2016
A MILESTONE FOR SUCCESS
ANNUAL REPORT AND FORM 10-K
2016
STRATEGIC EXECUTION HIGHLIGHTS
ACCELERATED
ORGANIC GROWTH:
CONTINUED TO STRATEGICALLY
MANAGE CAPITAL:
Improved profitability and returns
Grew originated loan balances 18% during the
year, or $387 million
Increased loan originations to a record $1.037
billion in 2016
Grew 2016 average transaction deposits
6% year-over-year while consolidating 12%
of the banking center franchise over the past
18 months
Increased non-interest income 87%, driven
by increases in bankcard fees, increases
in gain on sale of mortgages, and benefits
derived from our early termination of
loss-share agreements with the FDIC
Generated industry leading stock
performance, delivering shareholders a 51%
total return in 2016, with a year-end $31.89
share price
Continued share repurchase program,
repurchasing 4.5 million shares ($94 million)
in 2016, or 15% of outstanding shares
Repurchased 51% of shares at a weighted
average price of $20.03, lifetime through 2016
Maintained flexible capital position with $60
million of excess capital at year-end
Increased quarterly dividend 40% to 7 cents
per share
POSITIONED NBH BANK TO
CONTINUE ITS MOMENTUM:
COMPLETED MEASURABLE
EFFICIENCY INITIATIVES:
Consolidated underperforming banking centers
while growing low-cost transaction deposits
Expanded specialty banking, commercial and
mortgage teams by attracting proven leaders in
each of these key businesses
Increased gain on sale of mortgages by nearly
$1 million, or 47% year over year, driven by
higher origination activity and mortgage sale
process enhancements
Capitalized on experienced Special Assets
team to create meaningful returns on acquired
problem assets
Enhanced NBH family of brands through target
campaigns, blogs, and engagement points on
social media and digital marketing channels
Executed enterprise-wide benchmarking and
process improvement programs
Successfully captured savings from telecommunication
and data processing system conversions, resulting in
year-over-year expense reduction of $5.5 million or 48%
Continued steady trend of decreasing expenses
with a decrease of non-interest expense by $22
million in 2016, or 14% from 2015
Reduced problem asset workout expenses while
delivering consistent returns on acquired
problem assets
Consolidated seven banking centers in 2Q 2016,
with another five banking centers to be sold or
consolidated in 2Q 2017, bringing total sales/
consolidations to 17% of the franchise over a
21-month period
A LETTER FROM CHAIRMAN, PRESIDENT AND CEO
TIM LANEY
FELLOW SHAREHOLDERS,
2016 represented a milestone for our success, achieving yet another year of substantial progress as we embarked into our fifth
year of being a publicly traded company. Key accomplishments throughout 2016 included the recruitment of additional talented
bankers across our commercial, mortgage and SBA teams; the consolidation of seven banking centers, creating further network
efficiency; delivering strong loan and deposit growth; and increasing our profitability. More specifically, we delivered a record
of over $1 billion in loan originations and grew average transaction deposits 6% year-over-year. We also increased non-interest
income 87%, driven by increases in bankcard fees, increases in gain on sale of mortgages, and benefits derived from our early
termination of loss-share agreements with the FDIC. Further, we reduced non-interest expense 14% from 2015, and generated a
record $23.1 million of net income and $0.79 earnings per share.
Our ability to deliver these results, as well as execute on other key elements of our strategic plan, translated to a 51% total return
to our shareholders in 2016, with a year-end share price of $31.89. All of these accomplishments have made us stronger today
than at any other time in our short history. More than ever, we are well-positioned to capitalize on our momentum to become a
top-performing community bank.
Since our inception, we have taken a client-focused and common sense approach to banking, providing an alternative to big-box-
banking-as-usual. This approach continues to drive our growth and allows us to earn new client relationships, while deepening
our existing client relationships. We believe our experienced relationship managers and full range of products enable us to serve
clients very effectively and holistically. In 2016, we grew originated loans $387 million, representing an 18% increase from 2015.
Transaction deposits reached 70% of our total deposits in 2016, reflecting our client-driven deposit focus, and an important
driver of our franchise value.
We have maintained a relentless focus on efficiency. Our decision to strategically consolidate banking centers in conjunction
with other expense management initiatives has resulted in significant cost savings. In 2016, we decreased non-interest expense
by $22 million, or 14% year-over-year, contributing to what is now a total reduction of $74 million of annual expense since our
formation. That said, we will continue to make prudent investments where we see opportunity to generate additional revenue
growth and improve client access and experience. Some of these actions will include enhancement of our digital capabilities,
as well as our distribution network and a continued focus on top-talent acquisition.
As we move past the energy-related challenges we faced in 2016, the importance we have placed on prudent risk management
and maintaining a strong credit culture has never been more top of mind. A key tenet of our success is producing strong organic
loan growth that is granular in size and diversified across industry, geography and loan type. Achieving this goal requires a
steadfast adherence to our seasoned credit policy within a framework of safety and soundness that allows for solid growth.
Our $2.7 billion non 310-30 loan portfolio experienced just 10 basis points of net charge-offs in 2016, excluding energy, and
continues to perform exceptionally well, carrying very strong momentum into 2017.
In 2016, we continued to strategically manage our capital. Over the course of the year, we opportunistically used $94 million of
our excess capital to repurchase 4.5 million shares, or 15% of our outstanding shares. We also believe dividends are an important
element of our overall shareholder return strategy. In October, we announced a 40% increase in our quarterly dividend to seven
cents per share, and we will continue to evaluate further increases as our earnings grow. Our excess capital of $60 million at year
end is a source of strength and gives us flexibility to pursue future opportunities.
Our teams at NBH achieved many milestones in 2016, making it a stand-out year for our company, our shareholders and our
communities alike. I sincerely want to thank our associates for their continued dedication and relentless focus on serving our
clients. The caliber of talent we have across all areas of our company gives me great confidence for what lies ahead. I look forward
to our continued success in 2017 and beyond.
SINCERELY,
TIM LANEY
CHAIRMAN, PRESIDENT AND CEO
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, 2016
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)
Non-accelerated filer
(cid:133)(cid:3) (do not check if a smaller reporting company)
Accelerated filer
Smaller Reporting Company
(cid:133)(cid:3)
(cid:133)(cid:3)
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, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $565,000,000 based on the closing sale
price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 21, 2017, NBHC had outstanding 26,609,973 shares of Class A voting common stock with $0.01 par value per share, excluding 496,775 shares of restricted Class
A common stock issued but not yet vested.
Portions of the Registrant’s definitive proxy statement for its 2017 Annual Meeting of Shareholders to be filed within 120 days of December 31, 2016 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
19
30
30
30
30
31
34
41
75
76
126
126
128
128
128
128
128
128
129
130
132
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:
(cid:120) our ability to execute our business strategy, as well as changes in our business strategy or development plans;
(cid:120) business and economic conditions generally and in the financial services industry;
(cid:120) economic, market, operational, liquidity, credit and interest rate risks associated with our business;
(cid:120) effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the
Federal Reserve Board;
(cid:120) changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for
well-capitalized financial institutions;
(cid:120) effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations;
(cid:120) changes in the economy or supply-demand imbalances affecting local real estate values;
(cid:120) changes in consumer spending, borrowings and savings habits;
(cid:120) our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions of
financial institutions on attractive terms, or at all;
(cid:120) our ability to integrate acquisitions or consolidations 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;
(cid:120) our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from
time to time without significant change in our client service or risk to our control environment;
(cid:120) dependence on information technology and telecommunications systems of third party services providers and the
risk of system failures, interruptions or breaches of security, including those that could result in disclosure or
misuse of confidential or proprietary client or other information;
(cid:120) our ability to achieve organic loan and deposit growth and the composition of such growth;
(cid:120) changes in sources and uses of funds, including loans, deposits and borrowings;
(cid:120) increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other
things, lower returns;
3
(cid:120) 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;
(cid:120) the trading price of shares of the Company's stock;
(cid:120) our ability to realize deferred tax assets or the need for a valuation allowance, or the effect of changes in tax laws
on our deferred tax assets;
(cid:120) continued consolidation in the financial services industry;
(cid:120) our ability to maintain or increase market share and control expenses;
(cid:120) 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;
(cid:120) technological changes;
(cid:120) the timely development and acceptance of new products and services and perceived overall value of these products
and services by our clients;
(cid:120) changes in our management personnel and our continued ability to hire and retain qualified personnel;
(cid:120) ability to implement and/or improve operational management and other internal risk controls and processes and
our reporting system and procedures;
(cid:120) regulatory limitations on dividends from our bank subsidiary;
(cid:120) changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant
regulatory and accounting requirements;
(cid:120) 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;
(cid:120) impact of reputational risk on such matters as business generation and retention;
(cid:120) other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the
Securities and Exchange Commission; and
(cid:120) 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 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 91 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 and services. As of December 31, 2016, we had $4.6 billion
in assets, $2.9 billion in loans, $3.9 billion in deposits and $0.5 billion in shareholders’ equity.
The Company was formed through a private offering of our common stock in 2009. As part of our goal of becoming a leading
regional community bank holding company, we are pursuing a strategy of organic growth through strong banking
relationships with small and medium-sized businesses and consumers in our markets, complemented by selective acquisitions
of financial institutions and other complementary businesses. 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, technology and corporate governance
considerations.
Our Acquisitions
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. 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.
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. 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)
Community Banks
Pine River
August 1, 2015
No
No
of Colorado
October 21, 2011
Yes
Yes(1)
Bank of Choice
July 22, 2011
Yes
No
4
$ 130
$ 142
40
$ 1,195
$ 1,228
16
$ 760
$ 950
Primary Market
Colorado
Colorado
Colorado
Bank Midwest
December 10, 2010
No
No
39
$ 2,386
$ 2,426
Greater Kansas City
Region
Hillcrest Bank
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, 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 the third quarter of 2015, three banking centers were consolidated in our
Bank Midwest network. During the second quarter of 2016, seven banking centers were consolidated in our Community Banks of Colorado network.
5
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 Transition to a State-Chartered Bank
On October 9, 2015, we announced the termination of the operating agreement between our bank subsidiary, 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 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.
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 and the fifth largest banking center network in the greater Kansas City MSA ranked by
deposits as of June 30, 2016 (the last date as of which data are available), according to SNL Financial. Other major MSAs in
which we operate include Dallas-Fort Worth-Arlington, Texas and Austin-Round Rock, Texas.
We believe that our established presence positions us well for growth opportunities in our markets. 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) lack of consolidation in the banking sector and corresponding opportunities for add-on
transactions; and (vi) markets sizeable enough to support our long-term organic growth objectives and provide attractive
acquisition opportunities. The table below describes certain key demographic statistics regarding our markets:
Denver, CO
Front Range, CO(3)
Kansas City, MO-KS MSA
U.S.
(cid:3)
# of
Median
Deposits businesses Population Unemployment Population household
(billions)
$ 75.8
103.6
65.1
(thousands)
114.9
182.7
76.0
(millions)
2.9
4.6
2.1
growth(2)
income
13.9% $ 70,249
68,525
13.5%
60,635
5.1%
55,551
4.4%
2.6%
2.6%
3.8%
4.4%
rate(1)
Top 3
competitor
combined
deposit
market share
54%
52%
43%
55%(4)
(1) Unemployment data is as of November 30, 2016.
(2) For the period 2010 through 2016.
(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, 2016, except Deposits and Top 3 Competitor Combined Deposit Market Shares,
which reflects data as of June 30, 2016.
6
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:
(cid:120) Focus on client-centered, relationship-driven banking strategy. Our small business 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 array of loan, deposit and treasury management products and services. Our small
business and commercial bankers 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 business 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, online and mobile banking solutions.
(cid:120) 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 have 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.
(cid:120) Expansion through organic growth and competitive product offerings. We believe that our focus on serving
consumers and small- to medium-sized businesses, coupled with our competitive 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 pursue
opportunities 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.
(cid:120) Continue to strengthen profitability through organic growth and operating efficiencies. We continue to utilize our
comprehensive underwriting and risk management processes under one operating platform while maintaining local
branding, leadership and decision making, which allows us to support growth and realize operating efficiencies
throughout our enterprise. The actions taken to consolidate banking centers in conjunction with other expense
management initiatives have resulted in significant cost savings. We believe that we have the infrastructure in place
to support our future revenue growth without causing non-interest expenses to increase by a corresponding amount.
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, increasing our deposits while
maintaining our cost of funds, implementing additional fee-based business initiatives and further enhancing
operational efficiencies.
(cid:120) Maintain conservative risk profile and sound risk management practices. Strong risk management is an important
element of our operating philosophy. We maintain a conservative risk culture with adherence to mature and seasoned
policies across all areas of the organization. Our risk management approach seeks to identify, assess and mitigate
risk and minimize any resulting losses. We have implemented processes to identify measure, monitor, and report and
analyze the types of risk to which we are subject. We believe our risk management policies establish appropriate
limitations that allow for the prudent oversight of such risks that include, but are not limited to the following: credit,
liquidity, market, operational, legal and compliance, reputational, and strategic and business risk.
7
(cid:120) 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 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 teams, asset portfolios,
specialty commercial finance businesses, and whole banks.
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, small business and consumer clients, who are predominantly located in Colorado, Missouri, Kansas and
Texas. We conduct our banking business through 91 banking centers, with 47 of those located in Colorado, 42 in the greater
Kansas City region and two in Texas. Our distribution network also includes 112 ATMs, fully integrated online banking and
mobile banking 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.
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. We offer a variety of products and services that are focused on the following areas:
Consumer and Small Business Banking
Our consumer and small business bankers focus on knowing their 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.
All of our newly originated consumer loans are on a direct to consumer basis. We offer a variety of consumer and small
business loans, including:
Residential Real Estate Loans—Residential real estate loans consist of loans secured by the primary or secondary residence
of the borrower. These loans consist of closed loans, which are typically amortizing over a 10 to 30-year term. We also offer
open-ended home equity loans, which are loans secured by secondary financing on residential real estate. Our loan-to-value
(LTV) 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. Through our established mortgage banking
business, we aim to originate high-quality loans for customers as part of a full banking relationship. The mortgage loans in
our portfolio that meet investor criteria and pricing may also be sold in to the secondary market to buyers, such as Fannie
Mae and Freddie Mac, and provide an additional source of fee income.
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Consumer Loans—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.
Small Business Loans—Small business loans consist of term loans, line of credit, and real estate secured loans. The terms of
these loans vary by purpose and by type of underlying collateral, if any. Small business loans generally require LTV ratios of
not more than 75 percent. Small business loans also assist in the growth of our deposits because many commercial loan
borrowers establish noninterest-bearing and interest-bearing demand deposit accounts and banking services relationships with
us. Those deposit accounts help us to reduce our overall cost of funds and those banking service relationships provide us with
a source of non-interest income.
Commercial and Specialty Banking
Our commercial bankers focus on small- and medium-sized businesses with an advisory approach that emphasizes
understanding the client’s business and offering a complete suite of loan, deposit and treasury management products and
services. We have invested significantly in our commercial banking capabilities, attracting experienced commercial bankers
from competing institutions in our markets, which have resulted in significant growth in our originated 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, government and non-profit banking,
treasury management and SBA lending. Our commercial relationship managers offer a wide range of commercial loan
products, including:
Commercial and Industrial Loans—We originate commercial and industrial loans and leases, including working capital
loans, equipment loans, structured and asset-based loans, energy loans, agriculture loans, government and non-profit loans,
owner occupied commercial real estate 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. In the case of owner-occupied commercial
real estate loans, we are usually the primary provider of financial services for the company and/or the principals and the
primary source of repayment is through the cash flows generated by the borrowers’ business operations. Owner-occupied
commercial real estate loans are typically secured by a first lien mortgage on real property plus assignments of all leases
related to the properties. Underwriting guidelines generally require borrowers to contribute cash equity that results in an 80%
or less loan-to-value ratio on owner-occupied properties. As of December 31, 2016, substantially all of our commercial and
industrial loans were secured.
Non-Owner Occupied Commercial Real Estate Loans—Non-owner occupied commercial real estate loans, or non-owner
occupied 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 non-owner
occupied CRE loans include loans on multi-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.
Non-owner occupied 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. Underwriting guidelines generally require borrowers to
contribute cash equity that results in a 75% or less loan-to-value ratio.
We seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our primary markets.
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.
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Small Business Administration Loans—We offer a range of U.S. Small Business Administration, or SBA loans, to support
manufacturers, distributors and service providers targeted to small businesses and entrepreneurs seeking growth capital,
working capital, or other capital investments as an SBA Preferred Lender Provider. As a Preferred Lender Provider of the
SBA, we are able to expedite SBA loan approval, closing, and servicing functions through delegated authority to underwrite
and approve loans on behalf of the SBA. We utilize the SBA 7(a) loan, SBA 504 loan, SBA Express loan, and CAP Line loan
programs. In addition to SBA loans, our commercial lending relationship managers also coordinate with associates in
consumer and small business banking to provide personal loans and other services to the owners, managers and employees of
the Bank’s commercial clients.
Lending Activities
Our loan portfolio includes commercial and industrial loans, commercial real estate loans, residential real estate loans, small
business 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 commercial and industrial 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.”
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.
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Other 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.
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. 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, the client
service orientation of our associates and the availability of digital banking products and services. We believe the most
important of these competitive factors that determine our success are our consumer bankers’ focus on knowing their
individual clients in order to best meet their financial needs and our small business 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 array of loan, deposit and treasury management products and services through our banking centers and our digital
banking platform.
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.
Associates
At December 31, 2016, we had 928 full-time associates and 76 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.
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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
As a bank holding company, we are subject to regulation under the Bank Holding Company Act (“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, our bank subsidiary, NBH Bank, N.A., 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.
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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
The Federal Reserve, the FDIC and state bank regulators have broad regulatory, examination and enforcement authority over
bank holding companies and banks, as applicable. 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 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 not 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 such investors and to affiliates of such investors.
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Regulatory Capital Requirements
In General
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. 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 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%. Under recently revised
guidelines, 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.
Further, the federal bank regulatory agencies may, however, set higher capital requirements for an individual bank or when a
bank’s particular circumstances warrant. At this time, the bank regulatory agencies are more inclined to impose higher capital
requirements in order to be considered well-capitalized, and future regulatory change could impose higher capital standards
as a routine matter.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For
example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital
positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
Prompt Corrective Action
The FDI Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured
depository institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of
the prompt corrective action provisions will depend upon how its capital levels compare to various capital measures and
certain other factors, as established by regulation. 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.
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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 doctrine, 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.
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 and a Colorado state-chartered
bank, NBH Bank is subject to Regulation H and limitations under Colorado law with respect to the payment of dividends.
Non-bank subsidiaries are also limited by certain federal and state statutory provisions and regulations covering the amount
of dividends that may be paid in any given year.
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. 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. In addition, as a Delaware corporation, the Company is
subject to certain limitations and restrictions under Delaware corporate law with respect to the payment of dividends and
other distributions.
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.
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, 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, 2016, the Company did not have any outstanding Covered Transactions.
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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. 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.
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. 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.
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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. Failure to comply with these laws and regulations could give
rise to regulatory sanctions, client rescission rights, actions by state and local attorneys general and civil or criminal liability.
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
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. 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.
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Assessments are based 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). NBH Bank may be able to pass part or all of
this cost on to its clients, including in the form of lower interest rates on deposits, or fees to some depositors, depending on
market conditions.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition
is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule,
regulation, order or condition enacted or imposed by the institution’s regulatory agency. If deposit insurance for a banking
business we invest in or acquire were to be terminated, that would have a material adverse effect on that banking business
and potentially on the Company as a whole.
Interstate Banking
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.
The Federal Reserve, OCC, and FDIC jointly issued a final rule, effective October 10, 1977, that adopted uniform regulations
implementing Section 109 of the Riegle-Neal Act. Section 109 prohibits any bank from establishing or acquiring a branch or
branches outside of its home state primarily for the purpose of deposit production. Congress enacted Section 109 to ensure
that interstate branches would not take deposits from a community without the bank reasonably helping to meet the credit
needs of that community.
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.
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Item 1A. RISK FACTORS
Risks Relating to Our Banking Operations
We are still 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 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 acquired 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.
Certain other factors may also make it difficult for investors to evaluate our future prospects and financial and operating
performance, including, among others:
(cid:120) 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;
(cid:120) a portion of our loans and OREO had 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;
(cid:120) 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;
(cid:120) our excess cash reserves and liquid investment securities portfolio, may not be representative of our future cash
position;
(cid:120) 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
(cid:120) our regulatory capital ratios, which currently well exceed regulatory minimum requirements, 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, 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.
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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.
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 resulting in greater charge-offs in future periods, as well as adversely impact mortgage
loan originations and gains on sale of mortgage loans. A decline in commercial real estate values would likewise adversely
affect the value of collateral securing certain commercial loans and result in greater charge-offs in future periods. 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.
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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.
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 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;
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.
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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.
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:
(cid:120) 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;
(cid:120) the scope, relevance and pricing of products and services offered to meet client needs and demands;
(cid:120) the rate at which we introduce new products and services relative to our competitors;
(cid:120) the ability to attract and retain highly qualified associates to operate our business;
(cid:120) the ability to expand our market position;
(cid:120) client satisfaction with our level of service;
(cid:120) the ability to operate our business effectively and efficiently; and
(cid:120) 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.
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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, all of which may make potential
funding sources more difficult to access, less reliable and more expensive. We may not have access to third party funding in
sufficient amounts on favorable terms, or the ability to undertake asset sales or access other sources of liquidity, when
needed, or at all, which could materially and adversely affect us.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are
affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held
by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are
directly affected by many factors, including domestic and international economic and political conditions, broad trends in
business and finance, legislation and regulation affecting the national and international business and financial communities,
monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of
short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of clients and counterparties
and the level and volatility of trading markets. Such factors can impact clients and counterparties of a financial services
institution and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the
interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing
liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at
different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income.
When interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest
rates would reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because
the magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates
would reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and liabilities, loan
and investment securities portfolios and our overall results. Changes in interest rates may also have a significant impact on
any future loan origination revenues. Historically, there has been an inverse correlation between the demand for loans and
interest rates. Loan origination volume and revenues usually decline during periods of rising or high interest rates and
increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the
carrying value of a significant percentage of the assets, both loans and investment securities, on our balance sheet. We may
incur debt in the future and that debt may also be sensitive to interest rates and any increase in interest rates could materially
and adversely affect us. Interest rates are highly sensitive to many factors beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies, particularly the 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.
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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 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, and could
have a material adverse effect on us.
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 via online, mobile and phone. The secure
transmission of confidential information over the internet and other remote channels is a critical element of remote banking.
Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes, ransomware 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 digital banking products and 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 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.
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We also face risks related to cyber-attacks and other security breaches in connection with credit or debit 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.
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:
(cid:120) 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;
(cid:120) scale our technology platform;
(cid:120) integrate our acquisitions and develop consistent policies throughout the various lines of businesses; and
(cid:120) 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:
(cid:120) the effect of the acquisition on competition;
(cid:120) the financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the
bank(s) involved;
(cid:120) the quantity and complexity of previously consummated acquisitions;
(cid:120) the managerial resources of the applicant and the bank(s) involved;
(cid:120) 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
(cid:120) the effectiveness of the applicant in combating money laundering activities.
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Such regulators could deny our application based on the above criteria or other considerations, which would restrict our
growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required
to sell banking centers as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or
may reduce the benefit of any acquisition. In addition, prior to the submission of an application our regulators could
discourage us from pursuing strategic acquisitions or indicate that regulatory approvals may not be granted on terms that
would be acceptable to us, which could have the same effect of restricting our growth or reducing the benefit of any
acquisitions.
The success of future transactions will depend on our ability to successfully identify and consummate acquisitions of financial
services franchises that meet our investment objectives. Because of the intense competition for acquisition opportunities and
the limited number of potential targets, we may not be able to successfully consummate acquisitions on attractive terms.
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.
26
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. Any of the foregoing matters could materially and adversely
affect us.
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.
The key effects of the Dodd-Frank Act on our business are:
(cid:120) changes to regulatory capital requirements;
(cid:120) creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which oversees
systemic risk, and the Consumer Financial Protection Bureau, which develops and enforces rules for bank and non-
bank providers of consumer financial products);
(cid:120) potential limitations on federal preemption;
(cid:120) changes to deposit insurance assessments;
(cid:120) regulation of debit interchange fees we earn;
(cid:120) changes in retail banking regulations, including potential limitations on certain fees we may charge; and
(cid:120) changes in regulation of consumer mortgage loan origination and risk retention.
Many provisions 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 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. Failure to comply with the
requirements could also materially and adversely affect us. Furthermore, additional uncertainties surrounding the Dodd-Frank
Act, its implementation, and enforcement persist as a result of the new presidential administration. 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. 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.
27
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. If current assessments imposed by the FDIC 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. 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.
28
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 engages 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 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.
29
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 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 shareholders in the future.
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, 2016, we
operated 47 banking centers in Colorado, 42 in Kansas and Missouri, and 2 in Texas. Of these banking centers, 19 locations
were leased and 72 were owned.
Item 3. LEGAL PROCEEDINGS.
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently
party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business,
prospects, financial condition, results of operations or liquidity.
Item 4. MINE SAFETY DISCLOSURES.
None.
30
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
2016
2015
Quarter
High
Low
First
Second
Third
Fourth
First
Second
Third
Fourth
$
$
$
$
$
$
$
$
21.40
21.64
24.14
32.28
19.53
21.30
22.04
23.55
$
$
$
$
$
$
$
$
18.41
19.17
19.51
22.69
17.69
18.35
19.20
19.47
$
$
$
$
$
$
$
$
Cash
dividends
0.05
0.05
0.05
0.07
0.05
0.05
0.05
0.05
The close price of our common stock on the NYSE was $33.04 per share on February 21, 2017. The Company had 170
shareholders of record as of February 21, 2017. 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.
During the third quarter of 2016, the Company increased the quarterly dividend to $0.07 per share.
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.” During 2016, the Bank paid dividends of $15.4 million to the holding company.
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 13 for discussion of a permanent capital reduction of
$140.0 million approved in February 2016.
31
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.
e
u
l
a
V
x
e
d
n
I
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
115
110
105
100
95
90
85
09/19/12
Total Return Performance
NBH
KBW Regional Banking Index
Russell 2000 Index
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Index
NBH
KBW Regional Banking Index
Russell 2000 Index
12/19/12
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
12/31/16
172.88
211.10
168.37
32
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2016:
Total number of
shares (or units)
Maximum number
(or approximate dollar
value) of shares (or
Period
October 1 - October 31, 2016
October 1 - October 31, 2016(1)
November 1, 2016 - November 30, 2016(1)
December 1, 2016 - December 31, 2016(1)
December 1, 2016 - December 31, 2016(2)
Total
Total number
of shares (or
units) purchased share (or unit) plans or programs
Average
purchased as part of units) that may yet be
price paid per publicly announced purchased under the
plans or programs (3)
12,562,825
12,562,825
12,562,825
12,562,825
12,562,825
12,562,825
269,062 $
—
—
—
—
269,062 $
23.25
23.70
27.38
30.85
31.89
28.06
269,062 $
24,401
339,838
177,226
297,938
1,108,465 $
(1) These shares represent shares purchased other than through publicly announced plans and were purchased pursuant to
the Company’s stock incentive plans. Pursuant to the plans, 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) These shares represent shares purchased other than through publicly announced plans and were purchased from warrant
holders at the then current market value in satisfaction of warrant exercise prices.
(3) On August 5, 2016, the Company’s Board of Directors authorized the repurchase of up to an additional $50.0 million of
common stock. Under this authorization, $12,562,825 remained available for purchase at December 31, 2016.
Securities Authorized for Issuance under Equity Compensation Plans
During the second quarter of 2014, shareholders approved the 2014 Omnibus Incentive Plan (the “2014 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, 2016, the aggregate number of Company common stock
available for issuance under the 2014 Plan was 5,588,905 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, 2016, the aggregate number of Company
common stock available for issuance under the ESPP was 366,337 shares.
See note 15 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 Weighted-average
issued upon exercise of
outstanding options,
warrants and rights
Number of
securities remaining
available for future
exercise price of
outstanding options,
issuance under equity
warrants and rights compensation plans
5,955,242
-
5,955,242
19.81
-
19.81
2,185,922 $
-
2,185,922 $
33
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth summary selected historical financial information as of and for the five years ended December
31, 2016. The summary selected historical consolidated financial information set forth below is derived from our audited
consolidated financial statements.
The summary unaudited 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 Statement of Financial Condition
Data:
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,
2016
2015
2014
2013
2012
$
152,736 $
166,092 $
256,979 $
189,460 $
769,180
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
1,157,246
427,503
22,529
2,587,673
(27,119)
2,560,554
13,292
—
20,814
103,103
72,059
140,716
884,232
332,505
14,949
2,860,921
(29,174)
2,831,747
24,187
—
15,662
95,671
66,579
154,778
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
$ 4,573,046 $ 4,683,908 $ 4,819,646 $ 4,914,115 $ 5,410,775
$ 3,868,649 $ 3,840,677 $ 3,766,188 $ 3,838,309 $ 4,200,719
119,497
4,320,216
1,090,559
$ 4,573,046 $ 4,683,908 $ 4,819,646 $ 4,914,115 $ 5,410,775
178,014
4,016,323
897,792
168,208
4,036,857
536,189
258,883
4,025,071
794,575
225,687
4,066,364
617,544
34
Consolidated Statement of Operations
Data:
Interest income
Interest expense
Net interest income
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 (loss)
Share Information(2):
Earnings (loss) per share, basic
Earnings (loss) per share, diluted
Dividends paid
Book value per share
Tangible common book value per share(3)
Tangible common equity to tangible assets(3)
Weighted average common shares
outstanding, basic
Weighted average common shares
outstanding, diluted
Common shares outstanding
December 31, December 31, December 31, December 31, December 31,
2016
2015
2014
2013
2012
As of and for the years ended
$
160,448 $
14,808
145,640
23,651
171,407 $
14,462
156,945
12,444
184,662 $
14,413
170,249
6,209
195,475 $
16,514
178,961
4,296
233,485
29,234
204,251
27,995
121,989
40,027
136,009
26,007
2,947
23,060 $
144,501
21,448
158,024
7,925
3,044
4,881 $
164,040
(1,696)
150,003
12,341
3,165
9,176 $
174,665
20,177
183,965
10,877
3,950
6,927 $
176,256
37,379
209,598
4,037
4,580
(543)
0.81 $
0.79 $
0.22 $
20.32 $
18.15 $
0.14 $
0.14 $
0.20 $
20.34 $
18.22 $
0.22 $
0.22 $
0.20 $
20.43 $
18.63 $
0.14 $
0.14 $
0.20 $
19.99 $
18.27 $
10.61%
11.98%
15.25%
16.97%
(0.01)
(0.01)
0.05
20.84
19.23
18.89%
$
$
$
$
$
$
28,313,061
34,349,996
42,404,609
50,790,410
52,214,175
29,091,343
26,386,583
34,363,487
30,358,509
42,421,014
38,884,953
50,824,422
44,918,336
52,214,175
52,327,672
(1) Total loans are net of unearned discounts and deferred fees and costs.
(2) Per share information is calculated based on the aggregate number of our shares of Class A common stock and Class B
non-voting common stock outstanding.
(3) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures.
Tangible book value per share is computed as total shareholders’ equity less goodwill (adjusted for deferred taxes) and
other intangible assets, net, divided by common shares outstanding at the balance sheet date. For purposes of
computing tangible common equity to tangible assets, tangible common equity is calculated as common shareholders’
equity less goodwill (adjusted for deferred taxes) and other intangible assets, net, and tangible assets is calculated as
total assets less goodwill (adjusted for deferred taxes) and other intangible assets, net. We believe that the most directly
comparable GAAP financial measures are book value per share and total shareholders’ equity to total assets. See the
reconciliation under “About Non-GAAP Financial Measures.”
35
Key Ratios
Return on average assets
Return on average tangible assets(1)
Return on average tangible assets before provision
for loan losses and taxes FTE(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 FTE(1)(3)
Interest rate spread(4)
Yield on earning assets(2)
Yield on earning assets FTE(1)(2)
Cost of interest bearing liabilities(2)
Cost of deposits
Non-interest expense to average assets
Efficiency ratio FTE(1)(5)
Dividend Payout Ratio
Asset Quality Data(6)(7)(8)
Non-performing loans to total loans
Non-performing assets to total loans and OREO
Allowance for loan losses to total loans
Allowance for loan losses to non-performing
loans
Net charge-offs to average loans
December 31, December 31, December 31, December 31,
2016
2015
2014
2013
December 31,
2012
As of and for the years ended
0.50%
0.57%
1.29%
3.95%
5.04%
133.44%
74.58%
12.55%
21.89%
3.39%
3.49%
3.38%
3.74%
3.84%
0.46%
0.36%
2.92%
68.79%
52.63%
0.10%
0.17%
0.60%
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%
0.52%
1.07%
1.58%
137.36%
57.55%
17.68%
19.45%
3.83%
3.85%
3.72%
4.15%
4.17%
0.45%
0.37%
3.08%
85.82%
90.91%
0.13%
0.20%
0.40%
0.67%
1.06%
137.05%
48.46%
20.07%
17.59%
3.81%
3.81%
3.68%
4.16%
4.16%
0.48%
0.41%
3.55%
89.70%
142.86%
1.07%
1.61%
1.02%
0.99%
1.81%
1.05%
0.50%
1.86%
0.81%
1.31%
4.97%
0.68%
94.98%
0.80%
105.74%
0.12%
162.89%
0.05%
51.43%
0.41%
(0.01)%
0.05%
0.66%
(0.05)%
0.27%
134.44%
43.76%
18.91%
16.14%
3.98%
3.98%
3.81%
4.55%
4.55%
0.74%
0.64%
3.62%
84.53%
NM
1.26%
6.19%
0.84%
66.53%
1.20%
(1) Ratio represents non-GAAP financial measure. See non-GAAP reconciliation below.
(2) Interest earning assets include assets that earn interest/accretion or dividends. 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) The efficiency ratio represents non-interest expense, less intangible asset amortization, as a percentage of net interest
income on a FTE basis plus non-interest income.
(6) Non-performing loans were redefined during the third quarter of 2014 to only include non-accrual loans and
restructured loans on non-accrual, and exclude any loans accounted for under ASC 310-30 in which the pool is still
performing. All previous periods have been restated.
(7) Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
(8) Total loans are net of unearned discounts and fees.
NM Not meaningful.
36
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible assets,” “return on average tangible assets,” “return
on average tangible assets before provision for loan losses and taxes,” “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 (FTE)" 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 FTE 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 should not be considered a substitute for financial information presented in accordance
with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. 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.
37
A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows.
December 31, December 31, December 31, December 31, December 31,
Total shareholders' equity
Less: goodwill and intangible assets, net
Add: deferred tax liability related to goodwill
Tangible common equity (non-GAAP)
$
$
2016
536,189 $
(66,580)
9,323
478,932 $
2015
617,544 $
(72,060)
7,772
553,256 $
2014
794,575 $
(76,513)
6,222
724,284 $
2012
2013
897,792 $ 1,090,559
(87,205)
(81,859)
3,121
4,671
820,604 $ 1,006,475
Total assets
Less: goodwill and intangible assets, net
Add: deferred tax liability related to goodwill
Tangible assets (non-GAAP)
$ 4,573,046 $ 4,683,908 $ 4,819,646 $ 4,914,115 $ 5,410,775
(87,205)
3,121
$ 4,515,789 $ 4,619,620 $ 4,749,355 $ 4,836,927 $ 5,326,691
(72,060)
7,772
(76,513)
6,222
(66,580)
9,323
(81,859)
4,671
Tangible common equity to tangible assets
calculations:
Total shareholders' equity to total assets
Less: impact of goodwill and intangible
11.72%
13.18%
16.49%
18.27%
20.16%
assets, net
(1.11)%
(1.20)%
(1.24)%
(1.30)%
(1.27)%
Tangible common equity to tangible assets
(non-GAAP)
Tangible common book value per share
calculations:
Tangible common equity (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per share (non-
10.61%
11.98%
15.25%
16.97%
18.89%
$
478,932 $
553,256 $
724,284 $
26,386,583
30,358,509
38,884,953
820,604 $ 1,006,475
52,327,672
44,918,336
GAAP)
$
18.15 $
18.22 $
18.63 $
18.27 $
19.23
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)
$
478,932 $
553,256 $
724,284 $
820,604 $ 1,006,475
1,762
(95)
(5,839)
6,756
(40,573)
480,694
26,386,583
553,161
30,358,509
718,445
38,884,953
827,360
44,918,336
965,902
52,327,672
$
18.22 $
18.22 $
18.48 $
18.42 $
18.46
38
Return on Average Tangible Assets and Return on Average Tangible Equity
Net income
Add: impact of core deposit intangible
amortization expense, after tax
Net income adjusted for impact of core
deposit intangible amortization expense,
after tax
Income before income taxes FTE (non-
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2016
23,060 $
$
2015
2014
2013
2012
4,881 $
9,176 $
6,927 $
(543)
3,343
3,295
3,260
3,235
3,233
$
26,403 $
8,176 $
12,436 $
10,162 $
2,690
GAAP)
$
30,088 $
10,620 $
13,271 $
10,877 $
4,037
Add: impact of core deposit intangible
amortization expense, before tax
Add: provision for loan losses
FTE income adjusted for impact of core
deposit intangible amortization expense and
provision (non-GAAP)
Average assets
Less: average goodwill and intangible assets,
5,480
23,651
5,401
12,444
5,344
6,209
5,346
4,296
5,344
27,995
$
59,219 $
28,465 $
24,824 $
20,519 $
37,376
$ 4,651,953 $ 4,831,070 $ 4,867,929 $ 5,175,210 $ 5,786,762
net of deferred tax asset related to goodwill
Average tangible assets (non-GAAP)
Average shareholders' equity
Less: average goodwill and intangible assets,
(59,977)
(86,841)
$ 4,591,976 $ 4,764,521 $ 4,794,855 $ 5,095,246 $ 5,699,921
(79,964)
(73,074)
(66,549)
$
583,686 $
701,476 $
860,691 $ 1,038,753 $ 1,093,998
net of deferred tax asset related to goodwill
(59,977)
(66,549)
(73,074)
(79,964)
(86,841)
Average tangible common equity (non-
GAAP)
Return on average assets
Return on average tangible assets (non-
GAAP)
Return on average tangible assets before
provision for loan losses and taxes FTE
(non-GAAP)
Return on average equity
Return on average tangible common equity
(non-GAAP)
$
523,709 $
634,927 $
787,617 $
958,789 $ 1,007,157
0.50%
0.10%
0.19%
0.13%
(0.01)%
0.57%
0.17%
0.26%
0.20%
0.05%
1.29%
3.95%
0.60%
0.70%
0.52%
1.07%
0.40%
0.67%
0.66%
(0.05)%
5.04%
1.29%
1.58%
1.06%
0.27%
39
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
Interest income
Add: impact of taxable equivalent adjustment
Interest income FTE (non-GAAP)
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2014
184,662 $
930
185,592 $
2015
171,407 $
2,695
174,102 $
2016
160,448 $
4,081
164,529 $
2012
233,485
—
233,485
2013
195,475 $
195,475 $
—
$
$
Net interest income
Add: impact of taxable equivalent adjustment
Net interest income FTE (non-GAAP)
$
$
145,640 $
4,081
149,721 $
156,945 $
2,695
159,640 $
170,249 $
930
171,179 $
178,961 $
—
178,961 $
204,251
—
204,251
Average earning assets
Yield on earning assets
Yield on earning assets FTE (non-GAAP)
Net interest margin
Net interest margin FTE (non-GAAP)
$ 4,290,171 $ 4,439,139 $ 4,446,903 $ 4,698,552 $ 5,130,836
4.55%
4.55%
3.98%
3.98%
4.16%
4.16%
3.81%
3.81%
4.15%
4.17%
3.83%
3.85%
3.75%
3.84%
3.39%
3.49%
3.86%
3.92%
3.54%
3.60%
40
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following management's discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes as of and for the years ended December 31, 2016,
2015, and 2014, 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
We believe that our established presence in the attractive markets of Colorado and the greater Kansas City area 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. As of December 31, 2016, we had $4.6 billion in assets, $2.9
billion in loans, $3.9 billion in deposits and $0.5 billion in equity.
Operating Highlights and Key Challenges
Our operations resulted in the following highlights as of and for the year ended December 31, 2016 (except as noted):
Strategic execution
(cid:120) Net income for 2016 was $23.1 million, or $0.79 per diluted share, compared to net income of $4.9 million, or $0.14
per diluted share for 2015. The return on average tangible assets was 0.57% for year ended 2016 compared to 0.17%
for the year ended 2015. The return on average tangible equity was 5.04% for the year ended 2016 compared to
1.29% for the year ended 2015.
(cid:120) Loan originations totaled a record of over $1.0 billion during the past twelve months, resulting in originated loan
outstandings growth of 17.8%. Net charge-offs on non 310-30 loans totaled 0.85% for the full year. Excluding
energy sector net charge-offs, the 2016 net charge-offs on non 310-30 loans totaled 0.10%, compared to 0.12% in
2015.
(cid:120) Maintained a conservatively structured loan portfolio represented by diverse industries and conservative
concentrations.
(cid:120) Opportunistic capital management – repurchased 4.5 million shares during 2016, or 14.8%, at a weighted average
price of $20.78. Since early 2013, we have repurchased 50.9% of our shares outstanding, at a weighted average price
of $20.03.
(cid:120) Maintained focus on expenses and enhancing operational efficiencies as evidenced by 2016 non-interest expenses
decreasing $22.0 million, or 13.9%, from the prior year.
41
Loan portfolio
(cid:120) Total loans ended 2016 at $2.9 billion, a 10.6% increase from the prior year.
(cid:120) Organic loan originations totaled over $1.0 billion, representing a 7.3% increase from the prior year.
(cid:120) Originated loans at December 31, 2016 totaled $2.6 billion representing an increase of $387.4 million, or 17.8%,
from the prior year.
(cid:120) Successfully exited $57.0 million, or 28.1%, of the remaining acquired 310-30 loan portfolio during 2016.
(cid:120) Maintained a diverse loan portfolio with no single industry sector comprising more than 15% of total loan exposure.
Credit quality
Non 310-30 loans
(cid:120) Net charge-offs on non 310-30 loans totaled 0.85% for the full year. Excluding energy sector net charge-offs, the
2016 net charge-offs on non 310-30 loans totaled 0.10%, compared to 0.12% in 2015.
(cid:120) Credit quality remained stable, as 90 days past due and non-accruing loans were 1.13% of total loans at December
31, 2016 compared to 1.08% at December 31, 2015. Non performing non 310-30 assets to total non 310-30 loans
and OREO declined to 1.61% from 1.81% in the prior year.
ASC 310-30 loans
(cid:120) Added a net $9.5 million to accretable yield for the acquired loans accounted for under ASC 310-30.
Client deposit funded balance sheet
(cid:120) Average transaction deposits totaled $2.7 billion representing an increase of $142.7 million, or 5.6%, from the prior
year.
(cid:120) Our relationship banking model drove solid growth in average demand deposits, adding $36.5 million, or 4.7%, from
the prior year.
(cid:120) Higher-cost average time deposits decreased $103.6 million, or 8.1%, from the prior year.
(cid:120) The mix of transaction deposits to total deposits improved to 69.7% at December 31, 2016 from 68.9% in the prior
year.
(cid:120) The average cost of deposits totaled 0.36%, consistent with the prior year.
Revenues
(cid:120) Fully taxable equivalent net interest income totaled $149.7 million, representing a decrease of $9.9 million, or 6.2%,
from 2015. Lower levels of higher-yielding 310-30 loans and investment portfolio paydowns decreased interest
income by $22.9 million and were partially offset by a $13.5 million increase in non 310-30 interest income from
new loan originations.
(cid:120) The continued resolution of the higher-yielding acquired loan portfolio and lower rates on the originated portfolio
led to a 0.11% narrowing of the fully taxable equivalent net interest margin to 3.49% from 3.60%.
(cid:120) Non-interest income totaled $40.0 million during 2016, compared to $21.4 million during 2015, increasing $18.6
million. Excluding the net $14.5 million of negative FDIC-related income and bargain purchase gain in the prior
year, non-interest income increased $4.1 million, or 11.3%.
(cid:82) Bank card fees increased $0.5 million on the strength of higher interchange activity, while gain on sales of
mortgages, net increased $0.9 million on a higher level of originations. Service charges decreased $0.9 million due
to lower instances of overdrafts and OREO-related income decreased $0.1 million.
(cid:82) Other non-interest income increased $3.4 million primarily from a $1.8 million gain on sale of a building, net
swap related income increase of $0.7 million and a $0.6 million increase in gain on recoveries of acquired loans.
42
Expenses
(cid:120) Non-interest expense totaled $136.0 million during 2016, representing a decrease of $22.0 million, or 13.9%. The
decrease was partially due to lower salaries and benefits of $3.3 million, lower occupancy and equipment of $1.6
million and lower professional fees of $1.0 million. Telecommunications and data processing expense decreased
$5.5 million, or 48.1%, driven by the core system conversion completed in the fourth quarter of 2015.
(cid:120) Problem asset workout expenses and gain on sale of OREO improved a combined $4.9 million. The decrease was
driven by higher year-over-year OREO gains of $1.6 million and lower problem asset workout expenses of $3.3
million as we reduced our acquired problem loan portfolio.
Strong capital position
(cid:120) Capital ratios are strong as our capital position remains well in excess of federal bank regulatory thresholds. As of
December 31, 2016, our consolidated tier 1 leverage ratio was 10.4% and our consolidated tier 1 risk-based capital
and common equity tier 1 risk-based capital ratios were both 14.2%.
(cid:120) 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 $0.93 after-tax to our tangible book value per share as of December 31,
2016, resulting in a tangible common book value per share of $19.08.
(cid:120) During 2016, we repurchased 4.5 million shares, or 14.8% of outstanding shares, at a weighted average price of
$20.78 per share. Since early 2013, we have repurchased 26.6 million shares, or 50.9% of then outstanding shares, at
an attractive weighted average price of $20.03 per share.
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 and deposits, 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 2016. 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 recovery 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 began a steep decline in November 2014 and have remained depressed throughout 2016. While there have
been job losses related to the Energy sector, employment rates and job creation have trended favorably as other industry
sectors have offset declines in Energy. Nevertheless, the direct impact on the Energy sector has been profound and we have
experienced credit deterioration and credit losses in our Energy loan portfolio. Energy loans comprised 3.2% of our total
loans and prolonged or further pricing pressure on oil and gas could lead to additional credit stress in our energy portfolio.
Our originated loan portfolio at December 31, 2016 totaled $2.6 billion, representing an increase of $387.4 million, or 17.8%,
compared to December 31, 2015, due to over $1.0 billion in 2016 loan originations, partially offset by loan paydowns,
particularly in our acquired loan portfolio of $57.0 million, or 28.1%, compared to the prior year. 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 2016, limiting the yields
we have been able to obtain on originated loans. During 2016, our weighted average rate on loan originations was 3.70%
(fully taxable equivalent), which is lower than the 2015 weighted average yield of our total loan portfolio of 5.71% (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.
43
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.
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 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, 2016.
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 into pools based on purpose and/or type of loan, geography and risk rating,
and take into account the sources of repayment and collateral. 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 the respective 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 cannot 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. In addition,
a pool will be accounted for on a cash basis to the extent the remaining discount on the pool is equal its unpaid principal
balance.
44
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 respective 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.
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 $4.6 billion at December 31, 2016 compared to $4.7 billion at December 31, 2015. During the year ended
2016, the decrease from the investment securities portfolio and acquired 310-30 loans was used to fund loan growth. Total
loans were $2.9 billion at December 31, 2016, and grew $273.2 million, or 10.6% from December 31, 2015. Originated loans
totaled $2.6 billion and increased $387.4 million, or 17.8%, during 2016. We originated over $1.0 billion of loans during
2016, which grew the balances in our non 310-30 portfolio $330.2 million year-over-year, or 13.8%. The acquired 310-30
loan portfolio declined $57.0 million, or 28.1%, from December 31, 2015, as a result of the continued successful workout
efforts that have been made on our existing acquired problem loans. OREO decreased $5.2 million or 24.8%, as we continue
to resolve problem assets. Lower cost demand, savings, and money market ("transaction") deposits increased $49.8 million,
or 1.9%, while time deposits decreased $21.8 million, or 1.8%, as we continued to focus on developing long-term banking
relationships with clients.
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 310-30 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 non 310-30 portfolio $502.1 million year-over-year, or 26.7%.
The acquired 310-30 loan portfolio declined $76.8 million, or 27.5%, from December 31, 2014, as a result of the continued
successful workout efforts that have been made on our existing 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 long-
term banking relationships.
45
Investment Securities
Available-for-sale
Total investment securities available-for-sale were $0.9 billion at December 31, 2016, compared to $1.2 billion at December
31, 2015, a decrease of $273.0 billion, or 23.6%. During 2016, maturities and pay downs of available-for-sale securities
totaled $275.5 million. Purchases of available-for-sale securities during 2016 totaled $4.9 million.
Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated:
December 31, 2016
December 31, 2015
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
portfolio
yield
cost
Fair
value
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
Municipal securities
Other securities
Total investment securities available-for-
$ 223,781 $ 227,160
25.8%
2.31% $
305,773 $
310,978
26.8%
2.24%
666,616
3,921
419
652,739
3,914
419
73.8%
0.4%
0.0%
1.71%
3.34%
0.00%
861,321
306
419
845,543
306
419
73.1%
0.0%
0.1%
1.74%
0.00%
0.00%
sale
$ 894,737 $ 884,232
100.0%
1.86% $ 1,167,819 $ 1,157,246
100.0%
1.87%
As of December 31, 2016 and 2015, generally 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, 2016 and 2015, adjustable rate securities comprised 6.7% and 7.3%, 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 2.0% per annum and 2.1% per annum at December 31, 2016 and
2015, respectively.
The available-for-sale investment portfolio included $16.5 million and $19.9 million of gross unrealized losses at December
31, 2016 and 2015, respectively, which were partially offset by $6.0 million and $9.4 million of gross unrealized gains,
respectively. In addition to the U.S. Government agency or sponsored enterprise backings of our MBS portfolio, we believe
any unrecognized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with
unrealized losses were other-than-temporarily-impaired.
Held-to-maturity
At December 31, 2016, we held $332.5 million of held-to-maturity investment securities, compared to $427.5 million at
December 31, 2015, a decrease of $95.0 million, or 22.2%. The Company did not purchase any held-to-maturity securities
during 2016.
46
Held-to-maturity investment securities are summarized as follows as of the date 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
Total investment securities held-to-
December 31, 2016
December 31, 2015
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
portfolio
yield
cost
Fair
value
Weighted
Percent of average
portfolio
yield
$ 263,411 $ 264,862
79.2%
3.24% $ 340,131 $ 342,812
79.6%
3.24%
69,094
67,711
20.8%
1.68%
87,372
85,773
20.4%
1.69%
maturity
$ 332,505 $ 332,573
100.0%
2.91% $ 427,503
$ 428,585
100.0%
2.92%
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 $332.6 million and $428.6 million, at December 31, 2016 and
2015, respectively, and included $0.1 million and $1.1 million of net unrealized gains for the respective periods.
Loans Overview
At December 31, 2016, 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. 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.
47
The table below shows the loan portfolio composition and the breakout of the portfolio between ASC 310-30 loans and non
310-30 loans at the respective dates:
December 31, 2016
December 31, 2015
2016 vs 2015
% Change
Loans excluded from ASC 310-30:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans excluded from ASC 310-30
Loans accounted for under ASC 310-30:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
$
1,074,696 $
221,544
134,637
90,273
1,521,150
437,642
728,361
27,916
2,715,069
39,280
89,150
16,524
898
145,852
2,860,921 $
892,889
184,619
145,558
146,880
1,369,946
321,712
662,550
30,635
2,384,843
57,474
121,173
21,452
2,731
202,830
2,587,673
20.4%
20.0%
(7.5)%
(38.5)%
11.0%
36.0%
9.9%
(8.9)%
13.8%
(31.7)%
(26.4)%
(23.0)%
(67.1)%
(28.1)%
10.6%
Total loans accounted for under ASC 310-30
Total loans
$
Our loan portfolio totaled $2.9 billion at December 31, 2016, representing an increase of $273.2 million, or 10.6%, year-over-
year on the strength of over $1.0 billion in loan originations between the two periods. The strong originations were the result
of continued market penetration. Originated loans outstanding totaled $2.6 billion representing an increase of $387.4 million,
or 17.8%, year-over-year, led by an 11.0% increase in total commercial loans. The acquired 310-30 loan portfolio declined
$57.0 million, or 28.1%, from December 31, 2015 as a result of the continued successful workout efforts that have been made
on exiting acquired problem loans. At December 31, 2016, $14.4 million of non 310-30 loans were held-for-sale, most of
which were in the residential real estate segment.
We have successfully generated new relationships with small to medium-sized businesses and individuals, experiencing
particularly strong loan growth in our commercial portfolio, which at December 31, 2016, was comprised of diverse industry
segments. These segments included public administration-related loans of $327.7 million, finance and insurance related loans
of $196.9 million, agriculture loans of $144.0 million, energy-related loans of $90.3 million, and manufacturing-related loans
of $84.3 million, and a variety of smaller subcategories of commercial and industrial loans.
Included in our commercial loans are energy-related loans that comprised 19.2% of the Company’s risk based capital and
3.2% of total loans. The average balance per client in the energy sector was $3.8 million at December 31, 2016. Energy
midstream (loans to companies that engage in consolidation, storage, and transportation of oil and gas), energy production
(loans to companies engaged in exploration and production), and energy services (loans to companies that provide products
and services to oil/gas companies), made up 47.9%, 36.3%, and 15.8%, respectively, of the total energy related portfolio at
December 31, 2016. Unfunded commitments to energy clients totaled $96.1 million at December 31, 2016, including $63.8
million to production clients, $29.0 million to midstream clients and $3.3 million to services clients. We may not be
contractually required to fund certain amounts depending on the individual circumstances of each client. Energy prices
continued to be depressed through the fourth quarter of 2016, which may result in continued stress on our energy clients and
the credit quality of our energy loan portfolio.
48
Loans in the midstream subsector totaled $43.2 million, with an average balance per client of $8.6 million. One midstream
client rated special mention at December 31, 2015, was placed on non-accrual during the first quarter of 2016, and remained
on non-accrual with a loan balance of $3.0 million at December 31, 2016. Loans in the production subsector totaled $32.8
million of the energy loan balances at December 31, 2016, with an average balance per client of $2.7 million. We lend only
against proven reserves of our production clients and on a senior secured basis. One production client was rated substandard
at December 31, 2015, was placed on non-accrual during the first quarter of 2016 and remained on non-accrual with a loan
balance of $6.5 million at December 31, 2016. Loans in the services subsector totaled $14.3 million with an average balance
per client of $2.0 million. We identified two loans within the energy services sector that were placed on non-accrual in the
third quarter of 2015. Both loans were resolved and charged-off during 2016. One energy services client with a loan balance
of $3.2 million as of December 31, 2016, was placed on non-accrual during the third quarter of 2016 and remained on non-
accrual at December 31, 2016.
At December 31, 2016, our non owner-occupied commercial real estate totaled $526.8 million and were 112.0% of the
Company’s risk based capital, or 18.4%, of total loans, and no specific property type comprised more than 4.5% of total
loans. Multi-family loans totaled $25.0 million, or less than 1.0% of total loans as of December 31, 2016. Agriculture loans
totaled $134.6 million and were 28.6% of the Company’s risk based capital and 4.7% of total loans.
The table below shows the geographic breakout of our loan portfolio at December 31, 2016 and 2015, based on the domicile
of the borrower or, in the case of collateral-dependent loans, the geographical location of the collateral:
Colorado
Missouri
Texas
Kansas
California
Other
Total
December 31, 2016
December 31, 2015
Loan balance
Percent of
loan portfolio
Loan balance
$
$
1,188,155
595,964
296,539
245,059
90,643
444,561
2,860,921
41.5%
20.8%
10.4%
8.6%
3.2%
15.5%
100.0%
$
$
1,120,806
651,386
274,012
198,374
53,313
289,782
2,587,673
Percent of
loan portfolio
43.3%
25.2%
10.6%
7.7%
2.1%
11.1%
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. Loan originations totaled a record $1.0 billion over the past twelve
months, resulting in originated loan outstanding growth of 17.8% over December 31, 2015. Originations are defined as
closed end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this
more conservative definition of originations to better approximate the impact of originations on loans outstanding and
ultimately net income. The following table represents new loan originations during 2016 and 2015:
Fourth quarter Third quarter Second quarter First quarter
2016
2016
2016
2016
Total
2016
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
109,670 $
18,606
18,480
4,433
151,189
30,227
89,968
3,566
92,433
19,091
9,589
(1,251)
119,862
54,456
102,703
4,995
274,950 $ 282,016
$
$
49
142,179 $
17,883
18,072
(17,328)
160,806
89,109
63,815
3,158
403,643
59,361 $
65,979
10,399
56,516
10,375
(28,130)
(13,984)
498,008
66,151
218,668
44,876
306,208
49,722
14,390
2,671
316,888 $ 163,420 $ 1,037,274
Fourth quarter Third quarter Second quarter First quarter
2015
2015
2015
2015
Total
2015
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
122,664 $ 134,189 $
13,395
24,194
1,075
161,328
23,260
50,387
3,086
12,095
11,295
17,245
174,824
36,480
36,808
5,616
$
238,061 $ 253,728 $
The tables below show the contractual maturities of our loans for the dates indicated:
17,566
19,019
11,667
183,906
38,113
44,699
4,669
135,654 $ 123,829 $ 516,336
55,834
58,113
35,278
665,561
119,751
164,936
16,618
271,387 $ 203,690 $ 966,866
12,778
3,605
5,291
145,503
21,898
33,042
3,247
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
December 31, 2016
68,485 $
18,887
22,146
18,840
128,358
126,784
9,554
5,529
270,225 $
455,444 $
92,739
92,269
71,433
711,885
279,135
35,506
18,164
1,044,690 $
559,421 $
131,434
29,332
—
720,187
120,873
699,825
5,121
1,546,006 $
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
December 31, 2015
68,678 $
17,772
40,982
17,914
145,346
95,100
10,681
9,469
260,596 $
452,896 $
77,673
80,268
126,919
737,756
269,582
33,438
17,820
1,058,596 $
384,323 $
116,889
41,060
2,046
544,318
78,204
639,883
6,077
1,268,482 $
$
$
$
$
Total
1,083,350
243,060
143,747
90,273
1,560,430
526,792
744,885
28,814
2,860,921
Total
905,896
212,334
162,310
146,879
1,427,419
442,886
684,002
33,366
2,587,673
50
The stated interest rate (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:
Commercial
Commercial and industrial(1)
Owner occupied commercial real
estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner
occupied
Residential real estate
Consumer
Total loans with > 1 year maturity
Commercial
Commercial and industrial(1)
Owner occupied commercial real
estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner
occupied
Residential real estate
Consumer
Total loans with > 1 year maturity
Fixed
December 31, 2016
Variable
Total
Balance
Weighted
average rate
Balance
Weighted
average rate
Balance
Weighted
average rate
$
544,464
3.25% $
464,713
3.80% $ 1,009,177
3.50%
114,513
41,373
7,174
707,524
4.13%
4.62%
0.93%
3.46%
92,535
72,140
64,259
693,647
4.32%
3.68%
3.60%
3.84%
207,048
113,513
71,433
1,401,171
136,965
402,616
19,127
$ 1,266,232
221,527
4.51%
316,784
3.37%
4.49%
3,395
3.56% $ 1,235,353
358,492
3.65%
719,400
3.73%
4.06%
22,522
3.78% $ 2,501,585
4.41%
4.02%
3.05%
3.65%
3.98%
3.53%
4.42%
3.67%
Fixed
December 31, 2015
Variable
Total
Balance
Weighted
average rate
Balance
Weighted
average rate
Balance
Weighted
average rate
$
449,444
3.33% $
379,904
3.78% $
829,348
3.54%
85,036
49,261
3,735
587,476
4.43%
4.69%
3.93%
3.61%
88,090
56,076
125,230
649,300
4.04%
3.73%
2.99%
3.66%
173,126
105,337
128,965
1,236,776
137,124
359,657
17,822
$ 1,102,079
162,781
4.56%
294,051
3.50%
4.68%
3,652
3.71% $ 1,109,784
299,905
3.43%
653,708
3.73%
4.10%
21,474
3.65% $ 2,211,863
4.23%
4.18%
3.02%
3.63%
3.95%
3.61%
4.58%
3.68%
(1) Included in commercial fixed rate loans are loans totaling $313,000 and $273,346 as of December 31, 2016 and 2015,
respectively, that have been swapped to variable rates at current market pricing. Included in the commercial segment
are tax exempt loans totaling $384,641 and $347,637 with a weighted average rate of 3.01% and 3.18% at December
31, 2016 and 2015, respectively.
Accretable Yield
At December 31, 2016 and 2015, the accretable yield balance was $60.5 million and $84.2 million, respectively. We re-
measured the expected cash flows quarterly for all 27 remaining loan pools 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 $9.5 million and $18.0
million reclassification from non-accretable difference to accretable yield during 2016 and 2015, respectively.
51
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
Asset Quality
December 31, 2016 December 31, 2015
84,194
$
5,008
89,202
60,476
3,236
63,712
$
$
$
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 $500,000, 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.
52
In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan
agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its
original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to
borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered “troubled debt
restructurings” or "TDRs" in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. Under this guidance,
modifications to loans that fall within the scope of ASC 310-30 are not considered troubled debt restructurings, regardless of
otherwise meeting the definition of a troubled debt restructuring. Assets that have been foreclosed on or acquired through
deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the lower of the related loan balance or the
fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ALL and any
subsequent declines in carrying value charged to impairments on OREO.
Non-performing Assets
Non-performing assets consist of 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 non-accrual loans performed in
accordance with their original contract terms during 2016, 2015 and 2014, was $2.6 million, $1.4 million and $1.2 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.
All loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2016, 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.
53
The following table sets forth the non-performing assets as of the dates presented:
December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013 December 31, 2012
$
1,160 $
942 $
221 $
15,572 $
1,547
Non-accrual loans:
Commercial:
Commercial and industrial
Owner occupied commercial
real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-
owner occupied
Residential real estate
Consumer
Total non-accrual loans
Restructured loans on non-accrual:
Commercial:
Commercial and industrial
Owner occupied commercial
real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner
occupied
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 still accruing interest to total
loans
Total non-performing assets to
total loans and OREO
ALL to non-performing loans
2,054
297
6,517
10,028
66
3,875
40
14,009
954
1,904
—
3,800
407
3,617
30
7,854
7,527
3,888
2
1,608
6,128
15,265
—
1,301
142
16,708
30,717
15,662
—
46,379 $
— $
5,766 $
29,174 $
319
81
12,009
16,297
815
679
2
17,793
25,647
20,814
894
47,355 $
166 $
8,403 $
27,119 $
385
130
—
736
222
2,845
37
3,840
3,994
458
365
—
4,817
—
1,966
190
467
153
—
16,192
1,131
3,437
10
20,770
535
225
—
—
760
169
2,408
237
6,973
10,813
29,120
849
40,782 $
263 $
19,275 $
17,613 $
3,574
24,344
70,125
1,086
95,555 $
129 $
11,605 $
12,521 $
3,135
230
—
4,912
1,400
3,936
—
10,248
2,951
231
20
—
3,202
6,908
2,471
290
12,871
23,119
94,808
1,331
119,258
25
17,720
15,380
1.07%
0.99%
0.50%
1.31%
1.26%
0.00%
0.01%
0.01%
0.01%
0.00%
1.61%
94.98%
1.81%
105.74%
1.86%
162.89%
4.97%
51.43%
6.19%
66.53%
Total non-performing loans increased $5.1 million during 2016, largely driven by activity within the commercial and
industrial and energy sectors. Non-performing loans within the commercial and industrial sector increased $3.9 million from
December 31, 2015 largely due to two loan relationships totaling $6.6 million at December 31, 2016, partially offset by
charge-offs throughout the year. Non-performing energy loans increased $0.6 million during 2016 driven by three loan
relationships totaling $12.6 million at December 31, 2016 that were placed on non-accrual during 2016, partially offset by
two loan relationships that were resolved and charged-off during 2016. During 2016, accruing TDRs decreased $2.7 million,
driven by decreases of $2.6 million within the commercial sector.
54
The OREO balance of $15.7 million at December 31, 2016, excludes $1.6 million of minority interest in participated OREO
in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a
controlling interest. These properties have been repossessed by the lead banks and we have recorded our receivable due from
the lead banks in other assets as minority interest in participated OREO. During 2016, $6.9 million of OREO was foreclosed
on or otherwise repossessed and $16.1 million of OREO was sold resulting in a net gain of $4.4 million. OREO write-downs
of $0.3 million were recorded during 2016.
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 resulting in a net gain of $2.8 million. OREO write-downs
of $1.6 million were recorded during 2015.
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, 2016:
Non ASC 310-30 loans
Commercial:
Commercial and industrial
Owner occupied commercial real
estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner
occupied
Residential real estate
Consumer
Total non ASC 310-30 loans
ASC 310-30 loans
Commercial
Commercial real estate non-owner
occupied
Residential real estate
Consumer
Total loans accounted for under
ASC 310-30
Total loans
Accruing
Non-accrual
Total
Unpaid
principal
balance
Carrying
value
Carrying Unpaid
value/ principal
balance
UPB
Carrying
value
Carrying Unpaid
principal
balance
value/
UPB
Carrying
value
Carrying
value/
UPB
$ 1,067,439 $ 1,066,009 99.9% $ 9,789 $ 8,688 88.8% $ 1,077,228 $ 1,074,697 99.8%
220,233
132,951
78,095
1,498,718
219,488
99.7%
132,731 99.8%
77,628 99.4%
99.8%
1,495,856
2,363
1,961
28,357
42,470
2,056
87.0%
1,905 97.1%
12,645 44.6%
59.6%
25,294
222,596
134,912
106,452
1,541,188
221,544
99.5%
134,636 99.8%
90,273 84.8%
98.7%
1,521,150
439,639
724,608
27,738
2,690,703
99.5%
437,576
723,185
99.8%
27,735 99.9%
2,684,352 99.8%
72
6,103
185
48,830
66
5,176
91.7%
84.8%
181 97.8%
30,717 62.9%
439,711
730,711
27,923
2,739,533
437,642
728,361
99.5%
99.7%
27,916 99.9%
2,715,069 99.1%
56,433
39,280 69.6%
107,926
24,000
4,973
89,150 82.6%
16,524 68.9%
898 18.1%
—
—
—
—
—
0.0%
56,433
39,280 69.6%
—
—
—
0.0%
0.0%
0.0%
107,926
24,000
4,973
89,150 82.6%
16,524 68.9%
898 18.1%
193,332
145,852 75.4%
$ 2,884,035 $ 2,830,204 98.1% $ 48,830 $ 30,717 62.9% $ 2,932,865 $ 2,860,921 97.5%
145,852 75.4%
193,332
0.0%
—
—
55
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. The table below shows the past due status of
loans not accounted for under ASC 310-30, based on contractual terms of the loans as of December 31, 2016 and 2015:
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 total loans
Total non-accrual loans to total loans
% of total past due and non-accrual loans that carry fair value marks
December 31, 2016
$
2,296 $
—
30,717
33,013 $
1.13%
1.13%
10.75%
December 31, 2015
6,716
165
25,647
32,528
1.08%
1.08%
22.01%
$
Loans 30-89 days past due and still accruing interest decreased by $4.4 million from December 31, 2015 to December 31,
2016 and loans 90 days or more past due and still accruing interest decreased $0.2 million at December 31, 2016 compared to
December 31, 2015, for a collective decrease in total past due loans of $4.6 million. Non-accrual loans increased $5.1 million
at December 31, 2016 compared to December 31, 2015, further described within the Non-Performing Assets discussion of
Management’s Discussion and Analysis. There were no ASC 310-30 loan pools past due or on non-accrual at December 31,
2016.
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.
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 2016 and 2015,
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.
56
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:
(cid:120) The borrower’s resources, ability, and willingness to repay in accordance with the terms of the loan agreement;
(cid:120)
(cid:120)
(cid:120)
the likelihood of receiving financial support from any guarantors;
the adequacy and present value of future cash flows, less disposal costs, of any collateral; and
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. During the first quarter of 2016, the Company updated the loan
classifications in its allowance for loan losses model to include owner occupied commercial real estate and agriculture within
the commercial loan segment and present energy as its own loan class within the commercial segment. The prior period
presentations have been reclassified to conform to the current period presentation. We have identified four primary loan
segments that are further stratified into eleven 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 four primary loan segments:
Commercial
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Non-owner occupied
commercial real estate
Construction
Acquisition and development
Multifamily
Non-owner occupied
Residential real estate
Senior lien
Junior lien
Consumer
Total Consumer
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:
(cid:120) economic/external conditions;
(cid:120) loan administration, loan structure and procedures;
(cid:120) risk tolerance/experience;
(cid:120) loan growth;
(cid:120) trends;
(cid:120) concentrations; and
(cid:120) other.
Management derives an estimated annual loss rate adjusted for an estimated loss emergence period based on historical loss
data categorized by segment and class. The loss rates are applied at the loan segment and class level. Our historical loss
history began in 2012, 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 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.
57
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 2016, we recorded $24.5 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 non-performing loans, particularly in the energy
sector portfolio totaling $18.9 million. Net charge-offs for non ASC 310-30 loans during 2016 totaled $21.5 million and were
driven by $19.1 million of energy sector loan charge-offs. Specific reserves on impaired loans totaled $2.4 million at
December 31, 2016.
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. Specific reserves on impaired loans totaled $4.3 million at December 31, 2015.
310-30 ALL
During 2016, loans accounted for under ASC 310-30 had $805 thousand of recoupment. The recoupment was driven by a
previously impaired agriculture pool.
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.
Total ALL
After considering the above mentioned factors, we believe that the ALL of $29.2 million and $27.1 million is adequate to
cover probable losses inherent in the loan portfolio at December 31, 2016 and 2015, 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.
58
The following schedule presents, by class stratification, the changes in the ALL during the periods listed.
ASC
310-30
loans
1,077 $
December 31, 2016
Non
310-30
loans
26,042 $
Beginning allowance for loan losses $
Charge-offs:
ASC
310-30
loans
As of and for the years ended
December 31, 2015
Non
310-30
loans
16,892 $
721 $
ASC
310-30
loans
1,280 $
December 31, 2014
Non
310-30
loans
11,241 $
Total
17,613 $
Total
27,119 $
Total
12,521
Commercial
Commercial real estate non-
owner occupied
Residential real estate
Consumer
Total charge-offs
Recoveries
Net charge-offs
(Recoupment) provision for
loan loss
Ending allowance for loan losses
Ratio of annualized net charge-offs
to average total loans during the
period, respectively
Ratio of ALL to total loans
outstanding at period end,
respectively
—
(20,684)
(20,684)
—
(1,911)
(1,911)
(3)
(507)
(510)
(41)
—
(6)
(47)
—
(47)
(280)
(408)
(771)
(22,143)
594
(21,549)
(321)
(408)
(777)
(22,190)
594
(21,596)
—
—
(10)
(10)
—
(10)
(222)
(208)
(1,196)
(3,537)
609
(2,928)
(222)
(208)
(1,206)
(3,547)
609
(2,938)
—
—
(36)
(39)
—
(39)
—
(739)
(783)
(2,029)
951
(1,078)
—
(739)
(819)
(2,068)
951
(1,117)
(805)
225 $
24,456
28,949 $
23,651
29,174 $
366
1,077 $
12,078
26,042 $
12,444
27,119 $
(520)
721 $
6,729
16,892 $
6,209
17,613
$
0.03%
0.85%
0.80%
0.01%
0.36%
0.12%
0.01%
0.06%
0.05%
0.15%
1.07%
1.02%
0.53%
1.09%
1.05%
0.26%
0.90%
0.81%
0.00%
162.89%
101.54%
$ 145,852 $ 2,715,069 $ 2,860,921 $ 202,830 $ 2,384,843 $ 2,587,673 $ 279,645 $ 1,882,764 $ 2,162,409
156.22%
105.74%
0.00%
0.00%
94.98%
94.24%
$ 170,330 $ 2,530,464 $ 2,700,794 $ 209,268 $ 2,323,527 $ 2,532,795 $ 361,806 $ 1,688,197 $ 2,050,003
$
10,813
25,647 $
10,813 $
25,647 $
30,717 $
30,717 $
— $
— $
— $
Ratio of ALL to total non-performing
loans at period end, respectively
Total loans
Average total loans outstanding
during the period
Non-performing loans
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Beginning allowance for loan losses
Charge-offs:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total charge-offs
Recoveries
Net charge-offs
Provision for loan loss
Ending allowance for loan losses
Ratio of annualized net charge-offs to average total loans
during the period, respectively
Ratio of ALL to total loans outstanding at period end,
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) $
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) $
December 31, 2013
December 31, 2012
As of and for the years ended
ASC
310-30
loans
4,652 $
(717)
(2,801)
(623)
—
(4,141)
—
(4,141)
769
1,280 $
Non
310-30
loans
10,728 $
(1,654)
(943)
(882)
(1,001)
(4,480)
1,466
(3,014)
3,527
11,241 $
ASC
310-30
loans
Non
310-30
loans
2,188 $
9,339 $
(360)
(15,578)
(872)
(19)
(16,829)
275
(16,554)
19,018
4,652 $
(3,149)
(2,605)
(1,132)
(1,502)
(8,387)
799
(7,588)
8,977
10,728 $
Total
15,380
$
(cid:3)
(2,371) (cid:3)
(3,744) (cid:3)
(1,505) (cid:3)
(1,001) (cid:3)
(8,621) (cid:3)
1,466
(cid:3)
(7,155) (cid:3)
(cid:3)
4,296
$
12,521
Total
11,527
(3,509)
(18,183)
(2,004)
(1,521)
(25,216)
1,074
(24,142)
27,995
15,380
0.67%
0.27%
0.41%
1.56%
0.79%
1.20%
respectively
(cid:3)
(cid:3)
0.28%
0.80%
0.68%
0.57%
1.06%
0.84%
Ratio of ALL to total non-performing loans at period end,
respectively
Total loans
Average total loans outstanding during the period
Non-performing loans
8.63%
450,880 $
620,709 $
14,827 $
118.11%
1,403,214 $
1,128,545 $
9,517 $
51.43%
1,854,094 $
$
1,749,254
$
24,344
0.00%
822,021 $
1,058,092 $
— $
46.40%
1,010,681 $
962,147 $
23,119 $
66.53%
1,832,702
2,020,239
23,119
(cid:3) $
(cid:3) $
(cid:3) $
59
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, 2016
Total loans
% of total loans
Related ALL
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
$
$
$
$
$
$
$
$
Total loans
% of total loans
Related ALL
1,560,430
526,792
744,885
28,814
2,860,921
54.6% $
18.4%
26.0%
1.0%
100.0% $
December 31, 2015
1,427,420
442,885
684,002
33,366
2,587,673
55.2% $
17.1%
26.4%
1.3%
100.0% $
December 31, 2014
1,092,885
401,636
632,700
35,188
2,162,409
50.6% $
18.6%
29.2%
1.6%
100.0% $
December 31, 2013
794,023
423,644
599,924
36,503
1,854,094
42.9% $
22.8%
32.3%
2.0%
100.0% $
December 31, 2012
Total loans
% of total loans
Related ALL
Total loans
% of total loans
Related ALL
Total loans
% of total loans
Related ALL
618,371
630,623
533,377
50,331
1,832,702
33.7% $
34.4%
29.1%
2.7%
100.0% $
ALL as a %
of total ALL
64.6%
19.3%
15.0%
1.1%
100.0%
18,821
5,642
4,387
324
29,174
ALL as a %
of total ALL
63.6%
15.4%
19.5%
1.5%
100.0%
17,261
4,166
5,281
411
27,119
ALL as a %
of total ALL
59.0%
17.3%
21.4%
2.4%
100.0%
10,384
3,042
3,771
416
17,613
ALL as a %
of total ALL
48.0%
14.1%
34.0%
3.9%
100.0%
6,005
1,766
4,259
491
12,521
ALL as a %
of total ALL
25.8%
44.3%
26.1%
3.8%
100.0%
3,975
6,811
4,011
583
15,380
The ALL allocated to commercial loans increased $1.6 million to 64.6% of total ALL at December 31, 2016, from 63.6% at
December 31, 2015, primarily due to loan growth. Within the commercial ALL, the non 310-30 energy sector ALL was $3.6
million at December 31, 2016, representing a decrease of $0.2 million compared to December 31, 2015. The decrease was
driven by net charge-offs of $19.1 million in the energy sector mostly offset by an energy sector provision for loan losses of
$18.9 million recognized in 2016. The ALL allocated to commercial real estate non-owner occupied increased to 19.3% of
the total ALL primarily due to net loan growth. The residential real estate ALL decreased $0.9 million during 2016 due to
improved credit trends within the portfolio and improvements within the real estate market.
60
Other Assets
Significant components of other assets were as follows as of the periods indicated:
Increase (decrease)
December 31, 2016 December 31, 2015
Amount
Bank-owned life insurance
Deferred tax asset
Accrued income taxes receivable
Minority interest in participated other real estate owned
Accrued interest on loans
Accrued interest on interest bearing bank deposits and
investment securities
Derivative asset
Other miscellaneous assets
Total other assets
$
$
62,516 $
52,810
5,252
1,578
10,020
2,542
11,715
8,345
154,778 $
50,311 $
52,633
9,427
5,450
8,827
12,205
177
(4,175)
(3,872)
1,193
% Change
24.3%
0.3%
(44.3)%
(71.0)%
13.5%
3,363
2,347
8,358
140,716 $
(821)
9,368
(13)
14,062
(24.4)%
399.1%
(0.2)%
10.0%
Other assets totaled $154.8 million and $140.7 million at December 31, 2016 and 2015, respectively, representing an increase
of $14.1 million, or 10.0%, year-over-year. The increase was largely driven by $10.3 million of bank-owned life insurance
purchased during the second quarter of 2016 and a $9.4 million increase in derivative assets, further discussed in note 20 of
our consolidated financial statements. These increases were mostly offset by a $4.2 million decrease in accrued income taxes
receivable, further discussed in note 19 of our consolidated financial statements, and a $3.9 million decrease in minority
interest in participated other real estate owned, due to a property sale during the first quarter of 2016.
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
Total other liabilities
Increase (decrease)
December 31, 2016 December 31, 2015
Amount
$
$
13,040 $
5,063
4,973
3,466
10,990
37,532 $
(2,453)
15,493 $
(4,873)
9,936
654
4,319
(4,849)
8,315
11,101
(111)
49,164 $ (11,632)
% Change
(15.8)%
(49.0)%
15.1%
(58.3)%
(1.0)%
(23.7)%
Other liabilities totaled $37.5 million and $49.2 million at December 31, 2016 and 2015, respectively, representing a decrease
of $11.6 million, or 23.7%, year-over-year. The decrease was largely driven by reduced derivative liabilities, further
discussed in note 20 of our consolidated financial statements, a decrease in pending loan purchase settlement due to timing of
loan settlements, and a decrease in accrued expenses. The decrease in accrued expenses was driven by a combined $2.4
million in severance accruals and banking center consolidation accruals at December 31, 2015.
61
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, 2016 and 2015:
Increase (decrease)
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
$
Amount
December 31, 2015
436,745 11.4%
357,505
December 31, 2016
846,744 21.9% $ 815,054 21.2% $ 31,690
427,538 11.1%
9.7%
376,046
(9,207)
9.3% 18,541
1,046,275 27.0% 1,037,490 27.0%
8,785
2,696,603 69.7% 2,646,794 68.9% 49,809
762,038 19.8% (57,365)
431,845 11.3% 35,528
1,172,046 30.3% 1,193,883 31.1% (21,837)
$ 3,868,649 100.0% 3,840,677 100.0% $ 27,972
704,673 18.2%
467,373 12.1%
% Change
3.9%
(2.1)%
5.2%
0.8%
1.9%
(7.5)%
8.2%
(1.8)%
0.7%
At December 31, 2016, deposits totaling $103.0 million were held-for-sale, including $51.6 million of time deposits.
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to
$100,000 as of December 31, 2016:
Three months or less
Over 3 months through 6 months
Over 6 months through 12 months
Thereafter
Total time deposits > $100,000
$
December 31, 2016
73,050
79,051
152,391
162,881
467,373
$
During 2016, our total deposits increased $28.0 million, or 0.7%. Non-interest bearing demand deposits increased $31.7
million, or 3.9%, from December 31, 2015, while time deposits decreased $21.8 million, or 1.8%, from December 31, 2015.
As a result, the mix of transaction deposits to total deposits improved to 69.7% at December 31, 2016, from 68.9% at
December 31, 2015 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, 2016 and 2015, we had $788.8 million and $807.2 million,
respectively, of time deposits that were scheduled to mature within 12 months. Of the $788.8 million in time deposits
scheduled to mature within 12 months at December 31, 2016, $304.5 million were in denominations of $100,000 or more,
and $484.3 million were in denominations less than $100,000. Note 11 to the consolidated financial statements provides a
maturity schedule and weighted average rates of time deposits outstanding at December 31, 2016 and 2015.
62
Regulatory Capital
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, 2016
and 2015, 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 13 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, swap fee income, and gain on sale of mortgages,
net. 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.
Overview of Results of Operations
Year ended 2016
We recorded net income of $23.1 million, or $0.79 per diluted share, during 2016, compared to net income of $4.9 million, or
$0.14 per diluted share, during 2015. Fully taxable equivalent net interest income totaled $149.7 million representing a
decrease of $9.9 million from 2015. Lower levels of higher-yielding 310-30 loans and investment portfolio paydowns
decreased interest income $22.9 million and were partially offset by a $13.5 million increase in non 310-30 interest income
from new loan originations during 2016. The continued resolution of the higher-yielding acquired loan portfolio and lower
rates on the originated portfolio led to a 0.11% narrowing of the fully taxable equivalent net interest margin to 3.49% from
3.60% in the prior year. Average earning assets totaled $4.3 billion and decreased $0.2 billion from prior year as decreases in
the higher-yielding 310-30 loan portfolio, investment portfolio paydowns and lower cash balances were mostly offset by
increases in the originated loan portfolio.
Provision for loan loss expense was $23.7 million during 2016, compared to $12.4 million during 2015, an increase of $11.3
million driven by 2016 energy sector provision of $18.9 million. Lower net charge-offs and lower provision attributable to
net loan growth partially offset the increase in the energy sector provision in the year-over-year comparison. The non 310-30
allowance for loan losses ended the year at 1.07% of total non 310-30 loans compared to 1.09% at prior year end. Net charge-
offs on non 310-30 loans totaled 0.85% for the full year. Excluding energy sector net charge-offs, the 2016 net charge-offs on
non 310-30 loans totaled 0.10%, compared to 0.12% in 2015.
Non-interest income totaled $40.0 million during 2016, compared to $21.4 million during 2015, increasing $18.6 million.
Excluding the net $14.5 million of negative FDIC-related income and bargain purchase gain in the prior year, non-interest
income increased $4.1 million, or 11.3%. The increase was driven by growth in bank card fees of $0.5 million on the strength
of higher interchange activity, while gain on sale of mortgages, net increased $0.9 million on a higher level of originations.
These increases were partially offset by $0.9 million lower service charges due to lower instances of overdrafts and lower
OREO-related income of $0.1 million. Other non-interest income increased $3.4 million primarily from a $1.8 million gain on
sale of a building, net swap related income increase of $0.7 million and a $0.6 million increase in gain on recoveries of acquired
loans.
Non-interest expense totaled $136.0 million during 2016, representing a decrease of $22.0 million, or 13.9%, from the prior
year. The decrease was partially due to lower salaries and benefits of $3.3 million, lower occupancy and equipment of $1.6
million, lower marketing expenses of $1.8 million and lower professional fees of $1.0 million. Telecommunications and data
processing expense decreased $5.5 million from the prior year benefiting from the core system conversion. Problem asset
workout expenses and gain on sale of OREO improved a combined $4.9 million. Additionally, the prior period included
banking center consolidation related expenses of $1.4 million, and warrant liability expense of $0.1 million.
63
Years ended 2015 and 2014
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, representing 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, representing 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
partially 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 other decreases driven by lower
compensation costs, banking center consolidations and successful vendor contract negotiations and a $4.1 million contract
termination expense in 2014. One-time non-interest expenses totaled $6.2 million during 2015.
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.
64
The table below presents the components of net interest income on a fully taxable equivalent basis for the years ended
December 31, 2016, 2015 and 2014:
For the year ended
December 31, 2016
For the year ended
December 31, 2015
For the year ended
December 31, 2014
Average
balance
Interest
Average Average
balance
rate
Interest
Average Average
balance
rate
Average
Interest
rate
$
170,330
2,545,643
$ 33,256
100,142
19.52% $
3.93%
237,453
2,109,152
$ 47,255
86,693
19.90% $
4.11%
361,806
1,691,253
$ 60,841
74,565
16.82%
4.41%
Interest earning assets:
ASC 310-30 loans
Non 310-30 loans FTE(1)(2)(3)(4)(5)
Investment securities available-
for-sale
1,035,679
18,991
1.83%
1,327,245
26,398
1.99%
1,655,730
31,887
1.93%
Investment securities held-to-
maturity
Other securities
Interest earning deposits and
securities purchased under
agreements to resell
Total interest earning assets
FTE(4)
Cash and due from banks
Other assets
Allowance for loan losses
Total assets
Interest bearing liabilities:
Interest bearing demand, savings
and money market deposits
Time deposits
Securities sold under agreements
to repurchase
Federal Home Loan Bank
382,366
14,975
10,674
748
2.79%
4.99%
476,924
25,865
11,747
1,210
2.46%
4.68%
588,909
25,855
16,764
1,206
2.85%
4.66%
141,178
718
0.51%
262,500
799
0.30%
123,350
329
0.27%
$ 164,529
$ 4,290,171
63,513
332,122
(33,853)
$ 4,651,953
3.84% $ 4,439,139
59,526
353,344
(20,939)
$ 4,831,070
$ 174,102
3.92% $ 4,446,903
57,763
378,723
(15,460)
$ 4,867,929
$ 185,592
4.17%
$ 1,865,225
1,177,523
$
4,985
8,978
0.27% $ 1,758,965
1,281,171
0.76%
$
4,524
9,085
0.26% $ 1,701,344
1,421,726
0.71%
$
4,323
9,797
0.25%
0.69%
109,246
152
0.14%
197,728
187
0.09%
99,057
129
0.13%
Demand deposits
Other liabilities
advances
45,773
Total interest bearing liabilities $ 3,197,767
818,901
51,587
4,068,255
583,698
Total liabilities
Shareholders' equity
693
$ 14,808
666
$ 14,462
1.51%
40,000
0.46% $ 3,277,864
782,431
69,299
4,129,594
701,476
1.67%
9,975
0.44% $ 3,232,102
700,809
74,327
4,007,238
860,691
164
$ 14,413
1.64%
0.45%
Total liabilities and
shareholders' equity
Net interest income
Interest rate spread FTE(4)
Net interest earning assets
Net interest margin FTE(4)
Ratio of average interest earning
assets to average interest bearing
liabilities
$ 4,651,953
$ 4,831,070
$ 4,867,929
$ 149,721
$ 159,640
$ 171,179
$ 1,092,404
$ 1,161,275
$ 1,214,801
3.38%
3.48%
3.49%
3.60%
3.72%
3.85%
134.16%
135.43%
137.59%
(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 $2,368,968, $1,893,792 and $1,421,332, interest income of $85,792, $70,569 and $58,373 and tax
equivalent yields of 3.79%, 3.87% and 4.17% for the years ended 2016, 2015 and 2014, respectively.
(3) Non 310-30 loans include loans held-for-sale. Average balances during 2016, 2015 and 2014 were $15,179, $7,097 and $3,056, and interest income
was $830, $589 and $267 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 $4,081,
$2,695 and $930 for the years ended 2016, 2015 and 2014, respectively.
(5) Loan fees included in interest income totaled $4,734, $4,253 and $4,172 during 2016, 2015 and 2014, respectively.
65
Net interest income totaled $145.6 million, $156.9 million, and $170.2 million for the years ended 2016, 2015 and 2014,
respectively. On a fully taxable equivalent basis, net interest income totaled $149.7 million, $159.6 million and $171.2
million for the years ended 2016, 2015 and 2014, respectively. Lower levels of higher-yielding 310-30 loans and investment
portfolio paydowns decreased interest income $22.9 million and were partially offset by a $13.5 million increase in non 310-
30 interest income from new loan originations in 2016 compared to 2015. Average earning assets totaled $4.3 billion during
2016 representing a decrease of $0.2 billion from 2015 as decreases in the higher-yielding 310-30 loan portfolio, investment
portfolio paydowns and lower cash balances were partially offset by increases in the originated loan portfolio. The continued
resolution of the higher-yielding acquired loan portfolio and lower rates on the originated portfolio led to an 0.11%
narrowing of the fully taxable equivalent net interest margin to 3.49% in 2016 from 3.60% in 2015.
Net interest income decreased $13.3 million in 2015 compared to 2014 primarily due to lower levels of higher-yielding 310-
30 loans. Average earning assets remained consistent from 2014 to 2015 as increases in the originated loan portfolio offset a
reduction in the investment portfolio and 310-30 loans. The continued resolution of the higher-yielding acquired loan
portfolio and higher levels of lower-yielding short-term investments led to a 0.25% narrowing of the fully taxable equivalent
net interest margin to 3.60% in 2015 from 3.85% in 2014.
Average loans comprised $2.7 billion, or 63.3%, of total average interest earning assets during 2016, compared to $2.3
billion, or 52.9%, during 2015 and $2.1 billion, or 46.2% during 2014. The continued resolution of the ASC 310-30 loan
portfolio was more than offset by loan growth in the non 310-30 portfolio during 2016 and 2015. The yield on the ASC 310-
30 loan portfolio was 19.52% during 2016, compared to 19.90% during 2015 and 16.82% during 2014. The decrease in yield
during 2016 was driven by the continued resolution of the ASC 310-30 loans. The increase in yield from 2014 to 2015 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 33.1% of total interest earning assets during 2016, compared to 40.6% during 2015
and 50.5% during 2014. 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,
decreased to 3.3% of interest earning assets during 2016, compared to 5.8% during 2015 and 2.8% during 2014, primarily
due to increased cash from client repurchase agreements on deposit during 2015.
Average balances of interest bearing liabilities totaled $3.2 billion during 2016 representing a decrease of $80.1 million from
$3.3 billion during 2015, largely driven by a $103.6 million decrease in time deposits and an $88.5 million decrease in
securities sold under agreement to repurchase, offset by a $106.3 million increase in interest bearing demand, savings and
money market deposits. During 2016, total interest expense related to interest bearing liabilities was $14.8 million, compared
to $14.5 million during 2015 and $14.4 million during 2014. 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 totaled
70.3% during 2016 from 68.1% during 2015. The average rate of interest bearing liabilities increased two basis points to
0.46% during 2016 from 0.44% during 2015 due to higher rates on time deposits year-over-year.
66
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 rate for 2016, 2015
and 2014:
The year ended December 31, 2016
compared to
the year ended December 31, 2015
Increase (decrease) due to
The year ended December 31, 2015
compared to
the year ended December 31, 2014
Increase (decrease) due to
Volume
Rate
Net
Volume
Rate
Net
Interest income:
ASC 310-30 loans
Non 310-30 loans FTE(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
$ (13,105) $
17,171
(5,346)
(2,640)
(544)
(894) $ (13,999)
13,449
(7,407)
(1,073)
(462)
(3,722)
(2,061)
1,567
82
(617)
(81)
$ (5,081) $ (4,492) $ (9,573)
536
$
284 $
(790)
87
(123)
(542)
461
(107)
27
(35)
346
$ (4,539) $ (5,380) $ (9,919)
177 $
683
(60)
88
888
$ (24,747) $ 11,161
(5,049)
17,177
1,044
(6,533)
(2,259)
(2,758)
4
—
$ (13,586)
12,128
(5,489)
(5,017)
4
424
46
$ (16,437) $ 4,947
470
$ (11,490)
$
148 $
(997)
500
93
(256)
53
285
2
(35)
305
$ (16,181) $ 4,642
$
201
(712)
502
58
49
$ (11,539)
(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 2016, 2015 and 2014 were $15,179, $7,097 and
$3,056 and interest income was $830, $589 and $267 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 $4,081, $2,695 and $930 for the years ended 2016, 2015 and 2014, respectively.
Below is a breakdown of deposits and the average rates paid during the periods indicated:
December 31, 2016
September 30, 2016
For the three months ended
June 30, 2016
March 31, 2016
December 31, 2015
Non-interest bearing demand
Interest bearing demand
Money market accounts
Savings accounts
Time deposits
Total average deposits
Average
rate
paid
Average
rate
paid
$
Average
Average
Average
balance
balance
balance
825,979 0.00%
793,264 0.00% $
821,987 0.00% $
824,848 0.00% $
835,263 0.00% $
0.08%
0.09%
0.09%
0.09%
0.09%
415,948
417,460
426,769
420,253
413,446
0.33%
0.33% 1,047,072
0.33% 1,037,376
0.33% 1,169,238
0.36% 1,001,658
1,057,908
0.26%
0.25%
0.27%
0.28%
0.27%
370,845
347,811
375,481
388,947
383,981
0.70%
0.72% 1,222,829
0.75% 1,186,126
0.78% 1,180,496
0.80% 1,174,269
1,169,325
0.34%
0.35% $ 3,861,151
0.36% $ 3,819,016
0.36% $ 3,980,921
0.38% $ 3,798,202
$ 3,849,289
Average
balance
Average
balance
Average
rate
paid
Average
rate
paid
Average
Rate
Paid
67
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 $3.2 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 recorded in the consolidated statements of
operations for the periods indicated:
(Recoupment) provision for impairment loans accounted for under ASC 310-30
Provision for loan losses
Total provision for loan losses
For the years ended December 31,
2016
2014
2015
$
$
(520)
(805)
6,729
24,456
$ 6,209
$ 23,651
$
366
12,078
$ 12,444
Provision for loan loss expense was $23.7 million during 2016, compared to $12.4 million during 2015, an increase of $11.3
million primarily driven by 2016 energy sector provision of $18.9 million. Lower non-energy net charge-offs and lower
provision attributable to net loan growth partially offset the increase in the energy sector provision in the year-over-year
comparison. The non 310-30 allowance for loan losses was 1.07% of total non 310-30 loans at December 31, 2016 compared
to 1.09% at December 31, 2015. Net charge-offs on non 310-30 loans totaled 0.85%, or excluding energy sector net charge-
offs totaled 0.10% compared to net charge-offs of 0.12% in 2015.
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 for loan losses was 1.09% of total non 310-30 loans at December 31, 2015 compared to 0.90% at December 31,
2014, 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 2016, 2015 and 2014 we recorded recoupments of $805 thousand, provision of $366 thousand and recoupments of
$520 thousand, respectively, 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.
68
Non-Interest Income
The table below details the components of non-interest income during 2016, 2015 and 2014, respectively:
Service charges
Bank card fees
Gain on sale of mortgages, net
Bank-owned life insurance income
Other non-interest income
OREO related write-ups and other
income
Bargain purchase gain
FDIC loss-sharing related
Total non-interest income
For the years ended December 31,
2016
2015
2014
2016 vs 2015
Increase (decrease)
2015 vs 2014
Increase (decrease)
$ 13,900 $ 14,798 $ 15,430 $
11,429
2,881
1,861
7,708
10,123
1,000
442
4,105
10,898
1,963
1,614
4,301
Amount % Change Amount
(632)
775
963
1,172
196
(6.1)% $
4.9%
46.8%
15.3%
79.2%
(898)
531
918
247
3,407
% Change
(4.1)%
7.7%
96.3%
265.2%
4.8%
2,248
—
—
(131)
(1,048)
15,553
$ 40,027 $ 21,448 $ (1,696) $ 18,579
2,379
1,048
(15,553)
3,807
—
(36,603)
(5.5)%
(100.0)%
(100.0)%
(1,428)
1,048
21,050
86.6% $ 23,144
(37.5)%
100.0%
(57.5)%
(1,364.6)%
Non-interest income totaled $40.0 million, $21.4 million and $(1.7) million during 2016, 2015 and 2014, respectively. The
year-over-year increases were largely driven by negative FDIC loss-sharing income during 2015 and 2014. FDIC loss-
sharing related represents the income (expense) recognized in connection with the actual reimbursement of costs/recoveries
related to the resolution of covered assets by the FDIC.
Service charges, which represent various fees charged to clients for banking services, including fees such as non-sufficient
(“NSF”) charges and service charges on deposit accounts, decreased $0.9 million, or 6.1%, during 2016 compared to $0.6
million, or 4.1%, during 2015, largely due to declines in overdraft charges. Bank card fees increased 4.9% and 7.7% from
2016 to 2015 and 2015 to 2014, respectively, and are comprised primarily of interchange fees on the debit cards that we have
issued to our clients.
Gain on sale of mortgages, net represents gains of mortgage loans held-for-sale and mark-to-market adjustments on mortgage
banking derivatives. Gain on sale of mortgages, net increased $0.9 million from 2015 and $1.0 million from 2014 to 2015
due to a higher level of originations.
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 2016, 2015 and 2014,
this income totaled $2.2 million, $2.4 million, and $3.8 million, respectively. OREO rental income was higher during 2016
compared to 2015, but was more than offset by higher write-ups of $1.2 million during 2015 for one OREO property. Lower
OREO rental income in 2015 was a result of property sales during 2015.
Other non-interest income increased $3.4 million during 2016, or 79.2%, largely due to a $1.8 million gain on sale of a
building during the second quarter of 2016, net swap related income increase of $0.7 million and a $0.6 increase in gain on
recoveries of acquired loans.
During 2015, the Company realized a bargain purchase gain of $1.0 million resulting from the acquisition of Pine River.
69
Non-Interest Expense
The table below details non-interest expense for the periods presented:
For the years ended December 31,
2016 vs 2015
Increase (decrease)
2015 vs 2014
Increase (decrease)
2016
2015
2014
Amount
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
Bank card expenses
Professional fees
Other non-interest expense
Problem asset workout
Gain on OREO sales, net
Intangible asset amortization
Loss (gain) from the change in fair value
$ 79,765 $ 83,018 $ 82,834 $ (3,253)
(1,586)
(5,537)
(1,761)
(686)
739
(999)
(2,553)
(3,334)
(1,607)
79
25,101
11,927
4,571
4,130
3,079
3,257
14,581
11,258
(13,126)
5,344
22,904
5,970
2,564
3,236
4,440
3,496
8,554
3,983
(4,383)
5,480
24,490
11,507
4,325
3,922
3,701
4,495
11,107
7,317
(2,776)
5,401
% Change Amount
184
3.9% $
(611)
6.5%
(420)
48.1%
(246)
40.7%
(208)
17.5%
622
20.0%
1,238
22.2%
(3,474)
23.0%
(3,941)
45.6%
10,350
57.9%
57
1.5%
% Change
0.2%
2.4%
3.5%
5.4%
5.0%
20.2%
38.0%
23.8%
35.0%
78.9%
1.1%
of warrant liability
Banking center consolidation related
expenses
Total non-interest expense
—
106
(2,953)
(106)
100.0%
3,059
103.6%
—
(1,411)
$ 136,009 $ 158,024 $ 150,003 $ (22,015)
1,411
—
100.0%
1,411
13.9% $ 8,021
100.0%
5.3%
Non-interest expense totaled $136.0 million, $158.0 million and $150.0 million during 2016, 2015 and 2014, respectively.
Salaries and benefits is the largest component of non-interest expense totaling $79.8 million in 2016, representing a decrease
of $3.3 million from 2015 due to lower staffing levels and decreases in stock compensation expense. Salaries and benefits
were consistent between 2015 and 2014 as reduced health plan costs and lower incentive payments absorbed normal merit
increases.
Occupancy and equipment expense decreased to $22.9 million in 2016 from $24.5 million and $25.1 million in 2015 and
2014, respectively. The decrease was primarily due to decreases in depreciation expense and benefits realized from successful
vendor contract negotiations during 2015.
Telecommunications and data processing expense decreased to $6.0 million in 2016 from $11.5 million and $11.9 million in
2015 and 2014, respectively, benefitting from the core system conversion and favorable vendor contract negotiations during
2015.
Marketing and business development expense decreased to $2.6 million in 2016 from $4.3 million and $4.6 million in 2015
and 2014, respectively, due to reduced levels of marketing campaigns in 2016.
Professional fees totaled $3.5 million, $4.5 million and $3.3 million during 2016, 2015 and 2014, respectively. The increase
in 2015 was partially due to one-time core system conversion related expenses completed during the fourth quarter of 2015.
Bank card expenses increased $0.7 million and $0.6 million during 2016 and 2015. The increase during 2016 was due to the
issuance of bank cards with chip reader technology. The increase during 2015 was due to conversion costs related to a change
in our third party vendor.
Problem asset workout expense is incurred in connection with the resolution process of our acquired problem loan portfolios
and OREO expenses. During 2016, problem asset workout expense and gain on sale of OREO improved a combined $4.9
million, due to the sale of several larger assets during 2016. During 2015, problem asset workout expenses and gain on sale
of OREO increased a combined $6.4 million due to lower year-over-year OREO gains.
70
The warrant agreements were amended during 2015 resulting in a reclassification from a liability to equity; therefore, the
warrant agreements had no effect on non-interest expense in 2016. The year-over-year change from 2014 to 2015 was
primarily due to the change in our stock price.
Other non-interest expense decreased $2.6 million and $3.5 million during 2016 and 2015, respectively. The decrease during
2016 was largely due to decreases in unfunded commitment reserves of $1.4 million and other net decreases of $1.2 million.
The decrease during 2015 was largely due to contract termination expenses of $4.1 million in 2014, partially offset by other
net increases of $0.6 million during 2015.
During 2016, the Company entered into definitive agreements for the sale of four banking centers expected to close during
the second quarter of 2017. The sale includes buildings with an estimated fair value of $1.6 million, loans carried at $14.4
million and deposits carried at $103.0 million at December 31, 2016. The Company determined the buildings, loans and
deposits are held-for-sale at December 31, 2016, and are included within property and equipment, loans receivable and
deposits, respectively. The Company estimates it will realize a $3.0 million gain during the second quarter of 2017 as a result
of these sales. Additionally, the Company will consolidate one banking center within the Community Banks of Colorado
footprint during the first quarter of 2017.
During 2015 and 2016, the Company consolidated twelve banking centers in our Bank Midwest and Community Banks of
Colorado footprint. The payback period on the consolidations is expected to be less than two years. Eight of the banking
centers were owned and classified as held-for-sale, resulting in a fair value impairment charge of $1.1 million during the
second quarter of 2015 and a fair value impairment charge of $0.3 million during the fourth quarter of 2015.
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 $32.00
to $34.00 per share. The strike prices for options range from $18.09 to $23.75, with a large portion of the awards having
strike prices of $20.00. Depending on the movement in our stock price, these stock-based compensation awards may create
either an excess tax benefit or tax deficiency depending on the relationship between the fair value at the time of vesting or
exercise and the estimated fair value recorded at the time of grant. The Company adopted ASU 2016-09 effective January 1,
2016, which results in recording the excess tax benefit or tax deficiency as a tax benefit or expense in the consolidated
statements of operations. During 2016, we recorded an excess tax benefit of $2.1 million in income tax expense in the
consolidated statements of operations related to the settlement of certain awards during the period. During 2015, we recorded
a tax deficiency of $3.7 million income tax expense resulting from expired or exercised awards. As of December 31, 2016,
we had $7.4 million of deferred tax assets related to stock-based compensation, $5.6 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, 2016 and 2015, we have not identified any uncertain tax positions.
71
Income tax expense totaled $3.0 million for 2016, as compared to $3.0 million for 2015, and $3.2 million for 2014. These
amounts equate to effective tax rates of 11.3%, 38.4% and 25.6% for the respective periods.
The effective tax rate for 2016 was 11.3% and includes a $2.1 million benefit related to the early adoption of ASU 2016-09.
Prior to this adoption, the realized tax benefit from stock compensation awards vested would have been recorded directly to
capital. Without this $2.1 million benefit, tax expense would have been $5.1 million, an effective tax rate of 19.7%. The
effective tax rate for 2015 was 38.4% and included $3.7 million of non-cash deferred tax asset write-offs in connection with
former executive stock-based compensation agreements. 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 in 2015. When the impacts of
the 2016 tax benefit and 2015 tax deficiency are removed, the tax rate in 2016 is higher than 2015 due to the increase in pre-
tax income year-over-year. The difference in the 2016 effective tax rate compared to the statutory tax rate is primarily due to
interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax
income.
The increase in the effective tax rate for 2015 compared to 2014 was primarily due to the aforementioned $3.7 million of
non-cash deferred tax asset write-offs 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.
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.
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, 2016 and 2015:
Cash and due from banks
Interest bearing bank deposits
Unencumbered investment securities, at fair value
Total
$
December 31, 2016 December 31, 2015
155,985
10,107
1,093,517
1,259,609
152,736
—
843,061
995,797
$
$
$
Total on-balance sheet liquidity decreased $263.8 million from December 31, 2015 to December 31, 2016. The decrease was
largely due to a planned reduction of $250.5 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.
72
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, 2016, 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 $1.2 billion
at December 31, 2016, inclusive of pre-tax net unrealized losses of $10.5 million on the available-for-sale securities portfolio.
Additionally, our held-to-maturity securities portfolio had $0.1 million of pre-tax net unrealized gains at December 31, 2016.
The gross unrealized gains and losses are detailed in note 4 of our consolidated financial statements. As of December 31,
2016, 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.
At present, financing activities primarily consist of changes in deposits and repurchase agreements, and advances from the
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, 2016, $788.8 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, our strategy is to replace a significant portion of those maturing time
deposits with transaction deposits and market-rate time deposits.
As of December 31, 2016, we were a member of the FHLB of Topeka. As of December 31, 2015 and 2014, we were a
member of the FHLB of Des Moines. Through these relationships, we have pledged qualifying loans and investments
securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. FHLB advances and lines of
credit available totaled $903.9 million of which $38.7 million was used at December 31, 2016. We can obtain additional
liquidity through FHLB advances if required. The bank also has access to federal funds lines of credit with corresponding
banks.
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, 2016, 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 13 in our consolidated financial statements.
Our shareholders' equity is impacted by the retention of earnings, changes in unrealized gains and losses on securities, net of
tax, stock-based compensation activity, share repurchases and the payment of dividends. 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 2016, we repurchased
4.5 million shares of our common stock at a weighted average price of $20.78, 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 August 5, 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. The remaining authorization under this program as of December
31, 2016 was $12.6 million.
On January 19, 2017, our Board of Directors declared a quarterly dividend of $0.07 per common share, payable on March 15,
2017 to shareholders of record at the close of business on February 24, 2017.
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.
73
The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within
the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate
levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability
Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other
things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and
rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the
Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for
acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest
rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure
to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities.
The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future
cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is
used in conjunction with the analyses on net interest income.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at December
31, 2016. During 2016, 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, 2016 and 2015:
Hypothetical
shift in interest
rates (in bps)
200
100
(50)
% change in projected net interest income
December 31, 2016
December 31, 2015
5.84%
3.66%
(2.49)%
5.81%
3.13%
(1.33)%
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 $49.8 million during 2016, and totaled 69.7% of
total deposits at December 31, 2016 compared to 68.9% at December 31, 2015. 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.
74
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, 2016 and 2015, we had loan commitments totaling $602.2 million and $627.2 million, respectively, and
standby letters of credit that totaled $13.5 million and $9.8 million, respectively. Unused commitments do not necessarily
represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. We do not
anticipate any material losses arising from commitments or contingent liabilities and we do not believe that there are any
material commitments to extend credit that represent risks of an unusual nature.
Contractual Obligations
In addition to the financing commitments detailed above under “Off-Balance Sheet Activities,” in the normal course of
business, we enter into contractual obligations that require future cash settlement. The following table summarizes the
contractual cash obligations as of December 31, 2016 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
within five
After one but After three but
within three
years
10,000
3,328
6,210
6,175
8,287
321,000
788,781
$ 798,284 $ 345,497
years
Total
15,000 $
25,000
5,969
15,322
30,829
6,811
3,071
24,344
1,172,046
4,041
58,224
86,004 $ 22,434 $ 1,252,219
After five
years
— $
$
$
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 our financial results in the near future.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth on pages 73-74 of Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
75
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, 2016 and 2015, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2016. 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, 2016 and 2015, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2016, 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, 2016, 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 24, 2017, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
As discussed in note 2 to the consolidated financial statements, the Company has changed its method of accounting for
stock-based compensation in the consolidated financial statements referred to above due to the adoption of FASB Accounting
Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting.
Kansas City, Missouri
February 24, 2017
76
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2016 and 2015
(In thousands, except share and per share data)
December 31, 2016 December 31, 2015
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 $332,573 and $428,585 at
December 31, 2016 and 2015, respectively)
Non-marketable securities
Loans
Allowance for loan losses
Loans, net
Loans held for sale
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
Other liabilities
Total liabilities
Shareholders’ equity:
$
$
$
152,736 $
—
152,736
884,232
332,505
14,949
2,860,921
(29,174)
2,831,747
24,187
15,662
95,671
59,630
6,949
154,778
4,573,046 $
846,744 $
427,538
1,422,321
1,172,046
3,868,649
92,011
38,665
37,532
4,036,857
Common stock, par value $0.01 per share: 400,000,000 shares authorized;
51,813,011 and 52,177,352 shares issued; 26,386,583 and 30,358,509 shares
outstanding at December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Retained earnings
Treasury stock of 24,927,157 and 20,982,812 shares at December 31, 2016 and
December 31, 2015, respectively, at cost
Accumulated other comprehensive (loss) income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
514
984,087
55,454
(502,104)
(1,762)
536,189
4,573,046 $
$
See accompanying notes to the consolidated financial statements.
155,985
10,107
166,092
1,157,246
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
815,054
436,745
1,394,995
1,193,883
3,840,677
136,523
40,000
49,164
4,066,364
513
997,926
38,670
(419,660)
95
617,544
4,683,908
77
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2016, 2015 and 2014
(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 sale of mortgages, net
Bank-owned life insurance income
Other non-interest income
OREO related write-ups and other income
Bargain purchase gain
FDIC loss-sharing related
Total non-interest income
Non-interest expense:
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
Bank card expenses
Professional fees
Other non-interest expense
Problem asset workout
Gain on OREO sales, net
Intangible asset amortization
Loss (gain) from the change in fair value of warrant liability
Banking center consolidation related 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
(cid:3)(cid:3)
2016
2015
2014
$
$
$
$
129,317
29,665
748
718
160,448
13,963
845
14,808
145,640
23,651
121,989
13,900
11,429
2,881
1,861
7,708
2,248
—
—
40,027
79,765
22,904
5,970
2,564
3,236
4,440
3,496
8,554
3,983
(4,383)
5,480
—
—
136,009
26,007
2,947
23,060
0.81
0.79
$
$
$
$
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
4,301
2,379
1,048
(15,553)
21,448
83,018
24,490
11,507
4,325
3,922
3,701
4,495
11,107
7,317
(2,776)
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
4,105
3,807
—
(36,603)
(1,696)
82,834
25,101
11,927
4,571
4,130
3,079
3,257
14,581
11,258
(13,126)
5,344
(2,953)
—
150,003
12,341
3,165
9,176
0.22
0.22
28,313,061
29,091,343
34,349,996
34,363,487
42,404,609
42,421,014
See accompanying notes to the consolidated financial statements.
78
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Net income
Other comprehensive (loss) income, net of tax:
Securities available-for-sale:
2016
23,060
$
2015
2014
$
4,881
$
9,176
Net unrealized gains (losses) arising during the period, net of tax
(expense) benefit of $(26), $2,015 and $(9,694) for the years ended
2016, 2015 and 2014, respectively
Less: amortization of net unrealized holding gains to income, net of tax
benefit of $1,166, $1,523 and $520 for the years ended 2016, 2015 and
2014, respectively
Other comprehensive (loss) income
Comprehensive income (loss)
42
(3,275)
15,765
(1,899)
(1,857)
21,203
$
(2,469)
(5,744)
$
(863) $
(3,170)
12,595
21,771
See accompanying notes to the consolidated financial statements.
79
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended 2016, 2015 and 2014
(In thousands, except share and per share data)
Additional
Accumulated
other
Common
stock
paid-in
capital
Retained
earnings
512 $ 990,216 $ 39,966
9,176
—
—
3,572
—
—
Treasury
stock
$ (126,146)
—
—
comprehensive
income (loss), net
$
Total
(6,756) $ 897,792
9,176
3,572
—
—
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
Cash dividends declared ($0.20 per
share)
Other comprehensive income
Balance, December 31, 2014
$
Net income
Stock-based compensation
Issuance of stock under equity
compensation plans, including tax
benefit of $24, gain on reissuance of
treasury stock of $96
Repurchase of 8,645,836 shares
Cash dividends declared ($0.20 per
share)
Warrant reclassification
Other comprehensive loss
Balance, December 31, 2015
$
Net income
Stock-based compensation
Issuance of stock under equity
compensation and ASPP plans,
including gain on reissuance of
treasury stock of $4,396
Repurchase of 4,500,936 shares
Cash dividends declared ($0.22 per
share)
Warrant exercise
Other comprehensive loss
Balance, December 31, 2016
$
—
—
(576)
—
—
—
—
(119,370)
—
—
(576)
(119,370)
—
—
(8,614)
—
—
—
512 $ 993,212 $ 40,528
4,881
—
—
3,349
—
—
—
—
$ (245,516)
—
—
$
—
12,595
(8,614)
12,595
5,839 $ 794,575
4,881
3,349
—
—
1
—
(1,701)
—
—
—
904
(175,048)
—
—
(796)
(175,048)
—
—
—
—
3,066
—
(6,739)
—
—
513 $ 997,926 $ 38,670
23,060
—
—
3,492
—
—
—
—
—
$ (419,660)
—
—
$
—
—
(5,744)
(6,739)
3,066
(5,744)
95 $ 617,544
23,060
—
3,492
—
1
—
(13,790)
—
—
—
7,588
(93,573)
—
—
(6,201)
(93,573)
—
—
—
(6,276)
—
—
514 $ 984,087 $ 55,454
—
(3,541)
—
—
3,541
—
$ (502,104)
$
(6,276)
—
—
—
(1,857)
(1,857)
(1,762) $ 536,189
See accompanying notes to the consolidated financial statements.
80
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities:
(cid:3)(cid:3)
$
2016
2015
2014
23,060
$
4,881
$
9,176
Provision for loan losses
Depreciation and amortization
Current income tax receivable
Deferred income tax asset
Net excess tax (benefit) deficit on stock-based compensation
Discount accretion, net of premium amortization on securities
Loan accretion
Gain on sale of mortgages, net
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
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 in due to FDIC, net
(Increase) decrease in other assets
(Decrease) 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 redemption of 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
Proceeds from maturities of non-marketable securities
Purchase of investment securities available-for-sale
Purchase of investment securities held-to-maturity
Net increase in loans
Sales (purchases) 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 investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
(Decrease) increase in repurchase agreements
Advances from FHLB
FHLB payoffs
Issuance of stock under purchase and equity compensation plans
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 period
Supplemental disclosure of cash flow information during the period:
Cash paid for interest
Net tax refunds (payments)
Supplemental schedule of non-cash investing activities:
Loans transferred to other real estate owned at fair value
FDIC submissions transferred to other liabilities
Loans purchased but not settled
23,651
14,203
4,176
(176)
(2,078)
3,067
(35,073)
(2,881)
(114,397)
101,098
(1,861)
—
(4,383)
298
—
(1,981)
—
3,492
—
(4,721)
(9,430)
(3,936)
(5,544)
7,670
4,964
91,376
275,448
—
490
(4,872)
—
(270,585)
690
(10,344)
9,231
16,105
—
—
114,629
27,972
(44,512)
218,629
(219,964)
(6,201)
—
—
(6,400)
(93,573)
(124,049)
(13,356)
166,092
152,736
14,154
2,193
6,868
—
5,285
$
$
$
$
$
$
12,444
15,502
(7,328)
(4,241)
3,677
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
(37,628)
—
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
—
—
(952)
160
(368)
(6,711)
(175,048)
(235,602)
(90,887)
256,979
166,092
13,751
(7,420)
4,576
—
9,936
$
$
$
$
$
$
6,209
15,930
10,807
(15,776)
15
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
(2,755)
(952)
—
5,570
105,594
327,368
—
—
—
—
(253,102)
(1,585)
(43,800)
3,607
56,519
(2,376)
—
196,843
(72,121)
34,005
40,000
—
(576)
—
—
(8,507)
(119,370)
(126,569)
67,519
189,460
256,979
13,863
(8,119)
4,491
(5,673)
10,038
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
81
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
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 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, a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides
a variety of banking products to both commercial and consumer clients through a network of 91 banking centers located in
Colorado, the greater Kansas City area and Texas, and through online and mobile banking products and services.
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. During the
first quarter of 2016, the Company updated the loan classifications in its allowance for loan losses model. Certain loan
classifications within the consolidated financial statement disclosures have been updated to reflect this change. Refer to note
7 for further discussion. The prior year presentations have been reclassified to conform to the current year 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.
82
b) Cash and cash equivalents—Cash and cash equivalents include cash, cash items, amounts due from other banks, amounts
due from the Federal Reserve Bank of Kansas City, federal funds sold, and interest-bearing bank deposits.
c) Investment securities—Investment securities may be classified in three categories: trading, available-for-sale and held-to-
maturity. Management determines the appropriate classification at the time of purchase and reevaluates the classification at
each reporting period. 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 (loss) (“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 OCI. 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 facility 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. Loan fees and certain costs of originating loans are deferred and the net
amount is amortized over the contractual life of the related loans. Acquired loans are initially recorded at fair value and are
accounted for under either Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality (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 are 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 is amortizing, and a discount rate reflecting the Company’s
assessment of risk inherent in the cash flow estimates. Acquired 310-30 loans are grouped together according to similar
characteristics such as type of loan, loan purpose, geography, risk rating and underlying collateral and are 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.
83
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 in 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 as a component of gain on sale of
mortgages, net in 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.
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The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is
determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to
be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential
mortgage loan commitments, the Company utilizes both "best efforts" and "mandatory delivery" forward loan sale
commitments to mitigate the risk of potential increases or decreases in the values of loans that would result from the change
in market rates for such loans. The Company manages the interest rate risk on interest rate lock commitments by entering into
forward sale contracts of mortgage backed securities. Such contracts are accounted for as derivatives and are recorded at fair
value as derivative assets or liabilities. They are carried on the consolidated statements of financial condition within other
assets or other liabilities and changes in fair value are recorded as a component of gain on sale of mortgages, net in the
consolidated statements of operations. The gross gains on loan sales are recognized based on new loan commitments with
adjustment for price and pair-off activity. Commission expenses on loans held for sale are recognized based on loans closed.
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 7.
The Company routinely evaluates adversely 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.
85
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-measurement of these loans. Any impairment in the individual pool is generally recognized in the current
period as provision for loan losses. Any improvement in the estimated cash flows, is generally not recognized immediately,
but is instead reflected as an adjustment to the related loan pools yield on a prospective basis once any previously recorded
impairment has been recaptured.
h) 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.
i) 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.
j) 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.
k) 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.
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l) 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.
m) Stock-based compensation—The Company accounts for stock-based compensation in accordance with ASC Topic
718, Compensation—Stock Compensation as amended by ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting. The Company grants stock-based awards including stock options, restricted stock and performance stock units.
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.
In the fourth quarter of 2016, the Company early adopted ASU 2016-09, with an effective date of January 1, 2016. The ASU
requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) be
recognized in the consolidated statements of operations as a component of income tax expense or benefit. The tax effects of
exercised, expired or vested awards are treated as discrete items in the reporting period in which they occur and may result in
increased volatility in our effective tax rate. As part of the adoption of this standard, the Company made an accounting
election to continue to estimate forfeitures when determining amortization expense of stock-based compensation.
Additionally, the Company applied the retrospective transition method for the presentation of “Net tax (benefit) deficit on
stock-based compensation” from a financing activity to an operating activity in the Company’s consolidated statements of
cash flows. Cash paid by the Company when directly withholding shares for tax withholding purposes is classified as a
financing activity in the consolidated statements of cash flows. For the year ended December 31, 2016, the impact of
adopting all provisions of the ASU to the Company’s consolidated statements of operations was a $2.1 million decrease to
income tax expense from excess tax benefits realized in the fourth quarter of 2016.
Prior to 2016, excess tax benefits were recognized in additional paid-in capital and tax deficiencies were recognized either as
an offset to accumulated excess tax benefits, if any, or in the consolidated statements of operations. Excess tax benefits were
not recognized until the deduction reduces taxes payable. Additionally, excess tax benefits from stock-based compensation
was included in operating and financing activities within the Company’s consolidated statements of cash flows.
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n) Warrants—The Company issued warrants to certain lead investors in 2009 and 2010. 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.
o) Income taxes—The Company and its subsidiaries file U.S. federal and certain state income tax returns on a consolidated
basis. Additionally, the Company and its subsidiaries file separate state income tax returns with various state jurisdictions.
The provision for income taxes includes the income tax balances of the Company and all of its subsidiaries.
Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax
basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or
settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax rates in the period of change. The
Company establishes a valuation allowance when management believes, based on the weight of available evidence, it is more
likely than not that some portion of the deferred tax assets will not be realized.
The Company recognizes and measures income tax benefits based upon a two-step model: 1) a tax position must be more
likely than not to be sustained based solely on its technical merits in order to be recognized; and 2) the benefit is measured as
the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between
the benefit recognized for a position in this model and the tax benefit claimed on a tax return is treated as an unrecognized tax
benefit. The Company recognizes income tax related interest and penalties in other non-interest expense.
p) 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”) using the treasury stock
method. Common stock equivalents are excluded from the computation of diluted earnings per common share in periods in
which they have an anti-dilutive effect.
q) Interest Rate Swap 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.
88
r) 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 in 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.
Note 3 Recent Accounting Pronouncements
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, if any. The Company will adopt ASU 2014-09 in the first quarter of 2018 and expects to apply the
modified retrospective approach.
Leases—In February 2016, the FASB issued ASU 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease
recognition requirements in ASC Topic 840, Leases. The new standard establishes a right-of-use (ROU) model that requires a
lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statements. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. Early adoption of the amendments in the update is permitted. The Company will adopt ASU 2016-02
in the first quarter of 2019 and is currently in the process of evaluating the impact of the ASU's adoption on the Company's
consolidated financial statements.
Financial Instruments - Credit Losses—In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments. This update replaces the current incurred loss methodology for recognizing credit losses with a current
expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the
reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amendment
broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the
update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a
more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help
investors and other financial statement users better understand significant estimates and judgments used in estimating credit
losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. The amendments in this update
are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption in fiscal years beginning after December 15, 2018 is permitted. The amendment requires the use of the modified
retrospective approach for adoption. The Company is in the process of evaluating the impact of the ASU’s adoption on the
Company’s consolidated financial statements.
The Company reviewed ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and
Financial Liabilities (Topic 825), ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash
Payments and ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
and does not expect the adoption of these pronouncements to have a material impact on its financial statements.
89
Note 4 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities.
These investment securities totaled $1.2 billion at December 31, 2016 and were comprised of $0.9 billion of available-for-
sale securities and $0.3 billion of held-to-maturity securities. At December 31, 2015, investment securities totaled $1.6 billion
and included $1.2 billion of available-for-sale securities and $0.4 billion of held-to-maturity securities.
Available-for-sale
At December 31, 2016 and 2015, the Company held $0.9 billion and $1.2 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
Municipal securities
Other securities
Total investment securities available-for-sale
$ 894,737 $
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
Municipal securities
Other securities
Total investment securities available-for-sale
$ 1,167,819 $
Amortized
Gross
Gross
cost
unrealized gains unrealized losses
Fair value
December 31, 2016
$ 223,781 $
3,909
$
(530)
$
227,160
666,616
3,921
419
2,124
—
—
6,033
$
(16,001)
(7)
—
(16,538)
652,739
3,914
419
884,232
$
Amortized
Gross
Gross
cost
unrealized gains unrealized losses
Fair value
December 31, 2015
$
305,773 $
5,721
$
(516) $
310,978
861,321
306
419
3,638
—
—
9,359
$
(19,416)
—
—
845,543
306
419
(19,932) $ 1,157,246
At December 31, 2016 and 2015, 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”).
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The table below summarizes the available-for-sale investment securities with 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
Municipal securities
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, 2016
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 100,898 $
(530)
$
—
$
—
$ 100,898
$
(530)
137,576
3,058
(2,976)
(7)
$ 241,532 $ (3,513)
385,707
—
$ 385,707
(13,025)
—
$ (13,025)
523,283
3,058
$ 627,239
(16,001)
(7)
$ (16,538)
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)
643,481
$ (19,012) $ 752,663
(19,416)
$ (19,932)
Management evaluated all of the available-for-sale securities in an unrealized loss position and concluded that no OTTI
existed at December 31, 2016 or December 31, 2015. The unrealized losses in the Company's investments issued or
guaranteed by U.S. government agencies or sponsored enterprises at December 31, 2016 were caused by changes in interest
rates. The portfolio included 61 securities, having an aggregate fair value of $627.2 million, which were in an unrealized loss
position at December 31, 2016, compared to 66 securities, with an aggregate fair value of $752.7 million at December 31,
2015. 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.
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, and the Federal Home Loan Bank (“FHLB”), if needed. The fair value of
available-for-sale investment securities pledged as collateral totaled $373.7 million and $335.8 million at December 31, 2016
and 2015, respectively. 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 2016. Certain investment
securities may also be pledged as collateral for the line of credit at the FHLB of Topeka; however, no investment securities
were pledged for this purpose at December 31, 2016 or December 31, 2015.
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 3.4 years and 3.6 years at December 31, 2016
and 2015, respectively. This estimate is based on assumptions and actual results may differ. At December 31, 2016 and 2015,
the duration of the total available-for-sale investment portfolio was 3.2 years and 3.4 years, respectively.
As of December 31, 2016, municipal securities with an amortized cost and fair value of $3.3 million were due after one year
through five years, while municipal securities with an amortized cost and fair value of $0.6 million were due after five years
through ten years. Other securities of $0.4 million as of December 31, 2016, have no stated contractual maturity date.
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Held-to-maturity
At December 31, 2016 and 2015, the Company held $332.5 million and $427.5 million of held-to-maturity investment
securities, respectively. Held-to-maturity investment 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
$ 263,411 $ 1,685
$ (234) $ 264,862
December 31, 2016
Gross
Gross
unrealized unrealized
gains
losses
Fair value
Amortized
cost
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Total investment securities held-to-maturity
69,094
16
$ 332,505 $ 1,701
(1,399)
67,711
$ (1,633) $ 332,573
December 31, 2015
Gross
Gross
unrealized unrealized
gains
losses
Fair value
Amortized
cost
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
$ 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
35
$ 427,503 $ 2,946
(1,634)
85,773
$ (1,864) $ 428,585
The table below summarizes the held-to-maturity investment securities with 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, 2016
12 months or more
Fair
value
Unrealized
losses
Total
Unrealized
losses
Fair
value
$ 27,799
$
(234) $
— $
— $ 27,799 $
(234)
26,992
$ 54,791
$
32,146
(357)
(1,399)
(591) $ 32,146 $ (1,042) $ 86,937 $ (1,633)
(1,042)
59,138
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 $
45,872
(180)
(1,454)
(385) $ 46,725 $ (1,479)
74,362
(1,634)
$ 109,856 $ (1,864)
92
The held-to-maturity portfolio included 15 securities, having an aggregate fair value of $86.9 million, which were in an
unrealized loss position at December 31, 2016, compared to 16 securities, with a fair value of $109.9 million, at December
31, 2015.
Management evaluated all of the held-to-maturity securities in an unrealized loss position and concluded that no OTTI
existed at December 31, 2016 or December 31, 2015. The unrealized losses in the Company's investments issued or
guaranteed by U.S. government agencies or sponsored enterprises at December 31, 2016, 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 $119.2 million and $156.5 million
at December 31, 2016 and 2015, 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, 2016 and 2015 was 3.5 years and 3.7 years,
respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity
investment portfolio was 3.2 years and 3.4 years as of December 31, 2016 and 2015, respectively.
Note 5 Non-marketable Securities
Non-marketable securities include Federal Reserve Bank stock, FHLB stock and non-negotiable certificates of deposit. At
December 31, 2016, the Company held $9.2 million of Federal Reserve Bank stock, $5.2 million of FHLB stock for
regulatory or debt facility purposes and $0.5 million of non-negotiable certificates of deposit acquired as part of the Pine
River acquisition. At December 31, 2015, the Company held $14.1 million of Federal Reserve Bank stock, $7.4 million of
FHLB stock and $1.0 million of non-negotiable certificates of deposit acquired from the Pine River acquisition.
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, 2016 or December 31, 2015.
Note 6 Loans
The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the
Company’s acquisitions.
The table below shows the loan portfolio composition including carrying value by segment of loans accounted for under ASC
310-30 and loans not accounted for under this guidance, which includes our originated loans. The carrying value of loans is
net of discounts on loans excluded from ASC 310-30, and fees and costs of $6.3 million and $8.1 million at December 31,
2016 and 2015, respectively. At December 31, 2016, $14.4 million of non 310-30 loans were held-for-sale, most of which
were in the residential real estate segment.
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
December 31, 2016
ASC 310-30 loans Non 310-30 loans
Total loans
% of total
$
$
39,280
89,150
16,524
898
145,852
$
$
1,521,150
437,642
728,361
27,916
2,715,069
$
$
1,560,430
526,792
744,885
28,814
2,860,921
54.6%
18.4%
26.0%
1.0%
100.0%
93
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
December 31, 2015
ASC 310-30 loans Non 310-30 loans
Total loans
% of total
$
$
57,474
121,173
21,452
2,731
202,830
$
$
1,369,946
321,712
662,550
30,635
2,384,843
$
$
1,427,420
442,885
684,002
33,366
2,587,673
55.2%
17.1%
26.4%
1.3%
100.0%
Delinquency for loans excluded from ASC 310-30 is shown in the following tables at December 31, 2016 and 2015:
30-59
days past
due
60-89
days past
due
Greater
than 90
days past
due
(cid:3)
Total past
due
Current
Total
non
310-30
loans
Loans > 90
days past
due and
still accruing
(cid:3)
Non-
accrual
December 31, 2016
Loans excluded from ASC 310-30:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
$
Total Commercial
Commercial real estate non-owner
occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans excluded from ASC
3,134 $
583
501
2
4,220
4,009 $
216
—
—
4,225
1,078 $
56
—
6,548
7,682
8,221 $ 1,066,475 $ 1,074,696 $
855
501
6,550
16,127
220,689
134,136
83,723
1,505,023
221,544
134,637
90,273
1,521,150
—
—
—
—
—
888
115
1,003
83
—
—
—
—
—
645
61
706
8
—
—
—
28
28
1,458
22
1,480
—
—
—
—
28
28
2,991
198
3,189
91
90,314
13,306
24,954
309,040
437,614
672,699
52,473
725,172
27,825
90,314
13,306
24,954
309,068
437,642
675,690
52,671
728,361
27,916
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 8,688
2,056
1,905
12,645
25,294
—
—
—
66
66
4,522
654
5,176
181
310-30
$
5,306 $
4,939 $
9,190 $ 19,435 $ 2,695,634 $ 2,715,069 $
—
$ 30,717
30-59
days past
due
60-89
days past
due
Greater
than 90
days past
due
(cid:3)
Total past
due
Current
Total
non
310-30
loans
Loans > 90
days past
due and
still accruing
(cid:3)
Non-
accrual
December 31, 2015
Loans excluded from ASC 310-30:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner
occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans excluded from ASC
$
2,252 $
370
441
23
3,086
359
—
—
2,340
2,699
1,909
299
2,208
239
238 $
111
58
5,781
6,188
49 $
66
1,222
—
1,337
2,539 $
547
1,721
5,804
10,611
890,350 $
184,072
143,837
141,076
1,359,335
892,889 $
184,619
145,558
146,880
1,369,946
188
—
38
182
408
911
237
1,148
26
—
—
22
968
990
1,481
194
1,675
38
547
—
60
3,490
4,097
4,301
730
5,031
303
29,596
5,575
9,813
272,631
317,615
610,192
47,327
657,519
30,332
30,143
5,575
9,873
276,121
321,712
614,493
48,057
662,550
30,635
—
—
—
—
—
—
—
—
—
—
$ 4,830
1,273
1,984
12,008
20,095
188
—
22
1,013
1,223
124
6
130
36
3,713
584
4,297
32
310-30
$
8,232 $
7,770 $
4,040 $ 20,042 $ 2,364,801 $ 2,384,843 $
166
$ 25,647
94
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.
Non-accrual loans excluded from the scope of ASC 310-30 totaled $30.7 million at December 31, 2016, representing an
increase of $5.1 million, or 19.8%, from December 31, 2015. The increase was driven by activity within the commercial and
industrial and energy sectors. Non-performing loans within the commercial and industrial sector increased $3.9 million from
December 31, 2015, largely due to two loan relationships totaling $6.6 million at December 31, 2016, offset by charge-offs
throughout the year. Non-performing energy loans totaled $12.6 million at December 31, 2016, representing an increase of
$0.6 million from December 31, 2015. The increase was due to three energy loan relationships totaling $12.6 million at
December 31, 2016 that were placed on non-accrual during 2016, mostly offset by two loan relationships resolved and
charged-off during 2016.
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows at December 31,
2016 and 2015:
Loans excluded from ASC 310-30:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
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
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans accounted for under ASC 310-30
Total loans
Pass
Special
mention
Substandard
Doubtful
Total
December 31, 2016
$
$
1,041,326
202,036
123,809
77,619
1,444,790
90,099
10,758
22,495
300,922
424,274
669,148
51,250
720,398
27,669
2,617,131
27,436
38,895
12,477
721
79,529
2,696,660
$
$
$
$
$
$
$
$
7,243
9,371
8,922
—
25,536
—
2,548
238
5,895
8,681
1,215
178
1,393
59
35,669
610
967
1,327
17
2,921
38,590
$
$
$
$
$
25,636
10,137
1,906
7,811
45,490
215
—
2,221
2,251
4,687
5,316
1,243
6,559
188
56,924
11,234
45,520
2,720
160
59,634
116,558
$
$
$
$
$
491
—
—
4,843
5,334
$
1,074,696
221,544
134,637
90,273
1,521,150
—
—
—
—
—
11
—
11
—
5,345
—
3,768
—
—
3,768
9,113
90,314
13,306
24,954
309,068
437,642
675,690
52,671
728,361
27,916
2,715,069
39,280
89,150
16,524
898
145,852
2,860,921
$
$
$
$
95
Loans excluded from ASC 310-30:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
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
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans accounted for under ASC 310-30
Total loans
Pass
Special
mention
Substandard
Doubtful
Total
December 31, 2015
$
$
865,840
174,108
132,450
92,152
1,264,550
24,686
5,066
9,851
262,035
301,638
609,196
46,437
655,633
30,483
2,252,304
35,384
49,817
16,960
2,296
104,457
2,356,761
$
$
$
$
$
$
$
$
8,363
5,595
2,440
36,503
52,901
4,882
509
—
8,091
13,482
349
252
601
67
67,051
787
352
1,604
94
2,837
69,888
$
$
$
$
$
16,769
4,916
10,668
16,098
48,451
575
—
22
5,722
6,319
4,921
1,368
6,289
85
61,144
21,303
67,235
2,888
341
91,767
152,911
$
$
$
$
$
1,917
—
—
2,127
4,044
—
—
—
273
273
27
—
27
—
4,344
—
3,769
—
—
3,769
8,113
$
892,889
184,619
145,558
146,880
1,369,946
30,143
5,575
9,873
276,121
321,712
614,493
48,057
662,550
30,635
2,384,843
57,474
121,173
21,452
2,731
202,830
2,587,673
$
$
$
$
The Company’s substandard energy loans excluded from ASC 310-30 decreased $8.3 million from December 31, 2015, due
to charge-offs of $9.9 million from two loan relationships in 2016, partially offset by one energy loan relationship totaling
$3.2 million that was downgraded from special mention during 2016. Non 310-30 substandard loans within the commercial
and industrial sector increased $8.9 million from December 31, 2015, primarily due to downgrades of two loan relationships
totaling $7.7 million during 2016. Non 310-30 substandard loans within the agriculture sector decreased $8.8 million from
December 31, 2015, due to a pay-off of one loan relationship totaling $8.4 million during 2016. Non 310-30 special mention
loans within the owner occupied commercial real estate sector increased $3.8 million from December 31, 2015, due to a
downgrade of one loan relationship totaling $4.3 million during 2016, partially offset by other net decreases of $0.5 million.
Non 310-30 special mention loans within the agriculture sector increased $6.5 million from December 31, 2015, due to one
loan relationship totaling $8.9 million downgraded to special mention during 2016, partially offset by a downgrade to
substandard of one loan relationship totaling $1.6 million at December 31, 2015 and other decreases of $0.9 million during
2016.
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, 2016, the Company measured $28.2 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 $7.8 million that individually were less than $250 thousand
each, were measured through our general ALL reserves due to their relatively small size.
At December 31, 2016 and 2015, the Company’s recorded investment in impaired loans was $38.3 million and $37.4 million,
respectively. Impaired loans at December 31, 2016 were primarily comprised of eight relationships totaling $25.3 million.
Four of the relationships were in the commercial and industrial sector, three of the relationships were in the energy sector and
one relationship was in the agriculture sector. Impaired loans had a collective related allowance for loan losses allocated to
them of $2.4 million and $4.4 million at December 31, 2016 and 2015, respectively.
96
Additional information regarding impaired loans at December 31, 2016 and 2015 is set forth in the table below:
$
$
$
With no related allowance recorded:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
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:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
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
December 31, 2016
December 31, 2015
Unpaid
principal
balance
Allowance
for loan
losses
allocated
Recorded
investment
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
8,671 $
3,350
2,044
17,142
31,207
$
7,495
3,197
1,987
6,105
18,784
— $
—
—
—
—
4,997 $
2,218
1,877
5,815
14,907
4,995 $
2,150
1,878
5,749
14,772
—
—
33
394
427
1,551
54
1,605
4
—
—
33
343
376
1,426
51
1,477
4
—
—
—
—
—
—
—
—
—
190
—
—
154
344
947
113
1,060
—
188
—
—
153
341
941
112
1,052
—
33,243 $
20,641
$
— $
16,311 $
16,165 $
3,495 $
957
—
11,216
15,668
$
3,464
642
—
6,548
10,654
492 $
2
—
1,866
2,360
4,537 $
1,272
254
6,279
12,342
4,503 $
1,117
248
6,260
12,128
—
—
—
261
261
5,646
1,781
7,427
188
—
—
—
255
255
5,016
1,532
6,548
184
—
—
—
1
1
31
14
45
2
—
—
61
1,642
1,703
5,827
1,800
7,627
86
—
—
59
1,630
1,689
5,701
1,593
7,294
86
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,918
2
1
2,127
4,048
—
—
—
274
274
54
11
65
1
allowance recorded
Total impaired loans
$
$
23,544 $
56,787 $
17,641
38,282
$
$
2,408 $
2,408 $
21,758 $
38,069 $
21,198 $
37,363 $
4,388
4,388
97
The table below shows additional information regarding the average recorded investment and interest income recognized on
impaired loans for the periods presented:
With no related allowance recorded:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
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:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
December 31, 2016
For the years ended
December 31, 2015
December 31, 2014
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
$
$
7,909
3,249
1,830
12,565
25,553
$
252
92
—
—
344
$
5,049
2,221
1,961
5,679
14,910
$
266
83
—
—
349
$ 21,827
1,018
3,458
—
26,303
—
—
—
368
368
1,466
54
1,520
4
—
—
—
22
22
19
2
21
—
188
—
—
157
345
956
113
1,069
—
—
—
—
—
—
15
—
15
—
—
—
—
—
—
605
—
605
—
414
51
126
—
591
—
—
—
—
—
7
—
7
—
$ 27,445
$
387
$ 16,324
$
363
$ 26,908
$
598
$
$
3,545
703
162
10,008
14,418
—
—
34
268
302
5,200
1,600
6,800
196
198
20
5
—
223
—
—
2
13
15
88
56
144
—
382
769
$
$
6,273
1,230
276
3,092
10,871
—
—
60
1,667
1,727
5,911
1,725
7,636
92
$
1
27
4
—
32
—
—
1
48
49
119
51
170
1
$
893
1,166
158
—
2,217
—
—
—
1,095
1,095
6,594
1,568
8,162
265
$ 20,326
$ 36,650
$
$
252
615
$ 11,739
$ 38,647
$
$
7
40
—
—
47
—
—
—
56
56
101
60
161
1
265
863
Total impaired loans with a related allowance
recorded
Total impaired loans
$ 21,716
$ 49,161
$
$
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, 2016, 2015 and 2014 was immaterial.
98
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, 2016 and 2015, the Company had $5.8 million and $8.4 million, respectively, of accruing TDRs that
had been restructured from the original terms in order to facilitate repayment.
Non-accruing TDRs at December 31, 2016 and 2015 totaled $16.7 million and $17.8 million, respectively.
During 2016, the Company restructured 17 loans with a recorded investment of $12.3 million at December 31, 2016 to
facilitate repayment. Substantially all of the loan modifications were a reduction of the principal payment, a reduction in
interest rate, or 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, 2016 and 2015:
December 31, 2016
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
$
$
Recorded
investment
Unpaid
Average year-to-date
recorded investments principal balance
3,440 $
572
1,996
9
6,017 $
3,464 $
590
1,969
7
6,030 $
3,302 $
538
1,920
7
5,767 $
December 31, 2015
Recorded
investment
Unpaid
Average year-to-date
recorded investments principal balance
5,951 $
394
2,234
15
8,594 $
5,918 $
389
2,166
12
8,485 $
5,874 $
388
2,162
12
8,436 $
Unfunded commitments
to fund TDRs
Unfunded commitments
to fund TDRs
100
—
2
—
102
163
—
2
—
165
The following table summarizes the Company’s carrying value of non-accrual TDRs as of December 31, 2016 and 2015:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total non-accruing TDRs
December 31, 2016
December 31, 2015
15,265 $
—
1,301
142
16,708 $
16,297
816
678
2
17,793
$
$
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 twelve months and had defaulted on their restructured terms. The defaulted
TDRs consisted of two commercial loans totaling $6.4 million, and three residential totaling loans $0.4 million. The
allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation,
including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt
restructurings.
During 2015, 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. For purposes of this disclosure, the Company considers “default” to mean 90 days or
more past due on principal or interest.
99
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 2016 and 2015:
Accretable yield beginning balance
Reclassification from non-accretable difference
Reclassification to non-accretable difference
Accretion
Accretable yield ending balance
December 31, 2016
$
84,194 $
14,316
(4,778)
(33,256)
60,476 $
December 31, 2015
113,463
22,392
(4,387)
(47,274)
84,194
$
Below is the composition of the net book value for loans accounted for under ASC 310-30 at December 31, 2016 and 2015:
Contractual cash flows
Non-accretable difference
Accretable yield
December 31, 2016
$
537,611 $
(331,283)
(60,476)
145,852 $
December 31, 2015
627,843
(340,819)
(84,194)
202,830
Loans accounted for under ASC 310-30
$
100
Note 7 Allowance for Loan Losses
The tables below detail the Company’s allowance for loan losses (“ALL”) and recorded investment in loans as of and for the
years ended December 31, 2016 and 2015:
Beginning balance
Non 310-30 beginning balance
Charge-offs
Recoveries
Provision
Non 310-30 ending balance
ASC 310-30 beginning balance
Charge-offs
Recoveries
(Recoupment) provision
ASC 310-30 ending balance
Ending balance
Commercial
$
Year ended December 31, 2016
Non-owner
occupied
commercial
real estate
Residential
real estate
Consumer
Total
17,261 $
16,473
(20,684)
89
22,943
18,821
788
—
—
(788)
—
18,821 $
4,166 $
3,939
(280)
123
1,640
5,422
227
(41)
—
34
220
5,642 $
5,281 $
5,245
(408)
108
(558)
4,387
36
—
—
(36)
—
4,387 $
411 $
385
(771)
274
431
319
26
(6)
—
(15)
5
324 $
27,119
26,042
(22,143)
594
24,456
28,949
1,077
(47)
—
(805)
225
29,174
$
Ending allowance balance attributable to:
Non 310-30 loans individually evaluated for
impairment
$
2,360 $
1 $
46 $
2 $
2,409
Non 310-30 loans collectively evaluated for
impairment
ASC 310-30 loans
Total ending allowance balance
$
Loans:
Non 310-30 individually evaluated for
16,461
—
18,821 $
5,421
220
5,642 $
4,341
—
4,387 $
317
5
324 $
26,540
225
29,174
impairment
$
29,411 $
631 $
7,346 $
188 $
37,576
Non 310-30 collectively evaluated for
impairment
ASC 310-30 loans
Total loans
1,491,739
39,280
437,011
89,150
721,015
16,524
$ 1,560,430 $ 526,792 $ 744,885 $
27,728
898
28,814 $
2,677,493
145,852
2,860,921
101
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 (recoupment)
ASC 310-30 ending balance
Ending balance
Commercial
$
Year ended December 31, 2015
Non-owner
occupied
commercial
real estate
Residential
real estate
Consumer
Total
10,384 $
9,916
(1,911)
98
8,370
16,473
468
—
—
320
788
17,261 $
3,042 $
2,820
(222)
141
1,200
3,939
222
—
—
5
227
4,166 $
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 $
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
$
4,048 $
275 $
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
12,425
788
17,261 $
3,664
227
4,166 $
5,180
36
5,281 $
384
26
411 $
21,653
1,077
27,119
impairment
$
26,299 $
1,690 $
7,593 $
86 $
35,668
Non 310-30 collectively evaluated for
impairment
ASC 310-30 loans
Total loans
1,343,647
57,474
320,022
121,173
654,957
21,452
$ 1,427,420 $ 442,885 $ 684,002 $
30,549
2,731
33,366 $
2,349,175
202,830
2,587,673
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. During the first quarter of
2016, the Company updated the loan classifications in its allowance for loan losses model to include owner occupied
commercial real estate and agriculture within the commercial loan segment and present energy as its own loan class within
the commercial segment. The prior year presentation has been reclassified to conform to the current year presentation.
The Company had $21.6 million of net charge-offs on non 310-30 loans during 2016, of which $19.1 million were from the
energy portfolio. Management’s evaluation of credit quality resulted in a provision for loan losses on non 310-30 loans of
$24.5 million during 2016, of which $18.9 million was from the energy portfolio. During 2015, The Company had $2.9
million of net charge-offs on non ASC 310-30 loans and recorded a provision for loan losses on non 310-30 loans of $12.1
million.
During 2016 and 2015, the Company re-measured the expected cash flows of the loan pools accounted for under ASC 310-
30. The re-measurement in 2016 resulted in a net recoupment of $805 thousand, which was comprised primarily of a $788
thousand recoupment in the commercial segment. The re-measurement in 2015 resulted in a provision of $366 thousand,
which was comprised primarily of a $320 thousand commercial segment provision.
102
Note 8 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2016 and 2015:
Land
Buildings and improvements
Equipment
Total premises and equipment, at cost
Less: accumulated depreciation and amortization
Premises and equipment, net
December 31, 2016 December 31, 2015
29,991
$
71,908
39,382
141,281
(38,178)
103,103
29,864 $
69,980
42,067
141,911
(46,240)
95,671 $
$
The Company incurred $8.7 million, $10.1 million and $10.6 million of depreciation expense during 2016, 2015 and 2014,
respectively, as a component of occupancy and equipment expense in the consolidated statements of operations. The
Company disposed of $3.5 million, $0.1 million and $1.0 million of premises and equipment, net, during 2016, 2015 and
2014, 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. At December 31, 2016, the Company held one building related to these consolidations.
During 2016, the Company entered into definitive agreements for the sale of four banking centers expected to close during
the second quarter of 2017. The sale includes buildings classified as held-for-sale with an estimated fair value of $1.6 million
at December 31, 2016.
Space in certain facilities is leased under operating leases. Below is a summary of future minimum lease payments for the
years following 2016:
2017
2018
2019
2020
2021
Thereafter
Total
Note 9 Other Real Estate Owned
A summary of the activity in the OREO balances during 2016 and 2015 is as follows:
Beginning balance
Purchases through acquisition, at fair value
Transfers from loan portfolio, at fair value
Impairments
Sales, net
Ending balance
$
$
3,328
3,161
3,050
2,942
3,027
15,322
30,830
For the years ended December 31,
$
$
2016
20,814 $
—
6,868
(298)
(11,722)
15,662
$
2015
29,120
1,488
4,576
(1,580)
(12,790)
20,814
The OREO balances exclude $1.6 million and $5.5 million at December 31, 2016 and 2015, 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. Included in Sales, net
are net gains of $4.4 million and $2.8 million for the years ended December 31, 2016 and 2015, respectively.
103
Note 10 Goodwill and Intangible Assets
In connection with our acquisitions, the Company recorded core deposit intangible assets of $38.4 million. 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
$5.5 million, $5.4 million and $5.3 million during 2016, 2015 and 2014, respectively. The following table shows the
estimated future amortization expenses.
2017
2018
2019
2020
2021
$
5,480
1,122
135
135
135
The accumulated amortization of the core deposit intangible assets was $31.5 million and $25.8 million at December 31,
2016 and 2015, respectively.
The Company had goodwill of $59.6 million at December 31, 2016, 2015 and 2014. 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
2016, 2015 or 2014.
Note 11 Deposits
Total deposits were $3.9 billion and $3.8 billion at December 31, 2016 and 2015, respectively. Time deposits were $1.2
billion at both December 31, 2016 and 2015. At December 31, 2016, deposits totaling $103.0 million were held-for-sale,
including $51.6 million of time deposits. The following table summarizes the Company’s time deposits, based upon
contractual maturity, at December 31, 2016 and 2015, by remaining maturity:
December 31, 2016
December 31, 2015
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
Weighted
average
rate
Weighted
average
rate
$
Balance
200,054 0.59% $
205,875 0.70%
382,852 0.76%
244,135 0.90%
76,865 1.32%
50,921 1.44%
7,303 1.32%
4,041 1.19%
Balance
214,724 0.53%
200,771 0.52%
391,750 0.68%
271,353 0.81%
65,306 1.25%
36,955 1.39%
7,942 1.08%
5,082 1.48%
$ 1,172,046 0.82% $ 1,193,883 0.72%
The Company incurred interest expense on deposits as follows during the periods indicated:
For the years ended December 31,
2015
2016
2014
Interest bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Total
$
369 $
3,600
1,016
8,978
13,963 $
$
315 $
3,372
837
9,085
13,609 $
317
3,467
539
9,797
14,120
104
The Federal Reserve System requires cash balances to be maintained at the Federal Reserve Bank based on certain deposit
levels. There was no minimum reserve requirement for the Bank at December 31, 2016. The aggregate amount of certificates
of deposit in denominations that meet or exceed the FDIC insurance limit was $119.7 million and $86.9 million at December
31, 2016 and 2015, respectively.
Note 12 Borrowings
The following table sets forth selected information regarding repurchase agreements during 2016, 2015 and 2014:
As of and for the years ended December 31,
2015
2014
2016
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
$ 154,404 $ 288,591 $ 133,552
$ 109,246 $ 197,726 $ 99,057
0.13%
0.09%
0.14%
As of December 31, 2016, 2015 and 2014, the Company had pledged mortgage-backed securities with a fair value of
approximately $99.1 million, $205.7 million and $152.4 million, respectively, for securities sold under agreements to
repurchase. Additionally, there was $7.0 million, $68.1 million and $18.8 million of excess collateral pledged for repurchase
agreements at December 31, 2016, 2015 and 2014, respectively.
The vast majority of the Company’s repurchase agreements are overnight transactions with clients that mature the day after
the transaction. During 2016, 2015 and 2014, the overnight agreements had a weighted average interest rate of 0.17%, 0.18%
and 0.13%, respectively. At December 31, 2016, 2015 and 2014 none 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 FHLB of Topeka, the Bank has access to a line of credit and term financing from the FHLB with
available credit of $903.9 million at December 31, 2016. Total advances under the line of credit at December 31, 2016 were
$13.7 million with an interest rate of 0.72%, and had certain loans pledged as collateral. The Bank had no outstanding
advances at December 31, 2015 and 2014.
At December 31, 2016, 2015 and 2014, the Bank had $25.0 million in term advances from the FHLB of Des Moines. All of
the outstanding advances have fixed interest rates of 1.81% - 2.33%, with maturity dates of 2018 - 2020. The Bank had
investment securities pledges as collateral for FHLB of Des Moines advances in the amount of $28.8 million, $41.7 million
and $0.0 million at December 31, 2016, 2015 and 2014, respectively. Interest expense related to FHLB advances totaled $693
thousand, $666 thousand and $164 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
Note 13 Regulatory Capital
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 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, 2016, the Company and the Bank met all capital requirements and the
Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions.
In February 2016, the 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 in
cash to the Company in February 2016.
105
At December 31, 2016 and 2015, the Bank met the requirements to be considered “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized”, the Bank must maintain capital ratios as set
forth in the table below. The following table sets forth the capital ratios of the Company and the Bank at December 31, 2016
and 2015:
December 31, 2016
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized
Ratio
Amount
Ratio
Amount
Ratio
Actual
Amount
10.4%
8.6%
14.2%
11.8%
14.2%
11.8%
15.0%
12.7%
$
$
$
$
470,259
389,189
470,259
389,189
470,259
389,189
N/A
4.5%
N/A
6.5%
N/A
8.0%
499,759
418,689
N/A
10.0%
N/A
202,903
N/A
293,082
N/A
264,596
N/A
330,745
$
$
$
$
4.0%
4.0%
4.5%
4.5%
6.0%
6.0%
8.0%
8.0%
$
$
$
$
181,019
180,358
203,647
202,903
199,467
198,447
265,955
264,596
December 31, 2015
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized
Ratio
Amount
Ratio
Amount
Ratio
Actual
Amount
11.8%
11.2%
17.5%
16.6%
17.5%
16.6%
18.4%
17.5%
$
$
$
$
550,368
519,766
550,368
519,766
550,368
519,766
N/A
5.0%
N/A
6.5%
N/A
8.0%
578,448
547,846
N/A
10.0%
N/A
464,078
N/A
301,651
N/A
344,989
N/A
376,352
$
$
$
$
4.0%
4.0%
4.5%
4.5%
6.0%
6.0%
8.0%
8.0%
$
$
$
$
187,325
185,631
210,741
208,835
189,101
188,176
252,134
250,901
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
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
Note 14 FDIC Loss-Sharing Related
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 loss-sharing related income in the consolidated statements of operations. FDIC related income was $0, $(15.6)
million and $(36.6) million for 2016, 2015 and 2014, respectively. The amounts in 2015 and 2014 were mostly driven by the
FDIC indemnification asset amortization.
106
Note 15 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, 2016, the aggregate number of Class A common stock available for issuance under the 2014 Plan is
5,588,905 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. Upon an option exercise, it is the Company’s policy to issue shares from treasury stock.
To date, the Company has issued stock options, restricted stock and performance stock units 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 2016, 2015 and 2014 which are primarily 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 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.
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 2016, 2015 and 2014:
Weighted average fair value
Weighted average risk-free interest rate (1)
Expected volatility (2)
Expected term (years) (3)
Dividend yield (4)
$
$
2016
4.24
1.47%
22.47%
6.09
1.02%
$
2015
4.37
1.59%
23.87%
6.01
1.05%
2014
6.08
2.02%
33.94%
6.01
1.06%
(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 and $0.07 per share per quarter after October 18, 2016 in accordance
with the Company’s dividend policy at the time of grant.
107
The Company issued stock options in accordance with the 2014 Plan during 2016. The following table summarizes stock
option activity for 2016:
Weighted
average
Outstanding at December 31, 2015
Granted
Forfeited
Surrendered
Exercised
Expired
Outstanding at December 31, 2016
Options exercisable at December 31, 2016
Options expected to vest
Weighted remaining
average
exercise
price
contractual Aggregate
intrinsic
value
term in
years
175,693
(39,768)
(451,766)
(83,004)
(11,484)
Options
2,596,251 $ 19.84
19.74
19.25
19.98
19.91
19.68
2,185,922 $ 19.81
1,851,858 $ 19.91
313,403 $ 19.34
4.77 $ 3,968
4.85 $ 7,753
3.46 $ 6,060
8.32 $ 1,266
Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $0.7
million, $0.7 million and $1.2 million for 2016, 2015 and 2014, respectively. At December 31, 2016, there was $0.6 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.
The following table summarizes the Company’s outstanding stock options:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Options outstanding
Weighted average
Number
outstanding
remaining contractual
life (years)
Weighted average
exercise price
162,815
279,718
1,743,389
6.72 $
8.77 $
3.32 $
18.51
19.38
20.02
Options exercisable
(cid:3)
Number
exercisable
91,978
40,515
1,719,365
Weighted average
exercise price
$
$
$
18.57
19.17
20.00
(cid:3)
(cid:3)
(cid:3)
Range of exercise price
18.00 - 18.99
19.00 - 19.99
20.00 and above
$
$
$
Restricted stock awards
The Company issued time based restricted stock during 2016, 2015 and 2014. The restricted stock awards vest over a range
of a 1 – 3 year period. 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 ten-year period, it was assumed they were forfeited.
During the year ended December 31, 2016, the Company granted market-based stock awards of 26,594 shares in accordance
with the 2014 Plan. These shares have a five-year performance period. The restricted stock shares vest upon the later of the
Company’s stock price achieving an established price goal during the performance period, and the third anniversary of the
date of grant. The fair value of these awards was determined using a Monte Carlo Simulation at grant date. The grant date fair
value of these awards was $11.28. As of December 31, 2016, the market-based performance condition had been met for these
awards and the total unrecognized compensation cost related to these non-vested awards totaled $0.3 million, and is expected
to be recognized over a weighted average period of approximately 2.2 years.
108
Performance stock units
During the year ended December 31, 2016, the Company granted 91,342 performance stock units in accordance with the
2014 Plan. These performance stock units granted represent initial target awards and do not reflect potential increases or
decreases resulting from the final performance results, which are to be determined at the end of the three-year performance
period (vesting date). The actual number of shares to be awarded at the end of the performance period will range from 0% -
150% of the initial target awards. 60% of the award is based on the Company’s cumulative earnings per share (EPS target)
during the performance period, and 40% of the award is based on the Company’s cumulative total shareholder return (TSR
target), or TSR, during the performance period. On the vesting date, the Company’s TSR will be compared to the respective
TSRs of the companies comprising the KBW Regional Index at the grant date to determine the shares awarded. The fair
value of the EPS target portion of the award was determined based on the closing stock price of the Company’s common
stock on the grant date. The fair value of the TSR target portion of the award was determined using a Monte Carlo Simulation
at the grant date. The weighted-average grant date fair value per unit of the EPS target portion and the TSR target portion was
$19.56 and $16.52, respectively. As of December 31, 2016, the total unrecognized compensation cost related to these non-
vested units totaled $1.0 million, and is expected to be recognized over a weighted average period of approximately 2.4 years.
The following table summarizes restricted stock activity during 2016:
Unvested at December 31, 2015
Vested
Granted
Forfeited
Surrendered
Unvested at December 31, 2016
(cid:3) (cid:3)
(cid:3) (cid:3) Weighted
Restricted
shares
836,031 $
(249,766)
122,992
(28,597)
(181,389)
499,271 $
Weighted
average grant- (cid:3) Performance (cid:3) (cid:3) average grant-
(cid:3) (cid:3) date fair value
date fair value (cid:3)
stock units
15.42 (cid:3)
—
15.99 (cid:3)
—
19.15 (cid:3)
18.22
18.95 (cid:3)
18.22
15.50 (cid:3)
—
15.82 (cid:3)
18.22
— (cid:3) $
— (cid:3) (cid:3)
91,342 (cid:3) (cid:3)
(6,047)(cid:3) (cid:3)
— (cid:3) (cid:3)
85,295 (cid:3) $
Expense related to non-vested restricted awards and units totaled $2.6 million, $2.6 million and $2.3 million during 2016,
2015 and 2014, respectively, and is a component of salaries and benefits in the Company’s consolidated statements of
operations.
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, of which 366,337 was available for issuance.
Under the ESPP, employees purchased 19,178 shares during 2016.
Note 16 Warrants
The Company had 250,750 and 725,750 outstanding warrants to purchase Company stock as of December 31, 2016 and
2015, respectively. The warrants were granted to certain lead investors 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 2016, 475,000 warrants were exercised in
non-cash transactions. The modified term of the warrants outstanding at December 31, 2016 is for ten years and six months
from the date of grant and expires on September 15, 2020.
109
During 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. Prior to the
warrants reclassification to additional paid-in-capital during 2015, the warrants were revalued each reporting period. The
Company recorded an expense of $0.1 million in 2015 and a benefit of $3.0 million in 2014, in the consolidated statements of
operations, resulting from the change in fair value of the warrant liability.
Note 17 Common Stock
During 2016, the Company repurchased 4,500,936 shares for $93.6 million.
On August 5, 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. The remaining authorization under this program
at December 31, 2016 was $12.6 million.
The Company had 26,386,583 and 30,358,509 shares of Class A common stock outstanding at December 31, 2016 and 2015,
respectively. Additionally, the Company had 499,271 and 836,031 shares outstanding at December 31, 2016 and 2015,
respectively, of restricted Class A common stock issued but not yet vested under the 2014 Omnibus Incentive 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.
Note 18 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 15.
The Company had 26,386,583 and 30,358,509 shares outstanding (inclusive of Class A and B) as of December 31, 2016 and
2015, 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 2016, 2015 and 2014.
The following table illustrates the computation of basic and diluted income per share for 2016, 2015 and 2014:
Net income
Less: income allocated to participating securities
Income allocated to common shareholders
Weighted average shares outstanding for basic income per common share
Dilutive effect of equity awards
Dilutive effect of warrants
Weighted average shares outstanding for diluted income per common
share
Basic income per share
Diluted income per share
For the years ended December 31,
2015
2014
(cid:3)(cid:3)
$
2016
23,060 $
(52)
23,008 $
$
28,313,061
704,831
73,451
4,881 $
(53)
4,828 $
9,176
(38)
9,138
42,404,609
16,405
—
34,349,996
9,321
4,170
34,363,487
29,091,343
$
$
0.81 $
0.79 $
42,421,014
0.22
0.22
0.14 $
0.14 $
The Company had 2,185,922, 2,596,251 and 3,597,111 outstanding stock options to purchase common stock at weighted
average exercise prices of $19.81, $19.84 and $19.90 per share at December 31, 2016, 2015 and 2014, 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 250,750, 725,750 and 830,750 as of December 31, 2016, 2015 and 2014,
respectively. The warrants have an exercise price of $20.00, which had a dilutive effect of 73,451 and 4,170 shares during
2016 and 2015, respectively, and were out-of-the-money for purposes of dilution calculations during 2014. The Company had
499,271, 836,031 and 955,398 unvested restricted shares outstanding as of December 31, 2016, 2015 and 2014, 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.
110
Note 19 Income Taxes
(a) Income taxes
Total income taxes for 2016, 2015 and 2014 were allocated as follows:
Current expense:
U.S. federal
State and local
Total current income tax expense
Deferred expense (benefit):
U.S. federal
State and local
Total deferred income tax expense (benefit)
Income tax expense
(b) Tax Rate Reconciliation
For the years ended December 31,
2014
2015
2016
$
1,868 $
117
1,985
3,536 $ 17,032
1,909
18,941
311
3,847
626
336
962
2,947 $
(710)
(93)
(803)
3,044 $
(13,830)
(1,946)
(15,776)
3,165
$
Income tax expense attributable to income before taxes was $3.0 million, $3.0 million and $3.2 million for 2016, 2015 and
2014, 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,
2014
2015
2016
4,319
2,774 $
9,103 $
(24)
142
295
(889)
(2,568)
(3,798)
(177)
(576)
(724)
930
3,520
(2,002)
(1,034)
37
—
—
(367)
—
40
82
73
3,165
3,044 $
2,947 $
$
$
111
(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, 2016 and 2015 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
Net unrealized losses on investment securities
Other
Total deferred tax assets
Deferred tax liabilities:
Net unrealized gains on investment securities
Premises and equipment
Other real estate owned
Prepaid expenses
Total deferred tax liabilities
Net deferred tax asset
December 31, 2016 December 31, 2015
$
$
5,865 $
11,063
12,279
—
7,429
3,296
4,554
2,218
1,198
2,177
1,888
1,082
1,526
54,575
—
(937)
(426)
(402)
(1,765)
52,810 $
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
At December 31, 2016, the Company has federal and state net operating loss carryovers (NOLs) of $5.6 million and $5.9
million, respectively, which are available to offset future taxable income. The federal NOLs expire in varying amounts
through 2036, and the state NOLs expire in varying amounts between 2026 and 2036. The Company also has a minimum tax
credit carryover of $1.9 million that does not expire. The minimum tax credit is available to reduce income tax obligations in
future periods to the extent they exceed the calculated alternative minimum tax. The Company does not expect any tax
attribute carryovers to expire before they are utilized.
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, 2016 and 2015, 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, 2016 and 2015 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, 2013 through
2016 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.
112
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 $32.00 to $34.00 per share. The strike prices for options range from $18.09 to $23.75, with a large portion of the awards
having strike prices of $20.00. Depending on the movement in our stock price, these stock-based compensation awards may
create either an excess tax benefit or tax deficiency depending on the relationship between the fair value at the time of vesting
or exercise and the estimated fair value recorded at the time of grant. The Company adopted ASU 2016-09 effective January
1, 2016, which results in recording the excess tax benefit or tax deficiency as a component of tax benefit or expense in the
consolidated statements of operations. During 2016, the Company recorded $2.1 million of excess tax benefit related to the
settlement of certain awards during the period as a component of income tax expense in the consolidated statements of
operations. During 2015, the Company recorded a tax deficiency of $3.7 million in income tax expense resulting from
expired or exercised awards. As of December 31, 2016, the Company had a $7.4 million deferred tax asset related to stock-
based compensation, $5.6 million of which is associated with executive officers still employed by the Company.
Note 20 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 in the
consolidated statements of financial condition as of December 31, 2016 and 2015.
Information about the valuation methods used to measure fair value is provided in note 22.
Balance sheet
location
Asset derivatives fair value
December 31,
2016
December 31,
2015
Balance sheet
location
Liability derivatives fair value
December 31,
2016
December 31,
2015
Derivatives designated as hedging
instruments:
Interest rate products
Total derivatives
designated as hedging
instruments
Derivatives not designated as
hedging instruments:
Interest rate products
Interest rate lock
commitments
Forward contracts
Forward loan sales
agreements
Total derivatives not
designated as hedging
instruments
Other assets
$
9,528 $
388 Other liabilities $
1,381 $
6,232
$
9,528 $
388
$
1,381 $
6,232
Other assets
$
1,900 $
1,959 Other liabilities $
1,898 $
2,083
Other assets
Other assets
Loans held for sale
149
138
—
— Other liabilities
— Other liabilities
— Loans held for sale
6
20
161
—
—
—
$
2,187 $
1,959
$
2,085 $
2,083
113
Fair value hedges
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, 2016, the Company had 42 interest rate swaps with a notional amount of
$313.0 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed-rate loans.
The Company had 31 outstanding interest rate swaps with a notional amount of $273.3 million that were designated as fair
value hedges as of December 31, 2015.
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 2016, the Company
recognized a net gain of $293 thousand in non-interest income related to hedge ineffectiveness. During 2015, the Company
recognized a net loss of $198 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, 2016, the Company had 36 matched interest rate swap transactions with an aggregate notional amount of
$132.6 million related to this program. As of December 31, 2015, the Company had 20 matched interest rate swap
transactions with an aggregate notional amount of $68.1 million related to this program.
As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments
to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that
interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if
settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an
investor. Fair value changes of certain loans under interest rate lock commitments are hedged with forward sales contracts of
MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in non-interest income.
Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of
interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not
actively traded in stand-alone markets. The Company determines the fair value of interest rate lock commitments and
delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into
consideration the probability that the interest rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able
to meet the terms of the contracts. The Company does not expect any counterparty to any MBS contract to fail to meet its
obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Company fails to deliver the
loans subject to interest rate risk lock commitments, it will still be obligated to “pair off” MBS to the counterparty under the
forward sales agreement. Should this be required, the Company could incur significant costs in acquiring replacement loans
and such costs could have an adverse effect on the consolidated financial statements.
The fair value of the mortgage banking derivative is recorded as a freestanding asset or liability with the change in value
being recognized in current earnings during the period of change.
The Company had 78 interest rate lock commitments with a notional value of $13.8 million and 11 forward contracts with a
notional value of $11.8 million at December 31, 2016. The Company had 70 forward loan sales commitments with a notional
value of $12.0 million at December 31, 2016. At December 31, 2015, the Company had no mandatory delivery interest rate
lock commitments, forward sale contracts or forward loan sales commitments, and the best efforts mortgage banking
derivatives were immaterial to the consolidated financial statements.
114
Effect of derivative instruments on the consolidated statements of operations
The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of
operations for 2016 and 2015:
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
Interest rate lock commitments
Forward contracts
Forward loan sales agreements
Total
Location of gain (loss)
recognized in income on
derivatives
Other non-interest income
Amount of gain or (loss) recognized in income on derivatives
For the years ended December 31,
2016
2015
$
$
8,183
8,183
$
$
(2,648)
(2,648)
Location of gain (loss)
recognized in income on
hedged items
Other non-interest income
Amount of gain or (loss) recognized in income on hedged items
For the years ended December 31,
2016
2015
$
$
(7,890)
(7,890)
$
$
2,450
2,450
Location of gain (loss)
recognized in income on
derivatives
Amount of gain or (loss) recognized in income on derivatives
For the years ended December 31,
2015
2016
Other non-interest expense
Gain on sale of mortgages, net
Gain on sale of mortgages, net
Gain on sale of mortgages, net
$
$
129 $
142
118
(161)
228 $
43
—
—
—
43
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.
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, 2016, the termination value of derivatives in a net liability position related to these agreements was $1.3
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, 2016, the Company had
posted $0.8 million in eligible collateral. If the Company had breached any of these provisions at December 31, 2016, it
could have been required to settle its obligations under the agreements at the termination value.
Note 21 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 in 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, 2016 and 2015, the Company had loan
commitments totaling $602.2 million and $627.2 million, respectively, and standby letters of credit that totaled $13.5 million
and $9.8 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.
115
Total unfunded commitments at December 31, 2016 and 2015 were as follows:
Commitments to fund loans
Credit card lines of credit
Unfunded commitments under lines of credit
Commercial and standby letters of credit
Total unfunded commitments
December 31, 2016 December 31, 2015
261,004
$
18,418
347,822
9,770
637,014
149,391 $
—
452,851
13,532
615,774 $
$
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. During
the first quarter of 2016, the Company sold its credit card lines of credit and entered into a joint marketing agreement with an
unrelated third-party. As a result of this action, the Company will be able to better provide small business and consumer
clients with access to a more competitive suite of products and services.
Unfunded commitments under lines of credit—In the ordinary course of business, the Company extends revolving credit to its
clients. These arrangements may require the payment of a fee.
Commercial and standby letters of credit—As a provider of financial services, the Company routinely issues commercial and
standby letters of credit, which may be financial standby letters of credit or performance standby letters of credit. These are
various forms of “back-up” commitments to guarantee the performance of a client to a third party. While these arrangements
represent a potential cash outlay for the Company, the majority of these letters of credit will expire without being drawn
upon. Letters of credit are subject to the same underwriting and credit approval process as traditional loans, and as such,
many of them have various forms of collateral securing the commitment, which may include real estate, personal property,
receivables or marketable securities.
Contingencies
In the ordinary course of business, the Company and the Bank may be subject to litigation. Based upon the available
information and advice from the Company’s legal counsel, management does not believe that any potential, threatened or
pending litigation to which it is a party will have a material adverse effect on the Company’s liquidity, financial condition or
results of operations.
Note 22 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:
(cid:120) 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.
(cid:120) 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.
116
(cid:120) 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 2016 and 2015, there were no transfers of financial instruments between the hierarchy
levels.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as
the general classification of each instrument under the valuation hierarchy:
Fair Value of Financial Instruments Measured on a Recurring Basis
Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a recurring basis.
To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these
securities are classified as level 1. At December 31, 2016 and 2015, 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.
Interest rate swap 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.
117
Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative
financial assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate
the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the
interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical
experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment
groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies
on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e.,
an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for
similar financial instruments), which includes matching specific terms and maturities of the forward commitments against
applicable investor pricing.
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31, 2016 and
2015, in 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
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Municipal securities
Interest rate swap derivatives
Mortgage banking derivatives
Total assets at fair value
Liabilities:
Interest rate swap derivatives
Mortgage banking derivatives
Total liabilities at fair value
Level 1
Level 2
Level 3
Total
December 31, 2016
$
— $ 227,160 $
— $ 227,160
652,739
3,648
11,428
—
—
—
—
—
— $ 894,975 $
652,739
—
3,648
—
11,428
—
287
287
287 $ 895,262
— $
—
— $
3,279 $
—
3,279 $
— $
187
187 $
3,279
187
3,466
$
$
$
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
Level 1
Level 2
Level 3
Total
December 31, 2015
(cid:3)
$
— $ 310,978 $
— $
310,978
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Interest rate swap derivatives
Total assets at fair value
Liabilities:
Interest rate swap derivatives
Total liabilities at fair value
—
—
845,543
2,347
$
— $ 1,158,868 $
—
—
845,543
2,347
— $ 1,158,868
$ — $
— $
$
8,315 $ — $
— $
8,315 $
8,315
8,315
118
The table below details the changes in level 3 financial instruments during 2016:
Balance at December 31, 2015
Gain included in earnings, net
Balance at December 31, 2016
Mortgage banking
derivatives, net
$
$
—
100
100
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. At
December 31, 2016, the Company measured three loans not accounted for under ASC 310-30 at fair value on a non-recurring
basis with a carrying balance of $10.5 million and specific reserve balance of $2.4 million. At December 31, 2015, the
Company measured six loans not accounted for under ASC 310-30 at fair value on a non-recurring basis with a carrying
balance of $11.9 million and specific reserve balance of $4.3 million.
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 $0.3 million and $1.6 million of OREO impairments in the consolidated statements of operations during 2016 and
2015, 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.
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 the 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,
2016 and 2015:
December 31, 2016
Other real estate owned
Impaired loans
Other real estate owned
Impaired loans
Premises and Equipment
$
$
119
Total
15,662 $
38,282
Losses from fair value changes
154
15,200
December 31, 2015
Total
20,814 $
37,363
2,101
Losses from fair value changes
1,580
1,424
1,411
The Company did not record any liabilities for which the fair value was made on a non-recurring basis during 2016 and 2015.
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, 2016. 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, 2016
Valuation technique
Unobservable input
Qualitative measures
Other available-for-
sale securities
$
Municipal securities
Impaired loans
419 Par value
265 Par value
38,282 Appraised value
Par value
Par value
Appraised values
Discount rate
0% - 25%
120
Note 23 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.
The fair value of financial instruments at December 31, 2016 and 2015, 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, 2016
December 31, 2015
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
Municipal securities
Municipal securities
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
Loans held-for-sale
Accrued interest receivable
Interest rate swap derivatives
Mortgage banking derivatives
LIABILITIES
Deposit transaction accounts
Time deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Accrued interest payable
Interest rate swap derivatives
Mortgage banking derivatives
Cash and cash equivalents
Level 1
$
152,736 $
152,736 $
166,092 $
166,092
Level 2
227,160
227,160
310,978
310,978
Level 2
Level 2
Level 3
Level 3
652,739
3,648
265
419
652,739
3,648
265
419
845,543
—
306
419
845,543
—
306
419
Level 2
263,411
264,862
340,131
342,812
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
69,094
14,949
2,860,921
24,187
12,562
11,428
287
67,711
14,949
2,879,860
24,187
12,562
11,428
287
87,372
22,529
2,587,673
13,292
12,190
2,347
—
85,773
22,529
2,613,381
13,292
12,190
2,347
—
2,696,603
1,172,046
92,011
38,665
4,973
3,279
187
2,696,603
1,172,046
92,011
39,324
4,973
3,279
187
2,646,794
1,193,883
136,523
40,000
4,319
8,315
—
2,646,794
1,193,883
136,523
40,919
4,319
8,315
—
Cash and cash equivalents have a short-term nature and the estimated fair value is equal to the carrying value.
121
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.
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. The fair value of time deposits has a floor equal to the carrying value as the amount
payable on demand would approximate the carrying value.
Derivative assets and liabilities
Fair values for derivative assets and liabilities are fully described in note 20.
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.
122
Note 24 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, 2016 December 31, 2015
$
$
$
$
64,691 $
455,120
16,996
536,807 $
618 $
618
536,189
536,807 $
15,739
586,942
15,415
618,096
552
552
617,544
618,096
Condensed Statements of Operations
For the years ended December 31,
2016
2015
2014
Income
Interest income
Undistributed equity from subsidiaries
Distributions from subsidiaries
Other income
Total income
Expenses
Salaries and benefits
Other expenses
Total expenses
Income before income taxes
Income tax (benefit) expense
Net income
$
24 $
— $
(129,956)
155,353
—
25,421
(74,131)
86,000
1,048
12,917
2
11,712
—
—
11,714
3,529
3,578
7,107
18,314
(4,746)
23,060 $
3,349
3,572
3,597
751
6,946
4,323
5,971
7,391
(1,785)
1,090
4,881 $ 9,176
$
123
Condensed Statements of Cash Flows
For the years ended December 31,
2015
2014
2016
$
23,060 $
(25,388)
3,492
(2,078)
418
(496)
—
15,353
140,000
155,353
4,881 $
(11,869)
3,349
3,677
(1,042)
(1,004)
(9,482)
—
86,000
76,518
9,176
(11,712)
3,572
15
(2,333)
(1,282)
—
—
—
—
(6,201)
—
—
(6,131)
(93,573)
(105,905)
48,952
15,739
64,691 $
(952)
160
(368)
(6,711)
(175,048)
(182,919)
(107,405)
123,144
(576)
—
—
(8,476)
(119,370)
(128,422)
(129,704)
252,848
15,739 $ 123,144
$
First
Total
quarter
Third
quarter
December 31, 2016
Second
Fourth
quarter
quarter
$ 39,658 $ 40,764 $ 38,472 $ 41,554 $ 160,448
3,516
14,808
38,038
145,640
10,619
23,651
27,419
121,989
7,923
40,027
34,902
136,009
440
26,007
2,947
189
251 $ 23,060
0.81
0.01 $
0.79
0.01 $
3,700
37,064
5,293
31,771
11,608
33,370
10,009
1,695
$ 9,991 $ 8,314 $ 4,504 $
0.15 $
$
0.15 $
$
3,873
35,785
1,282
34,503
9,992
34,423
10,072
81
3,719
34,753
6,457
28,296
10,504
33,314
5,486
982
0.38 $
0.36 $
0.30 $
0.30 $
Cash flows from operating activities:
Net income
Undistributed equity from subsidiaries
Stock-based compensation expense
Net excess tax (benefit) deficit on stock-based compensation
Other
Net cash used in operating activities
Cash flows from investing activities:
Outlay for business combinations
Dividend payment from subsidiary equity
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
Proceeds from exercise of stock options
Settlement of warrants
Payment of dividends
Repurchase of shares
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Note 25 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 before income taxes
Income tax expense
Net income
Income per share-basic
Income per share-diluted
124
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)
3,662
38,855
1,858
36,997
2,747
40,393
(649)
692
3,608
39,479
1,453
38,026
(479)
36,724
823
(423)
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
3,597
41,895
1,515
40,380
1,614
37,981
4,013
676
3,538
43,347
1,769
41,578
(354)
39,018
2,206
775
3,582
42,423
1,660
40,763
2,161
39,855
3,069
940
0.06 $
0.06 $
0.08 $
0.08 $
0.05 $
0.05 $
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
125
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
There were no changes in or disagreements with accountants on accounting and financial disclosures.
Item 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
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, 2016. 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, 2016.
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, 2016 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, 2016. 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, 2016, which report is included in this Item
9A below.
Changes in Internal Control Over Financial Reporting
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.
126
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,
2016, 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, 2016, 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, 2016 and 2015, and the related consolidated
statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2016, and our report dated February 24, 2017 expressed an unqualified opinion on those
consolidated financial statements.
As discussed in note 2 to the consolidated financial statements, the Company has changed its method of accounting for stock-based
compensation in 2016 due to the adoption of FASB Accounting Standards Update (ASU) 2016-09, Improvements to Employee
Share-Based Payment Accounting.
Kansas City, Missouri
February 24, 2017
127
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
2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
The Company's Supplemental Code of Ethics for CEO and Senior Financial Officers, which applies to the CEO, Chief
Financial Officer and Principal Accounting Officer, is available at www.nationalbankholdings.com. Amendments to, and
waivers of, the code of ethics are publicly disclosed as required by applicable law, regulation or rule.
Item 11. EXECUTIVE COMPENSATION.
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS.
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The Information required by this Item is incorporated herein by reference to our Proxy Statement (Schedule 14A) for our
2017 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
2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
128
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 Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Page
77
78
79
80
81
82
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.
129
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 24, 2017, 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 24, 2017,
by the following persons on behalf of the registrant and in the capacities indicated.
130
/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)
/s/ MICHAEL J. DALEY
Michael J. Daley
Chief Accounting Officer
(principal accounting officer)
/s/ RALPH W. CLERMONT
Ralph W. Clermont, Lead 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
/s/ ART ZEILE
Art Zeile, Director
131
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)^
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)^
NBH Holdings Corp. 2009 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to our Form S-1
Registration Statement (Registration No. 333-177971), filed on November 14, 2011)^
10.10
Amendment to the NBH Holdings Corp. 2009 Equity Incentive Plan dated February 22, 2017 (filed herewith)^
132
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 Statements of Financial
Condition, (ii) the Consolidated Statements of Operations, (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.
133
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
Kansas City, MO
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
134
ABOUT NATIONAL BANK HOLDINGS CORPORATION
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 91 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 the
attractive markets of Colorado and Kansas City MSA
Completed initial public offering in 2012
Continuous improvement of profitability and returns
Execution of client-centered, relationship-based strategies,
delivering accelerating organic revenue growth
Built a granular and well-diversified loan portfolio that is well
positioned to absorb stress while providing excellent risk-
adjusted returns
Intensification of our focus on Small Business banking and
SBA lending as key growth areas
Maintenance of a strong expense management focus, with a
track record of decreasing annual expenses over the years
Continue to attract proven industry leaders
Evolving to a high-growth, organically driven business
Remain an opportunistic and disciplined manager of capital
OUR FAMILY OF BRANDS 1
LOCATIONS AND
MARKET SHARE2
BANK MIDWEST
42 banking centers
3.0% deposit market share in
Kansas City MSA
Ranks 6th in banking centers in
Kansas City MSA
COMMUNITY BANKS
OF COLORADO
47 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
1NBH 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, 2016. NBH Bank banking centers as of December 31, 2016.
© 2017, National Bank Holdings Corporation. All rights reserved.
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