valley Bank by merger in August 2015. Because our banking operations began in
late 2010, and because our acquisitions in 2010 and 2011 were of failed or troubled banks, 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. More importantly, because a portion of our loans and OREO were 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.
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Certain other factors may also make it difficult for investors to evaluate our future prospects and financial and operating
performance, including, among others:
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•
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our current asset mix, loan quality and allowance for loan losses are not fully 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 covered by loss sharing agreements with the FDIC, which reimbursed a
variable percentage of losses experienced on these assets; since our FDIC loss-share arrangements were terminated
in the fourth quarter 2015, we may face higher losses, which 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, which currently exceed regulatory minimum requirements by a substantial margin, 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 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 subjective judgments. As a
result of our acquisitions, our financial information is heavily influenced by the application of the acquisition method of
accounting and was heavily influenced in prior periods by 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 the acquisition method of accounting or loss share 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 decline 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.
We hold and acquire an amount of OREO from time to time, which may lead to volatility in operating expenses and vulnerability
to declines in real property values.
When necessary, we foreclose on and take title to the real estate 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. 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.
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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, 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.
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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 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.
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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 growth. Our 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, including the Federal Reserve and Colorado
Division of Banking. In acting on applications, our 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.
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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 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. The trading price of our common stock and of the
stock of other potential acquirers may affect our ability to offer a competitive price for acquisitions where stock is proposed
as acquisition consideration. 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.
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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;
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.
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 and now have finalized implementing regulations. 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 several supervisory cycles are complete. The changes resulting from the Dodd-Frank Act have limited our business
activities, required changes to certain of our business practices, imposed upon us more stringent capital, liquidity and
leverage requirements or otherwise materially and may continue to 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 by federal and state regulators and bodies 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. On December 31, 2015, NBH
Bank, formerly a national association chartered under federal law and supervised and regulated by the OCC, converted to a
Colorado state-chartered bank. As such, following the conversion, NBH Bank became subject to examination, supervision
and regulation by the Colorado Division of Banking and the Federal Reserve. 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.
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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 and state 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 and state banking agencies periodically conduct examinations of our business, including compliance with laws and
regulations. If, as a result of an examination, a federal or state 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.
31
A capital injection may be required at times when we do not have the resources to provide it and therefore we may be required to
borrow the funds or raise additional equity capital from third parties. Any loans by a holding company to its subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding
company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment
will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders
of its indebtedness. Any financing that must be done by the holding company in order to make the required capital injection may be
difficult and expensive and may not be available on attractive terms, or at all, which likely would have a material adverse effect on us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes
and regulations.
The federal Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among other
duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction
reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to
administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and
has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S.
Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of
compliance with the rules enforced by the Office of Foreign Assets Control (“OFAC”). If our policies, procedures and systems are
deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire
in the future are deficient, we would be subject to liability, including fines and regulatory actions (such as restrictions on our ability
to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our
acquisition plans), which could materially and adversely affect us. Failure to maintain and implement adequate programs to combat
money laundering and terrorist financing could also have serious reputational consequences for us.
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. 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.
32
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, 2015, we
operated 53 banking centers in Colorado, 42 in Kansas and Missouri, and 2 in Texas. Of these banking centers, 20 locations
were leased and 77 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 in Colorado, Kansas, Missouri and
Texas. During 2015, we consolidated three banking centers in our Bank Midwest network, and in the first quarter of 2016 we
announced the consolidation of seven banking centers in our Community Banks of Colorado network during the second
quarter of 2016.
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.
33
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Registrant’s Common Equity
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
2015
2014
Quarter
First
Second
Third
Fourth
First
Second
Third
Fourth
$
$
$
$
$
$
$
$
High
Low
Cash
Dividends
19.53
21.30
22.04
23.55
21.48
20.61
20.89
19.95
$
$
$
$
$
$
$
$
17.69
18.35
19.20
19.47
18.77
18.50
18.94
18.11
$
$
$
$
$
$
$
$
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 $19.50 per share on February 25, 2016. The Company had 182
shareholders of record as of February 25, 2016. 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. Other than (1) dividends
from the Bank paid as noted above, (2) the cash held by the Company and (3) any future financing at the holding company
level, we do not expect to have other liquidity sources at the holding company level. 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 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.” We may also execute permanent capital reductions at the Bank level in
accordance with federal and state regulatory guidelines as a source of liquidity for the holding company. See note 28 for
discussion of a permanent capital reduction of $140.0 million approved in February 2016.
34
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
160
155
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
12/31/13
12/31/14
12/31/15
Index
NBH
KBW Regional Banking Index
Russell 2000 Index
09/19/12
100.00
100.00
100.00
Period Ending
12/31/13
112.63
139.76
138.46
12/31/12
98.92
95.19
99.74
12/31/14
103.18
143.16
145.24
12/31/15
114.75
151.74
138.83
35
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2015:
Period
October 1 - October 31, 2015 (1)
November 1 - November 30, 2015 (1)
December 1 - December 31, 2015 (1)
Total
Total Number
of Shares (or
Units) Purchased Share (or Unit) Plans or Programs
Average
Maximum Number
(or Approximate Dollar
Total Number of
Shares (or Units)
Value) of Shares (or
Purchased as Part of Units) that May Yet Be
Price Paid Per Publicly Announced Purchased Under the
Plans or Programs (2)(3)
6,093,512
6,093,512
6,093,512
6,093,512
22.06
23.04
20.91
23.04
- $
-
-
- $
472 $
431,306
94
431,872 $
(1) These shares represent shares purchased other than through publicly announced plans and were purchased pursuant to the
Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”). Under the 2014 Plan, shares were purchased from plan
participants at the then current market value in satisfaction of stock option exercise prices, settlements of restricted stock,
and tax withholdings.
(2) On February 11, 2015, the Company announced that the Board of Directors authorized the repurchase of up to an
additional $50.0 million of common stock. Under this authorization, $6,093,512 remained available for purchase at
December 31, 2015.
(3) On January 21, 2016, the Board of Directors approved a $50.0 million stock repurchase program.
Securities Authorized for Issuance under Equity Compensation Plans
During the second quarter of 2014, shareholders approved the 2014 Omnibus Incentive Plan. Under 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. As of December 31, 2015, the aggregate number of Company common stock available for
issuance under the 2014 Plan was 5,707,826 shares.
During the second quarter of 2015, shareholders approved the Company’s 2014 Employee Stock Purchase Plan (“ESPP”).
The ESPP allows employees to purchase shares of common stock through payroll deductions up to a limit of $25,000 per
calendar year or 2,000 shares per offering period. The price an employee pays for shares is 90.0% of the fair market value of
Company common stock on the last day of the offering period. As of December 31, 2015, the aggregate number of Company
common stock available for issuance under the ESPP was 385,515 shares.
See note 17 to the consolidated financial statements for further detail related to these equity compensation plans.
Plan Category
Equity plans approved by security holders
Equity plans not approved by security holders
Total
Number of
securities to be
issued upon
exercise of
oustanding options,
warrants and rights warrants and rights
Weighted-
average
exercise price
of outstanding
options,
Number of
securities remaining
available for future
issuance under equity
compensation
plans
6,093,341
-
6,093,341
2,596,251 $
-
2,596,251 $
19.84
-
19.84
36
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, 2015. The summary selected historical consolidated financial information set forth below is derived from our audited
consolidated financial statements.
During the five years ended December 31, 2015, we consummated the Bank of Choice acquisition on July 22, 2011, the
Community Banks of Colorado acquisition on October 21, 2011 and the Pine River acquisition on August 1, 2015. All
acquisitions were accounted for using the acquisition method of accounting. 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. All amounts are presented in thousands, except share data, or as otherwise noted.
Summary of Selected Historical Consolidated Financial Data
Consolidated Balance Sheet Information
(unaudited):
Cash and cash equivalents
Investment securities available-for-sale (at fair
value)
Investment securities held-to-maturity
Non-marketable securities
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
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31, December 31, December 31, December 31, December 31,
2015
2014
2013
2012
2011
$ 166,092 $ 256,979 $ 189,460 $
769,180 $ 1,628,137
1,157,246
427,503
22,529
2,587,673
(27,119)
2,560,554
13,292
—
20,814
103,103
72,059
140,716
1,718,028
577,486
32,996
1,832,702
(15,380)
1,817,322
5,368
86,923
94,808
121,436
87,205
100,023
1,785,528
641,907
31,663
1,854,094
(12,521)
1,841,573
5,787
64,447
70,125
115,219
81,859
86,547
1,479,214
530,590
27,045
2,162,409
(17,613)
2,144,796
5,146
39,082
29,120
106,341
76,513
124,820
1,862,699
6,801
29,117
2,268,435
(11,527)
2,256,908
5,616
223,402
120,636
87,315
92,553
38,842
$ 4,683,908 $ 4,819,646 $ 4,914,115 $ 5,410,775 $ 6,352,026
$ 3,840,677 $ 3,766,188 $ 3,838,309 $ 4,200,719 $ 5,063,053
200,244
5,263,297
1,088,729
$ 4,683,908 $ 4,819,646 $ 4,914,115 $ 5,410,775 $ 6,352,026
119,497
4,320,216
1,090,559
178,014
4,016,323
897,792
225,687
4,066,364
617,544
258,883
4,025,071
794,575
37
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
Dividends paid
Book value per share
Tangible book value per share(3)
Tangible common equity to
tangible assets(3)
Weighted average common shares
December 31,
December 31,
December 31,
December 31,
December 31,
2015
2014
2013
2012
2011
As of and for the years ended
$
$
$
$
$
$
$
171,407
14,462
156,945
12,444
144,501
1,048
21,448
158,024
7,925
3,044
4,881
0.14
0.14
0.20
20.34
18.22
$
$
$
$
$
$
$
184,662
14,413
170,249
6,209
164,040
—
(1,696)
150,003
12,341
3,165
9,176
0.22
0.22
0.20
20.43
18.63
$
$
$
$
$
$
$
195,475
16,514
178,961
4,296
174,665
—
20,177
183,965
10,877
3,950
6,927
0.14
0.14
0.20
19.99
18.27
$
$
$
$
$
$
$
233,485
29,234
204,251
27,995
176,256
—
37,379
209,598
4,037
4,580
(543)
(0.01)
(0.01)
0.05
20.84
19.23
$
$
$
$
$
$
$
197,159
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
11.98 %
15.25 %
16.97 %
18.89 %
15.94 %
outstanding, basic
34,349,996
42,404,609
50,790,410
52,214,175
51,978,744
Weighted average common shares
outstanding, diluted
Common shares outstanding
34,363,487
30,358,509
42,421,014
38,884,953
50,824,422
44,918,336
52,214,175
52,327,672
52,104,021
52,157,697
(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.”
38
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2013
2012
2014
2015
2011
Key Ratios
Return on average assets
Return on average tangible assets (1)
Return on average equity
Return on average tangible common equity (1)
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(2)
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
Dividend Payout Ratio
0.10 %
0.17 %
0.70 %
1.29 %
133.71 %
67.72 %
14.52 %
21.22 %
3.54 %
3.60 %
3.48 %
3.86 %
3.92 %
0.44 %
0.36 %
3.27 %
85.55 %
142.86 %
0.19 %
0.26 %
1.07 %
1.58 %
0.13 %
0.20 %
0.67 %
1.06 %
(0.01)%
0.05 %
(0.05)%
0.27 %
0.81 %
0.88 %
4.01 %
4.62 %
137.36 %
57.55 %
17.68 %
137.05 %
48.46 %
20.07 %
134.44 %
43.76 %
18.91 %
127.91 %
44.91 %
20.26 %
19.45 %
3.83 %
3.85 %
3.72 %
4.15 %
4.17 %
0.45 %
0.37 %
3.08 %
85.82 %
90.91 %
17.59 %
3.81 %
3.81 %
3.68 %
4.16 %
4.16 %
0.48 %
0.41 %
3.55 %
89.70 %
142.86 %
16.14 %
3.98 %
3.98 %
3.81 %
4.55 %
4.55 %
0.74 %
0.64 %
3.62 %
84.53 %
NM
13.41 %
3.40 %
3.40 %
3.17 %
4.31 %
4.31 %
1.15 %
1.05 %
3.01 %
61.72 %
0.00 %
Asset Quality Data(5)(6)(7)
Non-performing loans to total loans
Non-performing non 310-30 assets to total non 310-30 loans
and OREO
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans
Net charge-offs to average loans
0.99 %
0.50 %
1.31 %
1.26 %
1.66 %
1.81 %
1.05 %
105.74 %
0.12 %
1.86 %
0.81 %
162.89 %
0.05 %
5.00 %
0.68 %
51.43 %
0.41 %
6.19 %
0.84 %
66.53 %
1.20 %
6.71 %
0.51 %
30.52 %
0.51 %
(1) Ratio represents non-GAAP financial measure. See non-GAAP reconciliation below.
(2) Interest earning assets include assets that earn interest/accretion or dividends, 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 percentage
of average interest earning assets.
(4) 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) 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.
(6) Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
(7) Total loans are net of unearned discounts and fees.
NM – Not Meaningful
39
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “operating expense,” “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.
40
A reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures is as follows.
December 31,
Total shareholders’ equity
Less: goodwill and intangible assets, net
Add: deferred tax liability related to goodwill
Tangible common equity (non-GAAP)
$
$
2015
617,544
(72,060)
7,772
553,256
$
$
December 31,
2014
As of and for the years ended
December 31,
2013
December 31,
2012
December 31,
2011
794,575
(76,513)
6,222
724,284
$
$
897,792
(81,859)
4,671
820,604
$ 1,090,559
(87,205)
3,121
$ 1,006,475
$ 1,088,729
(92,553)
1,571
997,747
$
Total assets
Less: goodwill and intangible assets, net
Add: deferred tax liability related to goodwill
Tangible assets (non-GAAP)
$ 4,683,908
(72,060)
7,772
$ 4,619,620
$ 4,819,646
(76,513)
6,222
$ 4,749,355
$ 4,914,115
(81,859)
4,671
$ 4,836,927
$ 5,410,775
(87,205)
3,121
$ 5,326,691
$ 6,352,026
(92,553)
1,571
$ 6,261,044
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)
13.18 %
16.49 %
18.27 %
20.16 %
17.14 %
(1.20)%
(1.24)%
(1.30)%
(1.27)%
(1.20)%
11.98 %
15.25 %
16.97 %
18.89 %
15.94 %
Common book value per share calculations:
Total shareholders' equity
Divided by: ending shares outstanding
Common book value per share
$
617,544
30,358,509
20.34
$
$
794,575
38,884,953
20.43
$
$
897,792
44,918,336
19.99
$
$ 1,090,559
52,327,672
20.84
$
$ 1,088,729
52,157,697
20.87
$
Tangible common book value per share
calculations:
Tangible common equity (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per share (non-
$
553,256
30,358,509
$
724,284
38,884,953
$
820,604
44,918,336
$ 1,006,475
52,327,672
$
997,747
52,157,697
GAAP)
$
18.22
$
18.63
$
18.27
$
19.23
$
19.13
Tangible common book value per share,
excluding accumulated other
comprehensive income calculations:
Tangible common equity (non-GAAP)
Less: accumulated other comprehensive
income, net of tax
Tangible common book value, excluding
accumulated other comprehensive income,
net of tax (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per share,
excluding accumulated other comprehensive
income, net of tax (non-GAAP)
$
553,256
$
724,284
$
820,604
$ 1,006,475
$
997,747
(95)
(5,839)
6,756
(40,573)
(47,022)
553,161
30,358,509
718,445
38,884,953
827,360
44,918,336
965,902
52,327,672
950,725
52,157,697
$
18.22
$
18.48
$
18.42
$
18.46
$
18.23
41
Return on Average Tangible Assets and Return on Average Tangible Equity
Net income
Add: impact of core deposit intangible
amortization expense, after tax
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2013
6,927
2011
41,963
2014
9,176
2015
4,881
(543)
2012
$
$
$
$
$
3,295
3,260
3,235
3,233
2,635
Net income adjusted for impact of core deposit
intangible amortization expense, after tax
$
8,176
$
12,436
$
10,162
$
2,690
$
44,598
Average assets
Less: average goodwill and intangible assets,
$ 4,831,070
$ 4,867,929
$ 5,175,210
$ 5,786,762
$ 5,166,172
(66,549)
$ 4,764,521
(73,074)
$ 4,794,855
(79,964)
$ 5,095,246
(86,841)
$ 5,699,921
(80,248)
$ 5,085,924
net of deferred tax asset related to goodwill
Average tangible assets (non- GAAP)
Average shareholder's equity
Less: average goodwill and intangible assets,
$
701,476
$
860,691
$ 1,038,753
$ 1,093,998
$ 1,045,459
net of deferred tax asset related to goodwill
Average tangible common equity (non-GAAP) $
(66,549)
634,927
$
(73,074)
787,617
$
(79,964)
958,789
(86,841)
$ 1,007,157
$
(80,248)
965,211
Return on average assets
Return on average tangible assets (non-
GAAP)
Return on average equity
Return on average tangible common equity
(non-GAAP)
0.10 %
0.19 %
0.13 %
(0.01)%
0.81 %
0.17 %
0.70 %
0.26 %
1.07 %
0.20 %
0.67 %
0.05 %
(0.05)%
0.88 %
4.01 %
1.29 %
1.58 %
1.06 %
0.27 %
4.62 %
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-
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2013
195,475
—
2011
197,159
—
2014
184,662
930
2012
233,485
—
2015
171,407
2,695
$
$
$
$
$
GAAP)
$
174,102
$
185,592
$
195,475
$
233,485
$
197,159
Net interest income
Add: impact of taxable equivalent adjustment
Net interest income, fully taxable equivalent
$
156,945
2,695
$
170,249
930
$
178,961
—
$
204,251
—
$
155,463
—
(non-GAAP)
$
159,640
$
171,179
$
178,961
$
204,251
$
155,463
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)
$ 4,439,139
$ 4,446,903
$ 4,698,552
$ 5,130,836
$ 4,571,331
3.86 %
4.15 %
4.16 %
4.55 %
4.31 %
3.92 %
3.54 %
4.17 %
3.83 %
4.16 %
3.81 %
4.55 %
3.98 %
4.31 %
3.40 %
3.60 %
3.85 %
3.81 %
3.98 %
3.40 %
42
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, 2015,
2014, and 2013, 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.
On December 31, 2015, our bank subsidiary converted to a Colorado state-charted bank and changed its name from NBH
Bank, N.A. to NBH Bank. All references to NBH Bank should be considered synonymous with references to NBH Bank, N.A.
prior to the name change.
All amounts are in thousands, except share data, or as otherwise noted.
Overview
National Bank Holdings Corporation is a bank holding company formed in 2009, with banking operations beginning in October
2010. We completed an initial public offering of our stock on September 20, 2012, when we began trading on the NYSE under
the ticker symbol “NBHC.” 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 2010 and 2011, we completed the acquisition and integration of four problem or failed banks, three of which were FDIC-
assisted. During the third quarter of 2015, we completed the acquisition of Pine River, which is included in our Community
Banks of Colorado brand. We have transformed these five 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, 2015, we had $4.7 billion in assets, $2.6 billion in loans, $3.8 billion in deposits and $0.6 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 medium-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, 2015 (except as noted):
Strategic execution
• Originated $966.9 million in loans, driving total loan growth of 19.7%, and 32.5% originated loan growth, with net
charge-offs of only 12 basis points for 2015.
• Maintained a conservatively structured loan portfolio represented by diverse industries and conservative
concentrations.
• Opportunistic capital management – repurchased 8.6 million shares, or 22.2%, at a weighted average price of $20.16.
Since early 2013, we have repurchased 42.3% of our shares outstanding, at a weighted average price of $19.88.
• Maintained focus on expenses and enhancing operational efficiencies – 2015 operating expenses, net of Pine River
operating expenses, decreased 3.2% from the prior year.
43
• Converted core operating systems during 2015, resulting in expected annual savings of approximately $4.0 million
per year.
• Completed the acquisition of Pine River on August 1, 2015 for $9.5 million cash. The acquisition resulted in a $1.0
million bargain purchase gain. Assets and liabilities recorded at fair value included cash and investments of $64.4
million; loans of $64.3 million; and deposits of $130.1 million.
• Completed regulatory initiatives, including the termination of operating agreement with the OCC, the termination
of the loss-share agreements with the FDIC with a $4.9 million gain, and the Bank’s charter conversion from a
national association to a Colorado state-chartered bank.
Loan portfolio
• Total loans ended 2015 at $2.6 billion, a 19.7% increase from the prior year.
• Organic loan originations totaled $966.9 million, an 11.2% increase from the prior year.
• Strategic loans at December 31, 2015 increased a strong $507.2 million, or 25.9% from the prior year.
• Successfully exited $81.9 million, or 40.6%, of the remaining acquired non-strategic loan portfolio during 2015.
• Maintained a diverse loan portfolio with no single industry sector comprised more than 15% of total loan exposure.
Credit quality
Non 310-30 loans
• Net charge-offs in the non 310-30 portfolio remained low at just 0.12% during 2015.
• Credit quality remained strong, as 90 days past due and non-accruing loans were just 1.08% of total loans at
December 31, 2015. Non performing non 310-30 assets to total non 310-30 loans and OREO declined to 1.81%
from 1.86% in the prior year.
ASC 310-30 loans
• Added a net $18.0 million to accretable yield for the acquired loans accounted for under ASC 310-30.
• Realized 19.9% yield on ASC 310-30 loans during 2015.
•
310-30 loans represented 7.8% of total loans at December 31, 2015, compared to 12.9% in the prior year.
Client deposit funded balance sheet
• Average transaction deposits and client repurchase agreements increased $237.9 million, or 9.5%, from the prior
year.
• Relationship banking model drove solid growth in average demand deposits, adding $81.6 million, or 11.6%, from
prior year.
• Total deposits increased $74.5 million, or 2.0%, from 2014, driven by growth of $240.6 million, or 9.5%, in
transaction deposits and client repurchase agreements, offset by a decrease in higher-cost average time deposits
$140.6 million, or 9.9%.
• Strongly client-funded balance sheet, with total deposits and client repurchase agreements comprising 97.8% of total
liabilities as of December 31, 2015.
44
Revenues and expenses
• Net interest income totaled $156.9 million and decreased $13.3 million, or 7.8%, from 2014, primarily driven by
lower levels of higher-yielding acquired loans.
• The continued resolution of the higher-yielding acquired non-strategic loan portfolio and higher levels of lower-
yielding short-term investments led to a 25 basis point narrowing of the fully taxable equivalent net interest margin
to 3.60% from 3.85%.
• Banking related non-interest income totaled $33.0 million during 2015, an increase of $2.6 million, or 8.6%,
compared to 2014, as a result of increases in bank card fees, gain on sales of mortgages, mark-to-market adjustments
related to fair value interest rate swaps on fixed-rate term loans, and bank-owned life insurance income.
• Total non-interest income for 2015 was $21.4 million compared to a negative $1.7 million in 2014, an increase of
$23.1 million. The increase was largely due to $21.1 million higher FDIC related income driven by $7.0 million less
indemnification amortization, $9.2 million increase in other FDIC loss-share income, and a $4.9 million gain on the
termination of the FDIC loss-share agreements.
• Non-interest expense totaled $158.0 million in 2015, an increase of $8.0 million from 2014. The increase was driven
by lower year-over-year OREO gains of $7.0 million, one-time core system conversion-related expenses of $3.0
million, efficiency initiative expenses related to severance accruals and banking center consolidation expense
accruals of $2.4 million, the change in warrant liability fair value adjustments of $3.1 million, and $2.1 million
related to the addition of Pine River.
• Our non-GAAP measure of operating expenses (excludes OREO expenses, problem loan expense, and one-time
expenses related to the impact from the change in the warrant liability, contract termination expenses, banking center
consolidation expense accruals, severance expense accruals, core system conversion-related expenses, acquisition-
related expenses) totaled $145.9 million and decreased a net $4.8 million, or 3.2%, from 2014, as a result of
management expense initiatives, led by banking center consolidations and successful vendor contract negotiations,
while covering $1.4 million of additional Pine River Valley Bank operating expenses.
• Problem loan/OREO workout expenses totaled $4.5 million for 2015, increasing $6.4 million from the prior year.
The increase was driven by lower year-over-year OREO gains of $7.0 million.
Strong capital position
• Capital ratios are strong as our capital position remains well in excess of federal bank regulatory thresholds. As of
December 31, 2015, our consolidated tier 1 leverage ratio was 11.75% and our consolidated tier 1 risk-based capital
and common equity tier 1 risk-based capital ratios were both 17.48%.
• The excess accretable yield on ASC 310-30 loans above a 4.0% yield (an approximate yield on new loan
originations), and discounted at 5%, adds $1.21 after-tax to our tangible book value per share as of December 31,
2015, resulting in a tangible common book value per share of $19.43.
• During 2015, we repurchased 8.6 million shares, or 22.2% of outstanding shares, at a weighted average price of
$20.16 per share. Since early 2013, we have repurchased 22.1 million shares, or 42.3% of then outstanding shares,
at an attractive weighted average price of $19.88 per share.
•
In January 2016, we authorized a new program to repurchase up to $50.0 million of the Company’s common stock.
45
Key Challenges
There are a number of significant challenges confronting us and our industry. In our short history, we have acquired
distressed financial institutions, and sought to rebuild them and implement 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 continued to modestly improve in 2015, but continue to be 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 remained depressed throughout 2015. The full impact to the broad
economy, to banks in general, and to us, is yet to be determined. Energy loans comprise only 5.7% of our total loans;
however, prolonged or further pricing pressure on oil and gas could lead to increased credit stress in our energy portfolio.
Suppressed energy prices may lead to an increase in consumer spending in the short term, but the decline could have
unpredictable secondary impacts such as job losses in industries tied to energy, 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 $425.3 million during 2015, or 19.7%, on the strength of $966.9 million of loan
originations, partially offset by loan paydowns, particularly in our non-strategic portfolio. Our acquired loans 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 2015, limiting the yields we have
been able to obtain on originated loans. During 2015, our weighted average yield on loan originations was 3.52% (fully
taxable equivalent), which is lower than the 2014 weighted average yield of our total loan portfolio of 3.78% (fully taxable
equivalent). 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 “non-strategic” loans and put particular emphasis on the buildup of
“strategic” relationships.
46
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 Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 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. 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. We review our tier 1 leverage capital ratios, common equity tier 1
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 acquired 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.
47
Non-interest income—Non-interest income consists of service charges, bank card fees, increase in bank-owned life insurance value,
gains on sales of mortgages, gains on sales of investment securities, gains on previously charged-off acquired loans, bargain
purchase gains, 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) for the year, prior to the Company’s
termination of the FDIC loss-share agreements during the fourth quarter of 2015. This income (expense) 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.
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 problem 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 and, return on average tangible equity 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, the accounting for acquired loans 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, 2015.
Valuation of Assets Acquired and Liabilities Assumed in Business Combinations
We account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business
Combinations. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including any
identifiable intangible assets. The initial fair values are determined in accordance with the guidance provided in ASC Topic 820, Fair
Value Measurements and Disclosures. If the fair value of net assets acquired exceeds the fair value of consideration paid, a bargain
purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets
acquired, goodwill is recognized at the acquisition date. The determination of fair value requires the use of estimates and significant
judgment is required. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information
relative to closing date fair values becomes available. Adjustments recorded to the acquired assets and liabilities are applied
prospectively in accordance with FASB Accounting Standards Update (“ASU”) 2015-16. 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.
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.
48
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.
Accounting for Acquired Loans
Included in our loan portfolio are originated loans and acquired loans. 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 the 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, 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 Topic 310, Receivables. Discounts created when the
loans are recorded at their estimated fair values at acquisition are accreted over the remaining life of the loan as an adjustment
to the related loan’s yield. Similar to originated loans, the accrual of interest income is discontinued on acquired loans that are
not accounted for under ASC 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.
49
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 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 $4.7 billion at December 31, 2015 compared to $4.8 billion at December 31, 2014. During the year ended 2015,
the decrease from the investment securities portfolio and non-strategic loans was used to fund loan growth. Total loans were $2.6
billion at December 31, 2015, and grew $425.3 million, or 19.7% from December 31, 2014. We originated $966.9 million of loans
during 2015, which grew the balances in our strategic portfolio $507.2 million year-over-year, or 25.9%. We reduced our non-
strategic loan portfolio $81.9 million from December 31, 2014 to $119.8 million at December 31, 2015, or 40.6%, which was a
reflection of our successful workout progress on acquired problem loans. OREO deceased $8.3 million, or 28.6%, as we continue to
resolve problem assets. The indemnification asset and amounts due to the FDIC were eliminated from our consolidated statement of
financial condition as of December 31, 2015 as a result of our termination of the loss-share agreements with the FDIC in the fourth
quarter of 2015. Lower cost demand, savings, and money market ("transaction") deposits increased $237.9 million, or 9.5%, while
average time deposits decreased $140.6 million, or 9.9%, as we continued to focus our deposit base on clients who were interested
in market-rate time deposits and in developing a long-term banking relationship.
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.
Investment Securities
Available-for-sale
Total investment securities available-for-sale were $1.2 billion at December 31, 2015, compared to $1.5 billion at December
31, 2014, a decrease of $0.3 billion, or 20%. During 2015, maturities and pay downs of available-for-sale securities totaled
$314.3 million. There were no purchases of available-for-sale securities during 2015. Available-for-sale securities acquired
from the Pine River acquisition totaled $30.1 million at the date of acquisition. Shortly after the acquisition date, the
Company sold $29.8 million of the acquired securities and recorded no gain or loss.
50
Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated:
December 31, 2015
December 31, 2014
Amortized
cost
Fair
value
Percent of
portfolio
average Amortized
yield
cost
Fair
value
Weighted
Percent of
portfolio
Weighted
average
yield
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
$ 305,773 $ 310,978
26.87 %
2.24 % $ 395,244 $ 404,215
27.33 %
2.11 %
861,321
725
845,543
725
$ 1,167,819 $ 1,157,246
73.07 %
0.06 %
100.00 %
1,074,580
1.74 %
0.00 %
419
1.87 % $ 1,484,497 $ 1,479,214
1,088,834
419
72.64 %
0.03 %
100.00 %
1.75 %
0.00 %
1.85 %
As of December 31, 2015 and 2014, except for other securities, the entire available-for-sale investment portfolio was backed by
mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate Federal
Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Government National
Mortgage Association (“GNMA”) securities. The other mortgage-backed securities are comprised of securities backed by FHLMC,
FNMA and GNMA securities.
At December 31, 2015 and 2014, adjustable rate securities comprised 7.3% and 7.4%, 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 2.1% per annum and 2.2% per annum at December 31, 2015 and 2014, respectively.
The estimated weighted average life of the available-for-sale MBS portfolio as of December 31, 2015 and 2014 was 3.6 years and
3.5 years, respectively. This estimate is based on various assumptions, including repayment characteristics and portfolio aging, and
actual results may differ. As of December 31, 2015 2014, the duration of the total available-for-sale investment portfolio was 3.4
years and 3.2 years, respectively.
The available-for-sale investment portfolio included $19.9 million and $21.8 million of gross unrealized losses at December 31,
2015 and 2014, respectively, which were partially offset by $9.4 million and $16.5 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.
Held-to-maturity
At December 31, 2015, we held $427.5 million of held-to-maturity investment securities, compared to $530.6 million at December
31, 2014, a decrease of $103.1 million, or 19.4%. The Company purchased $6.2 million of held-to-maturity securities during 2015.
Held-to-maturity investment securities are summarized as follows as of the date indicated:
December 31, 2015
December 31, 2014
Amortized
cost
Fair
value
Percent of average Amortized Fair
portfolio
value
yield
cost
Weighted
Weighted
Percent of average
portfolio
yield
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
$ 340,131 $ 342,812
79.56 %
3.24 % $ 422,622 $ 428,323
79.65 %
3.25 %
87,372
85,773
$ 427,503 $ 428,585
20.44 %
100.00 %
1.69 %
107,968
2.92 % $ 530,590
106,314
$ 534,637
20.35 %
100.00 %
1.68 %
2.93 %
51
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 $428.6 million and $534.6 million, at December 31, 2015 and 2014,
respectively, and included $1.1 million of net unrealized gains and $4.0 million of net unrealized losses for the respective periods.
The estimated weighted average life of the held-to-maturity investment portfolio was 3.7 years and 3.4 years as of December 31, 2015
and 2014, respectively. The duration of the total held-to-maturity investment portfolio was 3.4 years and 3.2 years as of December 31,
2015 and 2014, respectively.
Non-marketable securities
Non-marketable securities include Federal Reserve Bank ("FRB") stock, Federal Home Loan Bank (“FHLB”) stock, and non-
negotiable certificates of deposit. At December 31, 2015 and 2014, we held $14.1 million and $19.5 million, respectively, of FRB
stock. At December 31, 2015 and 2014, we held $7.4 million and $7.6 million of FHLB stock, respectively. We hold these securities
in accordance with debt and regulatory requirements. At December 31, 2015, we held $1.0 million of non-negotiable certificates of
deposit acquired in the Pine River acquisition. These are restricted securities which lack a market and are therefore carried at cost.
Loans Overview
At December 31, 2015, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in
connection with our five acquisitions to date.
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 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. None of the loans acquired in the Pine River 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. 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. 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 three 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 acquired non-strategic portfolio
Interest income
We look at:
Strategic balances and loan originations
Non-strategic balances and accretable yield
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, and non
310-30 loans, see note 7.
52
Strategic loans comprised 95.4% of the total loan portfolio at December 31, 2015, compared to 90.7% at December 31, 2014.
The table below shows the loan portfolio composition categorized between strategic and non-strategic at the respective dates:
Strategic
December 31, 2015
Non-strategic
Total
Strategic
December 31, 2014
Non-strategic
Total
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total
$ 1,047,053 $
160,824
200,218
353,001
674,351
32,398
30,282 $ 795,396
137,531
159,957
401,637
632,700
35,188
$ 2,467,845 $ 119,828 $ 2,587,673 $ 1,960,667 $ 201,742 $ 2,162,409
5,723 $ 1,052,776 $ 765,114 $
1,486
12,115
89,885
9,651
968
1,972
19,228
126,326
22,117
1,817
162,310
212,333
442,886
684,002
33,366
135,559
140,729
275,311
610,583
33,371
Our loan portfolio totaled $2.6 billion at December 31, 2015 and increased $425.3 million from December 31, 2014. The 19.7%
increase in total loans was primarily driven by a $507.2 million, or 25.9%, increase in our strategic loan portfolio, partially offset by
an $81.9 million decrease in our non-strategic loan portfolio. The increase in strategic loans was driven by strong loan originations
of $966.9 million, as we have successfully continued to generate new relationships with small to medium-sized businesses and
individuals. We have experienced particularly strong loan growth in our commercial portfolio, which at December 31, 2015, was
comprised of public administration-related loans of $259.2 million, energy-related loans of $146.9 million, finance and insurance-
related loans of $100.9 million, manufacturing-related loans of $70.1 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.
Included in our commercial loans are energy-related loans that comprised 5.7% of total loans, 3.4% of interest earning assets and
28.3% of the Bank’s tier 1 capital at December 31, 2015. The average loan balance per relationship in the energy sector was $5.2
million at December 31, 2015. 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 40.0%, 40.5% and 19.5%, respectively, of the total energy related
portfolio at December 31, 2015. Unfunded commitments to energy clients totaled $97.7 million at December 31, 2015, including
$59.6 million to production clients, $26.1 million to midstream clients and $12.0 million to services clients. We may not be
contractually required to fund certain amounts depending on the individual circumstances of each client. 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 credit reviews. Energy prices declined significantly during 2014 and 2015 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, is expected to protect us against significant credit loss.
Loans in the production subsector totaled $58.8 million of the energy loan balances at December 31, 2015, with an average balance
per client of $4.5 million. We lend only against proven reserves of our production clients and on a senior secured basis. Our
production clients have net debt to proven reserves ranging from 0% to 65%, with an average of 27%. Net debt to total
capitalization for our production clients ranges from 0% to 80%, with an average of 21%. Borrowing base commitment utilization
remains low at 48%. With the exception of one client with an outstanding balance of $6.2 million that we classified due to liquidity
constraints, as of December 31, 2015, our production clients have liquidity on hand to cover operating cost for 14 to 137 months.
Excluding the one classified client in the production sector, at December 31, 2015, this sector has a ratio of net debt to EBITDA
ranging from 0 to 2.6 times, with an average of 1.15 times. This compares very favorably to the average for large cap production
companies, as reported recently by Wells Fargo Securities at 2.6 times.
Loans in the midstream subsector totaled $59.5 million, with an average balance per client of $11.9 million. Our five midstream
clients have a ratio of senior secured debt to EBITDA ranging from 1.3 times to 6.1 times with a median of 3.9 times. Senior
secured debt to total assets ranges from 10% to 80% with an average of only 40%. One of our midstream clients represents an
outlier with senior secured debt above 4.5 times and senior secured debt to total assets above 51%. This client is working on several
strategies to reduce its leverage to be in line with other clients. Generally, we consider senior secured debt to EBITDA of less than 5
times to represent acceptable leverage for a midstream company.
53
Loans in the services subsector totaled $28.6 million, with an average balance per client of $2.9 million. As duration of low
oil prices persisted and worsened in the latter half of 2015, we identified two loans within our energy services subsector that
we moved to non-accrual in third quarter of 2015. These two loans account for $12.0 million of the $28.6 million in energy
services loan balances as of December 31, 2015. We have specific reserves of $2.1 million against these non-accruals, and are
working with both clients on resolution strategies. The remaining energy services clients are effectively managing capital,
liquidity and cash flow in the face of the protracted and severe downturn in the industry and are prepared for long scenario
continuing low oil prices and have senior debt to assets ranging from 50% to 71% with an average of 59%.
As of December 31, 2015, our non-owner occupied commercial real estate totaled $442.9 million and was only 85% of bank
tier-1 capital. Multi-family exposure totaled $7.8 million, or 1.8%, of non-owner occupied commercial real estate loans as of
December 31, 2015, and no specific property type comprised more than 3.4% of total loans.
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, 2015 and 2014, based on the domicile
of the borrower or, in the case of collateral-dependent loans, the geographic location of the collateral:
Colorado
Missouri
Texas
Kansas
California
Other
Total
December 31, 2015
December 31, 2014
Loan balance
Percent of
loan portfolio
Loan balance
$
$
1,120,806
651,386
274,012
198,374
53,313
289,782
2,587,673
43.3 %
25.2
10.6
7.7
2.1
11.1
100.0 %
$
$
850,778
518,623
248,262
228,612
44,694
271,440
2,162,409
Percent of
loan portfolio
39.3 %
24.0
11.5
10.6
2.1
12.5
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 $966.9 million during 2015, increased $97.6 million,
or 11.2%, from 2014 as a result of continued market penetration. The following table represents new loan originations during
2015 and 2014:
Fourth quarter Third quarter Second quarter First quarter
2015
2015
2015
2015
Total
2015
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
$ 123,739 $ 151,434 $ 147,321 $ 129,120 $ 551,614
58,113
55,834
119,751
164,936
16,618
$ 238,061 $ 253,728 $ 271,387 $ 203,690 $ 966,866
11,295
12,095
36,480
36,808
5,616
3,605
12,778
21,898
33,042
3,247
24,194
13,395
23,260
50,387
3,086
19,019
17,566
38,113
44,699
4,669
Fourth quarter Third quarter Second quarter First quarter
2014
2014
2014
2014
Total
2014
$ 102,732 $ 110,083 $ 133,671 $ 130,096 $ 476,582
27,213
71,237
136,970
139,435
17,806
$ 182,231 $ 203,289 $ 266,760 $ 216,963 $ 869,243
7,014
10,293
33,817
35,404
6,678
4,959
21,002
29,633
27,812
3,461
10,288
28,803
45,903
44,539
3,556
4,952
11,139
27,617
31,680
4,111
54
The tables below show the contractual maturities of our loans for the dates indicated:
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans
Due within
1 Year
Due after 1 but
within 5 Years
Due after
5 Years
December 31, 2015
86,592 $
40,982
17,772
95,100
10,681
9,469
260,596 $
579,815 $
80,268
77,673
269,582
33,438
17,820
1,058,596 $
386,369 $
41,060
116,889
78,204
639,883
6,077
1,268,482 $
Due within
1 Year
Due after 1 but
within 5 Years
Due after
5 Years
December 31, 2014
118,569 $
36,769
19,048
93,040
22,678
12,899
303,003 $
502,622 $
49,032
65,963
222,984
37,900
16,115
894,616 $
174,205 $
51,730
74,946
85,613
572,122
6,174
964,790 $
$
$
$
$
Total
1,052,776
162,310
212,334
442,886
684,002
33,366
2,587,673
Total
795,396
137,531
159,957
401,637
632,700
35,188
2,162,409
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:
Fixed
December 31, 2015
Variable
Total
Commercial(1)
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans with > 1 year maturity
Commercial(1)
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total loans with > 1 year maturity
Weighted
average rate
Balance
Weighted
average rate
$
Balance
453,179
49,261
85,036
137,124
359,657
17,822
$ 1,102,079
3.33 % $ 505,134
56,076
4.69 %
88,090
4.43 %
162,781
4.56 %
294,051
3.50 %
3,652
4.68 %
3.71 % $ 1,109,784
Balance
958,313
3.58 % $
105,337
3.73 %
173,126
4.04 %
299,905
3.43 %
653,708
3.73 %
21,474
4.10 %
3.65 % $ 2,211,863
Weighted
average rate
3.47 %
4.18 %
4.23 %
3.95 %
3.61 %
4.58 %
3.68 %
Fixed
December 31, 2014
Variable
Total
Weighted
average rate Balance
Weighted
average rate
Balance
$ 222,448
45,721
68,723
118,724
341,833
13,828
$ 811,277
3.80 % $ 443,305
37,533
4.83 %
44,482
4.31 %
109,117
4.59 %
236,365
3.48 %
5.32 %
4,591
3.91 % $ 875,393
Balance
665,753
3.63 % $
83,254
4.58 %
113,205
4.10 %
227,841
3.41 %
578,198
3.59 %
3.95 %
18,419
3.66 % $ 1,686,670
Weighted
average rate
3.68 %
4.72 %
4.23 %
4.02 %
3.53 %
4.97 %
3.78 %
(1) Included in commercial fixed rate loans are loans totaling $273.3 million and $68.8 million as of December 31, 2015 and
2014, respectively, that have been swapped to variable rates at current market pricing. Included in the commercial segment
are tax exempt loans totaling $347.6 million and $117.5 million, with a weighted average rate of 3.18% and 3.42% at
December 31, 2015 and 2014, respectively.
55
Accretable Yield
At December 31, 2015 and 2014, the accretable yield balance was $84.2 million and $113.5 million, respectively. During 2015 and
2014, we re-measured the expected cash flows quarterly for all 27 and 28 remaining loan pools, respectively, accounted for under
ASC 310-30 utilizing the same cash flow methodology used at the time of acquisition. This re-measurement resulted in a net $18.0
million and $43.7 million reclassification from non-accretable difference to accretable yield as of December 31, 2015 and 2014,
respectively.
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:
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,
December 31,
$
$
2015
84,194
5,008
89,202
$
$
2014
113,463
7,618
121,081
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 somewhat limited in their comparability to industry averages or to other
financial institutions because of the percentage of acquired problem loans and given that any asset quality deterioration that
existed at the date of acquisition was considered in the original fair value adjustments.
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 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 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
56
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 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 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. Interest income that would have been recorded had nonaccrual loans performed in
accordance with their original contract terms during 2015, 2014 and 2013, was $1.4 million, $1.2 million and $0.5 million,
respectively.
Our acquired non-performing 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. 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.
All loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2015, 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.
57
The following table sets forth the non-performing assets as of the dates presented:
December 31, 2015 December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2011
Non-accrual loans:
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
$
Total non-accrual loans
Restructured loans on non-accrual:
Commercial
Agriculture
Owner-occupied commercial real estate
Commercial real estate
Residential real estate
Consumer
Total restructured loans on non-accrual
Total non-performing loans
OREO
Other repossessed assets
Total non-performing assets
Loans 90 days or more past due and
still accruing interest
Accruing restructured loans
ALL
Total non-performing loans to total
$
$
$
$
loans
Loans 90 days or more past due and
942
1,904
954
407
3,617
30
7,854
15,897
81
319
815
679
2
17,793
25,647
20,814
894
47,355
166
8,403
27,119
$
$
$
$
$
221
130
385
222
2,845
37
3,840
3,994
365
458
—
1,966
190
6,973
10,813
29,120
849
40,782
263
19,275
17,613
$
$
$
$
$
15,572
153
467
1,131
3,437
10
20,770
535
—
225
169
2,408
237
3,574
24,344
70,125
1,086
95,555
129
11,605
12,521
$
$
$
$
$
1,547
230
3,135
1,400
3,936
—
10,248
2,951
20
231
6,908
2,471
290
12,871
23,119
94,808
1,331
119,258
25
17,720
15,380
$
$
$
$
$
5,255
29
1,796
12,103
2,298
1
21,482
119
—
55
16,053
61
—
16,288
37,770
120,636
1,553
159,959
652
12,325
11,527
0.99 %
0.50 %
1.31 %
1.26 %
1.66 %
still accruing interest to total loans
0.01 %
0.01 %
0.01 %
0.00 %
0.03 %
Total non-performing assets to total
loans and OREO
ALL to non-performing loans
1.81 %
105.74 %
1.86 %
162.89 %
5.00 %
51.43 %
6.19 %
66.53 %
6.71 %
30.52 %
Total non-performing loans increased $14.8 million from December 31, 2014 to December 31, 2015. The primary driver was
two energy services clients in the commercial segment, totaling $12.0 million that were restructured and put on non-accrual
status during the year. During 2015, accruing TDRs decreased $10.9 million. The decrease was the result of payoffs of prior
restructured loans, partially offset by a $6.3 million restructure of a relationship in the commercial segment.
The OREO balance of $20.8 million at December 31, 2015, excludes $5.5 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 2015, $4.6 million of OREO was foreclosed
on or otherwise repossessed and $15.6 million of OREO was sold resulted in a net gain of $2.8 million. OREO write-downs
of $1.6 million were recorded during 2015.
Total non-performing loans decreased $13.5 million from December 31, 2013 to December 31, 2014. The decrease was
driven by a $15.5 million decrease in non-performing loans as a result of a 310-30 loan pool that was returned to accrual
status during 2014. This decrease was offset by 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.
58
Non ASC 310-30
loans
Commercial
Agriculture
Owner-
occupied
commercial
real estate
Commercial
real estate
Residential real
estate
Consumer
Total non
ASC 310-30
loans
ASC 310-30
loans
Commercial
Agriculture
Commercial
real estate
Residential real
estate
Consumer
During 2014, accruing TDRs increased $7.7 million compared to 2013. 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.
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 $13.1 million of net gains.
OREO write-downs of $2.1 million were recorded during 2014.
The following table represents the carrying value of our accruing and non-accrual loans compared to the unpaid principal
balance ("UPB") as of December 31, 2015:
Accruing
Non-accrual
Total
Unpaid
principal
balance
Carrying Unpaid
Carrying
Carrying
value
value/
UPB
principal
balance
Carrying value/
UPB
value
Unpaid
principal
balance
Carrying
value
Carrying
value/
UPB
$ 1,025,516 $ 1,022,930
143,574
143,908
99.7 % $ 18,587 $ 16,839
1,984
2,099
99.8 %
90.6 % $ 1,044,103 $ 1,039,769
145,558
94.5 %
146,007
99.6 %
99.7 %
184,336
183,346
99.5 %
1,679
1,273 75.8% %
186,015
184,619
99.2 %
322,628
320,489
99.3 %
1,276
1,223
95.8 %
323,904
321,712
99.3 %
660,176
30,609
658,254
30,603
99.7 %
99.9 %
5,031
35
4,296
32
85.4 %
91.4 %
665,207
30,644
662,550
30,635
99.6 %
99.9 %
2,367,173
2,359,196
99.7 % 28,707
25,647
89.3 % 2,395,880
2,384,843
99.5 %
26,616
19,938
13,007
16,752
48.9 %
84.0 %
—
—
—
—
0.00 %
0.00 %
26,616
19,938
13,007
16,752
48.9 %
84.0 %
183,413
148,888
81.2 %
—
—
0.00 %
183,413
148,888
81.2 %
30,873
7,557
21,452
2,731
69.5 %
36.1 %
—
—
—
—
0.00 %
0.00 %
30,873
7,557
21,452
2,731
69.5 %
36.1 %
Total loans
accounted
for under
ASC 310-30
Total loans
268,397
202,830
$ 2,635,570 $ 2,562,026
75.6 %
—
—
97.2 % $ 28,707 $ 25,647
0.00 %
202,830
89.3 % $ 2,664,277 $ 2,587,673
268,397
75.6 %
97.1 %
59
Past Due Loans
Past due status is monitored as an indicator of credit deterioration. 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.” 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, 2015 and 2014:
Loans 30-89 days past due and still
accruing interest
Loans 90 days past due and still accruing
interest
Non-accrual loans
Total past due and non-accrual 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
December 31, 2015
December 31, 2014
ASC 310-30 Non ASC
310-30 loans
loans
Total
loans
ASC 310-30 Non ASC
310-30 loans
loans
Total
loans
$ 3,941
$ 6,716
$ 10,657
$ 7,016
$ 1,142
$ 8,158
15,762
—
$ 19,703
165
25,647
$ 32,528
15,927
25,647
$ 52,231
33,834
—
$ 40,850
263
10,813
$ 12,218
34,097
10,813
$ 53,068
7.77 %
1.08 %
1.61 %
12.10 %
0.59 %
2.08 %
0.00 %
1.08 %
0.99 %
0.00 %
0.57 %
0.50 %
that carry fair value marks
100.00 %
22.01 %
51.43 %
100.00 %
34.66 %
84.96 %
Loans 30-89 days past due and still accruing interest increased by $2.5 million from December 31, 2014 to December 31, 2015
and loans 90 days or more past due and still accruing interest decreased $18.2 million at December 31, 2015 compared to December
31, 2014, for a collective decrease in total past due loans of $15.7 million. The decrease in total past due loans was driven by lower
ASC 310-30 loans 90 days past due and still accruing totaling $18.1 million as a result of successful workout progress on
acquired loans, offset by one non 310-30 commercial real estate loan totaling $1.5 million that was 30 days past due at December
31, 2015. Non-accrual loans increased $14.8 million from December 31, 2014 to December 31, 2015. The increase was primarily
due to two energy services clients, totaling $12.0 million at December 31, 2015, that were placed on non-accrual status.
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 on the consolidated statements of operations.
60
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. 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 2015 and 2014,
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:
Commercial
Total commercial
Total agriculture
Agriculture
Commercial real estate
Residential real
estate
Senior lien
Junior lien
Consumer
Total consumer
Construction
Acquisition and development
Multi-family
Owner-occupied
Non-owner occupied
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.
61
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, resulting 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 28-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 loss rate to pass rated credits as necessary to account for inherent risks to the portfolio. For originated loans, we
assign a slightly higher portion of our loss history, but still rely on the peer loss history to account for our limited historical
data. For acquired loans, we use solely our internal loss history as those loans are more seasoned and more of the actual
losses in the portfolio have been from the acquired 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 2015, we recorded $12.1 million of provision for loan losses for loans not accounted for under ASC 310-30, which
primarily reflects reserves to support loan growth and specific reserves on certain non-performing loans. Net charge-offs for
non ASC 310-30 loans during 2015 totaled $2.9 million and were primarily from the commercial and consumer loan
segments. At December 31, 2015, there were eleven impaired loans that carried specific reserves totaling $4.3 million.
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 and specific reserves on certain non-performing loans. During 2014, net
charge-offs totaled $1.1 million and were primarily from the residential real estate, consumer, and commercial loan segments.
At December 31, 2014, there were five impaired loans that carried specific reserves totaling $0.3 million.
310-30 ALL
During 2015, seven loan pools accounted for under ASC 310-30 had combined impairments of $336 thousand as a result of
decreases in expected cash flows.
During 2014, several loans 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 loan pools had minimal impairments during
2014 as a result of decreases in expected cash flows. This activity resulted in net provision reversals of $520 thousand during
2014.
Total ALL
After considering the above mentioned factors, we believe that the ALL of $27.1 million and $17.6 million was adequate to
cover probable losses inherent in the loan portfolio at December 31, 2015 and 2014, 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.
62
The following schedule presents, by class stratification, the changes in the ALL during the periods listed.
As of and for the years ended
ASC
310-30
loans
December 31, 2015
Non
310-30
loans
16,892 $
721 $
Total
17,613 $
Beginning allowance for loan losses
Charge-offs:
$
December 31, 2014
Non
310-30
loans
ASC
310-30
loans
1,280 $
11,241 $
ASC
310-30
loans
December 31, 2013
Non
310-30
loans
4,652 $
10,728 $
Total
12,521 $
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total charge-offs
Recoveries
Net charge-offs
—
—
—
—
(10)
(10)
—
(10)
(1,860)
(51)
(222)
(208)
(1,196)
(3,537)
609
(2,928)
(1,860)
(51)
(222)
(208)
(1,206)
(3,547)
609
(2,938)
(3)
—
—
—
(36)
(39)
—
(39)
(507)
—
—
(739)
(783)
(2,029)
951
(1,078)
(510)
—
—
(739)
(819)
(2,068)
951
(1,117)
(496)
(221)
(2,801)
(623)
—
(4,141)
—
(4,141)
(1,654)
—
(943)
(882)
(1,001)
(4,480)
1,466
(3,014)
Total
15,380
(2,150)
(221)
(3,744)
(1,505)
(1,001)
(8,621)
1,466
(7,155)
Provision (recoupment) for loan
loss
Ending allowance for loan losses
Ratio of net charge-offs to average total
loans during the period, respectively
Ratio of ALL to total loans outstanding at
$
366
1,077 $
12,078
26,042 $
12,444
27,119 $
(520)
721 $
6,729
16,892 $
6,209
17,613 $
769
1,280 $
3,527
11,241 $
4,296
12,521
0.01%
0.36%
0.12%
0.01%
0.06%
0.05%
0.67%
0.27%
0.41%
period end, respectively
0.53%
1.09%
1.05%
0.26%
0.90%
0.81%
0.28%
0.80%
0.68%
0.00% 101.54% 105.74%
51.43%
156.22%
$ 202,830 $ 2,384,843 $ 2,587,673 $ 279,645 $ 1,882,764 $ 2,162,409 $ 450,880 $ 1,403,214 $ 1,854,094
162.89%
118.11%
8.63%
0.00%
$ 209,268 $ 2,323,527 $ 2,532,795 $ 361,806 $ 1,688,197 $ 2,050,003 $ 620,709 $ 1,128,545 $ 1,749,254
24,344
$
10,813 $ 14,827 $
25,647 $
10,813 $
25,647 $
9,517 $
— $
— $
As of and for the years ended
Ratio of ALL to total non-performing
loans at period end, respectively
Total loans
Average total loans outstanding during
the period
Total non-performing loans
Beginning allowance for loan losses
Charge-offs:
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total charge- offs
Recoveries
Net charge-offs
Provision (recoupment) for loan loss
Ending allowance for loan losses
Ratio of 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-performing loans at period end,
respectively
Total loans
Average total loans outstanding during the period
Total non-performing loans
December 31, 2012
Non
310-30
loans
ASC
310-30
loans
$
2,188 $
9,339 $
(216)
(144)
(15,578)
(872)
(19)
(16,829)
275
(16,554)
19,018
4,652 $
(3,140)
(8)
(2,605)
(1,132)
(1,502)
(8,387)
799
(7,588)
8,977
10,728 $
December 31, 2011
Non
310-30
loans
ASC
310-30
loans
Total
— $
48 $
48
(3,111)
—
—
—
—
(3,111)
288
(2,823)
5,011
2,188 $
(1,399)
—
(3,378)
(288)
(1,330)
(6,395)
695
(5,700)
14,991
9,339 $
(4,510)
—
(3,378)
(288)
(1,330)
(9,506)
983
(8,523)
20,002
11,527
Total
11,527 $
(3,356)
(152)
(18,183)
(2,004)
(1,521)
(25,216)
1,074
(24,142)
27,995
15,380 $
1.56%
0.79%
1.20%
0.34%
0.68%
0.51%
0.57%
1.06%
0.84%
0.17%
0.97%
0.51%
0.00%
46.40%
30.52%
$ 822,021 $ 1,010,681 $ 1,832,702 $ 1,307,709 $ 960,726 $ 2,268,435
$ 1,058,092 $ 962,147 $ 2,020,239 $ 823,598 $ 834,580 $ 1,658,178
37,770
$
0.00% 24.73%
37,770 $
23,119 $
23,119 $
66.53%
— $
— $
63
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:
December 31, 2015
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
1,052,776
162,310
655,219
684,002
33,366
2,587,673
% of total loans
40.7 %
6.3
25.3
26.4
1.3
100.0 %
Related ALL
% of ALL
$
$
14,390
1,676
5,362
5,283
409
27,119
53.1 %
6.2
19.8
19.5
1.4
100.0 %
December 31, 2014
Total loans
795,396
137,531
561,594
632,700
35,188
2,162,409
% of total loans
36.8 %
6.4
26.0
29.2
1.6
100.0 %
Related ALL
% of ALL
$
$
8,598
1,009
3,819
3,771
416
17,613
48.8 %
5.7
21.7
21.4
2.4
100.0 %
December 31, 2013
Total loans
483,495
159,952
574,220
599,924
36,503
1,854,094
% of total loans
26.1 %
8.6
31.0
32.3
2.0
100.0 %
Related ALL
% of ALL
$
$
4,258
1,237
2,276
4,259
491
12,521
34.0 %
9.9
18.2
34.0
3.9
100.0 %
December 31, 2012
Total loans
270,588
173,407
804,999
533,377
50,331
1,832,702
% of total loans
14.8 %
9.5
43.9
29.1
2.7
100.0 %
Related ALL
% of ALL
$
$
2,798
592
7,396
4,011
583
15,380
18.2 %
3.8
48.1
26.1
3.8
100.0 %
December 31, 2011
Total loans
372,931
151,403
1,152,478
522,885
74,354
2,274,051
% of total loans
16.4 %
6.7
50.6
23
3.3
100.0 %
Related ALL
% of ALL
$
$
2,959
282
3,389
4,121
776
11,527
25.7 %
2.4
29.4
35.8
6.7
100.0 %
The ALL allocated to commercial loans increased $5.8 million to 53.1% at December 31, 2015, from 48.8% at December 31,
2014, primarily due to loan growth and specific reserves on certain non-accrual loans.
64
FDIC Indemnification Asset and Clawback Liability
On November 5, 2015, the Bank terminated its loss-share agreements with the FDIC. The Bank paid consideration of $15.1
million to the FDIC and recorded a pre-tax gain of $4.9 million during the fourth quarter of 2015. The gain resulted primarily
from the settlement payment made to the FDIC, and the elimination of the remaining indemnification asset and clawback
payable, which totaled $18.2 million and $38.7 million, respectively, on the date of termination. The indemnification asset
was amortized through September 30, 2015.
During 2015, the Company paid a net $2.2 million to the FDIC related to certificates filed through June 30, 2015 for
recoveries on covered assets through that period. All rights and obligations of the Bank and the FDIC under the FDIC loss-
share agreements have been eliminated under the early termination agreement.
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. 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 were 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.
Other Assets
Significant components of other assets were as follows as of the periods indicated:
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 miscellaneous assets
Total other assets
$
December 31, 2015 December 31, 2014
45,506
5,743
44,242
8,082
7,199
4,266
9,782
124,820
52,633 $
9,427
50,311
5,450
8,827
3,363
10,705
140,716 $
$
Other assets totaled $140.7 million and $124.8 million at December 31, 2015 and 2014, respectively, and increased $15.9
million, or 12.7%, during the year ended December 31, 2015. The deferred tax assets increased $7.1 million during 2015,
which was primarily attributable to the reversal of the deferred tax liability related to the FDIC indemnification asset and the
acquisition of Pine River, and was offset by the write-off of deferred tax assets on certain stock-based compensation awards
granted to former executives. Accrued income taxes receivable increased $3.7 million during 2015 due to lower taxable
income. Bank-owned life insurance increased $6.1 million during 2015 due to additional life insurance policies acquired
through the Pine River acquisition coupled with increased bank-owned life insurance cash surrender value. Other
miscellaneous assets increased $0.9 million, or 9.4%, from December 31, 2014 to December 31, 2015, primarily due to an
increase in derivative assets, further discussed in note 22 of our consolidated financial statements, and acquired Pine River
other assets.
Other assets totaled $124.8 million and $86.5 million at December 31, 2014 and 2013, respectively, and increased $38.3
million, or 44.2%. 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.
65
Other Liabilities
Significant components of other liabilities were as follows as of the dates indicated:
Accrued expenses
Pending loan purchase settlement
Accrued interest payable
Derivative liability
Other miscellaneous liabilities
Accrued contract termination expenses
Warrant liability
Total other liabilities
$
$
December 31, 2015 December 31, 2014
15,192
10,038
3,608
4,728
2,316
4,110
3,328
43,320
15,493
9,936
4,319
8,315
11,101
—
—
49,164
$
$
Other liabilities totaled $49.2 million and $43.3 million at December 31, 2015 and 2014, respectively, and increased $5.8
million, or 13.5%, during 2015. Derivative liabilities increased $3.6 million during 2015 compared to prior year primarily
due to increased volume of fair value and interest rate hedges during 2015. Other miscellaneous liabilities increased $8.8
million during 2015, primarily due to an increase in deferred compensation liabilities from the Pine River acquisition totaling
$1.0 million and deferred revenue related to our core processing vendor contract of $5.2 million.
We have outstanding warrants to purchase 725,750 shares of our common stock. During 2015, the Company settled 105,000
warrants and recognized a gain of $97 thousand upon settlement. During the fourth quarter of 2015, the Company modified
its warrant agreements, resulting in a reclassification from other liabilities to additional paid-in capital in the statement of
financial condition at December 31, 2015. The warrants were recorded at fair value as of the date of the modified agreements
using a Black-Scholes model with the change in fair value reported in the consolidated statements of operations as “loss
(gain) from change in fair value of warrant liability” in non-interest expense. More information on the accounting and
measurement of the warrant contracts can be found in notes 2 and 18 in our consolidated financial statements.
Other liabilities totaled $43.3 million and $36.6 million at December 31, 2014 and 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 from 2013 primarily due to a $4.7 million increase in derivative liabilities.
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, 2015 and 2014:
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, 2015
$ 815,054 21.2 % $
December 31, 2014
732,580 19.5 %
386,121
255,246
1,035,190
2,409,137
859,910
497,141
1,357,051
100.0 % $ 3,766,188
10.3
6.8
27.4
64.0
22.8
13.2
36.0
100.0 %
11.4
9.3
27.0
68.9
19.8
11.3
31.1
436,745
357,505
1,037,490
2,646,794
762,038
431,845
1,193,883
$ 3,840,677
66
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to
$100,000 as of December 31, 2015:
Three months or less
Over 3 months through 6 months
Over 6 months through 12 months
Thereafter
Total time deposits > $100,000
$
December 31, 2015
76,228
62,631
141,789
151,198
431,845
$
During 2015, our total deposits increased $74.5 million, or 2.0%. Non-interest bearing demand deposits increased $82.5
million, or 11% from December 31, 2014, while time deposits decreased $163.2 million, or 12% from December 31, 2014.
As a result, the mix of transaction deposits to total deposits improved to 68.9% at December 31, 2015, from 64.0% at
December 31, 2014 as we continued to focus our deposit base on clients who were interested in market-rate time deposits and
in developing a long-term banking relationship. At December 31, 2015 and 2014, we had $807.7 million and $934.7 million,
respectively, of time deposits that were scheduled to mature within 12 months. Of the $807.7 million in time deposits
scheduled to mature within 12 months at December 31, 2015, $280.7 million were in denominations of $100,000 or more,
and $527.0 million were in denominations less than $100,000. Note 13 to the consolidated financial statements provides a
maturity schedule and weighted average rates of time deposits outstanding at December 31, 2015 and 2014.
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.
Regulatory Capital
On October 19, 2015, the Company announced that the operating agreement between its subsidiary bank and its then primary
regulator, the OCC, was terminated. The operating agreement was entered into in December 2010 as part of the Bank’s
approval to operate as a de novo bank. The agreement required the Bank to maintain certain capital levels, placed restrictions
on its ability to pay dividends, and limited its ability to make certain other business decisions.
Our subsidiary bank and the holding company are subject to the regulatory capital adequacy requirements of the Federal
Reserve Board and the FDIC, 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, 2015
and 2014, 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 15 of our consolidated financial statements.
Results of Operations
Our net income depends largely on net interest income, which is the difference between interest income from interest earning
assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan
losses and non-interest income, such as service charges, bank card income, FDIC indemnification asset amortization and
FDIC loss sharing income (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 problem assets are also included in non-interest expense.
67
Overview of Results of Operations
Year ended 2015
We recorded net income of $4.9 million, or $0.14 per diluted share, during 2015, compared to net income of $9.2 million, or
$0.22 per diluted share, during 2014. Net interest income totaled $156.9 million during 2015 and decreased $13.3 million, or
7.8%, from 2014. The decrease was primarily driven by lower levels of higher-yielding acquired loans of $124.4 million, or
34.4%. Average interest earning assets remained consistent as increases in the originated loan portfolio offset reductions in
the investment portfolio and non-strategic acquired loans. The continued resolution of the higher-yielding acquired non-
strategic loan portfolio and higher levels of lower-yielding short-term investments led to a 25 basis point narrowing of the
fully taxable equivalent net interest margin to 3.60% from 3.85% in the prior year.
Provision for loan loss expense was $12.4 million during 2015, compared to $6.2 million during 2014, an increase of $6.2
million. The increase in provision was primarily due to an increase in specific reserves of $5.6 million. The non 310-30
allowance was 1.09% of total non 310-30 loans compared to 0.90% in the prior year, increasing primarily due to the higher
specific reserves and an increase in the general allowance as the originated portfolio becomes a larger component of non 310-
30 loans. Net charge-offs on non 310-30 loans remained low at only 0.12% during 2015 compared to 0.06% during 2014.
Non-interest income was $21.4 million in 2015 compared to a negative $1.7 million in the prior year, an increase of $23.1 million.
The increase was largely due to $21.1 million higher FDIC related income driven by $7.0 million less indemnification
amortization, a $9.2 million increase in other FDIC loss-share income, and a $4.9 million gain on the termination of the FDIC
loss-share agreements. Banking related non-interest income totaled $33.0 million during 2015, increasing $2.6 million, or 8.6%,
as a result of increases in bank card fees, gain on sale of mortgages, mark-to-market adjustments related to fair value interest rate
swaps on fixed-rate term loans, and bank-owned life insurance income, and were somewhat offset by a decrease in overdraft fees.
Total non-interest expense was $158.0 million in 2015, increasing $8.0 million from prior year. The increase was driven by
lower year-over-year OREO gains of $7.0 million, one-time core system conversion-related expenses of $3.0 million,
efficiency initiative expenses related to severance accruals and banking center consolidation expense accruals of $2.4 million,
change in warrant liability fair value adjustments of $3.1 million primarily due to the change in our stock price, and $2.1
million related to the addition of Pine River. These increases were partially offset by a net decrease in operating expenses of
$4.8 million during 2015 and a $4.1 million contract termination expense in 2014. One-time non-interest expenses totaled
$6.2 million during 2015 and are excluded from operating expenses in 2015. When further adjusted for the additional Pine
River expenses, operating expenses decreased a net $4.8 million year-over-year, or 3.2%. Operating expense reductions were
driven by lower compensation costs, banking center consolidations and successful vendor contract negotiations. Operating
expenses exclude problem asset workout expenses, and one-time expenses related to the change in the warrant liability,
contract termination expenses, banking center consolidation expense accruals, severance expense accruals, core system
conversion-related expenses, and acquisition-related expenses.
Years ended 2014 and 2013
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
68
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 related non-interest income of $30.4 million during 2014 was 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. 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.
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 on
a fully taxable equivalent basis; (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.
69
The table below presents the components of net interest income on a fully taxable equivalent basis for the years ended
December 31, 2015, 2014, and 2013:
For the year ended December 31,
2015
For the year ended December 31,
2014
For the year ended December 31,
2013
Average
balance
Interest
Average Average
balance
rate
Interest
Average Average
Balance
rate
Interest
Average
Rate
$
237,453
2,109,152
$ 47,255
86,693
19.90 % $ 361,806
1,691,253
4.11 %
$ 60,841
74,565
16.82 % $
4.41 %
620,709
1,133,895
$ 76,661
62,387
12.35 %
5.5 %
1,327,245
26,398
1.99 %
1,655,730
31,887
1.93 %
1,951,039
35,460
1.82 %
Interest earning assets:
ASC 310-30 loans
Non 310-30 loans (1)(2)(3)(4)(5)
Investment securities
available-for-sale
Investment securities held-to-
maturity
476,924
25,865
Other securities
Interest earning deposits and
securities purchased under
agreements to resell
262,500
Total interest earning assets(4) $ 4,439,139
59,526
353,344
(20,939)
$ 4,831,070
Cash and due from banks
Other assets
Allowance for loan losses
Total assets
11,747
1,210
2.46 %
4.68 %
588,909
25,855
16,764
1,206
2.85 %
4.66 %
597,920
32,135
18,485
1,559
3.09 %
4.85 %
799
$ 174,102
329
$ 185,592
0.30 %
123,350
3.92 % $ 4,446,903
57,763
378,723
(15,460)
$ 4,867,929
0.27 %
362,854
4.17 % $ 4,698,552
60,922
428,426
(12,690)
$ 5,175,210
923
$ 195,475
0.25 %
4.16 %
Interest bearing liabilities:
Interest bearing demand,
savings and money market
deposits
Time deposits
Securities sold under
$ 1,758,965
1,281,171
$
4,524
9,085
0.26 % $ 1,701,344
1,421,726
0.71 %
$
4,323
9,797
0.25 % $ 1,719,507
1,607,676
0.69 %
$
4,271
12,122
0.25 %
0.75 %
agreements to repurchase
197,728
187
0.09 %
99,057
129
0.13 %
84,354
121
0.14 %
Federal Home Loan Bank
advances
Total interest bearing
liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
40,000
666
1.67 %
9,975
164
1.64 %
—
—
— %
$ 3,277,864
782,431
69,299
4,129,594
701,476
$ 14,462
0.44 % $ 3,232,102
700,809
74,327
4,007,238
860,691
$ 14,413
0.45 % $ 3,411,537
660,254
64,666
4,136,457
1,038,753
$ 16,514
0.48 %
shareholders’ equity
$ 4,831,070
$ 4,867,929
$ 5,175,210
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
$ 159,640
$ 171,179
$ 178,961
$ 1,161,275
3.48 %
$ 1,214,801
3.60 %
3.72 %
$ 1,287,015
3.85 %
3.68 %
3.81 %
135.43 %
137.59 %
137.73 %
(1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2) Includes originated loans with average balances of $1.9 billion, $1.4 billion, and $734.0 million, interest income of $70.6
million, $58.1 million, and $33.6 million and tax equivalent yields of 3.87%, 4.17%, and 4.57% for the years ended
2015, 2014, and 2013, respectively.
(3) Non 310-30 loans include loans held-for-sale. Average balances during 2015, 2014, and 2013 were $7.1 million, $3.1
million, and $5.4 million, and interest income was $589 thousand, $267 thousand, and $329 thousand for the same
periods, respectively. 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.
(4) Presented on a fully taxable equivalent basis using the statutory tax rate of 35%. The taxable equivalent adjustments
included above are $2,695 thousand, $930 thousand, and $0 for the years ended 2015, 2014, and 2013, respectively.
(5) Loan fees included in interest income totaled $4.3 million, $4.2 million, and $3.2 million during 2015, 2014, and 2013,
respectively.
70
Net interest income totaled $156.9 million, $170.2 million, and $179.0 million for the years ended 2015, 2014, and 2013,
respectively. On a fully taxable equivalent basis, net interest income totaled $159.6 million, $171.2 million, and $179.0
million for the years ended 2015, 2014, and 2013, respectively. The year-over-year decrease was primarily driven by a $13.6
million decrease in 310-30 income in 2015 compared to 2014, and a $15.8 million decrease in 2014 compared to 2013.
Average interest earning assets remained consistent as increases in the originated loan portfolio offset a reduction in the
investment portfolio and non-strategic acquired loans. The continued resolution of the higher-yielding non-strategic loan
portfolio and higher levels of lower-yielding short-term investments led to a 25 basis point narrowing of the fully taxable
equivalent net interest margin to 3.60% from 3.85% in 2014.
Average loans comprised $2.3 billion, or 52.9%, of total average interest earning assets during 2015, compared to $2.1
billion, or 46.2%, during 2014, and $1.8 billion, or 37.3%, during 2013. The continued resolution of the acquired non-
strategic loan portfolio was more than offset by strong organic growth in the strategic loan portfolio during 2015. The yield
on the ASC 310-30 loan portfolio was 19.90% during 2015, compared to 16.82% during 2014, and 12.35% during 2013. This
increase in yield was attributable to the effects of the favorable life-to-date and 2015 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 40.6% of total interest earning assets during 2015, compared to 50.5% during 2014,
and 54.2% during 2013. The decrease in the investment portfolio was a result of scheduled paydowns and reflects the re-
mixing of the interest-earning assets as we have utilized the paydowns of the investment portfolio to fund loan originations.
Short-term investments, comprised of the interest earning deposits and securities purchased under agreements to resell,
increased to 5.8% of interest earning assets during 2015, compared to 2.8% during 2014 and 7.7% during 2013, primarily due
to increased cash from client repurchase agreements on deposit.
Average balances of interest bearing liabilities during 2015 increased $45.8 million to $3.3 billion from $3.2 billion during
2014, driven by a $98.7 million increase in securities sold under agreement to repurchase, $57.6 million increase in interest
bearing demand deposits, $30.0 million increase in FHLB advances offset by a $140.6 million decrease in average time
deposits. During 2015, total interest expense related to interest bearing liabilities was $14.5 million, compared to $14.4
million during 2014 and $16.5 million during 2013. The $0.1 million increase in interest expense from 2014 to 2015 was due
to increased volume of transaction deposits, offset by decreases in average time deposits. 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 68.1% during 2015 from 63.8% during 2014. This strategy benefited the
average cost of interest bearing liabilities, which decreased one basis point to 0.44% during 2015 from 0.45% during 2014.
71
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 2015,
2014, and 2013:
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:
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
The year ended December 31, 2015
compared to
the year ended December 31, 2014
Increase (decrease) due to
Volume
Rate
Net
The year ended December 31, 2014
compared to
the year ended December 31, 2013
Increase (decrease) due to
Rate
Net
Volume
$ (24,747) $ 11,161
(5,049)
1,044
(2,259)
4
17,177
(6,533)
(2,758)
—
$ (13,586) $ (43,537) $ 27,717
(12,395)
2,114
(1,464)
(60)
24,573
(5,687)
(257)
(293)
12,128
(5,489)
(5,017)
4
424
46
$ (16,437) $ 4,947
470
45
$ (11,490) $ (25,840) $ 15,957
(639)
$ (15,820)
12,178
(3,573)
(1,721)
(353)
(594)
$ (9,883)
$
$
148
(997)
500
93
(256)
53
285
2
(35)
305
$ (16,181) $ 4,642
$
$
(46) $
201
(712)
502
58
49
(1,281)
19
164
(1,144)
(957)
$ (11,539) $ (24,696) $ 16,914
98
(1,044)
(11)
—
$
52
(2,325)
8
164
(2,101)
$ (7,782)
(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 2015 and 2014 were $7.1 million and $3.1
million, and interest income was $589 thousand and $267 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 $2,695 thousand and $930 thousand for the years ended 2015 and 2014, respectively.
Below is a breakdown of deposits and the average rates paid during the periods indicated:
December 31, 2015
September 30, 2015
For the three months ended
June 30, 2015
March 31, 2015
December 31, 2014
Average
balance
Average
rate
paid
Average
balance
Average
Average
rate
paid
Average
balance
Rate
Paid
Average
balance
Average
rate
paid
Average
balance
Average
rate
paid
Non-interest bearing
demand
728,345 0.00%
810,895 0.00% $ 758,288 0.00% $ 733,230 0.00% $
825,979 0.00% $
$
0.08%
0.08%
0.08%
Interest bearing demand
372,085
402,468
417,460
0.32%
0.33% 1,055,280
0.33% 1,034,284
Money market accounts 1,047,072
0.22%
0.22%
0.26%
347,811
Savings accounts
250,129
344,047
0.70%
0.70% 1,375,779
0.70% 1,268,476
1,222,829
Time deposits
Total
0.07%
386,665
0.32% 1,049,936
0.27%
281,409
0.73% 1,339,897
0.07%
391,523
0.33% 1,008,229
0.28%
323,677
0.71% 1,294,908
average deposits $ 3,861,151
0.34% $ 3,860,170
0.35% $ 3,776,625
0.37% $ 3,791,137
0.36% $ 3,781,618
0.37%
72
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 $5.0 million on acquired 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. Below is a summary of the provision for loan losses for the periods indicated:
Provision for impairment (recoupment) of loans accounted for under ASC 310-30
Provision for loan losses
Total provision for loan losses
2015
For the years ended December 31,
2013
2014
$ (520)
6,729
$ 6,209
$
769
3,527
$ 4,296
$
366
12,078
$ 12,444
Provision for loan loss expense was $12.4 million during 2015, compared to $6.2 million during 2014, an increase of $6.2
million. The increase in provision was primarily due to an increase in specific reserves of $5.6 million. The non 310-30
allowance was 1.09% of total non 310-30 loans compared to 0.90% in the prior year, increasing primarily due to the higher
specific reserves and an increase in the general allowance as the originated portfolio becomes a larger component of non 310-
30 loans. Net charge-offs on non 310-30 loans remained low at only 0.12% during 2015 compared to 0.06% during 2014.
During 2015 and 2014, we recorded impairments of $366 thousand and recouped $520 thousand, 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 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.
During 2014 and 2013, we recouped $0.5 million and recorded impairments of $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.
Non-Interest Income
The table below details the components of non-interest income during 2015, 2014, and 2013, respectively:
$
$
For the years ended December 31,
2014
(27,741)
(8,862)
15,430
10,123
1,000
3,810
—
737
3,807
(1,696)
2015
(15,878)
325
14,798
10,898
1,963
5,306
1,048
609
2,379
21,448
$
$
2013
(18,960)
2,811
15,955
9,956
1,358
2,901
—
1,339
4,817
20,177
FDIC indemnification asset amortization, net of gain on termination
FDIC loss sharing income (expense)
Service charges
Bank card fees
Gain on sale of mortgages, net
Other non-interest income
Bargain purchase gain
Gain on previously charged-off acquired loans
OREO related write-ups and other income
Total non-interest income
$
$
73
Year ended 2015
Non-interest income for 2015 was $21.4 million compared to negative $1.7 million during 2014, an increase of $23.1 million.
The increase was largely due to $21.1 million higher FDIC related income driven by $7.0 million less indemnification
amortization, a $4.9 million gain on the termination of the FDIC loss sharing agreement and a $9.2 million increase in other
FDIC loss-sharing income.
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. Prior to the termination of the FDIC loss share agreements
during the fourth quarter of 2015, FDIC loss sharing income (expense) activity during 2015, 2014, and 2013 was as follows:
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,
2013
2014
2015
$ (1,259)
65
(5,235)
(87)
9,327
$ 2,811
$ (1,131) $ (1,364)
(2,509)
(1,242)
(10,053)
(1,128)
(193)
(28)
5,257
3,854
$ (8,862)
325
$
FDIC loss sharing income (expense) contributed an increase of $9.2 million to total non-interest income for 2015 from 2014.
FDIC loss sharing income (expense) was primarily comprised of FDIC reimbursements of costs of resolution of covered
assets of $3.9 million during 2015, offset with reimbursements to the FDIC for gains on sales of and income from covered
OREO of $1.1 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 $33.0 million during 2015, and increased $2.6 million from the same period in 2014 as a result
of increases in bank card fees, gain on sale of mortgages, mark-to-market adjustments related to fair value interest rate swaps on
fixed rate term loans, and bank-owned life insurance income and were somewhat offset by a decrease in overdraft fees. Service
charges, which represent various fees charged to clients for banking services, including fees such as overdraft charges and service
charges on deposit accounts, decreased $0.6 million, or 4.1%, during 2015 compared to 2014. The decrease was largely due to
declines in 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 $10.9 million during 2015 and $10.1 million during 2014, an increase of 7.7%.
During 2015, the Company realized a bargain purchase gain of $1.0 million resulting from the acquisition of Pine River. See
note 4 to the consolidated financial statements for further detail related to the Pine River acquisition.
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 2015, these gains were $0.6 million, compared to $0.7 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 2015 and 2014, this
income totaled $2.4 million and $3.8 million, respectively. The decrease in OREO related income is due to less rental income
as a result of OREO properties sold during 2015, offset by one OREO property write-up totaling $1.2 million during 2015.
Years ended 2014 and 2013
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-sharing 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.
74
Other FDIC loss sharing income (expense) contributed a decrease of $11.7 million. Other FDIC loss share 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.
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 overdraft
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 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%.
Gain on previously charged-off acquired loans were $0.7 million, compared to $1.3 million during the prior year due to lower
activity.
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.
Non-Interest Expense
The table below details non-interest expense for the periods presented:
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
ATM/debit card expenses
Professional fees
Other non-interest expense
Problem asset workout
Intangible asset amortization
Loss (gain) from the change in fair value of warrant liability
Banking center consolidation related expenses
Contract termination expense
Total non-interest expense
Year ended 2015
$
$
For the years ended December 31,
2014
82,834
25,101
11,927
4,571
4,130
3,079
3,257
10,471
(1,868)
5,344
(2,953)
2013
90,002
24,700
13,073
5,280
4,122
4,262
3,734
12,636
16,601
5,346
820
3,389
—
$ 183,965
$
2015
83,018
24,490
11,507
4,325
3,922
3,701
4,495
11,107
4,541
5,401
106
1,411
—
$ 158,024
4,110
$ 150,003
—
Non-interest expense totaled $158.0 million during 2015 compared to $150.0 million for 2014, an increase of $8.0 million, or
5.3%. The increase was driven by lower year-over-year OREO gains of $7.0 million, one-time core system conversion-
related expenses of $3.0 million, efficiency initiative expenses related to severance accruals and banking center consolidation
expense accruals of $2.4 million, change in warrant liability fair value adjustments of $3.1 million primarily due to the
change in our stock price, and $2.1 million related to the addition of Pine River. These increases were partially offset by a net
decrease in operating expenses of $4.8 million during 2015 and a $4.1 million contract termination expense in 2014. One-
time non-interest expenses totaled $6.2 million during 2015 and are excluded from operating expenses in 2015. When further
adjusted for the additional Pine River expenses, operating expenses decreased a net $4.8 million year-over-year, or 3.2%.
Operating expense reductions were driven by lower compensation costs, banking center consolidations and successful vendor
contract negotiations. Operating expenses exclude problem asset workout expenses, and one-time expenses related to the
change in the warrant liability, contract termination expenses, banking center consolidation expense accruals, severance
expense accruals, core system conversion-related expenses, and acquisition-related expenses.
75
Salaries and benefits is our largest component of non-interest expense and remained consistent totaling of $83.0 million in
2015, compared to $82.8 million for 2014, absorbing normal merit increases through reduced health plan costs and lower
incentive payments. Occupancy and equipment expense totaled $24.5 million for 2015, a decrease of $0.6 million over 2014
primarily due to a decrease in depreciation expense and benefits realized from successful vendor contract negotiations.
Telecommunications and data processing expense totaled $11.5 million and decreased $0.4 million from the prior year. The
decrease was driven by expense initiatives including favorable vendor contract negotiations.
Marketing and business development expense totaled $4.3 million for 2015, compared to $4.6 million during 2014. The
decrease of $0.3 million from 2014 was due to reduced levels of marketing campaigns. Professional fees totaled $4.5 million
during 2015 compared to $3.3 million during 2014. The increase was partially due to one-time core system conversion
related expenses completed during the fourth quarter of 2015.
ATM/debit card expenses totaled $3.7 million, increasing $0.6 million from prior year. The increase was driven by
conversion costs related to a change in our third-party ATM and debit card vendor.
Problem asset workout expenses are incurred in connection with the resolution process of our acquired problem loan
portfolios and OREO expenses. During 2015, problem workout expenses totaled $4.5 million compared to a gain of $1.9
million in the prior year. The increase was driven by lower year-over-year OREO gains of $7.0 million.
Losses from the change in warrant liability fair value adjustments totaled $0.1 million during 2015 compared to a gain of
$3.0 million during 2014. The year-over-year change totaling $3.1 million is primarily due to the change in our stock price.
The warrant agreements were amended during 2015 resulting in a reclassification from a liability to equity; therefore, the
warrant agreements will have no effect on non-interest expense in future periods.
During 2015, we consolidated three banking centers in our Bank Midwest network. Two owned banking centers were classified
as held-for-sale during the second quarter, resulting in a fair value impairment charge of $1.1 million. The payback period on
the consolidation is expected to be less than two years. Additionally, during the first quarter 2016, we announced the plan to
consolidate seven banking centers in our Community Banks of Colorado footprint in the second quarter of 2016 as part of our
continued focus on operational efficiency. Six owned banking centers were classified as held-for-sale during the fourth quarter,
resulting in a fair value impairment charge of $0.3 million. The payback period on the consolidation is expected to be less than
one year. The banking center consolidations during 2015 resulted in one-time expense accruals totaling $1.4 million.
Years ended 2014 and 2013
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 consolidation related expenses, totaled $150.7 million
and decreased $12.4 million, or 7.6%, from 2013, primarily due to operating efficiencies, vendor consolidations and contract
negotiations. Salaries and benefits 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.
76
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
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.
Income taxes
Income taxes are accounted for in accordance with ASC Topic 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 Topic 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 of the Company’s 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 $22.10, with a large portion of the awards having
strike prices of $20.00. Due to our 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. During 2015, we wrote-off $3.7 million of deferred tax assets to income tax
expense resulting from expired or exercised awards. As of December 31, 2015, we had $9.8 million of deferred tax assets
related to stock-based compensation, $7.9 million of which is associated with executive officers still employed by the
Company.
ASC Topic 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, 2015 and 2014, we have not identified any uncertain tax positions.
Income tax expense totaled $3.0 million for 2015, as compared to $3.2 million for 2014, and $4.0 million for 2013. These
amounts equate to effective tax rates of 38.4%, 25.6%, and 36.3% for the respective periods.
The increase in the effective tax rate for 2015 compared to 2014 was primarily due to $3.7 million of non-cash deferred tax
asset write-offs in connection with former executive stock-based compensation agreements during 2015. Without this $3.7
million charge, we would have recorded a tax benefit resulting from the increased tax-exempt income sources compared to
pre-tax income. The effective tax rate, without the non-cash deferred tax asset write-off, is lower than 2014 due to the
increased tax-exempt income sources compared to pre-tax income in each period.
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 agreements.
77
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.
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. Adoption of the tangible property regulations did 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, 2015 and 2014:
Cash and due from banks
Interest bearing bank deposits
Unencumbered investment securities, at fair value
Total
$
December 31, 2015 December 31, 2014
246,924
10,055
1,651,395
1,908,374
155,985
10,107
1,093,517
1,259,609
$
$
$
Total on-balance sheet liquidity decreased $648.8 million from December 31, 2014 to December 31, 2015. The decrease was largely
due to a planned reduction of $557.9 million in unencumbered available-for-sale and held-to-maturity securities balances.
Our primary sources of funds are deposits, securities sold under agreements to repurchase, prepayments and maturities of
loans and investment securities, the sale of investment securities, and funds provided from operations. We are also a party to
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, 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.
Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and
pay downs of loans and purchases and sales of investment securities. At December 31, 2015, 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 $1.6 billion at December
31, 2015, inclusive of pre-tax net unrealized losses of $10.6 million on the available-for-sale securities portfolio. Additionally,
our held-to-maturity securities portfolio had $1.1 million of pre-tax net unrealized gains at December 31, 2015. The gross
unrealized gains and losses are detailed in note 5 of our consolidated financial statements. As of December 31, 2015, 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.
78
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, 2015, $807.7 million 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.
As of December 31, 2015, we were a member of the FHLB of Des Moines. 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, 2015, and we can obtain additional liquidity through FHLB advances if required. In January 2016,
we became a member of the FHLB of Topeka as a result of our bank charter conversion.
The new Basel III rules, effective January 1, 2015, changed the components of regulatory capital and changed the way in
which risk ratings are assigned to various categories of bank assets. Also, a new Tier I common risk-based ratio was defined.
Under the Basel III requirements, at December 31, 2015, the Company met all capital adequacy requirements and had
regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on
regulatory capital, see note 15 in our consolidated financial statements.
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. At December 31, 2015 and 2014, NBH Bank and the consolidated holding
company exceeded all capital requirements to which they were subject.
On October 19, 2015, the Company announced that the operating agreement between its subsidiary bank, and its then
primary regulator, the OCC, was terminated. The operating agreement was entered into in December 2010 as part of the
Bank’s approval to operate as a de novo bank. The agreement required the Bank to maintain certain capital levels, placed
restrictions on its ability to pay dividends and limited its ability to make certain other business decisions.
The Board of Directors has 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 the year ended 2015, we repurchased 8.6 million shares of our common stock at a weighted average price of $20.16,
and all such shares are held as treasury shares. We believe that our repurchases could serve to offset any future share
issuances for future acquisitions.
On January 21, 2016, the Company announced that its Board of Directors authorized a new program to repurchase up to an
additional $50.0 million of the Company’s common stock.
On January 21, 2016, our Board of Directors declared a quarterly dividend of $0.05 per common share, payable on March 15,
2016 to shareholders of record at the close of business on February 26, 2016.
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.
79
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, 2015. During 2015, 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, 2015 and 2014:
Hypothetical
shift in interest
rates (in bps)
200
100
(50)
% change in projected net interest income
December 31, 2015
December 31, 2014
5.81 %
3.13 %
(1.33)%
4.72 %
2.94 %
(0.88)%
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different
than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the
shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may
undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any
actions taken in response to the changing rates.
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 sensitive to changes in interest
rates. In response to this strategy, non-maturing deposit accounts have grown $237.7 million during 2015, and totaled 68.9%
of total deposits at December 31, 2015 compared to 64.0% at December 31, 2014. 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, 2015 and 2014, we had loan commitments totaling $627.2 million and $485.5 million, respectively, and
standby letters of credit that totaled $9.8 million and $10.0 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.
80
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, 2015 and the expected timing of those payments:
Federal Home Loan Bank advances
Operating lease obligations
Purchase obligations
Time deposits
Total
Impact of Inflation and Changing Prices
Within
one year
$ 15,000
3,882
6,206
807,245
$ 832,333
After one but After three but
within three within five
years
$ 10,000
5,980
8,565
336,659
$ 361,204
$
$
years
15,000 $
After five
years
— $
16,967
4,875
6,105
6,816
44,897
5,082
71,588 $ 28,154
Total
40,000
31,704
27,691
1,193,883
$ 1,293,278
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.
81
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, 2015 and 2014, and the related consolidated statements of operations,
comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2015. 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, 2015 and 2014, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 29, 2016, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Denver, Colorado
February 29, 2016
82
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2015 and 2014
(In thousands, except share and per share data)
ASSETS
Cash and due from banks
Interest bearing bank deposits
Cash and cash equivalents
Investment securities available-for-sale (at fair value)
Investment securities held-to-maturity (fair value of $428,585 and $534,637,
respectively)
Non-marketable securities
Loans
Allowance for loan losses
Loans, net
Loans held for sale
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:
Common stock, par value $0.01 per share: 400,000,000 shares authorized;
52,177,352 and 52,223,460 shares issued; 30,358,509 and 38,884,953 shares
outstanding, respectively
Additional paid-in capital
Retained earnings
Treasury stock of 20,982,812 and 12,383,109 shares, respectively, at cost
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31, 2015 December 31, 2014
$
155,985 $
10,107
166,092
1,157,246
246,924
10,055
256,979
1,479,214
427,503
22,529
2,587,673
(27,119)
2,560,554
13,292
—
20,814
103,103
59,630
12,429
140,716
4,683,908 $
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
4,819,646
815,054 $
436,745
1,394,995
1,193,883
3,840,677
136,523
40,000
—
49,164
4,066,364
732,580
386,121
1,290,436
1,357,051
3,766,188
133,552
40,000
42,011
43,320
4,025,071
513
997,926
38,670
(419,660)
95
617,544
4,683,908 $
512
993,212
40,528
(245,516)
5,839
794,575
4,819,646
$
$
$
See accompanying notes to the consolidated financial statements.
83
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2015, 2014, 2013
(In thousands, except share and per share data)
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:
Service charges
Bank card fees
Gain on sales of mortgages, net
Bank-owned life insurance income
Other non-interest income
Bargain purchase gain
Gain on previously charged-off acquired loans
OREO related write-ups and other income
FDIC indemnification asset amortization, net of gain on termination
FDIC loss sharing income (expense)
Total non-interest income
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
Other non-interest expense
Problem asset workout
Intangible asset amortization
Loss (gain) from the change in fair value of warrant liability
Banking center consolidation related expenses
Contract termination expenses
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Income per share—basic
Income per share—diluted
Weighted average number of common shares outstanding:
Basic
Diluted
$
$
$
$
2015
2014
2013
131,253
38,145
1,210
799
171,407
13,609
853
14,462
156,945
12,444
144,501
14,798
10,898
1,963
1,614
3,692
1,048
609
2,379
(15,878)
325
21,448
83,018
24,490
11,507
4,325
3,922
3,701
4,495
11,107
4,541
5,401
106
1,411
—
158,024
7,925
3,044
4,881
0.14
0.14
$
$
$
$
134,476
48,651
1,206
329
184,662
14,120
293
14,413
170,249
6,209
164,040
15,430
10,123
1,000
442
3,368
—
737
3,807
(27,741)
(8,862)
(1,696)
82,834
25,101
11,927
4,571
4,130
3,079
3,257
10,471
(1,868)
5,344
(2,953)
—
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
15,955
9,956
1,358
—
2,901
—
1,339
4,817
(18,960)
2,811
20,177
90,002
24,700
13,073
5,280
4,122
4,262
3,734
12,636
16,601
5,346
820
3,389
—
183,965
10,877
3,950
6,927
0.14
0.14
34,349,996
34,363,487
42,404,609
42,421,014
50,790,410
50,824,422
See accompanying notes to the consolidated financial statements.
84
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
For the Years Ended December 31, 2015, 2014, 2013
(In thousands)
Net income
Other comprehensive (loss) income, net of tax:
Securities available-for-sale:
Net unrealized (losses) gains arising during the period, net of tax benefit
2015
2014
2013
$
4,881
$
9,176
$
6,927
(expense) of $2,015, ($9,694), and $26,294, respectively.
(3,275)
15,765
(41,731)
Less: amortization of net unrealized holding gains to income, net of tax
benefit of $1,523, $1,950, and $3,567, respectively.
Other comprehensive (loss) income
Comprehensive (loss) income
(2,469)
(5,744)
(863)
$
(3,170)
12,595
21,771
$
(5,598)
(47,329)
(40,402)
$
See accompanying notes to the consolidated financial statements.
85
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Year Ended 2015, 2014, and 2013
(In thousands, except share and per share data)
Balance, December 31, 2012
Net Income
Stock-based compensation
Issuance of stock under equity
compensation plan, including tax
benefit of $24
Repurchase of 7,421,179
shares/retirement of 7,421,419
treasury shares
Dividends paid ($0.20 per share)
Other comprehensive loss
Balance, December 31, 2013
Net income
Stock-based compensation
Issuance of stock under equity
compensation plan, including tax
benefit of $7
Repurchase of 6,076,558 shares
Dividends paid ($.20 per share)
Other comprehensive income
Balance, December 31, 2014
$
Net income
Stock-based compensation
Issuance of stock under purchase
and equity compensation plans,
including tax benefit of $24,
gains on reissuance of treasury
stock of $96
Repurchase of 8,645,836 shares
Dividends paid ($.20 per share)
Warrant reclassification
Other comprehensive loss
Balance, December 31, 2015
$
Common
stock
$
523
—
—
Additional
paid-in
capital
$ 1,006,194
Retained
earnings
$ 43,273
6,927
—
$
4,861
—
Accumulated
other
Treasury
stock
comprehensive
income (loss), net
(4) $
—
—
40,573
Total
$ 1,090,559
6,927
4,861
—
—
—
(256)
—
—
—
(256)
(11)
—
—
$
512
$
—
—
(20,583)
— (126,142)
— (10,234)
—
—
990,216
$ 39,966
9,176
—
3,572
—
$ (126,146)
—
—
$
—
—
—
—
—
—
$
—
—
512
1
—
—
—
—
$
513
—
— (119,370)
—
(576)
—
—
—
(8,614)
—
993,212
$ 40,528
4,881
—
3,349
—
$ (245,516)
—
—
$
—
—
(1,701)
—
—
3,066
—
904
—
— (175,048)
(6,739)
—
—
—
—
—
$ (419,660) $
997,926
$ 38,670
—
—
(47,329)
(6,756) $
—
—
(146,736)
(10,234)
(47,329)
897,792
9,176
3,572
—
—
—
12,595
5,839
$
—
—
(576)
(119,370)
(8,614)
12,595
794,575
4,881
3,349
—
—
—
—
(5,744)
95
$
(796)
(175,048)
(6,739)
3,066
(5,744)
617,544
See accompanying notes to the consolidated financial statements.
86
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2015, 2014, 2013
(In thousands)
2015
2014
2013
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities:
$
4,881
$
9,176
$
Provision for loan losses
Depreciation and amortization
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
Bank-owned life insurance income
Amortization of indemnification asset, net of gain on termination
Gain on the sale of other real estate owned, net
Impairment on other real estate owned
Impairment on fixed assets related to banking center consolidations
Gain on sale of fixed assets
Bargain purchase gain
Stock-based compensation
(Decrease) increase in due to FDIC, net
Decrease in other assets
Increase in other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchase of FHLB stock
Proceeds from redemption of FHLB stock
Proceeds from FRB stock
Proceeds from maturities of investment securities held-to-maturity
Proceeds from maturities of investment securities available-for-sale
Proceeds from sales of investment securities available-for-sale
Purchase of investment securities held-to-maturity
Purchase of investment securities available-for-sale
Net increase 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 activity from acquisitions
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net decrease in deposits
Increase in repurchase agreements
Advances from FHLB
Issuance of stock under purchase and equity compensation plans
Excess tax benefit on stock-based compensation
Reissuance of treasury stock in excess of cost basis
Proceeds from exercise of stock options
Settlement of warrants
Payment of dividends
Repurchase of shares
Net cash used in financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information during the year:
Cash paid for interest
Net tax payments
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
Loans purchased but not settled
12,444
15,502
(3,675)
(4,241)
4,124
(50,687)
(1,963)
(99,246)
92,845
(1,614)
15,878
(2,776)
1,580
1,411
(28)
(1,048)
3,349
(37,138)
4,871
7,879
(37,652)
—
493
5,320
104,683
314,271
29,747
(6,225)
—
(334,798)
(5,081)
—
17,204
15,566
18,331
22,832
182,343
(55,654)
2,971
—
(1,048)
24
96
160
(368)
(6,711)
(175,048)
(235,578)
(90,887)
256,979
166,092
13,751
7,420
4,576
—
9,936
$
$
$
$
$
$
6,209
15,930
10,815
(15,776)
5,010
(63,881)
(1,000)
(44,490)
45,584
(442)
27,741
(13,126)
2,103
—
(123)
—
3,572
129
3,179
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)
7
—
—
—
(8,507)
(119,370)
(126,562)
67,519
189,460
256,979
13,863
8,119
4,491
(5,673)
10,038
$
$
$
$
$
$
$
$
$
$
$
$
6,927
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)
24
—
—
—
(10,139)
(146,736)
(473,655)
(579,720)
769,180
189,460
17,694
26,211
39,973
17,605
5,063
See accompanying notes to the consolidated financial statements.
87
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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, referred to as the "Bank" or NBH
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. 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. All amounts
are in thousands, except share data, or as otherwise noted.
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 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.
Adjustments recorded to the acquired assets and liabilities assumed are applied prospectively in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-16, Simplifying the Accounting for
Measurement-Period Adjustments. 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.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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 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. 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, Federal Home Loan
Bank ("FHLB") stock and non-negotiable certificates of deposit acquired in the acquisition of Pine River Bank Corporation, the
parent company of Pine River Valley Bank (“Pine River”). 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 Topic 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 310-30 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.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Interest income on acquired loans that are accounted for under ASC Topic 310 and interest income on loans originated by the
Company is accrued and credited to income as it is earned using the interest method based on daily balances of the principal
amount outstanding. However, interest is generally not accrued on loans 90 days or more past due, unless they are well secured
and in the process of collection. Additionally, in certain situations, loans that are not contractually past due may be placed on
non-accrual status due to the continued failure to adhere to contractual payment terms by the borrower coupled with other
pertinent factors, such as insufficient collateral value or deficient primary and secondary sources of repayment. Accrued interest
receivable is reversed when a loan is placed on non-accrual status and payments received generally reduce the carrying value of
the loan. Interest is not accrued while a loan is on non-accrual status and interest income is generally recognized on a cash basis
only after payment in full of the past due principal and collection of principal outstanding is reasonably assured. A loan may be
placed back on accrual status if all contractual payments have been received, or sooner under certain conditions and collection of
future principal and interest payments is no longer doubtful.
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 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 on the
consolidated statements of operations. 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.
90
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
g) Allowance for loan losses—The allowance for loan losses represents management’s estimate of probable credit losses
inherent in loans, including acquired 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 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 8.
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.
91
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
h) FDIC indemnification asset—An FDIC indemnification asset results from loss-share agreements in FDIC-assisted
transactions and is measured separately from the related covered assets (assets covered under FDIC loss-share agreements) 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-share agreements to which the Company was formerly a party, covered loans
and OREO were subject to stated loss thresholds whereby the FDIC would 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-share agreements. Fair value was
estimated using the net present value of projected cash flows related to the loss-share 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 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 could also have owed 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.
During 2015, the Company terminated the FDIC loss-share agreements and eliminated the FDIC indemnification asset. See
note 9 for additional information.
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-share income in the consolidated statements of
operations. During 2015, the Company terminated the FDIC loss-share agreements and eliminated the clawback liability. See
footnote 16 for additional information.
92
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
j) Premises and equipment—With the exception of premises and equipment acquired through business combinations, which
are initially measured and recorded at fair value, purchased land is stated at cost, and buildings and equipment are carried at
cost, including capitalized interest when appropriate, less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful life of the asset. The Company generally assigns depreciable lives of 39 years
for buildings, 7 to 15 years for building improvements, and 3 to 7 years for equipment. Leasehold improvements are
amortized over the shorter of their estimated useful lives or remaining lease terms. Maintenance and repairs are charged to
non-interest expense as incurred. The Company reviews premises and equipment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recognized when
the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less
than its carrying amount. 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. Property and equipment that meet the held-for-sale criteria is recorded at the lower of its carrying
amount or fair value less cost to sell and depreciation is ceased.
k) 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 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.
l) 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.
m) Bank-owned life insurance—The Company purchased or acquired 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.
93
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
n) 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.
o) Stock-based compensation—The Company accounts for stock-based compensation in accordance with ASC Topic
718, Compensation—Stock Compensation. The Company grants stock-based awards including stock options and restricted
stock. Stock option grants are for a fixed number of common shares and are issued to 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. 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 market criteria that are
tied to specified market conditions of the Company’s common stock price.
The fair value of stock options and market-based awards is measured using either a Black-Scholes model or a Monte Carlo
simulation model, depending on the vesting requirement of each grant. The fair value of time-based restricted stock awards is
based on the Company’s stock price on the date of 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. 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 ten years and the market
vesting 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.
p) Warrants—The Company issued warrants to certain lead shareholders. The warrants are for a fixed number of shares and
had original expirations of ten years from the date of issuance. If exercised, the Company must settle the warrants in its own
stock. Historically, the exercise price and the number of warrants were subject to certain down-round provisions, whereby
certain subsequent equity issuances at a price below the existing exercise price would result in a downward adjustment to the
exercise price and an increase in the number of warrants, and as a result, the warrants were historically classified as a liability
in the Company’s consolidated statements of financial condition with changes in the fair value each period reported in the
statements of operations as non-interest expense. During 2015, the outstanding warrant contracts were modified, terminating
the down-round provisions and extending the contractual life an additional six months from the original expiration. As a
result, the warrant contracts were recorded at fair value as of the modification date using a Black-Scholes model with the
change in fair value reported in the statement of operations as non-interest expense, and were reclassified to shareholders’
equity as of December 31, 2015.
q) 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.
94
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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.
r) Income per share—The Company applies the two-class method of computing income 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 according to dividends declared and participation rights in
undistributed income. Basic income per share is computed by dividing income allocated to common shareholders by the
weighted average number of common shares outstanding during each period. Diluted income per common share is computed
by dividing income 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 per common share in periods in which they have an anti-dilutive
effect.
s) 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 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.
t) Treasury stock —When the Company acquires treasury stock, the sum of the consideration paid and direct transaction costs
after tax is recognized as a deduction from equity. The cost basis for the reissuance of treasury stock is determined using a first-
in, first-out basis. To the extent that the reissuance price is more than the cost basis (gain), the excess is recorded as an increase
to additional paid-in capital on the consolidated statements of financial condition. If the reissuance price is less than the cost
basis (loss), the difference is recorded to additional paid-in capital to the extent there is a cumulative treasury stock paid-in
capital balance. Any loss in excess of the cumulative treasury stock paid-in capital balance is charged to retained earnings.
95
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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 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 are
effective for the Company for interim and annual periods beginning December 15, 2014. The Company adopted the ASU on
January 1, 2015 with no 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 ASC 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 after December 15, 2017, with early application permitted for interim and annual periods beginning
after December 15, 2016. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. The
Company is in the process of evaluating the impact of the ASU's adoption on the Company's consolidated financial statements.
Simplifying the Accounting for Measurement-Period Adjustments—In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments. This update amends ASC 805-10 and clarifies that an
acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined. The amendments to this ASU will become effective for the
Company for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company
adopted this ASU on September 30, 2015 with no material impact to the consolidated financial statements.
Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities—In January 2016, the
FASB issued ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities
(Topic 825). ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments and the
presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change
in fair value of many equity investments to be recognized in net income. ASU No. 2016-01 is effective for interim and annual
periods beginning after December 15, 2017, with early adoption permitted. Adopting ASU No. 2016-01 may result in a cumulative
effect adjustment to the consolidated statements of changes in shareholders’ equity as of the beginning of the year of adoption. The
Company is in the process of evaluating the impact of the ASU's adoption on the Company's consolidated financial statements.
Note 4 Acquisition Activities
On August 1, 2015, the Company completed the acquisition of Pine River for $9.5 million cash. The Company determined
that this acquisition constitutes a business combination as defined in ASC Topic 805, Business Combinations. Accordingly, as
of the date of the acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The Company
determined fair values in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements and
Disclosures. Fair value is established by discounting the expected future cash flows with a market discount rate for like
maturities and risk instruments. The estimation of expected future cash flows, market conditions and other future events and
actual results could differ materially. The determination of the initial fair values of fixed assets, loans, core deposit intangible
and OREO involves a high degree of judgment and complexity. The Company has made the determination of fair value using
the best information available at the time; however, the assumptions used are subject to change and, if changed, could have a
material effect on the Company's financial position and results of operations. The table below summarizes the net assets
acquired (at fair value) and consideration transferred in connection with the Pine River acquisition:
96
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Assets:
Cash and due from banks
Investment securities available-for-sale (at fair value)
Non-marketable securities
Loans, net
Other real estate owned
Premises and equipment, net
Core deposit intangible asset
Other assets
Total assets acquired
Liabilities:
Deposits:
Non-interest bearing demand deposits
Interest bearing demand deposits
Savings and money market
Time deposits
Total deposits
Other liabilities
Total liabilities assumed
Identifiable net assets acquired
Consideration:
Cash
Gain on bargain purchase
$
$
$
$
$
$
$
32,314
30,093
2,032
64,279
1,488
3,164
948
7,749
142,067
41,432
19,632
35,460
33,619
130,143
1,394
131,537
10,530
9,482
1,048
In connection with the Pine River acquisition, the Company recognized approximately $1.0 million of bargain purchase gain
and a $0.9 million core deposit intangible. The core deposit intangible will be amortized on a straight-line basis over seven
years. The bargain purchase gain of $1.0 million, recorded at the date of acquisition, represents the amount by which the
acquisition-date fair value of the net identifiable assets acquired exceeded the fair value of the consideration transferred.
The fair value of the acquired assets and liabilities noted in the table may change during the provisional period, which may
last up to twelve months subsequent to the acquisition date. The Company may obtain additional information to refine the
valuation of the acquired assets and liabilities and adjust the recorded fair value, although such adjustments are not expected
to be significant. Adjustments recorded to the acquired assets and liabilities will be applied prospectively in accordance with
ASU 2015-16.
At the date of acquisition, none of the loans were accounted for under the guidance of ASC 310-30, and the gross contractual
amounts receivable, inclusive of all principal and interest, was $79.0 million. The Company’s best estimate of the contractual
cash flows for loans not expected to be collected was $1.4 million and the recorded fair value was $64.3 million.
The results of Pine River are included in the results of the Company subsequent to the acquisition date. Included in other non-
interest expenses in the Company’s consolidated statements of operations for the year ended December 31, 2015 were $0.7
million of Pine River acquisition-related expenses.
97
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The following pro forma information combines the historical results of Pine River and the Company. The pro forma financial
information does not include the potential impacts of possible business model changes, current market conditions, revenue
enhancements, expense efficiencies, or other factors. The pro forma information below reflects adjustments made to exclude
the impact of the bargain purchase gain of $1.0 million, acquisition-related expenses of $0.7 million, amortization and
accretion of purchase discounts and premiums of $153 thousand, and amortization of acquired identifiable intangibles of $56
thousand during the year ended December 31, 2015. The pro forma information is theoretical in nature and not necessarily
indicative of future consolidated results of operations of the Company or the consolidated results of operations which would
have resulted had the Company acquired Pine River during the periods presented.
If the Pine River acquisition had been completed on January 1, 2014, total revenue would have been approximately $195.5
million and $187.4 million for the years ended December 31, 2015 and 2014, respectively. Net income would have been
approximately $4.3 million and $8.9 million, respectively, for the same periods. Basic and dilutive earnings per share would
have been $0.13 and $0.21, respectively, for the same periods.
The Company has determined that it is impractical to report the amounts of revenue and earnings of legacy Pine River since
the acquisition date due to the integration of operations shortly after the acquisition date. Accordingly, reliable and separate
complete revenue and earnings information is no longer available. In addition, such amounts would require significant
estimates related to the proper allocation of merger cost savings that cannot be objectively made.
Note 5 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities.
These investment securities totaled $1.6 billion at December 31, 2015 and were comprised of $1.2 billion of available-for-
sale securities and $0.4 billion of held-to-maturity securities. At December 31, 2014, investment securities totaled $2.0 billion
and included $1.5 billion of available-for-sale securities and $0.5 billion of held-to-maturity securities.
Available-for-sale
At December 31, 2015 and 2014, the Company held $1.2 billion and $1.5 billion of available-for-sale investment securities,
respectively. Available-for-sale securities are summarized as follows as of the dates indicated:
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
Amortized
Gross
Gross
cost
unrealized gains unrealized losses
Fair value
December 31, 2015
$ 305,773
$
5,721
$
(516) $ 310,978
861,321
725
$ 1,167,819
$
3,638
—
9,359
$
(19,416)
845,543
725
(19,932) $ 1,157,246
—
98
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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
Amortized
Gross
Gross
cost
unrealized gains unrealized losses
Fair value
December 31, 2014
$ 395,244 $
9,014
$
(43) $ 404,215
1,088,834
419
$ 1,484,497
$
7,464
—
16,478
$
(21,718)
1,074,580
419
(21,761) $ 1,479,214
—
At December 31, 2015 and 2014, mortgage-backed securities represented primarily all 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:
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
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2015
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 109,182
$ (516) $
— $
—
$ 109,182
$
(516)
67,527
$ 176,709
(404)
575,954
$ (920) $ 575,954
(19,012)
$ (19,012)
643,481
$ 752,663
(19,416)
$ (19,932)
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2014
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises
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
667,368
(2,053)
$ (2,053) $ 757,117
(19,665)
$ (19,708)
756,222
$ 845,988
(21,718)
$ (21,761)
Management evaluated all of the available-for-sale securities in an unrealized loss position and concluded that no OTTI existed
at December 31, 2015 or December 31, 2014. The unrealized losses in the Company's investments issued or guaranteed by U.S.
government agencies or sponsored enterprises at December 31, 2015 were caused by changes in interest rates. The portfolio
included 66 securities, having an aggregate fair value of $752.7 million, which were in an unrealized loss position at December
31, 2015, compared to 62 securities, with an aggregate fair value of $846.0 million at December 31, 2014. The Company has 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.
99
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Available-for-sale securities acquired from the Pine River acquisition totaled $30.1 million at the date of acquisition. Shortly
after the acquisition date, the Company sold $29.8 million of the acquired securities and recorded no gain or loss.
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 $335.8 million at December 31, 2015 and $274.4 million December 31, 2014. The increase in pledged
available-for-sale investment securities was primarily attributable to an increase in average deposit account balances and
client repurchase account balances during 2015. 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, 2015 or
December 31, 2014.
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 3.6 years as of December 31, 2015 and 3.5
years as of December 31, 2014. 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, 2015.
Held-to-maturity
At December 31, 2015 and 2014, the Company held $427.5 million and $530.6 million of held-to-maturity investment
securities, respectively. Held-to-maturity investment securities are summarized as follows as of the dates indicated:
December 31, 2015
Gross
Gross
Amortized unrealized unrealized
gains
losses
cost
Fair value
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
$ 340,131
$ 2,911
$
(230) $ 342,812
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Total investment securities held-to-maturity
87,372
$ 427,503
35
$ 2,946
(1,634)
85,773
$ (1,864) $ 428,585
December 31, 2014
Gross
Gross
Amortized unrealized unrealized
gains
losses
cost
Fair value
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
$ 422,622
$ 5,773
$
(72) $ 428,323
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Total investment securities held-to-maturity
107,968
$ 530,590
217
$ 5,990
(1,871)
106,314
$ (1,943) $ 534,637
100
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The table below summarizes the unrealized losses as of the dates shown, along with the length of the impairment period:
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
Less than 12 months
Fair
Value
Unrealized
Losses
December 31, 2015
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$ 34,641
$ (205) $
853
$
(25)
$ 35,494
$ (230)
28,490
$ 63,131
(180)
45,872
$ (385) $ 46,725
(1,454)
$ (1,479)
74,362
$ 109,856
(1,634)
$ (1,864)
Less than 12 months
Fair
Value
Unrealized
Losses
December 31, 2014
12 months or more
Fair
Value
Unrealized
Losses
Total
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)
$
The portfolio included 16 securities, having an aggregate fair value of $109.9 million, which were in an unrealized loss position
at December 31, 2015, compared to 12 securities, with a fair value of $110.3 million, at December 31, 2014.
Management evaluated all of the held-to-maturity securities in an unrealized loss position and concluded that no OTTI existed at
December 31, 2015 or December 31, 2014. The unrealized losses in the Company's investments issued or guaranteed by U.S.
government agencies or sponsored enterprises at December 31, 2015, were caused by changes in interest rates. The Company
has 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 $156.5 million and $88.3 million at
December 31, 2015 and 2014, 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, 2015 and 2014 was 3.7 years and 3.4 years, respectively.
This estimate is based on assumptions and actual results may differ.
Note 6 Non-marketable Securities
Non-marketable securities include Federal Reserve Bank stock, FHLB stock and non-negotiable certificates of deposit. At
December 31, 2015, the Company held $14.1 million of Federal Reserve Bank stock, $7.4 million of FHLB Des Moines stock
for regulatory or debt facility purposes, and $1.0 million of non-negotiable certificates of deposit acquired from Pine River. 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.
101
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
These are restricted securities which, lacking a market, are 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, 2015 or December 31, 2014.
Note 7 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 Hillcrest Bank and Bank Midwest in 2010, Bank of Choice and Community Banks of Colorado in
2011, and Pine River in 2015. The loans acquired from Pine River totaled $64.3 million. They were accounted for in
accordance with ASC Topic 805 and were classified as non 310-30 loans. During the fourth quarter of 2015, the Bank entered
into an early termination agreement with the FDIC, terminating its loss-share agreements with the FDIC; therefore,
presentation of prior period covered and non-covered loans were updated accordingly.
The table below shows the loan portfolio composition including carrying value by segment of loans accounted for under ASC
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 carrying value of loans are net of discounts on loans excluded
from ASC 310-30, and fees and costs of $8.1 million and $10.5 million as of December 31, 2015 and 2014, respectively:
December 31, 2015
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
$
$
ASC 310-30 loans Non 310-30 loans
1,039,769
145,558
506,331
662,550
30,635
2,384,843
13,007
16,752
148,888
21,452
2,731
202,830
$
$
Total loans
% of total
$
$
1,052,776
162,310
655,219
684,002
33,366
2,587,673
40.7 %
6.3
25.3
26.4
1.3
100.0 %
December 31, 2014
$
$
ASC 310-30 loans Non 310-30 loans
772,440
118,468
369,264
591,939
30,653
1,882,764
22,956
19,063
192,330
40,761
4,535
279,645
$
$
Total loans
% of total
$
$
795,396
137,531
561,594
632,700
35,188
2,162,409
36.8 %
6.4
26.0
29.2
1.6
100.0 %
102
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Loan delinquency for all loans is shown in the following tables at December 31, 2015 and 2014:
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 December 31, 2015
30-59
60-89
Greater
than 90
days past days past days past Total past
due
due
due
due
Current
Total
loans
Loans > 90
days past
due and
Non-
still accruing accrual
$ 2,275 $ 6,019 $
58
441
49 $
1,222
8,343 $ 1,031,426 $ 1,039,769 $
143,837
1,721
145,558
— $ 16,838
1,984
—
359
—
—
370
2,340
3,069
188
—
38
111
182
519
—
—
22
66
968
1,056
1,909
299
2,208
239
911
237
1,148
26
1,481
194
1,675
38
547
—
60
547
3,490
4,644
4,301
730
5,031
303
29,596
5,575
9,813
184,072
272,631
501,687
30,143
5,575
9,873
184,619
276,121
506,331
610,192
47,327
657,519
30,332
614,493
48,057
662,550
30,635
—
—
—
—
—
—
188
—
22
1,273
1,013
2,496
3,713
124
584
6
4,297
130
32
36
166 $ 25,647
—
217 $
—
511
—
14,931
—
97
—
5
15,761 $
—
15,927 $ 25,647
Total loans excluded from ASC 310-30
$ 8,232 $ 7,770 $ 4,040 $ 20,042 $ 2,364,801 $ 2,384,843 $
Loans accounted for under ASC 310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total loans accounted for under ASC 310-30
Total loans
$ 1,187 $
—
1,235
411
19
217 $
— $
—
511
936 14,932
97
104
5
49
13,007 $
11,603 $
16,752
16,241
148,888
131,785
21,452
20,840
2,731
2,658
$ 2,852 $ 1,089 $ 15,762 $ 19,703 $ 183,127 $
202,830 $
$ 11,084 $ 8,859 $ 19,802 $ 39,745 $ 2,547,928 $ 2,587,673 $
1,404 $
511
17,103
612
73
103
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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
Loans accounted for under ASC 310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total loans accounted for under ASC 310-30
Total loans
Total Loans December 31, 2014
30-59
60-89
Greater
than 90
days past days past days past Total past
due
due
due
due
Current
Total
loans
Loans > 90
days past
due and
Non-
still accruing accrual
$
83 $
47
97 $
—
318 $
10
498 $ 771,942 $
118,411
57
772,440 $
118,468
215 $ 4,215
495
10
—
41
—
336
158
535
—
—
—
78
—
78
—
—
—
101
222
323
—
41
—
515
380
936
11,748
4,532
10,856
119,710
221,482
368,328
11,748
4,573
10,856
120,225
221,862
369,264
378
133
511
266
732
101
833
39
$ 1,442 $ 1,600 $ 1,523 $
1,403
1
1,404
21
2,513
235
2,748
326
539,535
537,022
52,404
52,169
591,939
589,191
30,327
30,653
4,565 $ 1,878,199 $ 1,882,764 $
$
152 $
—
564
2,014
369
22,956 $
21,049 $
— $ 1,755 $
19,063
18,696
—
367
192,330
160,661
92 31,013
40,761
34,275
646
4,535
4,112
54
$ 3,099 $ 3,918 $ 33,835 $ 40,852 $ 238,793 $
279,645 $
$ 4,541 $ 5,518 $ 35,358 $ 45,417 $ 2,116,992 $ 2,162,409 $
1,907 $
367
31,669
6,486
423
3,826
—
—
—
(1)
—
—
(1)
—
—
—
843
222
1,065
4,335
—
476
—
4,811
—
227
39
263 $ 10,813
—
1,754 $
—
367
—
31,013
—
646
—
54
33,834 $
—
34,097 $ 10,813
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. 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.
Total non-accrual loans excluded from the scope of ASC 310-30 totaled $25.6 million and $10.8 million, as December 31,
2015 and 2014, respectively. Total past due loans accounted for under ASC 310-30 totaled $19.7 million at December 31,
2015, decreasing $21.2 million, or 51.8%, from $40.9 million in the prior year. The decrease is due to significant workout
progress on acquired non-strategic loans.
104
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows as of December 31,
2015 and 2014:
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
Loans accounted for under ASC 310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total loans accounted for under ASC 310-30
Total loans
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
Loans accounted for under ASC 310-30
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total loans accounted for under ASC 310-30
Total loans
Total Loans December 31, 2015
Pass
Special
mention
Substandard
Doubtful
Total
$
957,992
132,450
$
44,866
2,440
$
32,867
10,668
$
4,044
—
$
1,039,769
145,558
4,882
509
—
5,595
8,091
19,077
349
252
601
67
67,051
25
27
1,087
1,604
94
2,837
69,888
$
$
$
$
575
—
22
4,916
5,722
11,235
4,921
1,368
6,289
85
61,144
4,746
6,999
76,793
2,888
341
91,767
152,911
$
$
$
$
—
—
—
—
273
273
27
—
27
—
4,344
$
— $
—
3,769
—
—
$
$
3,769
8,113
30,143
5,575
9,873
184,619
276,121
506,331
614,493
48,057
662,550
30,635
2,384,843
13,007
16,752
148,888
21,452
2,731
202,830
2,587,673
Total Loans December 31, 2014
Special
mention
Substandard
Doubtful
Total
10,166
85
$
19,250
3,741
$
80
$
—
772,440
118,468
—
—
—
158
17,607
17,765
23
—
23
—
$
28,039
282
30
3,770
1,403
105
5,590
33,629
$
$
$
—
—
—
4,889
4,430
9,319
5,744
1,345
7,089
227
39,626
11,092
2,179
101,966
10,289
789
126,315
165,941
$
$
$
$
—
—
—
—
8
8
138
—
138
—
$
226
544
$
—
3,991
—
—
$
$
4,535
4,761
11,748
4,573
10,856
120,225
221,862
369,264
539,535
52,404
591,939
30,653
1,882,764
22,956
19,063
192,330
40,761
4,535
279,645
2,162,409
$
$
$
$
$
$
$
$
$
24,686
5,066
9,851
174,108
262,035
475,746
609,196
46,437
655,633
30,483
2,252,304
8,236
9,726
67,239
16,960
2,296
104,457
2,356,761
Pass
742,944
114,642
11,748
4,573
10,856
115,178
199,817
342,172
533,630
51,059
584,689
30,426
1,814,873
11,038
16,854
82,603
29,069
3,641
143,205
1,958,078
105
$
$
$
$
$
$
$
$
$
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The Company’s commercial substandard loans excluded from ASC 310-30 totaled $32.9 million and $19.3 million at
December 31, 2015 and 2014, respectively. The balance was primarily due to four loan relationships totaling $24.5 million at
December 31, 2015. Migration to special mention and substandard ratings during 2015 was driven by a small number of
agricultural clients, pressure in energy sector, and isolated weakening in a small number of commercial and industrial clients.
Three of these substandard loans were energy related and totaled $16.1 million at December 31, 2015. Total ASC 310-30
classified assets of $98.4 million decreased $38.0 million from $136.4 million in prior year due to significant workout
projects on acquired non-strategic loans.
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, loans in bankruptcy, 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, 2015, the Company measured $24.1 million of impaired loans based on
the fair value of the collateral less selling costs and $2.3 million of impaired loans using discounted cash flows and the loan’s
initial contractual effective interest rate. Impaired loans totaling $10.6 million that individually were less than $250 thousand
each, were measured through our general ALL reserves due to their relatively small size. Impaired loans acquired from Pine
River totaling $0.4 million were marked to fair value at the date of acquisition.
At December 31, 2015 and 2014, the Company’s recorded investment in impaired loans was $37.4 million and $32.1 million,
respectively. The balance in impaired loans was primarily due to three relationships totaling $15.5 million that were deemed
impaired during the year. All three of the relationships were in the commercial and industrial segment and on non-accrual
status at December 31, 2015. Impaired loans had a collective related allowance for loan losses allocated to them of $4.4
million and $0.3 million at December 31, 2015 and 2014, respectively.
106
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Additional information regarding impaired loans at December 31, 2015 and 2014 is set forth in the table below:
Impaired Loans
December 31, 2015
December 31, 2014
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
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
$
$
$
10,812
1,877
$
10,744
1,878
$
190
—
—
188
—
—
2,218
154
2,562
947
113
1,060
2,150
153
2,491
941
112
1,052
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
16,953
3,065
$
16,771
3,061
$
—
—
—
1,164
—
1,164
694
—
694
—
—
—
—
970
—
970
248
—
248
—
$
$
16,311
10,816
254
$
$
—
—
61
1,272
1,642
2,975
5,826
1,800
7,627
86
16,165
10,764
248
$
$
—
—
59
1,117
1,630
2,806
5,701
1,593
7,294
86
— $
21,876
$
21,050
$
4,045
1
$
894
177
693
145
$
$
—
—
—
2
274
277
54
11
65
1
—
—
—
1,321
1,140
2,461
7,360
1,768
9,128
277
—
—
—
1,024
1,060
2,084
6,359
1,515
7,874
245
21,758
38,069
$
$
21,198
37,363
$
$
4,388
4,388
$
$
12,937
34,813
$
$
11,041
32,091
$
$
107
—
—
—
—
—
—
—
—
—
—
—
—
—
82
—
—
—
—
5
9
14
172
9
181
2
279
279
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The table below shows additional information regarding the average recorded investment and interest income recognized on
impaired loans for the periods presented:
For the years ended
December 31, 2015
December 31, 2014
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
$
$
$
10,729
1,961
$
266
—
$
21,827
3,458
$
$
$
188
—
—
2,221
157
2,566
956
113
1,069
—
16,324
9,366
276
—
—
60
1,230
1,667
2,956
5,911
1,725
7,636
92
20,326
36,651
$
$
$
$
—
—
—
83
—
83
15
—
15
—
363
1
4
—
—
1
27
48
76
119
51
170
1
252
615
—
—
—
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
$
$
$
$
$
$
$
$
414
126
—
—
—
51
—
51
7
—
7
—
598
7
—
—
—
—
40
56
96
101
60
161
1
265
863
Interest income recognized on impaired loans noted in the table above, primarily represents interest earned on accruing
troubled debt restructurings. Interest income recognized on impaired loans using the cash-basis method of accounting during
the years ended December 31, 2015, 2014, and 2013 was immaterial.
108
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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, 2015 and 2014, the Company had $8.4 million and $19.3 million, respectively, of accruing TDRs that
had been restructured from the original terms in order to facilitate repayment.
Non-accruing TDRs at December 31, 2015 and 2014 totaled $17.8 million and $7.0 million, respectively.
During 2015, the Company restructured 19 loans with a recorded investment of $17.9 million at December 31, 2015 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, 2015 and 2014:
Accruing TDRs
December 31, 2015
Recorded
investment
Average year-to-date
recorded investments principal balance
Unpaid
Unfunded commitments
to fund TDRs
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
$
$
$
$
5,790 $
84
388
2,162
12
8,436 $
5,866 $
85
394
2,234
15
8,594 $
5,831 $
87
389
2,166
12
8,485 $
Accruing TDRs
December 31, 2014
163
—
—
2
—
165
Recorded
investment
Average year-to-date
recorded investments principal balance
Unpaid
Unfunded commitments
to fund TDRs
13,249 $
2,711
610
2,687
18
19,275 $
12,496 $
3,110
627
2,767
20
19,020 $
13,249 $
2,715
622
2,714
18
19,318 $
375
—
—
2
—
377
The following table summarizes the Company’s carrying value of non-accrual TDRs as of December 31, 2015 and 2014:
Commercial
Agriculture
Commercial real estate
Residential real estate
Consumer
Total
Non - Accruing TDRs
December 31, 2015
December 31, 2014
$
$
15,897 $
81
1,135
678
2
17,793 $
3,994
365
458
1,966
190
6,973
109
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Accrual of interest is resumed on loans that were on non-accrual only after the loan has performed sufficiently. The Company
had five TDRs that were modified within the past 12 months and had defaulted on their restructured terms. The defaulted
TDRs consisted of two commercial loans totaling $9.7 million and three consumer residential loans totaling $103 thousand.
During 2014, the Company had two TDRs that had been modified within the past 12 months that defaulted on their
restructured terms. The defaulted TDRs consisted of a commercial loan and a consumer loan totaling $112 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 310-30
Loan pools accounted for under ASC Topic 310-30 are periodically re-measured 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 loans if circumstances specific to that loan warrant a prepayment assumption. The re-measurement of loans accounted for
under ASC 310-30 resulted in the following changes in the carrying amount of accretable yield during 2015 and 2014:
Accretable yield beginning balance
Reclassification from non-accretable difference
Reclassification to non-accretable difference
Accretion
Accretable yield ending balance
$
$
December 31, 2015
113,463 $
22,392
(4,387)
(47,274)
84,194 $
December 31, 2014
130,624
47,252
(3,572)
(60,841)
113,463
Below is the composition of the net book value for loans accounted for under ASC 310-30 at December 31, 2015 and 2014:
December 31, 2015
627,843 $
(340,819)
(84,194)
202,830 $
December 31, 2014
751,932
(358,824)
(113,463)
279,645
Contractual cash flows
Non-accretable difference
Accretable yield
Loans accounted for under ASC 310-30
$
$
110
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 8 Allowance for Loan Losses
The tables below detail the Company’s allowance for loan losses (“ALL”) and recorded investment in loans as of and for the
years ended December 31, 2015 and 2014:
Beginning balance
Non 310-30 beginning balance
Charge-offs
Recoveries
Provision
Non 310-30 ending balance
ASC 310-30 beginning balance
Charge-offs
Recoveries
Provision
ASC 310-30 ending balance
Ending balance
$
Commercial
$
Year ended December 31, 2015
Commercial Residential
Agriculture real estate
real estate
Consumer
8,598 $
8,598
(1,860)
91
7,467
14,296
—
—
—
93
93
14,389 $
1,009 $
541
(51)
7
485
982
468
—
—
227
695
1,677 $
3,819 $
3,597
(222)
141
1,618
5,134
222
—
—
5
227
5,361 $
3,771 $
3,743
(208)
140
1,570
5,245
28
—
—
8
36
5,281 $
416 $
413
(1,196)
230
938
385
3
(10)
—
33
26
411 $
Total
17,613
16,892
(3,537)
609
12,078
26,042
721
(10)
—
366
1,077
27,119
Ending allowance balance attributable to:
Non 310-30 loans individually
evaluated for impairment
$
4,045 $
1 $
277 $
65 $
1 $
4,389
Non 310-30 loans collectively evaluated
for impairment
ASC 310-30 loans
Total ending allowance balance
$
Loans:
Non 310-30 individually evaluated for
10,251
93
14,389 $
981
695
1,677 $
4,857
227
5,361 $
5,180
36
5,281 $
384
26
411 $
21,653
1,077
27,119
impairment
$
21,494 $
2,126 $
4,369 $
7,593 $
86 $
35,668
Non 310-30 collectively evaluated for
impairment
ASC 310-30 loans
Total loans
1,018,275
13,007
2,349,175
202,830
$ 1,052,776 $ 162,310 $ 655,219 $ 684,002 $ 33,366 $ 2,587,673
654,957
21,452
143,432
16,752
501,962
148,888
30,549
2,731
111
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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
$
Commercial
$
Year ended December 31, 2014
Commercial Residential
Agriculture real estate
real estate
Consumer
4,258 $
4,029
(507)
315
4,761
8,598
229
(3)
—
(226)
—
8,598 $
1,237 $
572
—
8
(39)
541
665
—
—
(197)
468
1,009 $
2,276 $
1,984
—
146
1,467
3,597
292
—
—
(70)
222
3,819 $
4,259 $
4,165
(739)
212
105
3,743
94
—
—
(66)
28
3,771 $
491 $
491
(783)
270
435
413
—
(36)
—
39
3
416 $
Total
12,521
11,241
(2,029)
951
6,729
16,892
1,280
(39)
—
(520)
721
17,613
Ending allowance balance attributable to:
Non 310-30 loans individually
evaluated for impairment
$
82 $
— $
14 $
181 $
2 $
279
Non 310-30 loans collectively evaluated
for impairment
ASC 310-30 loans
Total ending allowance balance
$
Loans:
Non 310-30 individually evaluated for
8,516
—
8,598 $
541
468
1,009 $
3,583
222
3,819 $
3,562
28
3,771 $
411
3
416 $
16,613
721
17,613
impairment
$ 17,468 $
3,206 $
3,054 $
8,133 $
245 $
32,106
Non 310-30 collectively evaluated for
impairment
ASC 310-30 loans
Total loans
754,972
22,956
1,850,658
279,645
$ 795,396 $ 137,531 $ 561,594 $ 632,700 $ 35,188 $ 2,162,409
366,210
192,330
115,262
19,063
583,806
40,761
30,408
4,535
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 $2.9 million net charge-offs of non 310-30 loans during 2015. Credit quality remained at acceptable levels
within the non 310-30 loan portfolio during 2015, and, through management's evaluation, resulted in a provision for loan
losses on the non 310-30 loans of $12.1 million during 2015.
During 2015, the Company re-measured the expected cash flows of the loan pools accounted for under ASC 310-30. The re-
measurement resulted in a provision of $366 thousand for 2015, which was comprised primarily of a provision of $227
thousand in the agriculture segment and $93 thousand in the commercial segment.
The Company charged off $1.1 million, net of recoveries, of non ASC 310-30 loans during 2014. Strong credit quality trends
of the non 310-30 portfolio continued during 2014, and through management's evaluation, resulted in a provision for loan
losses on non 310-30 loans of $6.7 million.
112
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
During 2014, the Company re-measured 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 recoupment of $520
thousand for 2014, which was comprised primarily of recoupment or previous valuation allowances of $197 thousand in the
agricultural segment and $226 thousand in the commercial segment.
Note 9 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 was 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 reduced or
increased, respectively, the amount recoverable from the FDIC. Covered gains or losses that were incurred in excess of the
expected reimbursements (which were reflected in the FDIC indemnification asset balance), were recognized in the
consolidated statements of operations as FDIC loss sharing income in the period in which they occur.
During the fourth quarter of 2015, the Bank entered into an early termination agreement with the FDIC, terminating its loss-
share agreements with the FDIC. The Bank paid consideration of $15.1 million to the FDIC for the termination of the
agreements. Additionally, the Bank recorded a pre-tax gain of $4.9 million in the fourth quarter of 2015, which was recorded
in FDIC indemnification asset amortization, net of gain on termination on the consolidated statements of operations. The gain
resulted primarily from the settlement payment made to the FDIC, and the elimination of the remaining FDIC
indemnification asset and clawback payable, which totaled $18.2 million and $38.7 million, respectively, at the time of
settlement. The Company amortized the indemnification asset through September 30, 2015. During 2015, the Company paid
a net $2.6 million to the FDIC, prior to termination of the agreements on November 5, 2015. Below is a summary of the
activity related to the FDIC indemnification asset during 2015 and 2014:
Balance at beginning of period
Amortization
FDIC portion of charge-offs/recoveries
Changes for FDIC loss-share submissions
Termination of FDIC loss-share agreements
Balance at end of period
For the years ended December 31,
$
2015
39,082 $
(20,751)
(2,819)
2,644
(18,156)
$
— $
2014
64,447
(27,741)
332
2,044
—
39,082
The $20.8 million of amortization of the FDIC indemnification asset recognized during 2015 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 was reflected in increased accretion rates
on covered loans and was recognized over the expected remaining lives of the underlying covered loans as an adjustment to
yield.
During 2014, the Company recognized $27.7 million of amortization on the FDIC indemnification asset, and paid a net $2.0
million as to the FDIC.
113
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 10 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2015 and 2014:
Land
Buildings and improvements
Equipment
Total
Less: accumulated depreciation and amortization
Premises and equipment, net
December 31, 2015 December 31, 2014
30,106
$
69,046
37,732
136,884
(30,543)
106,341
29,991 $
71,908
39,382
141,281
(38,178)
103,103 $
$
The Company incurred $10.1 million, $10.6 million, and $10.5 million of depreciation expense during 2015, 2014, and 2013,
respectively, which is included in occupancy and equipment expense. The Company disposed of $0.1 million, $1.0 million,
and $3.4 million of premises and equipment, net, during 2015, 2014, and 2013, respectively.
During 2015, the Company consolidated three banking centers in the Bank Midwest network. During the first quarter of
2016, the Company announced the consolidation of seven banking centers in the Community Banks of Colorado network.
The banking center consolidations resulted in certain buildings to be classified as held-for-sale, which were adjusted to the
lower of the carrying amount or fair value less cost to sell. The adjustment totaled $1.4 million and is included in the
consolidated statements of operations.
Space in certain facilities is leased under operating leases. Below is a summary of future minimum lease payments for the
years following 2015:
2016
2017
2018
2019
2020
Thereafter
Total
Note 11 Other Real Estate Owned
A summary of the activity in the OREO balances during 2015 and 2014 is as follows:
Beginning balance
Purchases through acquisition, at fair value
Transfers from loan portfolio, at fair value
Impairments
Sales
Gain on sale of OREO, net
Ending balance
$
$
3,882
3,140
2,840
2,491
2,384
16,967
31,704
For the years ended December 31,
2015
29,120 $
$
1,488
4,576
(1,580)
(15,566)
2,776
20,814
$
$
2014
70,125
—
4,491
(2,103)
(56,519)
13,126
29,120
The OREO balances exclude $5.5 million and $8.1 million at December 31, 2015 and 2014, 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.
114
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 12 Goodwill and Intangible Assets
In connection with the Hillcrest Bank, Bank Midwest, Bank of Choice, Community Banks of Colorado and Pine River
transactions, the Company recorded core deposit intangible assets of $5.8 million, $21.7 million, $5.2 million, $4.8 million,
and $0.9 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. The Company recognized
core deposit intangible amortization expense of $5.4 million in 2015 and $5.3 million in 2014 and 2013. The following table
shows the estimated future amortization expenses.
2016
2017
2018
2019
2020
$
5,480
5,480
1,122
135
135
The accumulated amortization of the core deposit intangible assets was $25.8 million and $20.4 million at December 31,
2015 and 2014, respectively.
The Company had goodwill of $59.6 million at December 31, 2015, 2014, and 2013. 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
2015, 2014, or 2013.
Note 13 Deposits
Total deposits were $3.8 billion at both December 31, 2015 and 2014. Time deposits decreased from $1.4 billion at December
31, 2014 to $1.2 billion at December 31, 2015. The following table summarizes the Company’s time deposits, based upon
contractual maturity, at December 31, 2015 and 2014, by remaining maturity:
December 31, 2015
December 31, 2014
Balance
$ 214,724
200,771
391,750
271,353
65,306
36,955
7,942
5,082
$ 1,193,883
Weighted
Average
Balance
Rate
256,091
0.53 % $
255,301
0.52 %
423,329
0.68 %
321,073
0.81 %
63,806
1.25 %
24,467
1.39 %
7,748
1.08 %
5,236
1.48 %
0.72 % $ 1,357,051
Weighted
Average
Rate
0.46 %
0.56 %
0.71 %
0.89 %
1.05 %
1.24 %
1.22 %
1.47 %
0.71 %
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
115
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The Company incurred interest expense on deposits as follows during the periods indicated:
For the years ended December 31,
2014
2015
2013
Interest bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Total
$
315 $
3,372
837
9,085
$ 13,609 $
317 $
620
3,424
227
12,122
14,120 $ 16,393
3,467
539
9,797
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, 2015 was $10.3 million. The aggregate amount of
certificates of deposit in denominations that meet or exceed the FDIC insurance limit was $86.9 million and $98.9 million at
December 31, 2015 and 2014, respectively.
Note 14 Borrowings
The following table sets forth selected information regarding repurchase agreements during 2015, 2014, and 2013:
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
As of and for the years ended December 31,
2013
2014
2015
$ 288,591
$ 197,726
$ 133,552
99,057
$
$ 122,879
$ 84,355
0.09 %
0.13 %
0.14 %
As of December 31, 2015, 2014, and 2013, the Company had pledged mortgage-backed securities with a fair value of
approximately $205.7 million, $152.4 million, and $119.1 million, respectively, for securities sold under agreements to
repurchase. Additionally, there was $68.1 million, $18.8 million, and $19.5 million of excess collateral pledged for
repurchase agreements at December 31, 2015, 2014, and 2013, respectively.
The vast majority of the Company’s repurchase agreements are overnight transactions with clients that mature the day after
the transaction. During 2015, 2014, and 2013, the overnight agreements had a weighted average interest rate of 0.18%,
0.13%, and 0.14%, respectively. At December 31, 2015 and 2014, none of the Company’s repurchase agreements were for
periods longer than one day. At December 31, 2013, $20.0 million 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.
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, 2015 and 2014 were $40 million. All of the outstanding advances have fixed interest rates. More information about FHLB
advances at December 31, 2015 is detailed in the table below:
Maturity Year
2016
2018
2020
December 31, 2015 Balance
$ 15,000
$ 10,000
$ 15,000
Rate
0.84%
1.81%
2.33%
116
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 15 Regulatory Capital
During the fourth quarter of 2015, the Company announced that the operating agreement between its subsidiary bank, and its
then primary regulator, the Office of Comptroller of the Currency (the “OCC”), was terminated. The operating agreement
was entered into in December 2010 as part of the Bank’s approval to operate as a de novo bank. The agreement required the
Bank to maintain certain capital levels, placed restrictions on its ability to pay dividends, and limited its ability to make
certain other business decisions.
As a bank holding company, the Company is subject to the regulatory capital adequacy requirements implemented by the
Federal Reserve. The federal banking agencies have risk-based capital adequacy regulations intended to provide a measure of
capital adequacy that reflects the degree of risk associated with a banking organization’s operations. Under these regulations,
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.
The law requires federal bank regulatory agencies to take “prompt correction 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 capital adequacy regulations require banks to maintain a common
equity tier 1 capital ratio of 6.5%, a total tier 1 capital ratio of 8.0%, a total capital ratio of 10.0%, and a leveraged ratio of
5.0% 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 the Bank are in excess of the levels established for “well capitalized” institutions.
The new Basel III rules, effective January 1, 2015, changed the components of regulatory capital and changed the way in
which risk ratings are assigned to various categories of bank assets. Also, a new Tier 1 common risk-based ratio was defined.
Under the Basel III requirements, at December 31, 2015, the Company met all capital requirements and had regulatory capital
ratios in excess of the levels established for well-capitalized institutions.
During 2015, the Bank received approval from the OCC to permanently reduce the Bank’s capital by $86.0 million. As a
result, the Bank distributed $86.0 million cash to the Company during 2015. During February 2016, the Bank further
permanently reduced its capital by $140.0 million. For further discussion of the permanent reduction of capital during 2016,
refer to note 28 to our consolidated financial statements.
117
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
At December 31, 2015 and 2014, the 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:
Tier 1 leverage ratio
Consolidated
NBH Bank
Common equity tier 1 risk-based capital
Consolidated
NBH Bank
Tier 1 risk-based capital ratio
Consolidated
NBH Bank
Total risk-based capital ratio
Consolidated
NBH Bank
(1)
Tier 1 leverage ratio
Consolidated
NBH Bank
Tier 1 risk-based capital ratio
Consolidated
NBH Bank
Total risk-based capital ratio
Consolidated
NBH Bank
December 31, 2015
Required to be
considered well
capitalized
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
11.8 % $ 550,368
519,766
11.2 %
N/A
N/A
5.0 % $ 464,078
4.0 % $ 187,325
185,631
4.0 %
17.5 % $ 550,368
519,766
16.6 %
6.5 % $ 304,403
301,651
6.5 %
4.5 % $ 210,741
208,835
4.5 %
17.5 % $ 550,368
519,766
16.6 %
8.0 % $ 252,134
344,989
8.0 %
6.0 % $ 189,101
188,176
6.0 %
18.4 % $ 578,448
547,846
17.5 %
10.0 % $ 315,168
376,352
10.0 %
8.0 % $ 252,134
250,901
8.0 %
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
573,934
12.1 %
N/A
N/A
10.0 % $ 473,478
4.0 % $ 190,148
189,391
4.0 %
28.9 % $ 712,222
573,934
23.5 %
6.0 % $ 147,796
268,855
11.0 %
4.0 % $
4.0 %
98,530
97,766
29.6 % $ 730,086
591,799
24.2 %
10.0 % $ 246,326
293,297
12.0 %
8.0 % $ 197,061
195,531
8.0 %
(1) These ratio requirements for NBH Bank are reflective of the agreement NBH Bank had made with its regulators in
connection with the approval of its de novo charter.
118
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 16 FDIC Loss Sharing Income (Expense)
In connection with the loss-share agreements the Company had with the FDIC regarding the Hillcrest Bank and Community
Banks of Colorado transactions, the Company recognized the actual reimbursement of costs of resolution of covered assets
from the FDIC within the statements of operations through the termination date. The Company terminated its loss-share
agreements with the FDIC during the fourth quarter of 2015. The Company amortized the clawback liability through
September 30, 2015. All income (expense) included as of December 31, 2015 is for activity prior to the termination. The
table below provides additional details of the Company’s FDIC loss sharing income (expense) during 2015, 2014, and 2013:
For the years ended December 31,
2014
2015
2013
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 FDIC loss sharing income (expense)
$
$
(1,131) $
(1,242)
(1,128)
(28)
3,854
325
$
(1,364) $
(2,509)
(10,053)
(193)
5,257
(8,862) $
(1,259)
65
(5,235)
(87)
9,327
2,811
Note 17 Stock-based Compensation and Benefits
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.
As of December 31, 2015, the aggregate number of Class A common stock available for issuance under the 2014 Plan is
5,707,826 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.
Stock Options
The Company issued stock options during 2015, 2014, and 2013. The options granted during 2015 and 2014 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 majority of the
options granted during 2013 are time vested with 1/2 vesting on each of the third and fourth anniversary of the date of grant.
The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing
model. The outstanding option awards vest on a graded basis over 1-4 years of continuous service and have 7-10 year
contractual terms.
119
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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 2015, 2014, and 2013:
Weighted average fair value
Weighted average risk-free interest rate (1)
Expected volatility (2)
Expected term (years) (3)
Dividend yield (4)
$
$
2015
4.37
1.59 %
23.87 %
6.01
1.05 %
$
2014
6.08
2.02 %
33.94 %
6.01
1.06 %
2013
5.56
1.16 %
32.09 %
6.70
1.09 %
(1) 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.
(2) 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.
(3) The expected term was estimated to be the average of the contractual vesting term and time to expiration.
(4) 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.
The Company issued stock options in accordance with the 2014 Plan during 2015. The following table summarizes stock
option activity for 2015:
Weighted
Average
Outstanding at December 31, 2014
Granted
Forfeited
Surrendered
Exercised
Expired
Outstanding at December 31, 2015
Options exercisable at December 31, 2015
Options expected to vest
Weighted Remaining
Average
Exercise
Price
Contractual Aggregate
Intrinsic
Value
223
Term in
Years
4.46 $
147,967
(33,327)
(561,322)
(43,478)
(510,700)
Options
3,597,111 $ 19.90
19.16
18.67
19.97
19.98
20.00
2,596,251 $ 19.84
2,259,300 $ 19.98
331,886 $ 19.00
4.77 $ 3,968
4.20 $ 3,150
786
8.14 $
Stock option expense is included in salaries and benefits in the accompanying consolidated statements of operations and
totaled $0.7 million, $1.2 million, and $2.2 million for 2015, 2014, and 2013, respectively. At December 31, 2015, there was
$0.7 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 1.9 years.
120
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The following table summarizes the Company’s outstanding stock options:
Options outstanding
Weighted average
Options exercisable
Number
outstanding
204,606
141,257
2,250,388
remaining contractual
life (years)
7.72
9.28
4.18
Weighted average
exercise price
$
$
$
18.51
19.15
20.00
Number
exercisable
43,906
562
2,214,832
Weighted average
exercise price
$
$
$
18.76
19.51
20.00
Range of exercise price
18.09 - 18.92
19.08 - 19.85
20.00 - 22.10
$
$
$
Restricted Stock Awards
The Company issued restricted stock during 2015, 2014, and 2013. Restricted stock with time-based vesting was valued at
the fair value of the shares on the date of grant as they are assumed to be held beyond the vesting period. Restricted stock
awards with market vesting components (granted in 2010, 2011, and 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 ten years and if the restricted stock were not vested during the 10-year period, it
was assumed they were forfeited.
The following table summarizes restricted stock activity during 2015:
Unvested at December 31, 2014
Vested
Granted
Forfeited
Surrendered
Unvested at December 31, 2015
Total
Restricted
Shares
Weighted
Average Grant-
Date Fair Value
955,398 $
(61,429)
176,722
(209,481)
(25,179)
836,031 $
14.61
18.92
19.18
15.95
18.95
15.42
Expense related to non-vested restricted stock totaled $2.6 million, $2.3 million, and $2.7 million during 2015, 2014, and
2013, respectively, and is included in salaries and benefits in the Company’s consolidated statements of operations. As of
December 31, 2015, there was $2.4 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 2.1 years.
Employee Stock Purchase Plan
The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of
the Internal Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll
deductions up to a limit of $25,000 per calendar year and 2,000 shares per offering period. The price an employee pays for
shares is 90.0% of the fair market value of Company common stock on the last day of the offering period. The offering
periods is the six-month period commencing on March 1 and September 1 of each year and ending on August 31 and
February 28 (or February 29 in the case of a leap year) of each year. There is no vesting or other restrictions on the stock
purchased by employees under the ESPP. Under the ESPP, the total number of shares of common stock reserved for issuance
totaled 400,000 shares.
Under the ESPP, employees purchased 14,485 shares during 2015. Expense related to the ESPP totaled $0.1 million during
2015 and $0.0 million during 2014 and 2013.
121
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 18 Warrants
The company had 725,750 and 830,750 outstanding warrants to purchase Company stock at December 31, 2015 and 2014,
respectively. During 2015, the Company settled 105,000 warrants for $368 thousand cash and recognized a gain of $97
thousand. The warrants were granted to certain lead shareholders of the Company at the time of the Company’s initial capital
raise (2009-2010), all with an exercise price of $20.00 per share. During December 2015, the company modified its
remaining warrant agreements resulting in the reclassification of $3.1 million to additional paid-in capital included in the
consolidated statements of financial condition as of December 31, 2015. The modified term of the warrants is for ten years
and six months from the date of grant and the expiration dates of the warrants range from April 20, 2020 to September 23,
2020.
The fair value of the warrants was estimated to be $3.1 million, $3.3 million, and $6.3 million at December 31, 2015, 2014,
and 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 2015 (modification date) December 31, 2014 December 31, 2013
2.16 %
33.80 %
6 - 7
0.93 %
1.67 %
24.18 %
5 - 6
1.03 %
1.54 - 1.63 %
20.72 - 21.04 %
0.95 - 0.96 %
4 - 5
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 an expense of $0.1 million in 2015, benefit of $3.0 million in 2014, and an expense of $0.8 million
during 2013, respectively, in the consolidated statements of operations resulting from the change in fair value of the warrant
liability or settlement.
Note 19 Common Stock
During 2015, the Company repurchased 8,645,836 shares for $175.0 million, including completion of a tender offer through
which the Company repurchased a total of 4,651,163 shares for a total price of $100.7 million.
On January 21, 2016, 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. This new program, as well as the remaining $6.1
million available under the February 11, 2015 authorization, provides a total $56.1 million of authorization.
The Company had 30,358,509 shares of Class A common stock and zero shares of Class B common stock outstanding as of
December 31, 2015, and 38,017,179 shares of Class A common stock and 867,774 shares of Class B common stock
outstanding as of December 31, 2014. During 2015, 482,045 Class B common shares were repurchased by the Company and
385,729 Class B common shares were converted to Class A common shares. Additionally, as of December 31, 2015 and
2014, the Company had 836,031 and 955,398 shares, respectively, of restricted Class A common stock issued but not yet
vested under the 2014 Plan and the Prior Plan that are not included in shares outstanding until such time that they are vested;
however, these shares do have voting and certain dividend rights during the vesting period.
122
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 20 Income Per Share
The Company calculates income 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 17.
The Company had 30,358,509 and 38,884,953 shares outstanding (inclusive of Class A and B) as of December 31, 2015 and
2014, respectively, exclusive of issued non-vested restricted shares. Certain stock options and non-vested restricted shares are
potentially dilutive securities, but are not included in the calculation of diluted income per share because to do so would have
been anti-dilutive for 2015, 2014, and 2013.
The following table illustrates the computation of basic and diluted income per share for 2015, 2014, and 2013:
For the years ended December 31,
2014
2015
2013
Net income
Less: earnings allocated to participating securities
Earnings allocated to common shareholders
$
$
4,881 $
(53)
4,828 $
9,176 $
(38)
9,138 $
Weighted average shares outstanding for basic earnings per common share 34,349,996
9,321
Dilutive effect of equity awards
Dilutive effect of warrants
4,170
Weighted average shares outstanding for diluted earnings per common
6,927
(17)
6,910
50,790,410
34,012
—
42,404,609
16,405
—
42,421,014
34,363,487
$
$
0.14 $
0.14 $
50,824,422
0.14
0.14
0.22 $
0.22 $
share
Basic earnings per share
Diluted earnings per share
The Company had 2,596,251, 3,597,111, and 3,515,486 outstanding stock options to purchase common stock at weighted
average exercise prices of $19.84, $19.90, and $19.92 per share at December 31, 2015, 2014, and 2013, 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 outstanding warrants to
purchase the Company’s common stock totaling 725,750 and 830,750 as of December 31, 2015, and 2014, respectively. The
warrants have an exercise price of $20.00, which was out-of-the-money for purposes of dilution calculations during 2014 and
2013. The Company had 836,031, 955,398, and 1,064,460 unvested restricted shares outstanding as of December 31, 2015,
2014, and 2013, 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.
123
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 21 Income Taxes
(a) Income taxes
Total income taxes for 2015, 2014, and 2013 were allocated as follows:
Current expense:
U.S. federal
State and local
Total
Deferred benefit:
U.S. federal
State and local
Total
Income tax expense
(b) Tax Rate Reconciliation
For the years ended December 31,
2013
2014
2015
$
3,536 $ 17,032 $
311
1,909
$
3,847 $ 18,941 $
5,058
486
5,544
$
$
(710) $ (13,830) $ (1,278)
(316)
(1,946)
(1,594)
(15,776)
3,950
(93)
(803)
3,044 $
3,165 $
Income tax expense attributable to income before taxes was $3.0 million, $3.2 million, and $4.0 million for 2015, 2014, and
2013, 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:
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
Bargain purchase gain
Other
Income tax expense
For the years ended December 31,
2013
2014
2015
3,807
4,319 $
2,774 $
111
(24)
142
(64)
(889)
(2,568)
—
(177)
(576)
130
930
3,520
287
(1,034)
37
—
—
(367)
(321)
40
82
3,950
3,165 $
3,044 $
$
$
124
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
(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, 2015 and 2014 are presented below:
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 operating loss
Federal tax credits
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
Total deferred tax liabilities
Net deferred tax asset
December 31, 2015 December 31, 2014
$
$
$
$
3,477 $
10,315
14,284
2,103
9,795
3,112
5,076
2,550
1,191
1,424
504
1,354
55,185 $
— $
(57)
(2,133)
(362)
(2,552)
52,633 $
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
At December 31, 2015, the Company has federal and state net operating loss carryovers (NOLs) of $3.7 million and $4.8
million, respectively, which are available to offset future taxable income. The NOLs expire in varying amounts through 2035.
The Company also has a capital loss carryover of $88 thousand that expires in 2019 and a minimum tax credit carryover of
$33 thousand that does not expire. All of these tax attributes were obtained in the Pine River acquisition and are subject to
annual limitations as a result of the ownership change.
In addition, the Company has minimum tax credit carryovers of $471 thousand, which do not expire. The minimum tax credits
are available to reduce income tax obligations in future periods to the extent they exceed the calculated alternative minimum tax.
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, 2015 and 2014,
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 740-10 unrecognized tax benefits recorded as of December 31, 2015 and
2014 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 2015 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. As of
December 31, 2015, the Company was in an open IRS examination for the tax year 2012.
125
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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 $22.10, 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. Certain awards granted to former executives expired or were exercised during 2015 and resulted in the write-off of the
related deferred tax asset of $3.7 million. Of the $9.8 million deferred tax asset related to stock-based compensation at December
31, 2015, $7.9 million is associated with executive officers still employed by the Company.
Note 22 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, 2015 and 2014.
Information about the valuation methods used to measure fair value is provided in note 24.
Balance Sheet December 31,
Location
Asset Derivatives Fair Value
December 31,
2014
2015
Balance Sheet
Location
Liability Derivatives Fair Value
December 31,
December 31,
2014
2015
Derivatives designated as hedging
instruments
Interest rate products
Other assets $
388 $
10 Other liabilities $
6,232 $
3,206
Total derivatives designated as hedging
instruments
Derivatives not designated as hedging
instruments
$
388 $
10
$
6,232 $
3,206
Interest rate products
Other assets $
1,959 $
1,418 Other liabilities $
2,083 $
1,522
Total derivatives not designated as
hedging instruments
Fair value hedges of interest rate risk
$
1,959 $
1,418
$
2,083 $
1,522
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, 2015, the Company had thirty-one interest rate swaps with a notional
amount of $273.3 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed-
rate loans. The Company had eleven outstanding interest rate swaps with a notional amount of $68.8 million that was
designated as a fair value hedge as of December 31, 2014.
126
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 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 2015, the Company
recognized a net loss of $198 thousand in non-interest income related to hedge ineffectiveness. During 2014, the Company
recognized a net loss of $354 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. 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 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, 2015, the Company had twenty matched interest rate swap transactions with an aggregate notional
amount of $68.1 million related to this program. 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.
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 2015 and 2014:
Derivatives in fair value
hedging relationships
Interest rate products
Total
Hedged items
Interest rate products
Total
Derivatives not designated
as hedging instruments
Interest rate products
Total
Location of gain or (loss)
recognized in income on
derivatives
Other non-interest income
Location of gain or (loss)
recognized in income on
hedged items
Other non-interest income
Amount of gain or (loss) recognized in income on derivatives
For the years ended December 31,
2014
2015
$
$
$
$
(2,648)
(2,648)
$
$
(3,325)
(3,325)
Amount of gain or (loss) recognized in income on hedged
items
For the years ended December 31,
2014
2015
2,450
2,450
$
$
2,971
2,971
Location of gain or (loss)
recognized in income on
derivatives
Other non-interest expense
Amount of gain or (loss) recognized in income on derivatives
For the years ended December 31,
2014
2015
$
$
43 $
43 $
(103)
(103)
Credit-risk-related contingent features
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.
127
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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, 2015, the termination value of derivatives in a net liability position related to these agreements was $9.0
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, 2015, the Company had
posted $8.2 million in eligible collateral.
Note 23 Commitments and Contingencies
In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing
needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit
and standby letters of credit. The same credit policies are applied to these commitments as the loans on the consolidated
statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount
recognized in the consolidated statements of financial condition. At December 31, 2015 and 2014, the Company had loan
commitments totaling $627.2 million and $485.5 million, respectively, and standby letters of credit that totaled $9.8 million
and $10.0 million, respectively. The total amounts of unused commitments do not necessarily represent future credit exposure
or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these
commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.
Total unfunded commitments at December 31, 2015 and 2014 were as follows:
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
Total
December 31, 2015 December 31, 2014
$
$
3,053 $
208,355
44,282
5,314
18,418
347,822
9,770
637,014 $
1,683
202,604
35,814
4,376
18,065
222,950
9,965
495,457
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
128
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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.
Note 24 Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the
fair value of its financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. For disclosure purposes, the Company
groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the
availability and reliability of the information that is used to determine fair value. The three levels are defined as follows:
• Level 1—Includes assets or liabilities in which the inputs to the valuation methodologies are based on unadjusted
quoted prices in active markets for identical assets or liabilities.
• Level 2—Includes assets or liabilities in which the inputs to the valuation methodologies are based on similar assets
or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities in inactive markets, and
inputs other than quoted prices that are observable, such as interest rates, yield curves, volatilities, prepayment
speeds, and other inputs obtained from observable market input.
• Level 3—Includes assets or liabilities in which the inputs to the valuation methodology are based on at least one
significant assumption that is not observable in the marketplace. These valuations may rely on management’s
judgment and may include internally-developed model-based valuation techniques.
Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least
transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular
asset or liability being measured and then considers the assumptions that market participants would use when pricing the
asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active
markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active
markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company
maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not
available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial
instrument or of the 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 2015 and 2014, 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:
129
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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, 2015 and 2014, 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, 2015, 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,
2014, 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 derivative
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 measured the fair value of the warrant liability on a recurring basis using a Black-Scholes
option pricing model through the modification date as described in Note 18. 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 eight comparable companies with publicly traded shares,
and is deemed a significant unobservable input to the valuation model, as such this liability was classified as level 3.
Clawback liability—Prior to the termination of the FDIC loss-share agreements in 2015, the Company periodically measured
the net present value of expected future cash payments to be made by the Company to the FDIC. The expected cash flows
were calculated in accordance with the loss-share agreements and were based primarily on the expected losses on the covered
assets, which involve significant inputs that are not market observable, as such this liability was classified as level 3.
130
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31, 2015 and
2014, on the consolidated statements of financial condition utilizing the hierarchy structure described above:
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
$
— $ 310,978 $
— $ 310,978
Level 1
December 31, 2015
Level 3
Level 2
Total
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
Assets:
Investment securities available-for-sale:
Mortgage-backed securities (“MBS”):
—
—
—
— $ 1,158,868 $
845,543
—
2,347
—
725
—
845,543
725
2,347
725 $ 1,159,593
— $
—
—
— $
— $
—
8,315
8,315 $
— $
—
—
— $
—
—
8,315
8,315
$
$
$
Level 1
December 31, 2014
Level 3
Level 2
Total
Residential mortgage pass-through securities issued or guaranteed
by U.S. Government agencies or sponsored enterprises
$
— $ 404,215 $
— $ 404,215
1,074,580
—
1,428
—
—
—
— $ 1,480,223 $
—
419
—
1,074,580
419
1,428
419 $ 1,480,642
— $
—
—
— $
— $ 3,328 $
—
4,728
4,728 $ 39,666 $
36,338
—
3,328
36,338
4,728
44,394
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
$
$
$
131
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The table below details the changes in level 3 financial instruments during 2015 and 2014:
Other
Securities
Warrant
liability
Balance at December 31, 2013
Change in value
Amortization
Net change in Level 3
Balance at December 31, 2014
Change in value
Addition from business acquisition
Settlements
Warrant reclassification to equity
Amortization
Termination of FDIC agreement
Net change in Level 3
Balance at December 31, 2015
$
$
419 $
—
—
—
419
—
306
—
—
—
—
306
725 $
6,281 $
(2,953)
—
(2,953)
3,328
106
—
(368)
(3,066)
—
—
(3,328)
Clawback
liability
32,465
2,509
1,364
3,873
36,338
1,242
—
—
—
1,131
(38,711)
(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 2015, the
Company measured 11 loans not accounted for under ASC 310-30 at fair value on a non-recurring basis. These loans carried
specific reserves totaling $4.3 million at December 31, 2015. During 2015, the Company added specific reserves of $4.3 million
for ten loans with carrying balances of $11.5 million at December 31, 2015. The Company also eliminated specific reserves of
$0.2 million for four loans during 2015, primarily due to paydowns, charge offs, or transfers to OREO.
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.
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 cost basis 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 $1.6 and $2.1 million of OREO impairments in the consolidated statements of operations during 2015 and 2014,
respectively. 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.
132
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Premises and equipment held-for-sale are written down to estimated fair value less costs to sell in the period in which the
held-for-sale criteria are met. Fair value is estimated in a process which considers current local commercial real estate market
conditions and the judgment of the sales agent and often invoices obtaining third party appraisals from certified real estate
appraisers. These fair value measurements are classified as level 3. Unobservable inputs to these measurements, which
include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. The Company
recognized $1.4 million of impairments in its consolidated statements of operations related to banking centers classified as
held-for-sale during the year ended December 31, 2015.
The table below provides information regarding the assets recorded at fair value on a non-recurring basis at December 31,
2015 and 2014:
Other real estate owned
Impaired loans
Premises and equipment
Other real estate owned
Impaired loans
December 31, 2015
Total
$ 20,814 $
37,363
2,101
Losses from fair
value changes
1,580
1,424
1,411
December 31, 2014
Total
$ 29,120 $
32,091
Losses from fair
value changes
2,103
552
The Company did not record any liabilities for which the fair value was made on a non-recurring basis during 2015 and 2014.
The following table provides information about the valuation techniques and unobservable inputs used in the valuation of financial
instruments classified as level 3 of the fair value hierarchy as of December 31, 2015. The table below excludes non-recurring fair
value measurements of collateral value used for impairment measures for OREO and premises and equipment. These valuations
utilize third party appraisal or broker price opinions, and are classified as level 3 due to the significant judgment involved:
Fair value at
December 31, 2015
Valuation Technique
Unobservable Input
Other available-for-
sale securities
Impaired loans
$
725 Cash investment in private
Cash, par value
equity fund, par value
37,363 Appraised value
Appraised values
Discount rate
Quantitative
Measures
0% - 25%
Note 25 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.
133
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
The fair value of financial instruments at December 31, 2015 and 2014, including methods and assumptions utilized for determining
fair value of financial instruments, are set forth below:
ASSETS
hierarchy
Level in fair value
measurement
December 31, 2015
December 31, 2014
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
Cash and cash equivalents
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 available-for-sale 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
Non-marketable securities
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
Accrued interest payable
Derivatives
Cash and cash equivalents
Level 1
$ 166,092 $ 166,092 $
256,979 $ 256,979
Level 2
310,978
310,978
404,215
404,215
Level 2
Level 3
845,543
725
845,543
725
1,074,580
419
1,074,580
419
Level 2
340,131
342,812
422,622
428,323
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
87,372
22,529
2,560,554
13,292
12,190
2,347
85,773
22,529
2,613,381
13,292
12,190
2,347
107,968
27,045
2,144,796
5,146
11,465
1,428
106,314
27,045
2,193,222
5,146
11,465
1,428
2,646,794
1,193,883
136,523
40,000
4,319
8,315
2,646,794
1,182,098
136,523
40,919
4,319
8,315
2,409,137
1,357,051
133,552
40,000
3,608
4,728
2,409,137
1,357,885
133,552
40,465
3,608
4,728
Cash and cash equivalents have a short-term nature and the estimated fair value is equal to the carrying value.
Investment securities
The estimated fair value of investment securities is based on quoted market prices or bid quotations received from securities dealers.
Other investment securities, including securities that are held for regulatory purposes are carried at cost, less any other than
temporary impairment.
Loans 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.
134
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
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 22.
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.
Accrued interest payable
Accrued interest payable has a short-term nature and the estimated fair value is equal to the carrying value.
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
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, 2015 December 31, 2014
$
$
$
$
15,739 $
586,942
15,415
618,096 $
552 $
552
617,544
618,096 $
123,144
656,287
19,121
798,552
3,977
3,977
794,575
798,552
135
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Condensed Statements of Operations
For the years ended December 31,
2013
2014
2015
Interest income
Undistributed equity from subsidiaries
Distributions from subsidiaries
Other income
Total income
Expenses
Salaries and benefits
Other expenses
Total expenses
Operating income
Income tax expense (benefit)
Net income
$
— $
2 $
(74,131)
86,000
1,048
12,917
11,712
—
—
11,714
98
(299,836)
313,000
3
13,265
3,349
3,597
6,946
5,971
1,090
4,881 $ 9,176 $
3,572
751
4,323
7,391
(1,785)
4,861
4,521
9,382
3,883
(3,044)
6,927
$
Condensed Statements of Cash Flows
For the years ended December 31,
2014
2015
2013
Cash flows from operating activities:
Net income
Undistributed equity from subsidiaries
Stock-based compensation expense
Other
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Outlay for business combinations
Return of capital from investments in subsidiaries
Net cash provided by investing activities
Cash flows from financing activities:
Issuance of stock under purchase and equity compensation plans
Excess tax benefit on stock-based compensation
Reissuance of treasury stock in excess of cost basis
Proceeds from exercise of stock options
Settlement of warrants
Payment of dividends
Repurchase of shares
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
136
$
4,881 $
9,176 $
(11,869)
3,349
2,611
(1,028)
(9,482)
86,000
76,518
(11,712)
3,572
(2,325)
(1,289)
—
—
—
6,927
299,836
4,861
(2,311)
309,313
—
—
—
(1,048)
24
96
160
(368)
(6,711)
(175,048)
(182,895)
(107,405)
123,144
(256)
24
—
—
—
(10,139)
(146,736)
(157,107)
152,206
100,642
$ 15,739 $ 123,144 $ 252,848
(576)
7
—
—
—
(8,476)
(119,370)
(128,415)
(129,704)
252,848
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 27 Quarterly Results of Operations (unaudited)
The following is a summary of quarterly results:
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 (benefit)
Net income (loss)
Income (loss) per share-basic
Income (loss) per share-diluted
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 before income taxes
Income tax expense
Net income
Income per share-basic
Income per share-diluted
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 before income taxes
Income tax (benefit) expense
Net income
Income per share-basic
Income per share-diluted
137
First
Total
quarter
Third
quarter
December 31, 2015
Second
Fourth
quarter
quarter
$ 43,492 $ 42,311 $ 42,517 $ 43,087 $ 171,407
14,462
156,945
12,444
144,501
21,448
158,024
7,925
3,044
4,881
0.14
0.14
$ 3,340 $ 1,636 $ (1,341) $ 1,246 $
0.03 $
$
0.03 $
$
3,563
39,929
5,423
34,506
15,419
42,230
7,695
4,355
3,629
38,682
3,710
34,972
3,761
38,677
56
(1,580)
3,608
39,479
1,453
38,026
(479)
36,724
823
(423)
3,662
38,855
1,858
36,997
2,747
40,393
(649)
692
0.05 $ (0.04) $
0.05 $ (0.04) $
0.11 $
0.11 $
First
Total
quarter
Third
quarter
December 31, 2014
Second
Fourth
quarter
quarter
$ 46,280 $ 45,492 $ 46,005 $ 46,885 $ 184,662
14,413
170,249
6,209
164,040
(1,696)
150,003
12,341
3,165
9,176
0.22
0.22
$ 2,279 $ 3,337 $ 2,129 $ 1,431 $
0.03 $
$
0.03 $
$
3,696
42,584
1,265
41,319
(5,117)
33,149
3,053
774
3,582
42,423
1,660
40,763
2,161
39,855
3,069
940
3,538
43,347
1,769
41,578
(354)
39,018
2,206
775
3,597
41,895
1,515
40,380
1,614
37,981
4,013
676
0.05 $
0.05 $
0.08 $
0.08 $
0.06 $
0.06 $
First
Total
quarter
Third
quarter
December 31, 2013
Second
Fourth
quarter
quarter
$ 47,377 $ 49,522 $ 48,478 $ 50,098 $ 195,475
16,514
178,961
4,296
174,665
20,177
183,965
10,877
3,950
6,927
0.14
0.14
4,007
45,515
437
45,078
3,338
46,613
1,803
856
947 $ 2,898 $ 2,082 $
0.04 $
0.06 $
0.02 $
0.04 $
0.06 $
0.02 $
3,787
43,590
772
42,818
2,364
44,238
944
(56)
4,191
44,287
1,670
42,617
7,324
45,230
4,711
1,813
4,529
45,569
1,417
44,152
7,151
47,884
3,419
1,337
$ 1,000 $
0.02 $
$
0.02 $
$
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Note 28 Subsequent Event
On January 25, 2016, the Company announced the authorization of a new program to repurchase up to $50.0 million of the
Company’s common stock from time to time either in the open market or in privately negotiated transactions in accordance
with applicable regulations of the Securities and Exchange Commission.
In February 2016, NBH Bank received approval from the Colorado Division of Banking and the Federal Reserve Bank of
Kansas City to permanently reduce the Bank’s capital by $140.0 million. As a result, the Bank distributed $140.0 million
cash to the Company in February 2016.
138
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, 2015. 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, 2015.
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, 2015 based on the framework in Internal Control—Integrated Framework (2013) 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, 2015. 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, 2015, which report is included in this Item
9A below.
Changes in Internal Control Over Financial Reporting
During 2015, the Company completed a core system conversion. This system conversion resulted in changes to processes and
controls as we migrated from the legacy system to the new core system. The system change was undertaken to enhance our
operating platform, increase our product offerings and integrate systems and was not undertaken in response to any actual or
perceived deficiencies in our internal control over financial reporting. Other than this item, there were no changes made in the
Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.
139
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Bank Holdings Corporation:
We have audited National Bank Holdings Corporation’s (the Company) internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) 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 maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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 the Company as of December 31, 2015 and 2014, and the related
consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2015, and our report dated February 29, 2016 expressed an unqualified
opinion on those consolidated financial statements.
Denver, Colorado
February 29, 2016
140
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
2016 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 and, Chief
Financial Officer (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
2016 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
2016 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
2016 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
2016 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
141
PART IV
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Page
83
84
85
86
87
88
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.
142
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 29, 2016, on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
National Bank Holdings Corporation
By
/s/ G. Timothy Laney
G. Timothy Laney
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 29, 2016,
by the following persons on behalf of the registrant and in the capacities indicated.
143
/s/ G. TIMOTHY LANEY
G. Timothy Laney,
Chairman, President and Chief Executive Officer
(principal executive officer)
/s/ BRIAN F. LILLY
Brian F. Lilly,
Chief Financial Officer; Chief of M&A and Strategy
(principal financial officer and 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/ 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
144
INDEX TO EXHIBITS
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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)
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)^
First Amendment to Employment Agreement, dated November 17, 2015, by and between G. Timothy Laney and
National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on
November 20, 2015)^
Separation and Consulting Agreement, dated November 17, 2015, by and between Thomas M. Metzger and
National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on
November 20, 2015)^
Amended and Restated Employment Agreement, dated November 17, 2015, by and between Richard U. Newfield,
Jr. and National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.4 to our Form 8-K,
filed on November 20, 2015)^
Employment Agreement, dated November 17, 2015, by and between Brian F. Lilly and National Bank Holdings
Corporation (incorporated herein by reference to Exhibit 10.3 to our Form 8-K, filed on November 20, 2015)^
Employment Agreement, dated November 17, 2015, by and between Zsolt K. Besskó and National Bank Holdings
Corporation (incorporated herein by reference to Exhibit 10.5 to our Form 8-K, filed on November 20, 2015)^
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)^
National Bank Holdings Corporation Employee Stock Purchase Plan (incorporated herein by reference to Annex A
to the
Company’s Definitive Proxy Statement on Schedule 14A, filed on March 30, 2015)^
10.10
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)^
145
10.11
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)^
10.12
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Award
Agreement (For Management) (filed herewith)^
10.13
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Restricted Stock Award Agreement
(For Management) (filed herewith)^
10.14
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Nonqualified Stock Option Agreement
(For Management) (filed herewith)^
10.15
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Market-Based Performance Award
Agreement (For Management) (filed herewith)^
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
Subsidiaries of National Bank Holdings Corporation
23.1
Consent of KPMG LLP
31.1
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
101
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*
* This information is deemed furnished, not filed.
^
Indicates a management contract or compensatory plan.
146
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
147
ABOUT NATIONAL BANK HOLDINGS CORPORATION
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, 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
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
Transformed into a client-driven and relationship-based
franchise
Built a fully integrated and scalable platform capable of
handling future growth
Completed acquisition of Pine River Valley Bank in 2015
Exiting non-strategic assets with attractive returns
Executing successful organic loan growth strategy
Maintaining low-risk operating model and excellent
credit quality
Intensifying our focus on industry specialization and
small business
Opportunistic and disciplined manager of capital
OUR FAMILY OF BRANDS
1
LOCATIONS AND
MARKET SHARE2
BANK MIDWEST
42 banking centers
3.6% deposit market share in
Kansas City MSA
Ranks 6th in banking centers in
Kansas City MSA
COMMUNITY BANKS
OF COLORADO
53 banking centers
1.2% 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, 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.
2Source: SNL Financial. Financial information and rank as of June 30, 2015. NBH Bank banking centers as of December 31, 2015.
© 2016, National Bank Holdings Corporation. All rights reserved.
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