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2017
DELIVERING ON
OUR STRATEGY
ANNUAL RepoRt
ANd FoRm 10-k
3/14/18 6:34 PM
2017
HIGHLIGHTS
PROGRESSING T OWARD
PROfITAbILITY TARGETS:
DIScIPLINED cAPITAL
mANAGEmENT:
Steadily increased earnings per share, return on
average tangible equity and return on average
tangible assets (adjusted for 2017 non-cash
deferred tax asset charge)
Grew originated loan balances 15% during the
year, or $386 million
Relationship banking focused strategies
delivered record new commercial loan
originations of $605 million, a 21.5% increase
over 2016
Grew Q4 2017 average transaction deposits
10% year-over-year, adjusted for four banking
centers divested in 2017
Generated industry-leading stock
performance, delivering cumulative 3-year
total shareholder return of 72%, with a
year-end share price of $32.43
Steadily increased dividend to $0.09 per
share, an 80% increase in past 2 years
Lifetime repurchases of 51% of shares at a
weighted average price of $20.03
Closed accretive $146 million acquisition
of peoples, Inc. on January 1, 2018, adding
meaningful scale in our attractive markets,
a best-in-class residential banking platform,
a low-cost deposit base and a complementary
loan portfolio
DELIVERING EffIcIENcY
INITIATIVES:
POSITIONED fOR cONTINUED
GROWTH:
Continued trend of strong expense
management, decreasing expenses 36% during
the past five years, adjusted for acquisition
expenses
Reduced problem asset workout expenses
while delivering consistent returns on acquired
problem assets
divested another four banking centers in 2Q
2017, bringing total divestitures/consolidations
to 17, or 17% of the franchise, since mid-2015
Continued year-over-year progress towards
60% efficiency ratio target
Streamlined our deposit products to deliver
common sense solutions to our valued clients
Strong, low-risk balance sheet poised for future growth
decreasing trend of non-performing and classified
assets. excluding acquired problem assets, non-
performing asset ratio at 0.60% at december 31, 2017
Continued to consolidate or divest
underperforming banking centers while growing
low-cost transaction deposits
peoples acquisition adds significant residential
banking products, servicing capabilities and
residential loan origination channels, accelerating
non-interest income growth
enhanced awareness of our family of brands by
launching upgraded web sites and multi-channel
marketing initiatives, including an increase of digital
and social media content
820182cx.indd 3-4
FELLOW SHAREHOLDERS,
A LETTER FROM CHAIRMAN, PRESIDENT AND CEO
TIM LANEY
During 2017, our Company made significant progress toward our long-term performance targets by leveraging our organic growth platforms to
deliver on our commitments to our clients, our associates and to you, our shareholders. Our common sense approach to banking and our values-
based culture have always guided our actions to improving our Company, and I am excited to share how this consistent approach impacted 2017’s
accomplishments.
We delivered earnings per share of $1.26, a return on average tangible assets of 0.82% and a return on average tangible equity of 7.75%, all adjusted
for tax-reform related charges and expenses related to our acquisition of Peoples, Inc. We originated a record $605 million in commercial loans
during 2017, a 21.5% increase over the prior year. Most importantly, those strong loan originations were the result of our focus on relationship-based
banking, which also resulted in tremendous low-cost deposit growth. Our average quarterly transaction deposits grew 10% in the fourth quarter
compared to the prior year fourth quarter, adjusting for the four banking centers we divested in 2017. Further, our client-funded balance sheet
continues to improve as evidenced by the mix of transaction deposits to total deposits, improving 200 basis points to 72% as of December 31, 2017.
Our credit quality remains very strong as we moved past the energy portfolio issues in 2017 and recorded only 12 basis points non-energy net
charge-offs on non 310-30 loans, compared to 10 basis points in 2016.
We also continued a strong trend of expense control, decreasing our total expenses 36% over the past five years, net of acquisition costs, while
investing in key revenue generating initiatives. Several of those initiatives in 2017 led to the growth in bank card revenue and service charges of
5.3% compared to the prior year, and we expect these investments to result in future revenue growth in the years to come.
We are very pleased with our acquisition of Peoples, Inc., which closed on January 1, 2018, and was formally integrated into our organization during
the first quarter of 2018. This transaction expands our community bank footprint in highly-attractive and geographically-relevant markets and
adds a best-in-class, complementary residential banking platform to deepen our offering to clients. The addition of top banking talent, expanded
residential banking products and a strong presence in new and attractive markets that strategically align to our core footprint have made this
transaction a meaningful growth accelerator for our young Company.
With the acquisition of Peoples, we strengthened our coverage of the Colorado Front Range, including adding a meaningful presence in the rapidly
growing market of Colorado Springs. Peoples also deepened our coverage and presence in the attractive Overland Park/Johnson County market
in Kansas, added new presence in Lawrence, Kansas and adjacent areas, as well as new presence in Albuquerque and Taos, New Mexico. Our
markets are a differentiator as Colorado has been cited as the 2nd strongest state economy in the U.S. with the Front Range contributing 96% of the
population growth in recent years. Kansas City is not far behind, ranked as the 2nd best city for jobs and with consistently better demographic and
economic statistics compared to the national average. Our Texas and New Mexico markets represent stable and growing markets as well.
We continued to invest in our clients during the year with the addition of a new, state-of-the art website and product enhancements across our
digital, online and card-based platforms. Our investment extended into the communities we serve. For example, our 3rd annual Do More Charity
Challenge event, co-founded by our organization, posted record-breaking fundraising results, driving our ability to contribute nearly $750,000 to
worthy non-profit organizations in our communities since the event’s inception. We have demonstrated similar commitment, thought leadership
and financial support in our other core market communities.
Taking care of our associates is also a priority, and we were especially pleased to reward over 50 percent of our teammates with a special $1,000
bonus in connection with the 2017 tax-reform legislation. We also invested in a new intranet to better connect our associates and improve efficiencies
in how they can partner to serve our clients every day. I want to especially thank our associates for their outstanding teamwork and diligence in
delivering on a successful integration of the Peoples’ team and clients, while also delivering on our organic growth commitment.
All of this translated into remarkable shareholder returns as we generated an industry-leading cumulative 3-year shareholder return of 72%, with a
year-end share price of $32.43. We also continued our commitment to shareholder returns by increasing our dividend to $0.09 per share in 2017,
representing an 80% increase in the past two years. Our capital position remains a strength, ending the year at almost 10% leverage capital and
nearly 14% risk-based capital, providing capacity for additional growth.
As I reflect on our performance this year, the tremendous growth our Company has achieved in a very short period of time is remarkable. We’ve
accomplished these results by consistently maintaining our focus on delivering value to our clients and communities, our associates and our
shareholders. I firmly believe that the combination of our demonstrated organic growth engine, with complementary and accretive acquisitions,
such as the Peoples transaction, all operating in highly attractive markets, provides a platform for continued industry-leading growth trajectory in
2018 and beyond.
SINCERELY,
TIM LANEY
CHAIRMAN, PRESIDENT AND CEO
(This page has been left blank intentionally.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:95)(cid:3)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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, a smaller reporting company, or an emerging
growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act. (Check one)
Large accelerated filer
Non-accelerated filer
(cid:95)(cid:3)
(cid:133)(cid:3)(do not check if a smaller reporting company)
(cid:3)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:133)(cid:3)
(cid:133)(cid:3)
(cid:133)(cid:3)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95)
As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $866,000,000 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 22, 2018, NBHC had outstanding 30,312,222 shares of Class A voting common stock with $0.01 par value per share, excluding 160,510 shares of
restricted Class A common stock issued but not yet vested.
Portions of the Registrant’s definitive proxy statement for its 2018 Annual Meeting of Shareholders to be filed within 120 days of December 31, 2017 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
Page
3
5
18
30
30
30
30
31
34
41
72
73
123
123
125
125
125
125
125
125
126
129
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995,
notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans,
predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-
looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,”
“believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions
and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on
our current expectations and projections about future events and financial trends that we believe may affect our financial
condition, liquidity, results of operations, business strategy and growth prospects.
Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual
results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such
statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include,
but are not limited to:
• our ability to execute our business strategy, as well as changes in our business strategy or development plans;
• business and economic conditions generally and in the financial services industry;
• economic, market, operational, liquidity, credit and interest rate risks associated with our business;
• effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the
Federal Reserve Board;
• changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for
well-capitalized financial institutions;
• effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations;
• changes in the economy or supply-demand imbalances affecting local real estate values;
• changes in consumer spending, borrowings and savings habits;
• with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie
Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the
related loans if they fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the
geographic concentration of our servicing portfolio;
• our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions or
consolidations of financial institutions on attractive terms, or at all;
• 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;
• 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;
• our dependence on information technology and telecommunications systems of third party service 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;
• our ability to achieve organic loan and deposit growth and the composition of such growth;
3
• changes in sources and uses of funds, including loans, deposits and borrowings;
• increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other
things, lower returns;
• continued consolidation in the financial services industry;
• our ability to maintain or increase market share and control expenses;
• the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as
the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting
standard setters;
• the trading price of shares of the Company's stock;
• the effects of tax legislation or challenges to our tax position;
• our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws
on our deferred tax assets;
• 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 as a Colorado state-chartered bank;
• technological changes;
• the timely development and acceptance of new products and services and perceived overall value of these products
and services by our clients;
• changes in our management personnel and our continued ability to hire and retain qualified personnel;
• ability to implement and/or improve operational management and other internal risk controls and processes and
our reporting system and procedures;
• regulatory limitations on dividends from our bank subsidiary;
• changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant
regulatory and accounting requirements;
• widespread natural and other disasters, dislocations, political instability, acts of war or terrorist activities,
cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us
or our counterparties specifically;
• a cyber-security incident, data breach or a failure of a key information technology system;
• impact of reputational risk on such matters as business generation and retention;
• other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the
Securities and Exchange Commission; and
• our success at managing the risks involved in the foregoing items.
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events or circumstances, except as required by applicable law.
4
PART I: FINANCIAL INFORMATION
Item 1. BUSINESS.
Summary
National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the
State of Delaware in 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 85 banking centers as of December 31, 2017, with the majority of those banking centers located in
Colorado and the greater Kansas City region, and through online and mobile banking products and services. The Peoples, Inc.
acquisition adds an additional 19 banking centers, with the majority of those banking centers located in Colorado and the
greater Kansas City region. As of December 31, 2017, we had $4.8 billion in assets, $3.2 billion in loans, $4.0 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.
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. 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 New Mexico and 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 Acquisitions
In October 2010, we acquired the failed Hillcrest Bank from the FDIC and began banking operations. As of December 31,
2017, we have completed five bank acquisitions, three of which were FDIC-assisted. All loss share agreements associated
with the FDIC-assisted acquisitions were terminated on November 5, 2015. 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.
5
The following table summarizes certain highlights of our five historic acquisitions, including deposits and assets at fair value
as of each acquisition date:
Date acquired
FDIC-assisted
Loss share
Banking centers(3)
Deposits (millions)
Assets (millions)
Primary Market
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
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 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 2015, three banking centers were consolidated in our Bank Midwest network. During 2016, seven
banking centers were consolidated in our Community Banks of Colorado network. During 2017, six banking centers were consolidated or sold in our
Bank Midwest and Community Banks of Colorado networks.
Peoples Acquisition
During the second quarter of 2017, the Company announced the acquisition of Peoples, Inc. (“Peoples”), the bank holding
company of Colorado-based Peoples National Bank and Kansas-based Peoples Bank. The acquisition closed on January 1,
2018 and strengthens the NBH franchise in the attractive and growing markets along the Colorado Front Range, the greater
Kansas City region, including expanding our existing Overland Park, Kansas market and extending into the college town
markets of Lawrence and Ottawa, Kansas, and expands the NBH franchise into New Mexico. The transaction is valued at
$146.4 million, including $36.2 million of cash consideration, and adds an estimated $868 million in assets, $544 million in
loans held for investment and $730 million of low cost deposits. Peoples’ complementary, franchise-centric, retail mortgage
platform adds significant capabilities with over $1 billion in mortgage production historically and primarily serving NBH’s
markets with additional mortgage offices in Arizona, California, Nevada and Utah. The acquisition adds a solid core deposit
base, expanding into New Mexico, with cost of deposits significantly below peers at 0.10%. The system conversion was
completed during the first quarter of 2018. Refer to note 24 – Subsequent Events of our consolidated financial statements for
additional details of the acquisition.
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 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, 2017 (the last date as of which data are available), according to S&P Global. 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) consolidation opportunities as well as potential for add-on transactions; and (vi) markets
sizeable enough to support our long-term organic growth objectives.
6
The table below describes certain key demographic statistics regarding our markets:
Top 3
Denver, CO
Front Range, CO(3)
Kansas City, MO-KS MSA
U.S.
# of
Median
Deposits businesses Population Unemployment Population household
(billions)
$ 78.5
107.8
51.0
(thousands)
114.9
182.7
76.0
(millions)
2.9
4.6
2.1
growth(2)
income
15.3% $ 75,489
73,719
15.2%
65,702
6.0%
61,045
5.8%
2.8%
2.8%
3.2%
3.9%
rate(1)
competitor
combined
deposit
market share
55%
53%
43%
55%(4)
(1) Unemployment data is as of November 30, 2017.
(2) For the period 2010 through 2017.
(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: S&P Global as of December 31, 2017, except Deposits and Top 3 Competitor Combined Deposit Market Shares,
which reflects data as of June 30, 2017.
Our Business Strategy
As part of our goal of becoming a leading regional community bank holding company, we seek to continue to generate strong
organic growth, as well as pursue selective acquisitions of financial institutions and other complementary businesses. Our
focus is on building organic growth through strong banking relationships with small- and medium-sized businesses and
consumers in our primary markets, while maintaining a low-risk profile designed to generate reliable income streams and
attractive returns. We view our core market areas as the greater Kansas City region and Colorado. The key components of our
strategic plan are:
• Focus on client-centered, relationship-driven banking strategy. Our 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
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.
• Expansion of commercial banking, business banking and specialty businesses. We have made significant
investments in our commercial relationship managers, as well as developed significant capabilities across our
business banking and several specialty commercial banking offerings. 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 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.
• 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.
7
• 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, growing low-cost core deposits,
implementing additional fee-based business initiatives and further enhancing operational efficiencies.
• 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. We implement self-imposed concentration limits on our loan portfolio to
ensure a granular and diverse loan portfolio and protect against downside risk to any particular industry or real estate
sector. 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.
• 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, business and consumer clients, who are predominantly located in Colorado, the greater Kansas City
region, New Mexico and Texas. We conduct our banking business through 85 banking centers, with 44 of those located in
Colorado, 39 in Kansas and Missouri, and two in Texas as of December 31, 2017. Our distribution network also includes 106
ATMs as well as fully integrated online banking and mobile banking services. The Peoples acquisition adds 19 banking
centers, with seven located in Kansas, six located in Colorado, and six located in New Mexico, and adds an additional 17
ATMs. 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 banking products, while maintaining a strong and disciplined credit culture and
delivering excellent client service. We offer a variety of products and services that are focused on the following areas:
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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. 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, lender finance 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, 2017, substantially all of our commercial and
industrial loans were secured.
Non-Owner Occupied Commercial Real Estate Loans—Non-owner occupied commercial real estate loans (“CRE”) 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 CRE 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.
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.
Commercial Deposit Products (including business online and mobile banking)—Our commercial bankers are focused on
providing value-added deposit products to our clients that optimizes their cash management program. We are focused on full-
relationship banking, including banking core operating accounts and ancillary accounts. We also provide our commercial
clients with money market accounts and short-term repurchase reserve accounts depending on their individual needs. In
addition, we provide a wide array of treasury management solutions to our clients, including: business online and mobile
banking, commercial credit card services, wire transfers, automated clearing house services, electronic bill payment, lock box
services, remote deposit capture services, merchant processing services, cash vault, controlled disbursements, fraud
prevention services through positive pay and other auxiliary services (including account reconciliation, collections,
repurchase accounts, zero balance accounts and sweep accounts).
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Business and Consumer Banking
Our business and consumer 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 and deposit 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 business and consumer
loans, including:
Business Loans—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. Business loans generally require LTV ratios of not more than 75
percent. Business loans also assist in the growth of our deposits because many business loan borrowers establish noninterest-
bearing and interest-bearing demand deposit accounts and treasury management relationships with us. Those deposit accounts
help us to reduce our overall cost of funds and those treasury management relationships provide us with a source of non-
interest income.
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. Our loan-to-
value (LTV) benchmark for these loans will generally be below 80% at inception unless related to certain internal or
government programs where higher LTV’s may be warranted, along with satisfactory debt-to-income ratios. We do not
originate or purchase negatively amortizing or sub-prime residential loans. These residential real estate loans are generally
originated under terms and conditions consistent with secondary market guidelines. Some of these loans will be placed in the
Bank’s loan portfolio; however, a majority are sold in the secondary market and provide a significant source of fee income.
The mortgage operation acquired from Peoples adds significant residential banking products, servicing capabilities and
residential loan origination channels. In addition to the referral business through our existing consumer client base as we
establish full banking relationships we have a dedicated team of mortgage bankers who focus origination efforts primarily on
new purchase activity and secondarily on refinance activity. We also offer open- and closed-ended home equity loans, which
are loans generally secured by second lien positions on residential real estate, and residential construction loans to consumers
and builders for the construction of residential real estate.
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.
Deposit Products (including online and mobile banking)—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 client relationships. Consumer
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.
We also offer comprehensive, user-friendly mobile and online banking platforms allowing our clients to pay bills, check
statements, deposit checks and transfer funds, amongst other features, online or on-the-go.
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Lending Activities
Our loan portfolio includes commercial and industrial loans, commercial real estate loans, residential real estate loans,
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 individual and business clients 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 clients, 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 clients. 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.”
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 companies, finance companies and
financial technology (“FinTech”) 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
and FinTech companies. 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 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 and other financial services companies 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 and depository service needs.
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Associates
At December 31, 2017, we had 899 full-time associates and 64 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.
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.
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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.
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.
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
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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.
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.
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Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiaries. Because the Company’s consolidated net income
consists largely of the net income of NBH Bank, the Company’s ability to pay dividends depends upon its receipt of
dividends from its subsidiary. The ability of a bank to pay dividends and make other distributions is limited by federal and
state law. The specific limits depend on a number of factors, including the bank’s type of charter, recent earnings, recent
dividends, level of capital and regulatory status. As a member of the Federal Reserve System 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, 2017, the Company did not have any outstanding Covered Transactions.
Regulatory Notice and Approval Requirements for Acquisitions of Control
We must generally receive federal bank regulatory approval before we can acquire an institution or business. Specifically, as
a bank holding company, we must obtain prior approval of the Federal Reserve in connection with any acquisition that would
result in the Company owning or controlling 5% or more of any class of voting securities of a bank or another bank holding
company. 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
15
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.
The Consumer Financial 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 are the
“Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act” portions of Regulation Z and the
Know Before You Owe guidelines. 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 as well as clearly and concisely disclose the terms and costs associated with these
loans.
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The CFPB has actively issued enforcement actions against both large and small entities and to entities across the entire
financial services 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 against
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.
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
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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 U.S. Securities and Exchange
Commission (“SEC”). In addition, the public may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov.
Item 1A. RISK FACTORS
Risks Relating to Our Banking Operations
We are 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 and Peoples, Inc. by merger in August 2015 and January 2018,
respectively. 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 other real estate owned (“OREO”) were covered by loss sharing agreements with
the FDIC and all of the loans and OREO we acquired were marked to fair value at the time of our acquisitions, we believe
that the historical financial results of the acquisitions are less useful to an evaluation of our future prospects and financial and
operating performance.
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Certain other factors may also make it difficult for investors to evaluate our future prospects and financial and operating
performance, including, among others:
• 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;
• the income we report from certain acquired assets due to loan discounts and accretable yield may be higher than the
returns available in the current market and, if we are unable to make new performing loans and acquire other
performing assets in sufficient volume, we may be unable to generate the earnings necessary to implement our
growth strategy;
• our excess cash reserves and liquid investment securities portfolio, may not be representative of our future cash
position;
• our historical cost structure and capital expenditure requirements are not necessarily reflective of our anticipated cost
structure and capital spending as we continue to identify efficiencies and operate our organic banking platform; and
• our regulatory capital ratios, which currently exceed regulatory minimum requirements, 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.
Changes in the assumptions underlying our acquisition method of accounting, or other significant accounting estimates could
affect our financial information and have a material adverse effect on us.
A material portion of our financial results is based on, and subject to, significant assumptions and subjective judgments. As a
result of our acquisitions, our financial information is heavily influenced by the application of the acquisition method of
accounting and was heavily influenced in prior periods by loss share accounting. Both methodologies require us to make
complex assumptions, and these assumptions materially affect our financial results. As such, any financial information
generated through the use of the acquisition method of accounting or loss share accounting is subject to modification or
change. If our assumptions are incorrect and we change or modify our assumptions, it could have a material adverse effect on
us or our previously reported results. Additionally, a change in our accounting estimates, such as our ability to realize
deferred tax assets, the need for a valuation allowance or the recoverability of the goodwill recorded at the time of our
acquisitions, could have a material adverse effect on our financial results.
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Our business is highly susceptible to credit risk and fluctuations in the value of real estate and other collateral securing such
credit.
As a lender, we are exposed to the risk that our clients will be unable to repay their loans according to their terms and that the
collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The risks inherent in making
any loan include risks with respect to the ability of borrowers to repay their loans and, if applicable, the period of time over
which the loan is repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic
and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the
future value of collateral. Similarly, we have credit risk embedded in our securities portfolio. Our credit standards, procedures
and policies may not prevent us from incurring substantial credit losses, particularly in light of market developments in recent
years. A decline in residential real estate market prices and reduced levels of home sales, could adversely affect the value of
collateral securing mortgage loans 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, including key personnel added through mergers and acquisitions.
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 (“ALL”), which is a reserve established through a provision for loan losses charged
to expense, which we believe is appropriate to provide for probable losses inherent in our loan portfolio. The amount of this
allowance is determined by our management through periodic reviews.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity
and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information regarding our loans, identification of
additional problem loans by us and other factors, both within and outside of our control, may require an increase in the
allowance for loan losses. If the real estate markets deteriorate, we expect that we will experience increased delinquencies
and credit losses, particularly with respect to construction, land development and land loans. In addition, our regulators
periodically review our allowance for loan losses and may require an increase in the allowance for loan losses or the
recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in
future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan
losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital and may have a
material adverse effect on us.
We hold and acquire an amount of OREO from time to time, which may lead to volatility in operating expenses and
vulnerability to declines in real property values.
When necessary, we foreclose on and take title to the real estate serving as collateral for our loans as part of our business.
Real estate that we own but do not use in the ordinary course of our operations is referred to as OREO property. Higher
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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.
The fair value of our investment securities can fluctuate due to market conditions outside of our control.
We have historically taken a conservative investment strategy with our securities portfolio, with concentrations of securities
that are primarily backed by government sponsored enterprises. In the future, we may seek to increase yields through more
aggressive strategies, which may include a greater percentage of corporate securities and structured credit products. Factors
beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse
changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of
the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and
instability in the capital markets. These factors, among others, could cause other-than-temporary impairments and realized
and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse
effect on us. The process for determining whether impairment of a security is other-than-temporary usually requires complex,
subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the
security in order to assess the probability of receiving all contractual principal and interest payments on the security.
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We face significant competition from other financial institutions and financial services providers, which may materially and
adversely affect us.
Consumer and commercial banking is highly competitive. Our markets contain a large number of community and regional
banks as well as a significant presence of the country’s largest commercial banks. We compete with other state and national
financial institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In
addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies,
insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers, in providing
various types of loans and other financial services. Some of these competitors have a long history of successful operations in
our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor
bases. Some of our competitors also have greater resources and access to capital and possess an advantage by being capable
of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive
promotional and advertising campaigns or operating a more developed internet platform. Competitors may also exhibit a
greater tolerance for risk and behave more aggressively with respect to pricing in order to increase their market share. In
addition, the effects of disintermediation can also impact the banking business because of the fast growing body of FinTech
companies that use software to deliver mortgage lending, payment services and other financial services.
Our ability to compete successfully depends on a number of factors, including, among others:
• the ability to develop, maintain and build upon long-term client relationships based on quality service, effective and
efficient products and services, high ethical standards and safe and sound assets;
• the scope, relevance and pricing of products and services offered to meet client needs and demands;
• the rate at which we introduce new products and services relative to our competitors;
• the ability to attract and retain highly qualified associates to operate our business;
• the ability to expand our market position;
• client satisfaction with our level of service;
•
the ability to invest in new technologies;
• the ability to operate our business effectively and efficiently; and
• industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could materially and
adversely affect us.
We may not be able to meet the cash flow requirements of deposit withdrawals and other business needs unless we maintain
sufficient liquidity.
We require liquidity to make loans and to repay deposit and other liabilities as they become due or are demanded by clients.
We principally depend on checking, savings and money market deposit account balances and other forms of client deposits as
our primary source of funding for our lending activities. As a result of a decline in overall depositor confidence, an increase
in interest rates paid by competitors, general interest rate levels, higher returns being available to clients on alternative
investments and general economic conditions, a substantial number of our clients could withdraw their bank deposits with us
from time to time, resulting in our deposit levels decreasing substantially, and our cash on hand may not be able to cover such
withdrawals and our other business needs, including amounts necessary to operate and grow our business. This would require
us to seek third party funding or other sources of liquidity, such as asset sales. Our access to third party funding sources,
including our ability to raise funds through the issuance of additional shares of our common stock or other equity or equity-
related securities, incurrence of debt, and federal funds purchased, may be impacted by our financial strength, performance
and prospects and may also be impaired by factors that are not specific to us, such as a disruption in the financial markets or
negative views and expectations about the prospects for the financial services industry, all of which may make potential
funding sources more difficult to access, less reliable and more expensive. We may not have access to third party funding in
sufficient amounts on favorable terms, or the ability to undertake asset sales or access other sources of liquidity, when
needed, or at all, which could materially and adversely affect us.
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Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are
affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held
by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are
directly affected by many factors, including domestic and international economic and political conditions, broad trends in
business and finance, legislation and regulation affecting the national and international business and financial communities,
monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of
short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of clients and counterparties
and the level and volatility of trading markets. Such factors can impact clients and counterparties of a financial services
institution and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the
interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing
liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at
different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income.
When interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest
rates would reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because
the magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates
would reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and liabilities, loan
and investment securities portfolios and our overall results. Changes in interest rates may also have a significant impact on
any future loan origination revenues. Historically, there has been an inverse correlation between the demand for loans and
interest rates. Loan origination volume and revenues usually decline during periods of rising or high interest rates and
increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the
carrying value of a significant percentage of the assets, both loans and investment securities, on our balance sheet. We may
incur debt in the future and that debt may also be sensitive to interest rates and any increase in interest rates could materially
and adversely affect us. Interest rates are highly sensitive to many factors beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Changes in the
Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions could materially and
adversely affect us.
We are dependent on our information technology and telecommunications systems and third-party providers, and systems
failures or interruptions could have a material adverse effect on us.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and
telecommunications systems and third-party providers. We outsource many of our major systems, such as data processing,
loan servicing 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, ATM skimming or
jackpotting, and other dishonest acts. We provide our clients with the ability to bank remotely, including via online, mobile
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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.
We also face risks related to cyber-attacks and other security breaches in connection with credit or debit card, including ATM-
related, 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:
• continue to implement and improve our operational, credit, financial, legal, management and other internal risk
controls and processes and our reporting systems and procedures in order to manage a growing number of client
relationships;
• scale our technology platform;
• integrate our acquisitions and develop consistent policies throughout the various lines of businesses; and
• attract and retain management talent.
We may not successfully implement improvements to, or integrate, our management information and control systems,
procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In
particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the
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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:
• the effect of the acquisition on competition;
• the financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the
bank(s) involved;
• the quantity and complexity of previously consummated acquisitions;
• the managerial resources of the applicant and the bank(s) involved;
• the convenience and needs of the community, including the record of performance under the Community
Reinvestment Act (which we refer to as the “CRA”); and
• the effectiveness of the applicant in combating money laundering activities.
Such regulators could deny our application based on the above criteria or other considerations, which would restrict our
growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required
to sell banking centers as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or
may reduce the benefit of any acquisition. In addition, prior to the submission of an application our regulators could
discourage us from pursuing strategic acquisitions or indicate that regulatory approvals may not be granted on terms that
would be acceptable to us, which could have the same effect of restricting our growth or reducing the benefit of any
acquisitions.
The success of future transactions will depend on our ability to successfully identify and consummate acquisitions of financial
services franchises that meet our investment objectives. Because of the intense competition for acquisition opportunities and
the limited number of potential targets, we may not be able to successfully consummate acquisitions on attractive terms.
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.
25
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 continue 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.
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.
We face additional risks due to our increased mortgage banking activities that could negatively impact net income and
profitability.
We sell substantially all of the mortgage loans that we originate. The sale of these loans generates non-interest income and
can be a source of liquidity for the Bank. Disruption in the secondary market for residential mortgage loans as well as
declines in real estate values could result in one or more of the following:
• our inability to sell mortgage loans on the secondary market, which could negatively impact our liquidity position;
• declines in real estate values could decrease the potential of mortgage originations, which could negatively impact
our earnings;
• if it is determined that loans were made in breach of our representations and warranties to the secondary market, we
could incur losses associated with the loans;
• increased compliance requirements could result in higher compliance costs, higher foreclosure proceedings or lower
loan origination volume, all which could negatively impact future earnings; and
• a rise in interest rates could cause a decline in mortgage originations, which could negatively impact our earnings.
26
Our use of appraisals in deciding whether to make loans secured by real property does not ensure that the value of the real
property collateral will be sufficient to repay our loans.
In considering whether to make a loan secured by real property, we require an appraisal of the property. However, an
appraisal is only an estimate of the value of the property at the time the appraisal is made and requires the exercise of a
considerable degree of judgment. If the appraisal does not accurately reflect the amount that may be obtained upon sale or
foreclosure of the property, whether due to a decline in property value after the date of the original appraisal or defective
preparation of the appraisal, we may not realize an amount equal to the indebtedness secured by the property and as a result,
we may suffer losses.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial
condition.
We operate in multiple jurisdictions and we are subject to tax laws and regulations of the U.S. federal, state and local
governments. From time to time, legislative initiatives may be adopted, such as the recent tax reform in the United States,
which may impact our effective tax rate and could adversely affect our deferred tax assets, tax positions and/or our tax
liabilities. In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying
interpretations. There can be no assurance that our historical tax positions will not be challenged by relevant tax authorities or
that we would be successful in defending our positions in connection with any such challenge.
Additionally, the full impact of “H.R.1”, known as the “Tax Cuts and Jobs Act” on us and our clients is unknown at present,
creating uncertainty and risk related to our clients’ future demand for credit and our future results. Increased economic
activity expected to result from the decrease in tax rates on business generally could spur economic activity that would
encourage additional borrowing. At the same time, some clients may elect to use their additional cash flow from lower taxes
to fund their existing levels of activity, decreasing borrowing needs. The elimination of the federal income tax deductibility
of business interest expense for a number of our clients effectively increases the cost of borrowing and makes equity or
hybrid funding relatively more attractive. This could have a long-term negative impact on business client borrowing. Further,
uncertainty also exists surrounding the Tax Cuts and Jobs Act’s effects on housing markets, mortgage originations,
unemployment rates, interest rates and the economies of the markets we serve. Finally, it is unclear how states and other
taxing jurisdictions will respond to the Tax Cuts and Jobs Act.
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:
• changes to regulatory capital requirements;
• creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which oversees
systemic risk, and the Consumer Financial Protection Bureau, which develops and enforces rules for bank and non-
bank providers of consumer financial products);
• potential limitations on federal preemption;
• changes to deposit insurance assessments;
• regulation of debit interchange fees we earn;
• changes in retail banking regulations, including potential limitations on certain fees we may charge; and
• changes in regulation of consumer mortgage loan origination and risk retention.
Several 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-
27
Frank Act, its implementation, and enforcement persist as a result of the current 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.
The FDIC’s restoration plan for the DIF and any related increased assessment rates 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.
28
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to
a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are
responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or
fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties,
injunctive relief, restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may
also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
The Federal Reserve may require us to commit capital resources to support our subsidiary bank.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding company to act as
a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.
Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections
into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for
failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to
require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for
the institution. Under this requirement, we could be required to provide financial assistance to our subsidiary bank should
our subsidiary bank experience financial distress.
A capital injection may be required at times when we do not have the resources to provide it and therefore we may be
required to borrow the funds or raise additional equity capital from third parties. Any loans by a holding company to its
subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In
the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding
company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides
that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s
general unsecured creditors, including the holders of its indebtedness. Any financing that must be done by the holding
company in order to make the required capital injection may be difficult and expensive and may not be available on attractive
terms, or at all, which likely would have a material adverse effect on us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes
and regulations.
The federal Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among
other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency
transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury
Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of
those requirements, and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as
the 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. 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
29
predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities.
They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce
the average percentage rate or the points and fees on loans that we do make.
Our ability to pay dividends is subject to regulatory limitations and our bank subsidiary’s ability to pay dividends to us is
also subject to regulatory limitations.
Our ability to declare and pay dividends depends both on the ability of our bank subsidiary to pay dividends to us and on
certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and
dividends. Because we are a separate legal entity from our bank subsidiary and we do not have significant operations of our
own, any dividends paid by us to our 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, 2017, we
operated 44 banking centers in Colorado, 39 in Kansas and Missouri, and two in Texas. Of these banking centers, 13
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
2017
2016
Quarter
Fourth
Third
Second
First
Fourth
Third
Second
First
$
$
$
$
$
$
$
$
High
Low
Cash
dividends
37.08
36.04
33.85
34.10
32.28
24.14
21.64
21.40
$
$
$
$
$
$
$
$
30.33
30.25
30.10
30.17
22.69
19.51
19.17
18.41
$
$
$
$
$
$
$
$
0.09
0.09
0.09
0.07
0.07
0.05
0.05
0.05
The closing price of our common stock on the NYSE was $33.42 per share on February 22, 2018. The Company had 217
shareholders of record as of February 22, 2018. Management estimates that the number of beneficial owners is significantly
greater.
In October 2012, the Company commenced the payment of a $0.05 per share quarterly cash dividend to holders of its
common stock. During the fourth quarter of 2016, the Company increased its cash dividend 40% to $0.07 per share, and
during the second quarter of 2017 further increased its dividend 29% to $0.09 per share, for a cumulative increase of 80%. As
of December 31, 2017, the quarterly cash dividend is $0.09 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 2017, the Bank paid dividends of $28.9 million to the holding company.
The Company 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. There were no permanent capital reduction during
2017.
31
Performance Graph
The following graph presents a comparison of the Company’s performance to the indices named below. It assumes $100
invested on December 31, 2012, with dividends invested on a total return basis.
Index
NBH
KBW Regional Banking Index
Russell 2000 Index
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Period Ending
100.00 113.86 104.31 116.00 174.77 179.62
225.78
193.50
100.00
100.00
146.83
138.82
150.39
145.62
159.41
139.19
221.77
168.81
32
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2017:
Total number of
shares (or units)
Maximum number
(or approximate dollar
value) of shares (or
Period
October 1 - October 31, 2017(1)
November 1 - November 30, 2017(1)
December 1 - December 31, 2017(1)
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 (2)
12,562,825
12,562,825
12,562,825
12,562,825
35.90
33.28
32.76
35.85
— $
—
—
— $
35,222 $
518
74
35,814 $
(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) 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, 2017.
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, 2017, the aggregate number of Company common stock
available for issuance under the 2014 Plan was 5,754,830 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, 2017, the aggregate number of Company
common stock available for issuance under the ESPP was 355,159 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
6,109,989
—
6,109,989
20.62
—
20.62
1,598,318 $
—
1,598,318 $
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, 2017. 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,
2017
2016
2015
2014
2013
$
257,364 $
152,736 $
166,092 $
256,979 $
189,460
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
1,479,214
530,590
27,045
2,162,409
(17,613)
2,144,796
5,146
39,082
29,120
106,341
76,513
124,820
855,345
258,730
15,030
3,178,947
(31,264)
3,147,683
4,629
—
10,491
93,708
61,237
139,248
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
$ 4,843,465 $ 4,573,046 $ 4,683,908 $ 4,819,646 $ 4,914,115
$ 3,979,559 $ 3,868,649 $ 3,840,677 $ 3,766,188 $ 3,838,309
178,014
4,016,323
897,792
$ 4,843,465 $ 4,573,046 $ 4,683,908 $ 4,819,646 $ 4,914,115
331,499
4,311,058
532,407
258,883
4,025,071
794,575
225,687
4,066,364
617,544
168,208
4,036,857
536,189
(1) Total loans are net of unearned discounts and deferred fees and costs.
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
Share Information(1):
Income per share, basic
Income per share, diluted
Dividends paid
Book value per share
Tangible common book value per share(2)
Tangible common equity to tangible assets(2)
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,
2017
2016
2015
2014
2013
As of and for the years ended
$
164,421 $
18,115
146,306
12,972
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
133,334
39,205
136,677
35,862
21,283
14,579 $
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
0.54 $
0.53 $
0.34 $
19.81 $
17.94 $
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 $
10.06%
10.61%
11.98%
15.25%
0.14
0.14
0.20
19.99
18.27
16.97%
$
$
$
$
$
$
26,928,763
28,313,061
34,349,996
42,404,609
50,790,410
27,709,659
26,875,585
29,091,343
26,386,583
34,363,487
30,358,509
42,421,014
38,884,953
50,824,422
44,918,336
(1) 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.
(2) 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)(9)
Return on average equity
Return on average tangible common equity(1)
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)(9)
Interest rate spread FTE(4)(9)
Yield on earning assets(2)
Yield on earning assets FTE(1)(2)(9)
Cost of interest bearing liabilities(2)
Cost of deposits
Non-interest expense to average assets
Efficiency ratio FTE(1)(5)(9)
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
Non 310-30 net charge-offs to average non 310-30
loans
December 31,
2017
0.31%
0.38%
1.29%
2.67%
3.61%
80.00%
11.62%
22.68%
3.36%
3.50%
3.35%
3.78%
3.91%
0.56%
0.41%
2.90%
68.63%
62.96%
0.66%
0.99%
0.98%
148.88%
0.36%
December 31,
2016
As of and for the years ended
December 31,
2015
December 31,
2014
0.50%
0.57%
1.29%
3.95%
5.04%
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%
1.07%
1.61%
1.02%
94.98%
0.80%
0.10%
0.17%
0.60%
0.70%
1.29%
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%
0.99%
1.81%
1.05%
105.74%
0.12%
0.19%
0.26%
0.52%
1.07%
1.58%
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%
0.50%
1.86%
0.81%
162.89%
0.05%
December 31,
2013
0.13%
0.20%
0.40%
0.67%
1.06%
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%
1.31%
4.97%
0.68%
51.43%
0.41%
0.38%
0.85%
0.13%
0.06%
0.27%
(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.
(9) Presented on a fully taxable equivalent basis using the statutory rate of 35%. The taxable equivalent adjustments
included above are $5,852, $4,081, $2,695, $930 and $0 for the years ended 2017, 2016, 2015, 2014 and 2013,
respectively.
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,” “adjusted net income,” “adjusted income per share,” 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. 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.
Tangible Common Book Value Ratios
Total shareholders’ equity
Less: goodwill and intangible assets, net
Add: deferred tax liability related to goodwill
Tangible common equity (non-GAAP)
Total assets
Less: goodwill and intangible assets, net
Add: deferred tax liability related to goodwill
Tangible assets (non-GAAP)
Tangible common equity to tangible assets
calculations:
Total shareholders' equity to total assets
Less: impact of goodwill and intangible assets, net
Tangible common equity to tangible assets (non-
GAAP)
Tangible common book value per share
calculations:
$
December 31, December 31, December 31, December 31, December 31,
2015
617,544 $
(72,060)
7,772
553,256 $
2016
536,189 $
(66,580)
9,323
478,932 $
2017
532,407 $
(61,237)
10,873
482,043 $
2014
794,575 $
(76,513)
6,222
724,284 $
2013
897,792
(81,859)
4,671
820,604
$
$ 4,843,465 $ 4,573,046 $ 4,683,908 $ 4,819,646 $ 4,914,115
(81,859)
4,671
$ 4,793,101 $ 4,515,789 $ 4,619,620 $ 4,749,355 $ 4,836,927
(66,580)
9,323
(76,513)
6,222
(72,060)
7,772
(61,237)
10,873
10.99%
(0.93)%
11.72%
(1.11)%
13.18%
(1.20)%
16.49%
(1.24)%
18.27%
(1.30)%
10.06%
10.61%
11.98%
15.25%
16.97%
Tangible common equity (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per share (non-GAAP) $
482,043 $
$
26,875,585
478,932 $
553,256 $
724,284 $
26,386,583
30,358,509
38,884,953
17.94 $
18.15 $
18.22 $
18.63 $
820,604
44,918,336
18.27
Tangible common book value per share,
excluding accumulated other comprehensive
income (AOCI) calculations:
Tangible common equity (non-GAAP)
Less: AOCI, net of tax
Tangible common book value, excluding AOCI, net
of tax (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per share, excluding
$
482,043 $
6,242
478,932 $
1,762
553,256 $
(95)
724,284 $
(5,839)
820,604
6,756
488,285
26,875,585
480,694
26,386,583
553,161
30,358,509
718,445
38,884,953
827,360
44,918,336
AOCI, net of tax (non-GAAP)
$
18.17 $
18.22 $
18.22 $
18.48 $
18.42
38
Return on Average Tangible Assets and Return on Average Tangible Equity
Net income
Add: impact of core deposit intangible amortization expense,
$
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2015
2014
2013
2017
14,579 $
2016
23,060 $
4,881 $
9,176 $
6,927
after tax
3,259
3,343
3,295
3,260
3,235
Net income adjusted for impact of core deposit intangible
amortization expense, after tax
Income before income taxes FTE (non-GAAP)
Add: impact of core deposit intangible amortization expense,
before tax
Add: provision for loan losses
FTE income adjusted for impact of core deposit intangible
$
$
17,838 $
26,403 $
8,176 $
12,436 $
10,162
41,714 $
30,088 $
10,620 $
13,271 $
10,877
5,342
12,972
5,480
23,651
5,401
12,444
5,344
6,209
5,346
4,296
amortization expense and provision (non-GAAP)
$
60,028 $
59,219 $
28,465 $
24,824 $
20,519
Average assets
Less: average goodwill and intangible assets, net of deferred
tax liability related to goodwill
Average tangible assets (non-GAAP)
Average shareholders' equity
Less: average goodwill and intangible assets, net of deferred
$ 4,705,241 $ 4,651,953 $ 4,831,070 $ 4,867,929 $ 5,175,210
(52,958)
(79,964)
$ 4,652,283 $ 4,591,976 $ 4,764,521 $ 4,794,855 $ 5,095,246
(59,977)
(73,074)
(66,549)
$
546,716 $
583,686 $
701,476 $
860,691 $ 1,038,753
tax liability related to goodwill
Average tangible common equity (non-GAAP)
(52,958)
493,758 $
(59,977)
523,709 $
(66,549)
634,927 $
(73,074)
787,617 $
(79,964)
958,789
$
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)
0.31%
0.38%
1.29%
2.67%
3.61%
0.50%
0.57%
1.29%
3.95%
5.04%
0.10%
0.17%
0.60%
0.70%
1.29%
0.19%
0.26%
0.52%
1.07%
1.58%
0.13%
0.20%
0.40%
0.67%
1.06%
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,
2015
171,407 $
2,695
174,102 $
2014
184,662 $
930
185,592 $
2016
160,448 $
4,081
164,529 $
2017
164,421 $
5,852
170,273 $
2013
195,475
—
195,475
$
$
Net interest income
Add: impact of taxable equivalent adjustment
Net interest income FTE (non-GAAP)
$
$
146,306 $
5,852
152,158 $
145,640 $
4,081
149,721 $
156,945 $
2,695
159,640 $
170,249 $
930
171,179 $
178,961
—
178,961
Average earning assets
Yield on earning assets
Yield on earning assets FTE (non-GAAP)
Net interest margin
Net interest margin FTE (non-GAAP)
$ 4,353,320 $ 4,290,171 $ 4,439,139 $ 4,446,903 $ 4,698,552
4.16%
4.16%
3.81%
3.81%
4.15%
4.17%
3.83%
3.85%
3.78%
3.91%
3.36%
3.50%
3.86%
3.92%
3.54%
3.60%
3.75%
3.84%
3.39%
3.49%
39
Adjusted Financial Results
Adjustments to net income:
Net income
Adjustments (non-GAAP)(1)
Adjusted net income (non-GAAP)
Adjustments to income per share:
Income per share
Adjustments (non-GAAP)(1)
Adjusted income per share - diluted (non-GAAP)(1)
Adjustments to return on average tangible assets:
Adjusted net income (non-GAAP)(1)
Add: impact of core deposit intangible amortization expense, after tax
Net income adjusted for impact of core deposit intangible amortization expense, after tax(1)
Average tangible assets (non-GAAP)
Adjusted return on average tangible assets (non-GAAP)
Adjustments to return on average tangible common equity:
Net income adjusted for impact of core deposit intangible amortization expense, after tax(1)
Average tangible common equity (non-GAAP)
Adjusted return on average tangible common equity (non-GAAP)
(1) Adjustments:
Non-interest expense adjustments:
Acquisition-related
Special bonus accrual
Total pre-tax adjustments (non-GAAP)
Collective tax expense impact
Deferred tax asset re-measurement
Adjustments (non-GAAP)
As of and for the
year ended
December 31, 2017
14,579
20,430
35,009
0.53
0.73
1.26
35,009
3,259
38,268
4,652,283
0.82%
38,268
493,758
7.75%
2,691
491
3,182
(1,209)
18,457
20,430
$
$
$
$
$
$
$
$
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, 2017,
2016, and 2015, 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-chartered 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 conversion and name change.
All amounts are in thousands, except share data, or as otherwise noted.
Overview
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. We have established a solid
financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for
growth. We believe that our established presence in core markets that are outperforming national averages positions us well
for growth opportunities. As of December 31, 2017, we had $4.8 billion in assets, $3.2 billion in loans, $4.0 billion in
deposits and $0.5 billion in equity.
Operating Highlights and Key Challenges
Increased profitability and returns
• Net income was $14.6 million, or $0.53 per diluted share, for 2017 compared to net income of $23.1 million, or
$0.79 per diluted share, for 2016. Net income during 2017 included a non-cash deferred tax asset re-measurement
charge of $18.5 million and $3.2 million in one-time expenses primarily related to the acquisition of Peoples.
Adjusting for these items, net income would have been $35.0 million, or $1.26 per diluted share.
• The return on average tangible assets was 0.38% for 2017 compared to 0.57% for 2016. Adjusting for the one-time
expense items above, the return on average tangible assets was 0.82% for 2017.
• The return on average tangible common equity was 3.61% for 2017 compared to 5.04% for 2016. Adjusting for the
one-time expense items above, the return on average tangible common equity was 7.75% for 2017.
Strategic execution
• Grew non 310-30 loan outstandings to $3.1 billion, an increase of $343.3 million, or 12.6%, since prior year.
• Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most
industry sector concentrations at 5% or less of total loans and all concentration levels remain well below our self-
imposed limits.
• Continued to build and deepen relationships with our clients resulting in strong deposit growth, particularly average
demand deposits which grew 7.8%, adjusting for banking center divestitures, since December 31, 2016.
• Maintained strong expense management, decreasing expenses $76 million, or 36%, during the past five years,
adjusted for $3.2 million in one-time expenses primarily related to the acquisition of Peoples.
• Completed the acquisition of Peoples on January 1, 2018, which further strengthens the NBH franchise in the
attractive and growing markets along the Colorado Front Range and the greater Kansas City region. The transaction
is valued at $146.4 million and adds an estimated $868 million in assets, $544 million in loans held for investment
and $730 million of low-cost deposits. The aggregate consideration of $146.4 million consists of $36.2 million in
cash and the remainder in 3,398,477 share of NBHC common stock. The system conversion for this transaction was
completed in the first quarter of 2018.
41
Loan portfolio
• Total loans ended the year at $3.2 billion and increased $318.0 million, or 11.1%, since December 31, 2016, driven
by new loan originations of $879.2 million, led by commercial and industrial loan originations of $515.4 million.
• Non 310-30 loans increased $343.3 million, or 12.6%, led by commercial and industrial loans increasing 28.0%
since December 31, 2016.
• Successfully exited $25.2 million, or 17.3%, of the remaining acquired 310-30 loan portfolio, since December 31,
2016.
• Peoples adds complementary portfolio loans held for investment of an estimated $544 million, represented by
diverse industries with all pro-forma concentration levels well below our self-imposed limits.
Credit quality
• Credit quality improved, as 90 days past due and non-accruing loans were 0.69% of total loans at December 31,
2017 compared to 1.13% at December 31, 2016. Non-performing assets to total loans and OREO totaled 0.99% at
December 31, 2017 compared to 1.61% at December 31, 2016.
• Net charge-offs on non 310-30 loans totaled 0.38%, or 0.12% excluding the energy portfolio, compared to 0.85% in
the prior year, or 0.10% excluding the energy portfolio.
• Provision for loan loss expense on non 310-30 loans totaled $13.1 million compared to $24.5 million in the prior
year, a decrease of $11.4 million driven entirely by a reduction in the provision for energy loans.
Client deposit funded balance sheet
• Total deposits averaged $4.0 billion during the fourth quarter of 2017, increasing $273.5 million, or 7.3%, compared
to the fourth quarter of 2016, adjusting for the banking center divestitures in the second quarter of 2017.
• Demand deposits averaged $933.7 million during the fourth quarter of 2017 and grew $111.8 million, or 13.6%,
compared to the fourth quarter of 2016, adjusting for the banking center divestitures in the second quarter of 2017.
• Transaction deposits increased $263.1 million, or 10.0%, for the fourth quarter of 2017 compared to the fourth
quarter of 2016, adjusting for the banking center divestitures in the second quarter of 2017.
• Time deposits averaged $1.1 billion during the fourth quarter of 2017, increasing $10.4 million, compared to the
fourth quarter of 2016, on an adjusted basis.
• The mix of transaction deposits to total deposits improved to 71.9% from 69.7% at December 31, 2016.
• Cost of deposits totaled 0.41%, increasing from 0.36% in the prior year, due to higher cost of savings, money market
and time deposits.
• Peoples adds low cost deposits of an estimated $730 million, with over 90% in transaction deposits. Pro-forma cost
of deposits including Peoples would have been 0.37% during 2017.
Revenues
• Fully taxable equivalent (FTE) net interest income totaled $152.2 million and increased $2.4 million, or 1.6%.
• The FTE net interest margin widened 0.01% to 3.50% from 2016 as the yield on earning assets increased 0.07%, led
by a 0.27% increase in the originated portfolio yields, mostly offset by lower levels of income on high-yielding 310-
30 loans and an increase in the cost of deposits of 0.05%.
• Non-interest income totaled $39.2 million, decreasing $0.8 million from prior year due to lower gain on sale of
mortgages of $0.7 million from lower volumes.
Expenses
• Non-interest expense totaled $136.7 million, representing an increase of $0.7 million from prior year, due to $3.2
million of one-time expenses primarily related to the Peoples acquisition.
• Income tax expense totaled $21.3 million and included an $18.5 million non-cash one-time charge primarily related
to the deferred tax asset re-measurement, partially offset by $4.2 million in tax benefits from stock compensation
activity. Without these discrete items, tax expense would have been $7.1 million, an effective tax rate of 19.7%.
42
Strong capital position
• Capital ratios are strong as our capital position remains in excess of federal bank regulatory thresholds. As of
December 31, 2017, our consolidated tier 1 leverage ratio was 9.8% and our consolidated tier 1 risk-based capital
and common equity tier 1 risk-based capital ratios were both 12.9%.
• At December 31, 2017, common book value per share was $19.81, while tangible common book value per share was
$17.94 and $18.89 after consideration of the excess accretable yield value of $0.95 per share. The deferred tax re-
measurement charge impacted the tangible common book value per share by $0.69.
• 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 primarily 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 improve in 2017. 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. 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 historically low throughout 2017. 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 only 1.8% of our total
loans; however, prolonged or further pricing pressure on oil and gas could lead to additional credit stress in our energy
portfolio.
The agriculture industry is in the third year of depressed commodity prices. Our agriculture portfolio is only 4.4% of total
loans and is well-diversified across crop and livestock types. We have maintained prudent client selectivity, leading to
agriculture clients possessing low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit
losses in the future.
Our non 310-30 loans outstanding portfolio at December 31, 2017 totaled $3.1 billion, representing an increase of $343.3
million, or 12.6% compared to December 31, 2016, due to $879.2 million in loan originations, partially offset by loan
paydowns and payoffs during 2017. Our acquired loans have produced higher yields than our originated loans, due to
accretion of fair value adjustments. During 2017, our weighted average rate on loan originations at the time of origination
was 4.10% (fully taxable equivalent), compared to the weighted average yield of our total loan portfolio of 4.71% (fully
taxable equivalent) and the weighted average rate on loan originations of 4.06% (fully taxable equivalent) for the year ended
December 31, 2017. Downward pressure on the yields of our total loan portfolio will continue 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. Fully taxable equivalent net interest income reached an inflection point in the second quarter of 2017
and continued during the fourth quarter of 2017 as the yields and volumes of originated loans outpaced the decrease in higher
yielding acquired loan balances. The inflection point was driven by both the strong new loan originations as well as the short-
term market rate increases in 2017. Future growth in our interest income will ultimately be dependent on our ability to
continue to generate sufficient volumes of high-quality originated loans.
43
Continued 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, 2017.
Accounting for Acquired Loans
Included in our loan portfolio are originated loans and acquired loans. The estimated fair values of acquired loans at the
acquisition date 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 at 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.
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
44
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 increased to $4.8 billion at December 31, 2017 from $4.6 billion at December 31, 2016. Total loans were $3.2
billion at December 31, 2017, and grew $318.0 million, or 11.1% from December 31, 2016. Non 310-30 loan outstandings
totaled $3.1 billion and increased $343.3 million, or 12.6%, from December 31, 2016. We originated $879.2 million of loans
during 2017, led by commercial and industrial originations of $515.4 million. The acquired 310-30 loan portfolio declined
$25.2 million, or 17.3%, from December 31, 2016. Cash and cash equivalents totaled $257.4 million and increased $104.6
million, or 68.5%, from December 31, 2016 due to strong deposit balances. The investment securities portfolio decreased
$102.6 million, or 8.4%, to $1.1 billion at December 31, 2017, due to paydowns within the portfolio. OREO decreased $5.2
million or 33.0%, as we continue to resolve problem assets. During 2017, lower cost demand, savings, and money market
("transaction") deposits increased $164.9 million, or 6.1%, excluding the four banking center divestitures during the second
quarter of 2017, while time deposits decreased $54.0 million, or 4.6%, as we continued to focus on developing long-term
banking relationships with clients.
Investment Securities
Available-for-sale
Total investment securities available-for-sale were $855.3 million at December 31, 2017, compared to $884.2 million at
December 31, 2016, a decrease of $28.9 million, or 3.3%. During 2017 and 2016, maturities and pay downs of available-for-
sale securities totaled $224.3 million and $275.5 million, respectively. Purchases of available-for-sale securities during 2017
and 2016 totaled $202.7 million and $4.9 million, respectively.
45
Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated:
December 31, 2017
December 31, 2016
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
yield
portfolio
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-sale
$ 167,269 $ 168,648
19.8%
2.39% $ 223,781 $ 227,160
25.8%
2.31%
702,107
1,054
419
685,230
1,048
419
$ 870,849 $ 855,345
80.1%
0.1%
0.0%
100.0%
652,739
1.93%
3,914
2.60%
0.00%
419
2.02% $ 894,737 $ 884,232
666,616
3,921
419
73.8%
0.4%
0.0%
100.0%
1.71%
3.34%
0.00%
1.86%
As of December 31, 2017 and 2016, 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, 2017 and 2016, adjustable rate securities comprised 4.9% and 6.7%, 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 2.18% per annum and 1.97% per annum at December 31, 2017 and
2016, respectively.
The available-for-sale investment portfolio included $18.2 million and $16.5 million of gross unrealized losses at December
31, 2017 and 2016, respectively, which were partially offset by $2.7 million and $6.0 million of gross unrealized gains,
respectively. 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, 2017, we held $258.7 million of held-to-maturity investment securities, compared to $332.5 million at
December 31, 2016, a decrease of $73.8 million, or 22.2%. The Company did not purchase any held-to-maturity securities
during 2017 or 2016.
Held-to-maturity investment securities are summarized as follows as of the date indicated:
December 31, 2017
December 31, 2016
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
yield
portfolio
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
Total investment securities held-to-
$ 204,352 $ 204,048
79.0%
3.23% $ 263,411 $ 264,862
79.2%
3.24%
54,378
52,723
21.0%
1.66%
69,094
67,711
20.8%
1.68%
maturity
$ 258,730 $ 256,771
100.0%
2.90% $ 332,505
$ 332,573
100.0%
2.91%
The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of
fixed rate FHLMC, FNMA and GNMA securities.
46
The fair value of the held-to-maturity investment portfolio was $256.8 million and $332.6 million, at December 31, 2017 and
2016, respectively, and included $2.0 million of net unrealized losses and $0.1 million of net unrealized gains for the
respective periods.
Loans Overview
At December 31, 2017, 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.
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:
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
Total loans accounted for under ASC 310-30
Total loans
December 31, 2017
December 31, 2016
2017 vs 2016
% Change
$
$
1,376,022 $
272,753
138,895
57,460
1,845,130
485,141
703,478
24,575
3,058,324
29,475
77,908
12,759
481
120,623
3,178,947 $
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
28.0%
23.1%
3.2%
(36.3)%
21.3%
10.9%
(3.4)%
(12.0)%
12.6%
(25.0)%
(12.6)%
(22.8)%
(46.4)%
(17.3)%
11.1%
Our loan portfolio totaled $3.2 billion at December 31, 2017, increasing 318.0 million, or 11.1%, year-over-year on the
strength of $879.2 million in loan originations between the two periods. The strong originations were the result of continued
market penetration. Non 310-30 loan outstandings totaled $3.1 billion representing an increase of $343.3 million, or 12.6%,
year-over-year, led by a 21.3% increase in total commercial loans. The acquired 310-30 loan portfolio declined $25.2 million,
or 17.3%, from December 31, 2016.
We have successfully generated new relationships with small to medium-sized businesses and consumers, experiencing
particularly strong loan growth in our commercial and industrial portfolio, which at December 31, 2017, was comprised of
diverse industry segments. These segments included public administration-related loans of $396.3 million, finance and
insurance-related loans of $263.9 million, health care related loans of $143.3 million, manufacturing-related loans of $88.2
million, and a variety of smaller subcategories of commercial and industrial loans.
47
Non-owner occupied CRE loans were 111.0% of the Company’s risk based capital, or 17.5% of total loans, and no specific
property type comprised more than 5.0% of total loans. The Company maintains very little exposure to retail properties,
comprising just 2.3% of total loans. Multi-family loans totaled $26.9 million, or less than 1.0% of total loans as of December
31, 2017. Agriculture loans were 29.5% of the Company’s risk based capital and 4.4% of total loans, and are well-diversified
across crop and livestock types.
The table below shows the geographic breakout of our loan portfolio at December 31, 2017 and 2016, 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
New York
California
Other
Total
December 31, 2017
December 31, 2016
Loan balance
Percent of
loan portfolio
Loan balance
$
$
1,343,144
577,887
331,003
247,969
90,730
89,560
498,654
3,178,947
42.3%
18.2%
10.4%
7.8%
2.8%
2.8%
15.7%
100.0%
$
$
1,188,155
595,964
296,539
245,059
—
90,643
444,561
2,860,921
Percent of
loan portfolio
41.5%
20.8%
10.4%
8.6%
0.0%
3.2%
15.5%
100.0%
New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our
markets and provide needed services at competitive rates. Loan originations totaled $879.2 million over the past twelve
months, led by commercial and industrial loan originations of $515.4 million. 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 interest income. The following tables represent new loan originations during 2017 and 2016:
Fourth quarter Third quarter Second quarter First quarter
2017
2017
2017
2017
Total
2017
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Agriculture
Energy
$
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
167,699
8,937
14,050
(8,121)
182,565
21,323
25,995
1,815
231,698
$
$
73,917
32,787
3,335
(6,993)
103,046
46,654
28,471
3,122
181,293
$
$
159,340
6,899
16,696
9,120
192,055
47,312
26,979
3,233
269,579
$
$
114,414
16,988
(3,644)
(81)
127,677
36,962
29,616
2,378
196,633
$
$
515,370
65,611
30,437
(6,075)
605,343
152,251
111,061
10,548
879,203
Included in originations are net fundings under revolving lines of credit of $65,686, $(12,804), $68,305 and $33,397 as of the
fourth quarter 2017, third quarter 2017, second quarter 2017 and first quarter 2017, respectively.
48
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
274,950 $
92,433 $
19,091
9,589
(1,251)
119,862
54,456
102,703
4,995
282,016 $
142,179 $
17,883
18,072
(17,328)
160,806
89,109
63,815
3,158
316,888 $
59,361 $
10,399
10,375
(13,984)
66,151
44,876
49,722
2,671
403,643
65,979
56,516
(28,130)
498,008
218,668
306,208
14,390
163,420 $ 1,037,274
Included in originations are net fundings under revolving lines of credit of $18,670, $26,959, $85,345 and $9,565 as of the
fourth quarter 2016, third quarter 2016, second quarter 2016 and first quarter 2016, respectively. Residential real estate loan
originations decreased $195.1 million during 2017 when compared to 2016, due to the Company no longer including loans
held for sale in its definition of originated.
The tables below show the contractual maturities of our loans for the dates indicated:
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
December 31, 2017
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
83,314 $
18,044
14,513
25,970
141,841
118,980
6,820
5,909
273,550 $
551,567 $
115,421
102,390
31,489
800,867
316,242
38,824
15,014
1,170,947 $
745,746 $
156,306
29,845
—
931,897
127,827
670,593
4,133
1,734,450 $
December 31, 2016
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
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 $
$
$
$
$
Total
1,380,627
289,771
146,748
57,459
1,874,605
563,049
716,237
25,056
3,178,947
Total
1,083,350
243,060
143,747
90,273
1,560,430
526,792
744,885
28,814
2,860,921
49
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, 2017
Variable
Total
Balance
Weighted
average rate
Balance
Weighted
average rate
Balance
Weighted
average rate
$
696,224
3.34% $
597,253
4.14% $ 1,293,477
3.71%
125,821
35,605
132
857,782
4.20%
4.70%
4.37%
3.57%
133,408
89,487
31,357
851,505
4.26%
4.42%
4.57%
4.20%
259,229
125,092
31,489
1,709,287
161,846
372,104
15,883
$ 1,407,615
237,772
4.42%
325,227
3.40%
2,805
4.68%
3.64% $ 1,417,309
399,618
4.46%
697,331
3.94%
18,688
4.59%
4.19% $ 2,824,924
4.39%
4.50%
4.57%
3.89%
4.44%
3.65%
4.67%
3.91%
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%
3,395
4.49%
3.56% $ 1,235,353
358,492
3.65%
719,400
3.73%
22,522
4.06%
3.78% $ 2,501,585
4.41%
4.02%
3.05%
3.65%
3.98%
3.53%
4.42%
3.67%
(1) Included in commercial fixed rate loans are loans totaling $417,660 and $313,000 as of December 31, 2017 and 2016,
respectively, that have been swapped to variable rates at current market pricing. Included in the commercial segment
are tax exempt loans totaling $617,889 and $384,641 with a weighted average rate of 3.15% and 3.01% at December
31, 2017 and 2016, respectively.
Accretable Yield
At December 31, 2017, the accretable yield balance was $46.6 million compared to $60.5 million at December 31, 2016. We
re-measure the expected cash flows quarterly for all 25 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 $8.6 million and $9.5
million reclassification from non-accretable difference to accretable yield during 2017 and 2016, respectively.
50
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, 2017 December 31, 2016
60,476
$
3,236
63,712
48,339 $
46,568 $
1,771
$
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 and remains a strong point, driven by our disciplined adherence to out self-
imposed concentration limits across industry sector and real estate property type. 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 our collateral. To facilitate the oversight of asset quality, loans
are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more
detail below.
Our internal risk rating system uses a series of grades which reflect our assessment of the credit quality of 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.
Non 310-30 special mention loans increased $12.5 million from December 31, 2016 due to upgrades from substandard and
doubtful within the commercial and industrial sector and downgrades from pass within the commercial and industrial sector,
partially offset by payoffs in the commercial and industrial and owner-occupied commercial real estate sectors. Non 310-30
substandard loans decreased $23.3 million from December 31, 2016 primarily due to paydowns and upgrades to special
mention and pass within the commercial and industrial, owner-occupied commercial real estate and energy sectors. Non 310-
30 doubtful loans decreased $3.9 million from December 31, 2016 due to energy loan charge-offs during the period. At
December 31, 2017 there is one substandard commercial real estate non-owner occupied loan with an unpaid principal
51
balance of $24.9 million within a pool accounted for under ASC 310-30 that is being actively worked out and may transfer to
OREO in 2018.
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 2017, 2016 and 2015 was $1.5 million, $2.6 million and $1.4 million,
respectively.
All loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2017, as the future cash
flows on the loan pools were considered estimable. While individual loans making up the pools may be accounted for on a
cost recovery basis, the cash flows on the loan pools are considered estimable and, 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 loan pools accounted for under ASC 310-30.
52
The following table sets forth the non-performing assets as of the dates presented:
December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013
$
3,747 $
1,160 $
942 $
221 $
15,572
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,
excluding restructured
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
3,336
2,003
—
9,086
784
3,846
29
2,054
297
6,517
10,028
66
3,875
40
954
1,904
—
3,800
407
3,617
30
385
130
—
736
222
2,845
37
467
153
—
16,192
1,131
3,437
10
13,745
14,009
7,854
3,840
20,770
4,020
143
—
1,645
5,808
—
1,336
111
7,255
21,000
10,491
—
31,491 $
150 $
8,461 $
31,264 $
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 $
3,994
458
365
—
4,817
—
1,966
190
6,973
10,813
29,120
849
40,782 $
263 $
19,275 $
17,613 $
535
225
—
—
760
169
2,408
237
3,574
24,344
70,125
1,086
95,555
129
11,605
12,521
0.66%
1.07%
0.99%
0.50%
1.31%
0.00%
0.00%
0.01%
0.01%
0.01%
0.99%
148.88%
1.61%
94.98%
1.81%
105.74%
1.86%
162.89%
4.97%
51.43%
During 2017, total non-performing loans decreased $9.7 million, or 31.6%, from December 31, 2016 due to charge-offs of
two energy loans totaling $7.5 million and one commercial and industrial loan totaling $2.5 million. In addition, one
previously identified energy loan of $2.2 million at December 31, 2017 was placed back on accrual during the third quarter of
2017. These decreases were offset by one commercial and industrial loan totaling $3.7 million placed on non-accrual during
the fourth quarter of 2017. During 2017, accruing TDRs increased $2.7 million primarily due to increases in the commercial
53
segment totaling $3.3 million, partially offset by decreases of $0.5 million in the residential real estate segment. During 2017,
$1.8 million of loans were foreclosed or otherwise repossessed and transferred to OREO and $10.4 million of OREO was
sold resulting in a net gain of $4.2 million. OREO write-downs of $0.8 million were recorded during 2017.
Total non-performing assets to total loans and OREO was 0.99% and 1.61% at December 31, 2017 and 2016, respectively.
Included in this ratio at December 31, 2017 are acquired non-performing loans and OREO of 0.46% compared to 0.71% at
December 31, 2016. Acquired OREO has been a source of income for the Company as net OREO gains totaled $4.2 million
and $4.4 million for the years ended December 31, 2017 and 2016, respectively. In addition, the ratio includes 0.05% and
0.44% of non-performing energy loans at December 31, 2017 and 2016, respectively. The remaining non-performing assets
to total loans and OREO was 0.48% at December 31, 2017 and 0.46% and December 31, 2016.
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, 2017:
Accruing
Non-accrual
Total
Unpaid
principal
balance
Carrying
value
Carrying Unpaid
value/ principal
balance
UPB
Carrying
value
Carrying Unpaid
principal
value/
balance
UPB
Carrying
value
Carrying
value/
UPB
$ 1,368,740 $ 1,368,255 99.9% $ 11,678 $ 7,767 66.5% $ 1,380,418 $ 1,376,022 99.7%
270,039
137,353
56,267
1,832,399
269,275
99.7%
136,892 99.7%
55,815 99.2%
99.9%
1,830,237
3,745
2,041
6,269
23,733
3,478
92.9%
2,003 98.1%
1,645 26.2%
62.8%
14,893
273,784
139,394
62,536
1,856,132
272,753
99.6%
138,895 99.6%
57,460 91.9%
99.4%
1,845,130
486,154
699,305
24,435
3,042,293
99.6%
484,357
698,295
99.9%
24,435 100.0%
3,037,324 99.8%
830
6,031
145
30,739
784
5,183
94.5%
85.9%
140 96.6%
21,000 68.3%
486,984
705,336
24,580
3,073,032
99.6%
485,141
703,478
99.7%
24,575 99.9%
3,058,324 99.5%
42,468
29,475 69.4%
83,753
18,728
3,575
77,908 93.0%
12,759 68.1%
481 13.5%
—
—
—
—
—
0.0%
42,468
29,475 69.4%
—
—
—
0.0%
0.0%
0.0%
83,753
18,728
3,575
77,908 93.0%
12,759 68.1%
481 13.5%
148,524
120,623 81.2%
$ 3,190,817 $ 3,157,947 99.0% $ 30,739 $ 21,000 68.3% $ 3,221,556 $ 3,178,947 98.7%
120,623 81.2%
148,524
0.0%
—
—
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
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, 2017 and 2016:
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
December 31, 2017
$
3,681 $
150
21,000
24,831 $
December 31, 2016
2,296
—
30,717
33,013
$
Total 90 days past due and still accruing interest and non-accrual loans to total non
310-30 loans
Total non-accrual loans to total non 310-30 loans
% of total past due and non-accrual loans that carry fair value marks
0.69%
0.69%
14.66%
1.13%
1.13%
10.75%
54
Loans 30-89 days past due and still accruing interest increased $1.4 million from December 31, 2016 to December 31, 2017
and loans 90 days or more past due and still accruing interest increased $0.2 million from December 31, 2016 to December
31, 2017, for a collective increase in total past due loans of $1.6 million. Non-accrual loans decreased $9.7 million at
December 31, 2017 compared to December 31, 2016, 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,
2017 or 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 losses. 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 2017 and 2016,
these re-measurements resulted in overall increases in expected cash flows in certain loan pools, which, absent previous
valuation allowances within the same pool, are reflected in increased accretion as well as an increased amount of accretable
yield and are recognized over the expected remaining lives of the underlying loans as an adjustment to yield.
For all loans not accounted for under ASC 310-30, the determination of the ALL follows a process to determine the
appropriate level of ALL that is designed to account for changes in credit quality and other risk factors. This process provides
an ALL consisting of a specific allowance component based on certain individually evaluated loans and a general allowance
component based on estimates of reserves needed for all other loans, segmented based on similar risk characteristics.
Impaired loans less than $250,000 are included in the general allowance population. Impaired loans over $250,000 are
subject to individual evaluation on a regular basis to determine the need, if any, to allocate a specific reserve to the impaired
loan. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous
loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:
• the borrower’s resources, ability, and willingness to repay in accordance with the terms of the loan agreement;
•
•
•
the likelihood of receiving financial support from any guarantors;
the adequacy and present value of future cash flows, less disposal costs, of any collateral; 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 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
55
loan segment and present energy as its own loan class within the commercial segment. The prior periods 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:
• economic/external conditions;
• loan administration, loan structure and procedures;
• risk tolerance/experience;
• loan growth;
• trends;
• concentrations; and
• other.
Management derives an estimated annual loss rate adjusted for an estimated loss emergence period based on historical loss
data categorized by segment and class. The loss rates are applied at the loan segment and class level. Our historical loss
history began in 2012, 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.
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 2017, we recorded $13.1 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 2017 totaled $10.9 million and were primarily due to two energy loans totaling $7.5 million
and one commercial and industrial loan totaling $2.5 million. Specific reserves on impaired loans totaled $1.5 million at
December 31, 2017.
During 2016, we recorded $24.5 million of provision for loan losses for loans not accounted for under ASC 310-30, which
primarily reflects specific reserves on certain non-performing loans and reserves to support loan growth. The 2016 provision
was driven by loan growth and an increase in the energy sector provision of $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 loans. Specific reserves on
impaired loans totaled $2.4 million at December 31, 2016.
56
310-30 ALL
During 2017, loans accounted for under ASC 310-30 had $154 thousand of recoupment. The recoupment was due to an
improvement of expected future cash flows during the period.
During 2016, loans accounted for under ASC 310-30 had $805 thousand of recoupment. The recoupment was driven by cash
flow improvements on a previously impaired agriculture pool.
Total ALL
After considering the above mentioned factors, we believe that the ALL of $31.3 million and $29.2 million is adequate to
cover probable losses inherent in the loan portfolio at December 31, 2017 and 2016, respectively. However, it is likely that
future adjustments to the ALL will be necessary and any changes to the assumptions, circumstances or estimates used in
determining the ALL could adversely affect the Company's results of operations, liquidity or financial condition.
The following schedules present, by class stratification, the changes in the ALL during the periods listed.
ASC
310-30
loans
December 31, 2017
Non
310-30
loans
28,949 $
225 $
As of and for the years ended
December 31, 2016
Non
310-30
loans
26,042 $
ASC
310-30
loans
1,077 $
ASC
310-30
loans
Total
27,119 $
721 $
December 31, 2015
Non
310-30
loans
16,892 $
Total
29,174 $
Total
17,613
—
(10,342)
(10,342)
—
(20,684)
(20,684)
—
(1,911)
(1,911)
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
—
—
—
—
—
—
—
(236)
(737)
(11,315)
433
(10,882)
—
(236)
(737)
(11,315)
433
(10,882)
(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)
(Recoupment) provision for loan
loss
Ending allowance for loan losses
Ratio of net charge-offs to average total
$
(154)
71 $
13,126
31,193 $
12,972
31,264 $
(805)
225 $
24,456
28,949 $
23,651
29,174 $
366
1,077 $
12,078
26,042 $
12,444
27,119
loans during the period, respectively 0.00%
0.38%
0.36%
0.03%
0.85%
0.80%
0.01%
0.36%
0.12%
Ratio of ALL to total loans outstanding
at period end, respectively
0.06%
1.02%
0.98%
0.15%
1.07%
1.02%
0.53%
1.09%
1.05%
Ratio of ALL to total non-performing
loans at period end, respectively
Total loans
Average total loans outstanding during
0.00%
148.54%
148.88%
0.00%
94.24%
94.98%
0.00%
101.54%
105.74%
$
120,623 $ 3,058,324 $ 3,178,947 $ 145,852 $ 2,715,069 $ 2,860,921 $ 202,830 $ 2,384,843 $ 2,587,673
the period
Non-performing loans
$
$
132,130 $
— $
2,897,316 $ 3,029,446 $
21,000 $
21,000 $
170,330 $
— $
2,530,464 $ 2,700,794 $
30,717 $
30,717 $
209,268 $
— $
2,323,527 $ 2,532,795
25,647
25,647 $
57
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
(Recoupment) provision for loan loss
Ending allowance for loan losses
Ratio of net charge-offs to average total loans during the
$
period, respectively
Ratio of ALL to total loans outstanding at period end,
respectively
Ratio of ALL to total non-performing loans at period end,
respectively
Total loans
Average total loans outstanding during the period
Non-performing loans
ASC
310-30
loans
$
1,280 $
December 31, 2014
December 31, 2013
As of and for the years ended
Non
310-30
loans
11,241 $
(507)
—
(739)
(783)
(2,029)
951
(1,078)
6,729
16,892 $
ASC
310-30
loans
$
4,652 $
Total
12,521
(510)
—
(739)
(819)
(2,068)
951
(1,117)
6,209
17,613
$
(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 $
Total
15,380
(2,371)
(3,744)
(1,505)
(1,001)
(8,621)
1,466
(7,155)
4,296
12,521
(3)
—
—
(36)
(39)
—
(39)
(520)
721 $
0.01%
0.06%
0.05%
0.67%
0.27%
0.41%
0.26%
0.90%
0.81%
0.28%
0.80%
0.68%
$
$
$
0.00%
279,645 $
361,806 $
— $
156.22%
1,882,764 $
1,688,197 $
10,813 $
162.89%
2,162,409 $
$
2,050,003
$
10,813
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
The following tables present the allocation of the ALL and the percentage of the total amount of loans in each loan category
listed as of the dates presented:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
$
$
December 31, 2017
Total loans
% of total loans
Related ALL
1,874,605
563,049
716,237
25,056
3,178,947
59.0% $
17.7%
22.5%
0.8%
100.0% $
December 31, 2016
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
Total loans
% of total loans
Related ALL
Total loans
% of total loans
Related ALL
ALL as a %
of total ALL
68.4%
17.9%
12.7%
1.0%
100.0%
21,385
5,609
3,965
305
31,264
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
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
1,427,420
442,885
684,002
33,366
2,587,673
55.2% $
17.1%
26.4%
1.3%
100.0% $
58
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
$
$
December 31, 2014
Total loans
% of total loans
Related ALL
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
Total loans
% of total loans
Related ALL
794,023
423,644
599,924
36,503
1,854,094
42.9% $
22.8%
32.3%
2.0%
100.0% $
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
The ALL allocated to commercial loans increased to 68.4% at December 31, 2017 from 64.6% at December 31, 2016, due to
loan growth partially offset by a decrease in specific reserves of $0.9 million.
Other Assets
Significant components of other assets were as follows as of the periods indicated:
Increase (decrease)
December 31, 2017 December 31, 2016 Amount
Bank-owned life insurance
Deferred tax asset
Derivative asset
Accrued interest on loans
Accrued income taxes receivable
Accrued interest on interest bearing bank deposits and
investment securities
Other miscellaneous assets
Minority interest in participated other real estate owned
Total other assets
$
$
64,387
35,630
13,105
11,784
3,992
2,471
7,879
—
139,248
$
$
62,516 $
52,810
11,715
10,020
5,252
1,871
(17,180)
1,390
1,764
(1,260)
% Change
3.0%
(32.5)%
11.9%
17.6%
(24.0)%
2,542
8,345
1,578
154,778 $
(71)
(466)
(1,578)
(15,530)
(2.8)%
(5.6)%
(100.0)%
(10.0)%
Other assets totaled $139.2 million and $154.8 million at December 31, 2017 and 2016, respectively, representing a decrease
of $15.5 million, or 10.0%, year-over-year. The decrease was driven by a re-measurement of the deferred tax asset as a result
of “H.R.1”, known as the “Tax Cuts and Jobs Act”, which among other items reduced the federal corporate tax rate to 21%
effective January 1, 2018, further discussed in note 19 of our consolidated financial statements. This decrease was partially
offset by increases in bank-owned life insurance, accrued interest on loans and the derivative asset. Refer to note 20 of our
consolidated financial statements for further discussion of the derivative asset.
59
Other Liabilities
Significant components of other liabilities were as follows as of the dates indicated:
Pending loan purchase settlement
Accrued expenses
Accrued interest payable
Derivative liability
Other miscellaneous liabilities
Participant interest in OREO
Total other liabilities
$
$
December 31, 2017 December 31, 2016
5,063
13,040
4,973
3,466
10,990
—
37,532
30,181
16,172
5,776
3,758
15,346
688
71,921
$
$
Increase (decrease)
Amount
25,118
3,132
803
292
4,356
688
34,389
$
$
% Change
496.1%
24.0%
16.1%
8.4%
39.6%
100.0%
91.6%
Other liabilities totaled $71.9 million and $37.5 million at December 31, 2017 and 2016, respectively, increasing a combined
$34.4 million, or 91.6%, year-over-year. Pending loan purchase settlement increased due to timing of loan settlements. Other
miscellaneous liabilities increased largely due to an increase in derivative collateral reserves of $4.5 million. Accrued
expenses increased $1.6 million due to increases in bonus accruals and $1.5 million in various accrued expense categories.
Refer to note 20 of our consolidated financial statements for further discussion of the derivative liability.
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, 2017 and 2016:
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, 2017
902,439
47,069
474,607
96,806
472,852
(34,664)
1,011,611
164,906
2,861,509
(66,884)
637,789
12,888
480,261
(53,996)
1,118,050
$ 3,979,559 100.0% $ 3,868,649 100.0% $ 110,910
December 31, 2016
846,744 21.9% $ 55,695
11.1%
427,538
9.7%
376,046
1,046,275 27.0%
2,696,603 69.7%
704,673 18.2%
467,373 12.1%
1,172,046 30.3%
22.7% $
11.9%
11.9%
25.4%
71.9%
16.0%
12.1%
28.1%
% Change
6.6%
11.0%
25.7%
(3.3)%
6.1%
(9.5)%
2.8%
(4.6)%
2.9%
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to
$100,000 as of December 31, 2017:
Three months or less
Over 3 months through 6 months
Over 6 months through 12 months
Thereafter
Total time deposits > $100,000
$
December 31, 2017
80,903
61,888
129,330
208,140
480,261
$
Total deposits increased $110.9 million during 2017. Adjusting for the banking center divestitures during the second quarter
of 2017, total deposits increased $213.9 million, or 5.7% from the prior year. Money market accounts and time deposits
decreased $34.7 million and $54.0 million, from December 31, 2016, respectively, driven by $19.0 million and $48.4 million
sold from the banking center divestitures, respectively. The mix of transaction deposits (defined as total deposits less time
deposits) to total deposits improved to 71.9% at December 31, 2017, from 69.7% at December 31, 2016, as we continued to
focus on developing long-term banking relationships.
60
At December 31, 2017 and 2016, time deposits that were scheduled to mature within 12 months totaled $684.6 million and
$788.8 million, respectively. Of the $684.6 million in time deposits scheduled to mature within 12 months at December 31,
2017, $272.1 million were in denominations of $100,000 or more, and $412.5 million were in denominations less than
$100,000. Note 11 to the consolidated financial statements provides a maturity schedule of time deposits outstanding at
December 31, 2017.
Other Borrowings
As of December 31, 2017 and 2016, the Company sold securities under agreements to repurchase totaling $130.5 million and
$92.0 million, respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing
from the FHLB with total available credit of $806.7 million. At December 31, 2017 and 2016, the Bank had $129.1 million
and $25.0 million in term advances from the FHLB, respectively. The term advances have fixed rates between 1.31% -
2.33%, with maturity dates of 2018 - 2020.
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, 2017
and 2016, 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 2017
We recorded net income of $14.6 million, or $0.53 per diluted share, during 2017, compared to net income of $23.1 million,
or $0.79 per diluted share, during 2016. Net income during 2017 included a non-cash deferred tax asset re-measurement
charge of $18.5 million due to the enactment of the Tax Cuts and Jobs Act and $3.2 million in one-time expenses primarily
related to the acquisition of Peoples. Adjusting for these items, net income would have been $35.0 million, or $1.26 per
diluted share. Fully taxable equivalent net interest income totaled $152.2 million, representing an increase of $2.4 million
from 2016.
Provision for loan loss expense on non 310-30 loans was $13.1 million during 2017, compared to $24.5 million during 2016,
a decrease of $11.4 million driven entirely by a reduction in the provision for energy loans. Net charge-offs on non 310-30
loans totaled 0.38%, or 0.12% excluding the energy portfolio.
Non-interest income totaled $39.2 million during 2017, decreasing $0.8 million from 2016, due to decreases in OREO related
income of $1.8 million and gain on sale of mortgages, net of $0.7 million. These decreases were partially offset by a
combined increase in services charges and bank card fees of $1.3 million and other non-interest income of $0.4 million.
Non-interest expense totaled $136.7 million during 2017, increasing $0.7 million from 2016. The increase was largely due to
$3.2 million of one-time expenses primarily related to the Peoples acquisition, offset by decreases of $1.9 million in
61
occupancy and equipment, a $0.5 million decrease in bank card expense and a $0.5 million decrease in FDIC deposit
insurance.
Income tax expense totaled $21.3 million during 2017 and included an $18.5 million non-cash deferred tax asset re-
measurement charge due to the enactment of the Tax Cuts and Jobs Act, partially offset by $4.2 million in tax benefits from
stock compensation activity. Without these discrete items, tax expense would have been $7.1 million, an effective tax rate of
19.7%. The lower tax rate compared to the statutory rate reflects the continued success of our tax strategies and tax exempt
income in relation to pre-tax income.
Years ended 2016 and 2015
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.
Provision for loan loss expense on non 310-30 loans was $24.5 million during 2016, compared to $12.1 million during 2015,
an increase of $12.4 million driven by 2016 energy sector provision of $18.9 million. Net charge-offs on non 310-30 loans
totaled 0.85%, or 0.10% excluding the energy portfolio during 2016, compared to 0.12% during 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%, largely due to an increase of $3.4 million in other non-interest income.
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 telecommunications and data processing expense of $5.5 million, lower salaries
and benefits of $3.3 million, lower marketing expenses of $1.8 million, lower occupancy and equipment of $1.6 million and
lower professional fees of $1.0 million. Problem asset workout expense and gain on sale of OREO improved a combined $4.9
million. Additionally, 2015 included banking center consolidation related expenses of $1.4 million, and warrant liability
expense of $0.1 million.
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.
62
The table below presents the components of net interest income on a fully taxable equivalent basis for the years ended
December 31, 2017, 2016 and 2015:
Interest earning assets:
ASC 310-30 loans
Non 310-30 loans FTE(1)(2)(3)(4)(5)
Investment securities available-for-
sale
Investment securities held-to-
maturity
Other securities
Interest earning deposits and
securities purchased under
agreements to resell
Total interest earning assets
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 advances
Total interest bearing liabilities
88,390
113,433
164
1,779
$ 3,244,055 $ 18,115
873,265
41,205
4,158,525
546,716
$ 4,705,241
Demand deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders'
equity
Net interest income FTE(4)
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
For the year ended
December 31, 2017
For the year ended
December 31, 2016
For the year ended
December 31, 2015
Average
balance
Interest
Average Average
balance
rate
Interest
Average
rate
Average
balance
Interest
Average
rate
$ 132,130 $ 22,505
120,596
2,905,547
17.03% $ 170,330
4.15% 2,545,643
$
33,256
100,142
19.52% $
237,453
3.93% 2,109,152
$ 47,255 19.90%
4.11%
86,693
875,430
16,615
1.90% 1,035,679
18,991
1.83% 1,327,245
26,398
1.99%
296,093
15,249
8,226
839
2.78%
5.50%
382,366
14,975
10,674
748
2.79%
4.99%
476,924
25,865
11,747
1,210
2.46%
4.68%
128,871
1,492
1.16%
141,178
718
0.51%
262,500
799
0.30%
$ 4,353,320 $ 170,273
67,993
315,660
(31,732)
$ 4,705,241
$ 164,529
3.91% $ 4,290,171
63,513
332,122
(33,853)
$ 174,102
3.84% $ 4,439,139
59,526
353,344
(20,939)
$ 4,651,953
$ 4,831,070
3.92%
$ 1,895,852 $
1,146,380
6,003
10,169
0.32% $ 1,865,225
0.89% 1,177,523
$
4,985
8,978
0.27% $ 1,758,965
0.76% 1,281,171
$
4,524
9,085
0.26%
0.71%
109,246
0.19%
1.57%
45,773
0.56% $ 3,197,767
818,901
51,587
4,068,255
583,698
152
693
14,808
$
197,728
0.14%
1.51%
40,000
0.46% $ 3,277,864
782,431
69,299
4,129,594
701,476
187
666
$ 14,462
0.09%
1.67%
0.44%
$ 152,158
$ 149,721
$ 159,640
$ 4,651,953
$ 4,831,070
$ 1,109,265
$ 1,092,404
$ 1,161,275
3.35%
3.38%
3.50%
3.49%
3.48%
3.60%
134.19%
134.16%
135.43%
(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 $2,779,344, $2,368,968 and $1,893,792, interest income of $106,965, $85,792 and $70,569 and
tax equivalent yields of 4.06%, 3.79% and 3.87% for the years ended 2017, 2016 and 2015, respectively.
(3) Non 310-30 loans include loans held-for-sale. Average balances during 2017, 2016 and 2015 were $8,231, $15,179 and $7,097, and interest income
was $523, $830 and $589 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 $5,852,
$4,081 and $2,695 for the years ended 2017, 2016 and 2015, respectively.
(5) Loan fees included in interest income totaled $5,208, $4,734 and $4,253 during 2017, 2016 and 2015, respectively.
Net interest income totaled $146.3 million, $145.6 million and $156.9 million for the years ended 2017, 2016 and 2015,
respectively. On a fully taxable equivalent basis, net interest income totaled $152.2 million, $149.7 million and $159.6
million during 2017, 2016 and 2015, respectively, increasing $2.4 million during 2017 and decreasing $9.9 million during
2016, when compared to prior periods. During 2017, the fully taxable equivalent net interest income benefitted from the
continued shift of earning assets into the originated loan portfolio partially offset by lower levels of higher-yielding 310-30
loans and a 0.10% increase in the cost of interest bearing liabilities. During 2016, the fully taxable equivalent net interest
income decreased due to lower levels of higher-yielding 310-30 loans and investment portfolio paydowns, partially offset by
increases in the originated loan portfolio. The fully taxable equivalent net interest margin widened 0.01% to 3.50% during
2017 and narrowed 0.11% to 3.49 during 2016, when compared to prior periods.
63
Average loans comprised $3.0 billion, or 69.8%, of total average interest earning assets during 2017, compared to $2.7
billion, or 63.3%, during 2016 and $2.3 billion, or 52.9%, during 2015. The increase in average loan balances is reflective of
loan originations outpacing the exit of the acquired problem loans and a shifting of investment paydowns into originated
loans. The non 310-30 loan portfolio yield increase to 4.15% during 2017, compared to 3.93% during 2016, benefitting from
higher yields in our variable rate loans, primarily driven by the short-term market rate increases. The non 310-30 loan
portfolio yield decreased to 3.93% during 2016, compared to 4.11% during 2015, due to high originations in a lower rate
environment. The yield on the ASC 310-30 loan portfolio was 17.03%, 19.52% and 19.90% during 2017, 2016 and 2015,
respectively, decreasing due to the continued resolution of the high yielding ASC 310-30 loan pools.
Average investment securities comprised 26.9%, 33.1% and 40.6% of total interest earning assets during 2017, 2016 and
2015, respectively. 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, were 3.0%, 3.3%
and 5.8% of interest earning assets during 2017, 2016 and 2015, respectively. The 2015 average balance included an increase
in cash from temporary client repurchase agreements on deposit from one large client.
Average balances of interest bearing liabilities increased $46.3 million during 2017, compared to 2016, and decreased $80.1
million during 2016, compared to 2015. The increase during 2017 was driven by increases in Federal Home Loan Bank
advances of $67.7 million and interest bearing demand, savings and money market deposits of $30.6 million, partially offset
by decreases in time deposits of $31.1 million and securities sold under agreement to repurchase of $20.9 million. The
decrease during 2016 was driven by a decrease in time deposits of $103.6 million and securities sold under agreement to
repurchase of $88.5 million, offset by increases of $106.3 million in interest bearing demand, savings and money market
deposits. Adjusting for banking center divestitures during the second quarter of 2017, interest bearing demand, savings and
money market deposits increased $56.5 million and $109.0 million during 2017 and 2016, respectively, and time deposits
increased $5.7 million and decreased $99.7 million during 2017 and 2016, respectively, when compared to prior periods.
Total interest expense related to interest bearing liabilities was $18.1 million, $14.8 million and $14.5 million during 2017,
2016 and 2015, respectively, at an average cost of 0.56%, 0.46% and 0.44% during 2017, 2016 and 2015, respectively.
Additionally, the cost of deposits increased five basis points to 0.41% during 2017, compared to 0.36% during 2016 and
2015, due to higher cost of savings, money market and time deposits.
64
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 2017, 2016
and 2015:
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:
The year ended December 31, 2017
compared to
the year ended December 31, 2016
Increase (decrease) due to
The year ended December 31, 2016
compared to
the year ended December 31, 2015
Increase (decrease) due to
Volume
Rate
Net
Volume
Rate
Net
$ (6,506)
14,938
(3,041)
(2,397)
15
$ (4,245) $ (10,751)
20,454
5,516
(2,376)
665
(2,448)
(51)
91
76
$ (13,105) $
17,171
(5,346)
(2,640)
(544)
(894)
(3,722)
(2,061)
1,567
82
$ (13,999)
13,449
(7,407)
(1,073)
(462)
(142)
$ 2,867
916
$ 2,877 $
774
5,744
(617)
536
$ (5,081) $ (4,492)
(81)
$ (9,573)
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
$
97
(276)
(39)
1,061
843
$ 2,024
921 $
$
1,467
51
25
2,464
$
413 $
1,018
1,191
12
1,086
3,307
2,437
$
284 $
(790)
87
(123)
(542)
177
683
(60)
88
888
$ (4,539) $ (5,380)
$
461
(107)
27
(35)
346
$ (9,919)
(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 2017, 2016 and 2015 were $8,231, $15,179 and
$7,097 and interest income was $523, $830 and $589 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 $5,852, $4,081 and $2,695 for the years ended 2017, 2016 and 2015, respectively.
Below is a breakdown of deposits and the average rates paid during the periods indicated:
For the three months ended
For the years ended
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Average
rate
paid
Average
rate
paid
$
Average
balance
933,657 0.00% $
443,106
1,059,706
454,494
1,128,069
$ 4,019,032
Average
balance
835,263 0.00%
0.09%
415,948
0.12%
0.36%
1,057,908
0.42%
0.27%
370,845
0.40%
0.80%
0.95%
1,169,325
0.38%
0.44% $ 3,849,289
$
Average
balance
873,265
424,408
1,042,873
428,571
1,146,380
$ 3,915,497
Average
Average
rate
balance
paid
818,901
0.00% $
419,080
0.10%
1,066,345
0.39%
379,800
0.35%
0.89%
1,177,523
0.41% $ 3,861,649
Average
rate
paid
0.00%
0.09%
0.34%
0.27%
0.76%
0.36%
Non-interest bearing demand
Interest bearing demand
Money market accounts
Savings accounts
Time deposits
Total average deposits
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 $1.8 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.
65
Below is a summary of the provision for loan losses recorded in the consolidated statements of operations for the periods
indicated:
(Recoupment) provision for loans accounted for under ASC 310-30
Provision for loan losses on non 310-30 loans
Total provision for loan losses
2017
(154)
$
13,126
$ 12,972
2016
(805)
$
24,456
$ 23,651
2015
366
$
12,078
$ 12,444
Provision for loan loss expense on non 310-30 loans was $13.1 million during 2017, compared to $24.5 million during 2016,
a decrease of $11.4 million driven entirely by a reduction in the provision for energy loans. Net charge-offs on the non 310-
30 portfolio during 2017 totaled 0.38%, or 0.12% excluding the energy portfolio. The non 310-30 allowance for loan losses
was 1.02% of total non 310-30 loans at December 31, 2017 compared to 1.07% at December 31, 2016.
Provision for loan loss expense on non 310-30 loans was $24.5 million during 2016, compared to $12.1 million during 2015.
The provision for loan losses on non 310-30 loans during 2016 included energy sector provision of $18.9 million. Net
charge-offs within the non 310-30 portfolio during 2016 totaled $21.5 million, of which $19.1 million were from the energy
portfolio. Net charge-offs on the non 310-30 portfolio during 2016 totaled 0.85%, or excluding the energy loans, non 310-30
net charge-offs were 0.10% during 2016, compared to net charge-offs of 0.12% in 2015. 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.
During 2017, 2016 and 2015 we recorded recoupments of $154 thousand, recoupments of $805 thousand and provision of
$366 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.
Non-Interest Income
The table below details the components of non-interest income during 2017, 2016 and 2015, respectively:
$
Service charges
Bank card fees
Gain on sale of mortgages, net
Bank-owned life insurance income
Other non-interest income
OREO related income
Bargain purchase gain
FDIC loss-sharing related
Total non-interest income
$
For the years ended December 31,
2017
14,634
12,026
2,154
1,871
8,082
438
—
—
39,205
2016
13,900
11,429
2,881
1,861
7,708
2,248
—
—
40,027
$
$
2015
14,798
10,898
1,963
1,614
4,301
2,379
1,048
(15,553)
21,448
$
$
Amount
$
2017 vs 2016
Increase (decrease)
2016 vs 2015
Increase (decrease)
734
597
(727)
10
374
(1,810)
—
—
(822)
% Change Amount % Change
(6.1)%
4.9 %
46.8 %
15.3 %
79.2 %
(5.5)%
(100.0)%
100.0 %
86.6 %
5.3 % $
5.2 %
(25.2)%
0.5 %
4.9 %
(80.5)%
0.0 %
0.0 %
(2.1)% $
(898)
531
918
247
3,407
(131)
(1,048)
15,553
18,579
$
Non-interest income totaled $39.2 million, $40.0 million and $21.4 million during 2017, 2016 and 2015, respectively. Service
charges represent various fees charged to clients for banking services, including fees such as non-sufficient (“NSF”) charges
and service charges on deposit accounts. Service charges and bank card fees increased a combined $1.3 million, or 5.3%,
during 2017, compared to 2016, due to higher instances of both business and personal service charges and higher bank card
interchange activity, and decreased a combined $0.4 million during 2016, compared to 2015, largely due to declines in
overdraft charges partially offset by higher interchange activity.
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 decreased $0.7 million during 2017, compared to 2016, due to lower
volumes and increased $0.9 million during 2016, compared to 2015, due to a higher level of originations.
66
Other non-interest income increased $0.4 million during 2017 and $3.4 million during 2016, when compared to prior periods.
The increase in 2017, compared to 2016, was due to a $2.9 million gain from banking center divestiture in the second quarter
of 2017, partially offset by a $0.4 million decrease in swap-related income and a $1.8 million gain on sale of a building in the
prior year. The increase in 2016, compared to 2015, was largely due to the $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 million increase in gain on recoveries of
acquired loans during 2016.
OREO related income includes 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. OREO related income decreased $1.8 million and
$0.1 million during 2017 and 2016, when compared to prior periods. The decrease during 2017 was due to income from one
large OREO property in 2016.
During 2015, the Company realized a bargain purchase gain of $1.0 million resulting from the acquisition of Pine River.
FDIC loss-sharing related represents the expense recognized in connection with the actual reimbursement of costs/recoveries
related to the resolution of covered assets by the FDIC. The Company terminated its loss-share agreement with the FDIC in
the fourth quarter of 2015.
Non-Interest Expense
The table below details non-interest expense for the periods presented:
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
Bank card expense
Professional fees
Other non-interest expense
Problem asset workout
Gain on OREO sales, net
Intangible asset amortization
Banking center consolidation related expense
Loss from the change in fair value of warrant
liability
Total non-interest expense
For the years ended December 31,
$
2017
80,188
20,994
7,188
2,683
2,762
3,986
3,330
10,360
3,994
(4,150)
5,342
—
$
2016
79,765
22,904
5,970
2,564
3,236
4,440
3,496
8,554
3,983
(4,383)
5,480
—
$
2015
83,018
24,490
11,507
4,325
3,922
3,701
4,495
11,107
7,317
(2,776)
5,401
1,411
2017 vs 2016
Increase (decrease)
2016 vs 2015
Increase (decrease)
$
Amount
423
(1,910)
1,218
119
(474)
(454)
(166)
1,806
11
233
(138)
—
% Change
0.5 %
(8.3)%
20.4 %
4.6 %
(14.6)%
(10.2)%
(4.7)%
21.1 %
0.3 %
5.3 %
(2.5)%
0.0 %
$
Amount
(3,253)
(1,586)
(5,537)
(1,761)
(686)
739
(999)
(2,553)
(3,334)
(1,607)
79
(1,411)
% Change
(3.9)%
(6.5)%
(48.1)%
(40.7)%
(17.5)%
20.0 %
(22.2)%
(23.0)%
(45.6)%
(57.9)%
1.5 %
(100.0)%
—
$ 136,677
—
$ 136,009
106
$ 158,024
$
—
668
0.0 %
0.5 %
(106)
(22,015)
$
(100.0)%
(13.9)%
Non-interest expense totaled $136.7 million, $136.0 million and $158.0 million during 2017, 2016 and 2015, respectively.
One-time acquisition costs for the full year of 2017 totaled $2.7 million.
Salaries and benefits is the largest component of non-interest expense. The increase during 2017, compared to 2016, was due
to $1.4 million of acquisition costs and a $0.5 million accrual for the special $1,000 bonus payments to 490 associates
partially offset by lower staffing levels. The decrease during 2016, compared to 2015, was due to lower staffing levels and
decreases in stock compensation expense.
Occupancy and equipment expense decreased $1.9 million during 2017 and $1.6 million during 2016, compared to prior
periods. The decrease in 2017 was due to lower depreciation expense. The decrease in 2016 was primarily due to lower
depreciation expense and benefits realized from the successful negotiation of vendor contracts during 2015.
Telecommunications and data processing expense increased $1.2 million during 2017 and decreased $5.5 million during
2016, compared to prior periods. The increase during 2017 was primarily due to $0.7 million of acquisition related costs. The
decrease in 2016 benefited from the core system conversion and favorable vendor contract negotiations during 2015.
67
Marketing and business development expense increased $0.1 million during 2017 and decreased $1.8 million during 2016,
compared to prior periods. The decrease during 2016 was due to reduced levels of marketing campaigns in 2016.
FDIC deposit insurance expense decreased during 2017 and 2016, when compared to prior periods, due to lower assessment
rates.
Bank card expense decreased $0.5 million and increased $0.7 million during 2017 and 2016, respectively, when compared to
prior periods, due to the cost of re-issuance of our bank cards with chip reader technology during 2016.
Professional fees decreased $0.2 million during 2017, when compared to the prior period, and included $0.4 million of one-
time acquisition costs. Professional fees decreased $1.0 million during 2016, when compared to the prior period, due to one-
time core system conversion related expenses completed during the fourth quarter of 2015.
Other non-interest expense increased $1.8 million and decreased $2.6 million during 2017 and 2016, respectively, when
compared to prior periods. The increase during 2017 was primarily due to increases in unfunded commitment reserves of
$1.1 million, acquisition related costs of $0.1 million and $0.6 million of various other expense categories. 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.
Problem asset workout expense is incurred in connection with the resolution process of our acquired problem loans and were
consistent during 2017 and 2016. Problem asset workout expense decreased $3.3 million from 2015 to 2016 due to the
successful resolution of problem assets during 2015. Gain on OREO sales, net decreased $0.2 million during 2017 and
increased $1.6 million during 2016, respectively, due to the sale of several larger assets during 2016.
The Bank consolidated or sold banking centers within the Bank Midwest and Community Banks of Colorado footprints in
each of the years 2015 through 2017. Fair value impairment charges of $1.4 million were realized during 2015 related to
banking centers consolidated or sold. No impairment charges were realized during 2016 or 2017. The warrant agreements
were amended during 2015 resulting in a reclassification from a liability to equity.
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.
Income tax expense totaled $21.3 million, $2.9 million and $3.0 million for 2017, 2016 and 2015, respectively. During the
fourth quarter of 2017, the Company re-measured its deferred tax asset as a result of the Tax Cuts and Jobs Act, which among
other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, income tax expense recorded
in 2017 included an $18.5 million non-cash one-time charge primarily related to this re-measurement. In addition, the tax
expense recorded for 2017 and 2016 was lowered by a $4.2 million and $2.1 million tax benefit from stock compensation
activity, respectively. Without these discrete items, the effective tax rates for 2017 and 2016 were 19.7% and 19.7%,
respectively. The tax expense recorded for 2015 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, the Company would have recorded a
tax benefit resulting from the increased tax-exempt income sources compared to pre-tax income. The yearly effective tax
rates differ from the federal statutory tax rate primarily due to stock compensation activity, interest income from tax-exempt
lending, bank-owned life insurance income and the relationship of these items to pre-tax income.
68
The Company has unvested stock-based compensation awards outstanding at December 31, 2017, including stock options,
restricted stock and performance stock units. The strike prices for options range from $18.09 to $34.16, with a large portion
of the awards having strike prices of $20.00. The option awards and restricted stock awards vest over a range of a 1-3 year
period. The performance stock units cliff vest over a range of 2-3 years and the number of shares issued is determined by the
final performance results. 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. As of December 31, 2017, we had $3.1 million of deferred
tax assets related to stock-based compensation, $2.3 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, 2017 and 2016, we have not identified any uncertain tax positions.
As of December 31, 2017, our marginal tax rate (the rate we pay on each incremental dollar of earnings) was 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.
As a result of the Tax Cuts and Jobs Act, effective January 1, 2018, our marginal tax rate reduced to approximately 23%.
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, 2017 and 2016:
Cash and due from banks
Cash segregated for Peoples acquisition
Unsegregated cash and due from banks
Interest bearing bank deposits
Unencumbered investment securities, at fair value
Total
$
$
December 31, 2017 December 31, 2016
152,736
—
152,736
—
843,061
995,797
193,297
(36,189)
157,108
64,067
637,048
858,223
$
$
Total on-balance sheet liquidity decreased $137.6 million from December 31, 2016 to December 31, 2017. The decrease was
largely due to a planned reduction of $206.0 million in unencumbered available-for-sale and held-to-maturity securities
balances. Included in cash and due from banks on the consolidated statement of financial condition is $36.2 million of cash
segregated for the Peoples acquisition.
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
69
our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying
consolidated financial statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs
and pay downs of loans and purchases and sales of investment securities. At December 31, 2017, 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 $1.1 billion
at December 31, 2017, inclusive of pre-tax net unrealized losses of $15.5 million on the available-for-sale securities portfolio.
Additionally, our held-to-maturity securities portfolio had $2.0 million of pre-tax net unrealized losses at December 31, 2017.
The gross unrealized gains and losses are detailed in note 4 of our consolidated financial statements. As of December 31,
2017, 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, 2017, $684.6 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.
Through our relationship with the FHLB, we have pledged qualifying loans and investment securities allowing us to obtain
additional liquidity through FHLB advances and lines of credit. FHLB advances and lines of credit available totaled $935.8
million of which $129.1 million was used at December 31, 2017. 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 Basel III Capital rules, effective January 1, 2015, changed the components of regulatory capital, changed the way in
which risk ratings are assigned to various categories of bank assets, and defined a new Tier 1 common risk-based ratio. In
addition, a capital conservation buffer requirement, designed to strengthen an institution’s financial resilience during
economic cycles through the restriction of capital distributions and other payments, became effective in 2016 with full phase
in beginning January 1, 2019. When fully phased-in, the capital conservative buffer adds a 2.5% capital requirement above
existing regulatory minimum ratios. Under the Basel III requirements, at December 31, 2017 and 2016, the Company and the
Bank met all capital adequacy requirements and the Bank 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 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. 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, 2017 was $12.6 million. During 2017, we did not repurchase any shares of our common stock as part of a publicly
announced program.
On January 18, 2018, our Board of Directors declared a quarterly dividend of $0.09 per common share, payable on March 15,
2018 to shareholders of record at the close of business on February 23, 2018.
70
Asset/Liability Management and Interest Rate Risk
Management and the Board of Directors are responsible for managing interest rate risk and employing risk management
policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market
value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate
changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits,
and reinvestment/replacement of asset and liability cash flows.
The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within
the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate
levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability
Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other
things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and
rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the
Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for
acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest
rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure
to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities.
The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future
cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is
used in conjunction with the analyses on net interest income.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at December
31, 2017. During 2017, 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, 2017 and 2016:
Hypothetical
shift in interest
rates (in bps)
200
100
(50)
% change in projected net interest income
December 31, 2017
December 31, 2016
6.93%
4.82%
(1.46)%
5.84%
3.66%
(2.49)%
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 $216.3 million during 2017, and totaled 71.9%
of total deposits at December 31, 2017, compared to 70.4% at December 31, 2016, when adjusted for banking center
consolidations. 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.
71
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, 2017 and 2016, we had loan commitments totaling $680.8 million and $602.2 million, respectively, and
standby letters of credit that totaled $7.2 million and $13.5 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, 2017 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
67,335
$ 61,780 $
6,073
3,158
8,102
6,702
684,622
408,414
$ 756,262 $ 489,924
Total
129,115
27,584
12,210
6,143
21,257
—
6,453
21,433
1,118,050
3,581
34,029 $ 15,791 $ 1,296,006
After five
years
— $
— $
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 called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in
Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated
herein by reference.
72
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
National Bank Holdings Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of National Bank Holdings Corporation
and subsidiaries (the “Company”) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2017, 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)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 27, 2018 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2010.
Kansas City, Missouri
February 27, 2018
73
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2017 and 2016
(In thousands, except share and per share data)
December 31, 2017 December 31, 2016
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 $256,771 and $332,573 at
December 31, 2017 and December 31, 2016, 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:
$
$
$
193,297 $
64,067
257,364
855,345
258,730
15,030
3,178,947
(31,264)
3,147,683
4,629
10,491
93,708
59,630
1,607
139,248
4,843,465 $
902,439 $
474,607
1,484,463
1,118,050
3,979,559
130,463
129,115
71,921
4,311,058
Common stock, par value $0.01 per share: 400,000,000 shares authorized;
51,518,162 and 51,813,011 shares issued; 26,875,585 and 26,386,583 shares
outstanding at December 31, 2017 and December 31, 2016, respectively
Additional paid-in capital
Retained earnings
Treasury stock of 24,479,020 and 24,927,157 shares at December 31, 2017 and
December 31, 2016, respectively, at cost
Accumulated other comprehensive loss, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
515
970,668
60,795
(493,329)
(6,242)
532,407
4,843,465 $
$
See accompanying notes to the consolidated financial statements.
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
514
984,087
55,454
(502,104)
(1,762)
536,189
4,573,046
74
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2017, 2016 and 2015
(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 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 expense
Professional fees
Other non-interest expense
Problem asset workout
Gain on OREO sales, net
Intangible asset amortization
Loss from the change in fair value of warrant liability
Banking center consolidation related expense
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
2017
2016
2015
$
$
$
$
137,249
24,841
839
1,492
164,421
16,172
1,943
18,115
146,306
12,972
133,334
14,634
12,026
2,154
1,871
8,082
438
—
—
39,205
80,188
20,994
7,188
2,683
2,762
3,986
3,330
10,360
3,994
(4,150)
5,342
—
—
136,677
35,862
21,283
14,579
0.54
0.53
$
$
$
$
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
26,928,763
27,709,659
28,313,061
29,091,343
34,349,996
34,363,487
See accompanying notes to the consolidated financial statements.
75
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2017, 2016 and 2015
(In thousands)
Net income
Other comprehensive loss, net of tax:
Securities available-for-sale:
Net unrealized (losses) gains arising during the period, net of tax benefit
(expense) of $1,871, ($26) and $2,015 for the years ended 2017, 2016
and 2015, respectively
Less: amortization of net unrealized holding gains to income, net of tax
benefit of $828, $1,166, and $1,523 for the years ended 2017, 2016 and
2015, respectively
Other comprehensive loss
Comprehensive income (loss)
2017
14,579
$
2016
23,060
$
2015
$
4,881
(3,128)
42
(3,275)
(1,352)
(4,480)
10,099
$
(1,899)
(1,857)
21,203
$
(2,469)
(5,744)
(863)
$
See accompanying notes to the consolidated financial statements.
76
Balance, December 31, 2015
$
513 $ 997,926 $ 38,670 $ (419,660) $
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended 2017, 2016 and 2015
(In thousands, except share and per share data)
Additional
Accumulated
other
Common
stock
paid-in
capital
Retained
earnings
Treasury
stock
comprehensive
income (loss), net
Balance, December 31, 2014
$
512 $ 993,212 $ 40,528 $ (245,516) $
—
3,349
4,881
—
—
—
5,839
—
—
Total
$ 794,575
4,881
3,349
Net income
Stock-based compensation
Issuance of stock under equity
compensation plan, including gain
on reissuance of treasury stock of
$96, net
Repurchase of 8,645,836 shares
Cash dividends declared ($0.20 per
share)
Warrant reclassification
Other comprehensive loss
—
—
1
—
—
—
—
Net income
Stock-based compensation
Issuance of stock under purchase and
equity compensation plans,
including gain on reissuance of
treasury stock of $4,396, net
Repurchase of 4,500,936 shares
Cash dividends declared ($0.22 per
share)
Warrant exercise
Other comprehensive loss
—
—
1
—
—
—
—
Net income
Stock-based compensation
Issuance of stock under purchase and
equity compensation plans,
including gain on reissuance of
treasury stock of $6,118, net
Cash dividends declared ($0.34 per
share)
Warrant exercise
Other comprehensive loss
(1,701)
—
—
—
904
(175,048)
—
—
(796)
(175,048)
—
3,066
—
(6,739)
—
—
—
—
—
—
3,492
23,060
—
—
—
—
—
(5,744)
95
—
—
(6,739)
3,066
(5,744)
$ 617,544
23,060
3,492
(13,790)
—
—
—
7,588
(93,573)
—
—
(6,201)
(93,573)
—
(3,541)
—
(6,276)
—
—
—
3,541
—
—
—
—
3,648
14,579
—
—
—
—
—
(1,857)
(1,762)
—
—
(6,276)
—
(1,857)
$ 536,189
14,579
3,648
1
(15,134)
—
6,842
—
(8,291)
—
—
—
—
(1,933)
—
(9,238)
—
—
—
1,933
—
—
—
(4,480)
(6,242)
(9,238)
—
(4,480)
$ 532,407
Balance, December 31, 2016
$
514 $ 984,087 $ 55,454 $ (502,104) $
Balance, December 31, 2017
$
515 $ 970,668 $ 60,795 $ (493,329) $
See accompanying notes to the consolidated financial statements.
77
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2017, 2016 and 2015
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
2017
2016
2015
$
14,579
$
23,060
$
4,881
Provision for loan losses
Depreciation and amortization
Current income tax receivable
Deferred income taxes
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
Banking center consolidated related expenses
Loss (gain) on fixed assets
Bargain purchase gain
Stock-based compensation
Decrease in due to FDIC, net
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by (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
(Purchases) sale 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 in FDIC indemnification asset
Net cash activity from acquisitions
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Increase (decrease) 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 provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information during the period:
Cash paid for interest
Net tax payments
Supplemental schedule of non-cash investing activities:
Loans transferred to other real estate owned at fair value
Increase (decrease) in loans purchased but not settled
Loans transferred from loans held for sale to loans
12,972
12,889
1,260
17,180
(4,225)
2,581
(23,933)
(2,154)
(85,959)
101,935
(1,871)
—
(4,150)
766
—
(2,853)
—
3,648
—
6,040
9,434
58,139
(7,448)
6,877
—
71,105
224,336
—
490
(202,694)
—
(314,008)
(5,617)
—
38,087
10,355
—
—
(178,517)
113,796
38,452
263,129
(172,679)
(8,395)
104
—
(9,401)
—
225,006
104,628
152,736
257,364
17,312
127
1,800
25,118
5,736
$
$
$
$
$
$
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
(4,873)
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
(102)
218
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
78
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
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, (the "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 85 banking centers as of December 31, 2017, located
in Colorado and the greater Kansas City region, 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 GAAP and where
applicable, with general practices in the banking industry or guidelines prescribed by bank regulatory agencies. The
consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair
statement of the results presented. All such adjustments are of a normal recurring nature. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years' amounts are made
whenever necessary to conform to current period presentation. All amounts are in thousands, except share data, or as
otherwise noted.
The Company's significant accounting policies followed in the preparation of the consolidated financial statements are
disclosed in note 2. GAAP requires management to make estimates that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment
and available information. Management has made significant estimates in certain areas, such as the amount and timing of
expected cash flows from assets, the valuation of OREO, the fair value adjustments on assets acquired and liabilities
assumed, the valuation of core deposit intangible assets, the valuation of investment securities for other-than-temporary
impairment (“OTTI”), the valuation of stock-based compensation, the fair values of financial instruments, the 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 Accounting
Standards Codification (“ASC”) 805, Business Combinations. The determination of the fair value of loans acquired takes into
account credit quality deterioration and probability of loss; therefore, the related ALL is not carried forward at the time of
acquisition.
Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are
separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit
liabilities and the related depositor relationship intangible assets, known as the core deposit intangible assets, may be
exchanged in observable exchange transactions. As a result, the core deposit intangible asset is considered identifiable,
because the separability criterion has been met.
b) Cash and cash equivalents—Cash and cash equivalents include cash, cash items, amounts due from other banks, amounts
due from the Federal Reserve Bank of Kansas City, federal funds sold, and interest-bearing bank deposits and segregated
79
cash held for the acquisition of Peoples, Inc. Refer to note 24 – Subsequent Events of our consolidated financial statements
for additional details related to the acquisition.
c) Investment securities—Investment securities may be classified in three categories: trading, available-for-sale or 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 and Federal Home
Loan Bank ("FHLB") stock. 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 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
80
below, the accrual of interest income on acquired loans that are not accounted for under ASC 310-30 is discontinued when the
collection of principal or interest, in whole or in part, is doubtful.
Interest income on acquired loans that are accounted for under ASC 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 or are accounted for on the cost recovery method 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 the loan pool in which the loan is included can be otherwise reasonably
estimated and if collection of the new carrying value of such pool is expected.
The expected cash flows of individual 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 loan
cash flow projections are recognized within the loan’s respective loan pools 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—The Company has elected to record loans originated and intended for sale in the secondary market at
estimated fair value. The Company estimates fair value based on quoted market prices for similar loans in the secondary
market. 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 payoff, early payment default, breach of
representations or warranties, or documentation deficiencies.
81
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 the loan pool can be reasonably estimated and if collection of the carrying value of the loan pool loans is reasonably
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.
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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 at the cease-use date 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 that it is more likely than not that the
fair value of the reporting unit is less than its carrying amount. 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). If the Company determines, based upon the
qualitative assessment, that it is more likely than not that the fair value of the reporting unit is greater than the carrying
amount no additional procedures are performed; however, if the Company determines that it is more likely than not that the
fair value of the reporting unit is less than the carrying amount the Company will compare the fair value of the reporting unit
to its carrying amount. Any excess of the carrying amount 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 considering 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 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
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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.
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 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 and performance criterion, such as market criteria that are tied to specified market conditions of the
Company’s common stock price and performance targets tied to the Company’s earnings per share.
The fair value of stock options is measured using a Black-Scholes model. The fair value of time-based restricted stock awards
and performance stock units with performance based vesting criteria is based on the Company’s stock price on the date of
grant. The fair value of performance stock units with market based vesting criteria is measured using a Monte Carlo
simulation model. 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.
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. 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 primarily carry a maximum contractual term of ten years. To the extent that any
award is forfeited, surrendered, terminated, expires, or lapses without being vested or exercised, the shares of stock subject to
such award not delivered as a result thereof are again made available for awards under the Plan.
The Company accounts for all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based
payment awards) to be recognized in the consolidated statements of operations as a component of income tax expense or
benefit and are classified as an operating activity within the Company’s consolidated statements of cash flows. 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. 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.
Prior to the Company’s adoption of ASU 2016-09 during 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 reduced taxes payable.
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n) Warrants—The Company issued warrants to certain lead investors in 2009 and 2010. During 2015, the outstanding
warrant contracts were modified and 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. The awards were classified as equity in
the Company’s consolidated statements of financial condition. Prior to the modification, 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 the first quarter of 2017, the remaining issued warrants were exercised in a non-cash transaction. Refer to the
consolidated statements of changes in shareholders’ equity for additional details.
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
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inception of the hedging relationship (inception benchmark interest rate plus an inception credit spread), adjusted for changes
in the designated benchmark interest rate thereafter.
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 new guidance does not apply to revenue associated with financial assets and liabilities including loans, leases, securities,
and derivatives that are accounted for under other GAAP. Accordingly, the majority of the Company’s revenues will not be
affected. The Company has completed its review of revenue streams and contracts with customers and has determined certain
service charges, bank card fees and real estate sales are within the scope of the ASU, but has not identified changes to the
timing or amount of revenue recognition. The Company adopted ASU No. 2014-09 on January 1, 2018 utilizing the modified
retrospective approach. Accounting policies and procedures did not change materially since the principals of revenue
recognition from the ASU are largely consistent with existing guidance and current practices applied by the Company. The
Company continues to assess the expanded revenue disclosure requirements under the new standard.
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 expects to 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
86
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.
Statement of Cash Flows – Restricted Cash—In November 2016, the FASB issued ASU 2016-18, Restricted Cash (a
consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted
cash on the statement of cash flows. The standard requires an entity’s reconciliation of the beginning-of-period and end-of-
period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts general described
as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but
an entity will need to disclose the nature of the restrictions. The ASU is effective for public business entities for annual and
interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an
interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. Entities should apply this ASU using a retrospective transition
method to each period presented. The Company adopted ASU 2016-18 on January 1, 2018 with no material impact to the
consolidated financial statements.
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities—In August 2017, the FASB issued
ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this
updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of
those activities. ASU 2017-12 is effective for public business entities for annual and interim periods in fiscal years beginning
after December 15, 2018. Early adoption is permitted, including in an interim period. ASU 2017-12 requires a modified
retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening
balance of each affected component of equity in the consolidated statements of financial condition as of the date of adoption.
The Company is in the process of evaluating the impact of the ASU’s adoption on the Company’s consolidated financial
statements; however, the impact is not expected to be material.
Reclassification of Certain Tax Effects—In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. This update allows a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The
amendments eliminate the stranded tax effects that were created as a result of the reduction of historical U.S. federal
corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The update is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted, and is to be
applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted ASU 2018-02 in the first
quarter of 2018, resulting in a $1.5 million reclassification from accumulated other comprehensive income to retained
earnings on the consolidated statement of financial condition and the consolidated statement of changes in shareholders’
equity.
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 ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) and
does not expect the adoption of these pronouncements to have a material impact on its financial statements.
Note 4 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities.
These investment securities totaled $1.1 billion at December 31, 2017 and included $0.8 billion of available-for-sale
securities and $0.3 billion of held-to-maturity securities. At December 31, 2016, investment securities totaled $1.2 billion and
included $0.9 billion of available-for-sale securities and $0.3 billion of held-to-maturity securities.
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Available-for-sale
At December 31, 2017 and 2016, the Company held $855.3 million and $884.2 million of available-for-sale investment
securities, respectively. Available-for-sale securities are summarized as follows as of the dates indicated:
December 31, 2017
Amortized
cost
Gross
unrealized gains
Gross
unrealized losses
Fair value
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
$
167,269
$
2,371
$
(992)
$
168,648
702,107
1,054
419
870,849
$
$
351
—
—
2,722
$
(17,228)
(6)
—
(18,226)
685,230
1,048
419
855,345
$
Amortized
cost
Gross
unrealized gains
Gross
unrealized losses
Fair value
December 31, 2016
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
$
223,781 $
3,909
$
(530)
$
227,160
666,616
3,921
419
894,737
$
$
2,124
—
—
6,033
$
(16,001)
(7)
—
(16,538)
652,739
3,914
419
884,232
$
At December 31, 2017 and 2016, mortgage-backed securities represented primarily all of the Company’s available-for-sale
investment portfolio and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral
such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”), and
the government sponsored agency Government National Mortgage Association (“GNMA”).
The tables below summarize the available-for-sale 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
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2017
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 62,178 $
(408)
$ 36,086
$
(584) $ 98,264 $
(992)
(16,398)
—
(17,228)
(6)
$ (16,982) $ 674,091 $ (18,226)
575,313
514
162,346
514
(830)
(6)
$ 225,038 $ (1,244)
412,967
—
$ 449,053
88
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
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
385,707
—
$ 241,532 $ (3,513) $ 385,707
(2,976)
(7)
(13,025)
—
523,283
3,058
$ (13,025) $ 627,239
(16,001)
(7)
$ (16,538)
The unrealized losses in the Company’s investments portfolio at December 31, 2017 were caused by changes in interest rates.
The portfolio included 87 securities, having an aggregate fair value of $674.1 million, which were in an unrealized loss
position at December 31, 2017. During the twelve months ended December 31, 2017, the Company recorded $0.2 million of
other-than-temporary impairment (OTTI) included in other non-interest expense on the consolidated statements of operations.
The OTTI charge was on a single municipal security, with an aggregated fair value of $0.3 million at December 31, 2017.
The unrealized losses in the Company’s investment portfolio at December 31, 2016 were caused by changes in interest rates.
The portfolio included 61 securities, with an aggregate fair value of $627.2 million, which were in an unrealized loss position
at December 31, 2016.
Management evaluated all of the available-for-sale securities in an unrealized loss position and concluded no OTTI existed at
December 31, 2017 and 2016. 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 Federal Home Loan Bank (“FHLB”), if needed. The fair value of
available-for-sale investment securities pledged as collateral totaled $334.6 million and $373.7 million at December 31, 2017
and 2016, respectively. Certain investment securities may also be pledged as collateral for the line of credit at the FHLB; at
December 31, 2017 or December 31, 2016, no securities were pledged for this purpose.
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 3.4 years at December 31, 2017
and 2016, respectively. This estimate is based on assumptions and actual results may differ. At December 31, 2017 and 2016,
the duration of the total available-for-sale investment portfolio was 3.1 years and 3.2 years, respectively.
As of December 31, 2017, municipal securities with an amortized cost and fair value of $0.3 million were due in one year,
municipal securities with an amortized cost and fair value of $0.2 million were due after one year through five years, while
municipal securities with an amortized cost and fair value of $0.5 million were due after five years through ten years. Other
securities of $0.4 million as of December 31, 2017, have no stated contractual maturity date.
89
Held-to-maturity
At December 31, 2017 and 2016, the Company held $258.7 million and $332.5 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
$ 204,352 $
151
$ (455) $ 204,048
December 31, 2017
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
54,378
$ 258,730 $
—
151
(1,655)
52,723
$ (2,110) $ 256,771
December 31, 2016
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
$ 263,411 $ 1,685
$ (234) $ 264,862
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
The tables below summarize the held-to-maturity 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, 2017
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 149,182 $
(220) $ 17,506 $
(235) $ 166,688 $
(455)
6,460
$ 155,642 $
46,264
(65)
(1,655)
(285) $ 63,770 $ (1,825) $ 219,412 $ (2,110)
(1,590)
52,724
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
$ 27,799
$
(234) $
—
$
— $ 27,799 $
(234)
26,992
$ 54,791
(357)
32,146
(591) $ 32,146
(1,042)
(1,399)
59,138
$ (1,042) $ 86,937 $ (1,633)
$
90
The held-to-maturity portfolio included 36 securities, having an aggregate fair value of $219.4 million, which were in an
unrealized loss position at December 31, 2017, compared to 15 securities, with a fair value of $86.9 million, at December 31,
2016.
Management evaluated all of the held-to-maturity securities in an unrealized loss position and concluded that no OTTI
existed at December 31, 2017 or December 31, 2016. The unrealized losses in the Company's investments at December 31,
2017, 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 $142.0 million and $119.2 million
at December 31, 2017 and 2016, 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, 2017 and 2016 was 3.1 years and 3.5 years,
respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity
investment portfolio was 2.8 years and 3.2 years as of December 31, 2017 and 2016, respectively.
Note 5 Non-marketable Securities
Non-marketable securities include Federal Reserve Bank stock and FHLB stock. At December 31, 2017, the Company held
$9.2 million of Federal Reserve Bank stock and $5.8 million of FHLB stock for regulatory or debt facility purposes. At
December 31, 2016, the Company held $9.2 million of Federal Reserve Bank stock, $5.2 million of FHLB stock and $0.5
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, 2017 or December 31, 2016.
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 tables below show the loan portfolio composition including carrying value by segment of loans accounted for under ASC
310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, and loans not accounted for
under this guidance, which includes our originated loans, as of the dates shown. The carrying value of loans is net of
discounts on loans excluded from ASC 310-30, and fees and costs of $4.3 million and $6.3 million at December 31, 2017 and
2016, 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. The sale of these loans was completed in connection with the four banking center divestitures
in the second quarter of 2017.
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
December 31, 2017
ASC 310-30 loans Non 310-30 loans
Total loans
% of total
$
$
29,475
77,908
12,759
481
120,623
$
$
1,845,130
485,141
703,478
24,575
3,058,324
$
$
1,874,605
563,049
716,237
25,056
3,178,947
59.0%
17.7%
22.5%
0.8%
100.0%
91
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%
Delinquency for loans excluded from ASC 310-30 is shown in the following tables at December 31, 2017 and 2016:
30-59
days past
due
60-89
days past
due
Greater
than 90
days past
due
Total past
due
Current
Total
non
310-30
loans
Loans > 90
days past
due and
still accruing
Non-
accrual
December 31, 2017
$
554 $
696
585
—
1,835
117 $
—
—
—
117
1,389
1,983
701
1,645
5,718
$
2,060
2,679
1,286
1,645
7,670
$ 1,373,962 $ 1,376,022
272,753
138,895
57,460
1,845,130
270,074
137,609
55,815
1,837,460
$
150 $ 7,767
3,478
—
2,003
—
1,645
—
14,893
150
—
1,097
—
56
1,153
1,167
233
1,400
157
—
—
—
—
—
885
91
976
6
179
—
—
574
753
1,396
41
1,437
5
179
1,097
—
630
1,906
3,448
365
3,813
168
107,502
13,318
26,947
335,468
483,235
643,034
56,631
699,665
24,407
107,681
14,415
26,947
336,098
485,141
646,482
56,996
703,478
24,575
—
—
—
—
—
—
—
—
—
179
—
—
605
784
4,724
459
5,183
140
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
$
4,545 $
1,099 $
7,913
$ 13,557
$ 3,044,767 $ 3,058,324
$
150 $ 21,000
30-59
days past
due
60-89
days past
due
Greater
than 90
days past
due
Total past
due
Current
Total
non
310-30
loans
Loans > 90
days past
due and
still accruing
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Non-
accrual
$ 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
92
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 therefore are not included
in the tables above. Non-accrual loans include troubled debt restructurings on non-accrual status.
Non-accrual loans excluded from the scope of ASC 310-30 totaled $21.0 million at December 31, 2017, representing a
decrease of $9.7 million, or 31.6%, from December 31, 2016, due to charge-offs of two energy loans totaling $7.5 million
and one commercial and industrial loan totaling $2.5 million. In addition, one previously identified energy loan of $2.2
million at December 31, 2017 was placed back on accrual during the third quarter of 2017. These decreases were partially
offset by one commercial and industrial loan totaling $3.7 million placed on non-accrual during the fourth quarter of 2017.
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows at December 31,
2017 and 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 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, 2017
$
$
1,349,116
250,224
118,068
55,814
1,773,222
107,502
14,415
24,817
333,225
479,959
641,294
56,172
697,466
24,432
2,975,079
23,954
50,537
10,072
327
84,890
3,059,969
$
$
$
$
$
$
$
$
10,829
17,030
18,824
—
46,683
—
—
—
1,396
1,396
91
—
91
1
48,171
1,070
883
1,055
9
3,017
51,188
$
$
$
$
$
14,824
5,424
1,870
1,646
23,764
179
—
2,130
1,477
3,786
5,097
824
5,921
142
33,613
4,451
26,488
1,632
145
32,716
66,329
$
$
$
$
$
1,253
75
133
—
1,461
$
1,376,022
272,753
138,895
57,460
1,845,130
—
—
—
—
—
—
—
—
—
1,461
—
—
—
—
—
1,461
107,681
14,415
26,947
336,098
485,141
646,482
56,996
703,478
24,575
3,058,324
29,475
77,908
12,759
481
120,623
3,178,947
$
$
$
$
93
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
$
$
$
$
Non 310-30 special mention loans increased $12.5 million from December 31, 2016 due to upgrades from substandard and
doubtful within the commercial and industrial sector and downgrades from pass within the commercial and industrial sector,
partially offset by payoffs in the commercial and industrial and owner-occupied commercial real estate sectors. Non 310-30
substandard loans decreased $23.3 million from December 31, 2016 primarily due to paydowns and upgrades to special
mention and pass within the commercial and industrial, owner-occupied commercial real estate and energy sectors. Non 310-
30 doubtful loans decreased $3.9 million from December 31, 2016 due to energy loan charge-offs during the period.
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, 2017, the Company measured $20.3 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 $8.3 million that individually were less than $250 thousand
each, were measured through the general ALL reserves due to their relatively small size.
At December 31, 2017 and 2016, the Company’s recorded investment in impaired loans were $30.9 million and $38.3
million, respectively, of which $8.5 million and $5.8 million, respectively, were accruing TDRs. Impaired loans at December
31, 2017 were primarily comprised of seven relationships totaling $14.1 million. Four of the relationships were in the
commercial and industrial sector totaling $9.0 million, two of the relationships were in the energy sector totaling $3.9 million
and one relationship was in the agriculture sector totaling $1.2 million. Impaired loans had a collective related allowance for
loan losses allocated to them of $1.5 million and $2.4 million at December 31, 2017 and 2016, respectively.
94
Additional information regarding impaired loans at December 31, 2017 and 2016 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, 2017
December 31, 2016
Unpaid
principal
balance
Allowance
for loan
losses
allocated
Recorded
investment
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
$
6,481
4,186
1,502
8,661
20,830
$
5,055
3,934
1,245
3,861
14,095
215
—
29
901
1,145
333
—
333
—
179
—
29
853
1,061
309
—
309
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
8,671
3,350
2,044
17,142
31,207
$
7,495
3,197
1,987
6,105
18,784
—
—
33
394
427
1,551
54
1,605
4
—
—
33
343
376
1,426
51
1,477
4
22,308
$
15,465
$
—
$
33,243
$
20,641
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
7,919
873
2,122
—
10,914
—
—
—
207
207
6,481
1,295
7,776
146
5,339
713
2,083
—
8,135
—
—
—
200
200
5,753
1,179
6,932
141
$
$
1,329
4
133
—
1,466
$
3,495
957
—
11,216
15,668
$
3,464
642
—
6,548
10,654
492
2
—
1,866
2,360
—
—
—
1
1
24
8
32
1
—
—
—
261
261
5,646
1,781
7,427
188
—
—
—
255
255
5,016
1,532
6,548
184
—
—
—
1
1
31
14
45
2
allowance recorded
Total impaired loans
$
$
19,043
41,351
$
$
15,408
30,873
$
$
1,500
1,500
$
$
23,544
56,787
$
$
17,641
38,282
$
$
2,408
2,408
95
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, 2017
For the years ended
December 31, 2016
December 31, 2015
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
$
$
5,609
4,155
1,422
8,004
19,190
152
80
244
156
632
$
7,909
3,249
1,830
12,565
25,553
$
$
252
92
—
—
344
$
5,049
2,221
1,961
5,679
14,910
—
—
—
878
878
326
—
326
—
—
—
—
22
22
—
—
—
—
—
—
—
368
368
1,466
54
1,520
4
—
—
—
22
22
19
2
21
—
188
—
—
157
345
956
113
1,069
—
266
83
—
—
349
—
—
—
—
—
15
—
15
—
$ 20,394
$
654
$ 27,445
$
387
$ 16,324
$
363
$
$
7,331
747
2,092
—
10,170
188
—
30
213
431
5,986
1,225
7,211
163
—
20
5
—
25
—
—
1
9
10
67
42
109
—
144
798
$
$
3,545
703
162
10,008
14,418
$
198
20
5
—
223
$
6,273
1,230
276
3,092
10,871
—
—
34
268
302
5,200
1,600
6,800
196
—
—
2
13
15
88
56
144
—
—
—
60
1,667
1,727
5,911
1,725
7,636
92
$ 21,716
$ 49,161
$
$
382
769
$ 20,326
$ 36,650
$
$
1
27
4
—
32
—
—
1
48
49
119
51
170
1
252
615
Total impaired loans with a related allowance
recorded
Total impaired loans
$ 17,975
$ 38,369
$
$
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 during the years ended December 31,
2017, 2016 and 2015 was $0.8 million, $0.8 million and $0.6 million, respectively.
Troubled debt restructurings
The Company’s policy is to review each prospective credit 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
96
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.
Non-accruing TDRs at December 31, 2017 and 2016 totaled $7.3 million and $16.7 million, respectively.
During 2017, the Company restructured eleven loans with a recorded investment of $2.1 million at December 31, 2017 to
facilitate repayment. 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 tables below
provide additional information related to accruing TDRs at December 31, 2017 and 2016:
December 31, 2017
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
7,308 $
489
1,461
3
9,261 $
7,171 $
500
1,420
1
9,092 $
6,595 $
455
1,409
1
8,460 $
December 31, 2016
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 $
Unfunded commitments
to fund TDRs
Unfunded commitments
to fund TDRs
2,041
—
2
—
2,043
100
—
2
—
102
The following table summarizes the Company’s carrying value of non-accrual TDRs as of December 31, 2017 and 2016:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total non-accruing TDRs
December 31, 2017
December 31, 2016
$
$
5,808 $
—
1,336
111
7,255 $
15,265
—
1,301
142
16,708
At December 31, 2017 and 2016, the Company had $8.5 million and $5.8 million, respectively, of accruing TDRs that had
been restructured from the original terms in order to facilitate repayment. Accrual of interest is resumed on loans that were on
non-accrual only after the loan has performed sufficiently. The Company had three 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
$3.2 million, and one small residential loan. Non-accruing TDRs decreased $9.4 million from December 31, 2016 due to
charge-offs within the commercial loan segment. 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 2016, 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 loans
totaling $0.4 million. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on
principal or interest.
Loans accounted for under ASC 310-30
Loan pools accounted for under ASC Topic 310-30 are periodically re-measured to determine expected future cash flows. In
determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller homogeneous loans
are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the
97
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 2017 and 2016:
Accretable yield beginning balance
Reclassification from non-accretable difference
Reclassification to non-accretable difference
Accretion
Accretable yield ending balance
December 31, 2017
$
60,476 $
11,398
(2,801)
(22,505)
46,568 $
December 31, 2016
84,194
14,316
(4,778)
(33,256)
60,476
$
Below is the composition of the net book value for loans accounted for under ASC 310-30 at December 31, 2017 and 2016:
Contractual cash flows
Non-accretable difference
Accretable yield
Loans accounted for under ASC 310-30
$
Note 7 Allowance for Loan Losses
December 31, 2017
$
489,892 $
(322,701)
(46,568)
120,623 $
December 31, 2016
537,611
(331,283)
(60,476)
145,852
The tables below detail the Company’s allowance for loan losses and recorded investment in loans as of and for the years
ended December 31, 2017 and 2016:
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, 2017
Non-owner
occupied
commercial
real estate
Residential
real estate
Consumer
18,821 $
18,821
(10,342)
99
12,762
21,340
—
—
—
45
45
21,385 $
5,642 $
5,422
—
20
141
5,583
220
—
—
(194)
26
5,609 $
4,387 $
4,387
(236)
129
(315)
3,965
—
—
—
—
—
3,965 $
324 $
319
(737)
185
538
305
5
—
—
(5)
—
305 $
Total
29,174
28,949
(11,315)
433
13,126
31,193
225
—
—
(154)
71
31,264
$
Ending allowance balance attributable to:
Non 310-30 loans individually evaluated for
impairment
$
1,466 $
2 $
32 $
1 $
1,501
Non 310-30 loans collectively evaluated for
impairment
ASC 310-30 loans
Total ending allowance balance
$
Loans:
Non 310-30 individually evaluated for
19,874
45
21,385 $
5,581
26
5,609 $
3,933
—
3,965 $
304
—
305 $
29,692
71
31,264
impairment
$
22,232 $
1,260 $
7,240 $
141 $
30,873
Non 310-30 collectively evaluated for
impairment
ASC 310-30 loans
Total loans
1,822,898
29,475
483,881
77,908
696,238
12,759
$ 1,874,605 $ 563,049 $ 716,237 $
24,434
481
3,027,451
120,623
25,056 $ 3,178,947
98
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
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 $
Total
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
2,677,493
145,852
28,814 $ 2,860,921
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.
Net charge-offs on non 310-30 loans during 2017 were $10.9 million. Management’s evaluation of credit quality resulted in a
provision for loan losses on the non 310-30 loans of $13.1 million during 2017. During 2016, the Company had $21.6 million
of net charge-offs on non 310-30 loans, of which $19.1 million were from the energy portfolio, and recorded a provision for
loan losses on non 310-30 loans of $24.5 million, or which $18.9 million were from the energy portfolio.
During 2017 and 2016, the Company re-estimated the expected cash flows of the loan pools accounted for under ASC 310-
30. The re-measurement in 2017 resulted in a net recoupment of $154 thousand, due to a $194 thousand recoupment in the
non-owner occupied commercial real estate segment. 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.
99
Note 8 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2017 and 2016:
Land
Buildings and improvements
Equipment
Total premises and equipment, at cost
Less: accumulated depreciation and amortization
Premises and equipment, net
December 31, 2017 December 31, 2016
29,864
$
69,980
42,067
141,911
(46,240)
95,671
28,698 $
73,703
46,091
148,492
(54,784)
93,708 $
$
The Company incurred $7.6 million, $8.7 million and $10.1 million of depreciation expense during 2017, 2016 and 2015,
respectively, as a component of occupancy and equipment expense in the consolidated statements of operations. The
Company disposed of $2.3 million, $3.5 million and $0.1 million of premises and equipment, net, during 2017, 2016 and
2015, respectively.
During 2017, the Company consolidated two banking centers and completed the divestiture of four banking centers, resulting
in a gain of $2.9 million included in non-interest income in the consolidate statements of operations. The divestiture included
buildings classified as held-for-sale, which were adjusted to the lower of the carrying amount or fair value less cost to sell
and totaled $1.6 million at December 31, 2016.
During 2016, the Company consolidated seven banking centers resulting in certain buildings 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, 2015.
Space in certain facilities is leased under operating leases. Below is a summary of future minimum lease payments as of
December 31, 2017:
Years ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Note 9 Other Real Estate Owned
Amount
$
3,158
3,092
2,981
3,091
3,052
12,210
27,584
$
A summary of the activity in the OREO balances during 2017 and 2016 is as follows:
Beginning balance
Transfers from loan portfolio, at fair value
Impairments
Sales, net
Ending balance
For the years ended December 31,
2017
15,662 $
1,800
(766)
(6,205)
10,491
$
2016
20,814
6,868
(298)
(11,722)
15,662
$
$
The OREO balances excluded $0.7 million and $1.6 million at December 31, 2017 and 2016, 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 gains of $4.2 million and $4.4 million for the years ended December 31, 2017 and 2016, respectively.
100
Note 10 Goodwill and Intangible Assets
In connection with our acquisitions, the Company recorded goodwill of $59.6 million and 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 $5.3 million, $5.5 million and $5.4 million during 2017, 2016 and 2015, respectively. The
following table shows the estimated future amortization expense as of December 31, 2017:
Years ending December 31,
2018
2019
2020
2021
2022
$
Amount
1,122
135
135
135
79
The accumulated amortization of the core deposit intangible assets was $36.8 million and $31.5 million at December 31,
2017 and 2016, respectively. At December 31, 2017, the core deposit intangible for the Bank Midwest and Hillcrest Bank
acquisitions were fully amortized.
The Company had goodwill of $59.6 million at December 31, 2017 and 2016. 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 2017,
2016 or 2015.
Note 11 Deposits
Total deposits were $4.0 billion and $3.9 billion at December 31, 2017 and 2016, respectively. Time deposits were $1.1
billion and $1.2 billion at December 31, 2017 and 2016, respectively. 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 by
remaining contractual maturity:
Years ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total time deposits
The Company incurred interest expense on deposits as follows during the periods indicated:
$
Amount
684,622
308,139
100,275
7,044
14,389
3,581
$ 1,118,050
For the years ended December 31,
2016
2017
2015
Interest bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Total
$
$
445 $
4,077
1,481
10,169
16,172 $
369 $
3,600
1,016
8,978
13,963 $
315
3,372
837
9,085
13,609
101
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, 2017. The aggregate amount of certificates
of deposit in denominations that meet or exceed the FDIC insurance limit was $140.7 million and $119.7 million at
December 31, 2017 and 2016, respectively.
Note 12 Borrowings
The following table sets forth selected information regarding repurchase agreements during 2017, 2016 and 2015:
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
2017
As of and for the years ended December 31,
2016
$ 130,463 $ 154,404 $ 288,591
$ 88,390 $ 109,246 $ 197,726
0.09%
0.14%
0.19%
2015
As of December 31, 2017, 2016 and 2015, the Company had pledged mortgage-backed securities with a fair value of
approximately $136.1 million, $99.1 million and $205.7 million, respectively, for securities sold under agreements to
repurchase. Additionally, there was $5.7 million, $7.0 million and $68.1 million of excess collateral pledged for repurchase
agreements at December 31, 2017, 2016 and 2015, respectively.
The vast majority of the Company’s repurchase agreements are overnight transactions with clients that mature the day after
the transaction. During 2017, 2016 and 2015, the overnight agreements had a weighted average interest rate of 0.19%, 0.14%
and 0.09%, respectively. At December 31, 2017, 2016 and 2015, 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, the Bank has access to a line of credit and term financing from the FHLB with total available
credit of $806.7 million at December 31, 2017. At December 31, 2017, 2016 and 2015, the Bank had $129.1 million, $25.0
million and $25.0 million in term advances from the FHLB, respectively. All of the outstanding advances have fixed interest
rates between 1.31% - 2.33%, with maturity dates of 2018 - 2020. The Bank had investment securities pledged as collateral
for FHLB advances in the amount of $28.1 million, $28.8 million and $41.7 million at December 31, 2017, 2016 and 2015,
respectively. Interest expense related to FHLB advances totaled $1.8 million, $0.7 million and $0.7 million for the years
ended December 31, 2017, 2016 and 2015, 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 Basel III Capital rules, effective January 1, 2015, changed the components of regulatory capital, changed the way in
which risk ratings are assigned to various categories of bank assets and defined a new Tier 1 common risk-based ratio. In
addition, a capital conservative buffer requirement, designed to strengthen an institution’s financial resilience during
economic cycles through the restriction of capital distributions and other payments, became effective in 2016, with full
phase-in beginning January 1, 2019. When fully phased-in, the capital conservation buffer adds a 2.5% capital requirement
above existing regulatory minimum ratios.
102
Under the Basel III requirements, at December 31, 2017 and 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, as detailed in
the tables below.
Tier 1 leverage ratio:
Consolidated
NBH Bank
Common equity tier 1 risk-based capital:
Consolidated
NBH Bank
Tier 1 risk-based capital ratio:
Consolidated
NBH Bank
Total risk-based capital ratio:
Consolidated
NBH Bank
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
December 31, 2017
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized(1)
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
9.8% $
8.1%
470,877
382,918
N/A
5.0% $
N/A
237,772
4.0% $
4.0%
191,559
190,217
12.9% $
10.6%
470,877
382,918
N/A
6.5% $
N/A
309,103
7.0% $
7.0%
335,228
332,881
12.9% $
10.6%
470,877
382,918
N/A
8.0% $
N/A
289,022
8.5% $
8.5%
309,400
307,086
13.8% $
11.5%
502,917
414,958
N/A
10.0% $
N/A
361,277
10.5% $
10.5%
382,200
379,341
December 31, 2016
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized(1)
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
10.4% $ 470,259
389,189
8.6%
N/A
N/A
4.5% $ 202,903
4.0% $ 181,019
180,358
4.0%
14.2% $ 470,259
389,189
11.8%
N/A
N/A
6.5% $ 293,082
7.0% $ 316,784
315,627
7.0%
14.2% $ 470,259
389,189
11.8%
N/A
N/A
8.0% $ 264,596
8.5% $ 282,578
281,133
8.5%
15.0% $ 499,759
418,689
12.7%
N/A
N/A
10.0% $ 330,745
10.5% $ 349,067
347,282
10.5%
(1) As of the fully phased-in date of January 1, 2019, including the capital conservation buffer.
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. 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 during 2015 was $(15.6)
million, mostly driven by FDIC indemnification asset amortization.
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
103
authority to grant, from time to time, awards of stock 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, 2017, the aggregate number of Class A common stock available for issuance under the 2014 Plan is
5,754,830 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 2017, 2016 and 2015, 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 2017, 2016 and 2015:
Weighted average fair value
Weighted average risk-free interest rate (1)
Expected volatility (2)
Expected term (years) (3)
Dividend yield (4)
$
$
2017
7.84
2.14%
21.61%
6.09
0.83%
$
2016
4.24
1.47%
22.47%
6.09
1.02%
2015
4.37
1.59%
23.87%
6.01
1.05%
(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 $0.05 per share per quarter through the third quarter of 2016, $0.07 per share per
quarter through the first quarter of 2017 and $0.09 per share per quarter through the fourth quarter of 2017 in
accordance with the Company’s dividend policy at the time of grant.
104
The Company issued stock options in accordance with the 2014 Plan during 2017. The following table summarizes stock
option activity for 2017:
Weighted
average
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Options exercisable at December 31, 2017
Options vested and expected to vest
Weighted remaining
average
exercise
price
contractual Aggregate
intrinsic
value
term in
years
100,401
(658,371)
(29,634)
Options
2,185,922 $ 19.81
33.98
19.91
19.82
1,598,318 $ 20.62
1,372,300 $ 19.82
1,581,184 $ 20.54
4.85 $ 7,753
4.07 $ 19,017
3.35 $ 17,306
4.02 $ 18,924
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 $0.7 million for 2017, 2016 and 2015, respectively. At December 31, 2017, there was $0.5 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 2.0 years.
The following table summarizes the Company’s outstanding stock options:
Options outstanding
Weighted average
Number
outstanding
remaining contractual
life (years)
Weighted average
exercise price
129,327
243,649
1,126,549
98,793
5.85 $
7.78 $
2.61 $
9.14 $
18.55
19.38
20.01
33.42
Range of exercise price
18.00 - 18.99
19.00 - 19.99
20.00 - 20.99
21.00 and above
$
$
$
$
Restricted stock awards
Options exercisable
Weighted average
exercise price
Number
exercisable
129,145
115,278
$
$
1,125,577 $
2,300 $
18.55
19.31
20.01
23.98
The Company issued time based restricted stock awards during 2017, 2016 and 2015. 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.
No market-based stock awards were granted during 2017. During the year ended December 31, 2016, the Company granted
market-based awards of 26,594 shares in accordance with the 2014 Plan. These shares have a five-year performance period
and 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 $11.28 per share fair value of these awards was determined using a Monte
Carlo Simulation at grant date. The market-based performance condition had been met for these awards and the total
unrecognized compensation cost related to these non-vested awards totaled $0.1 million, and is expected to be recognized
over a weighted average period of approximately 1.2 years.
Performance stock units
During the year ended December 31, 2017 and 2016, the Company granted 49,758 and 91,342 performance stock units in
accordance with the 2014 Plan, respectively. 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
105
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 for awards granted during 2017
of the EPS target portion and the TSR target portion was $34.04 and $32.06, respectively.
The following table summarizes restricted stock and performance stock unit activity during 2017 and 2016:
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2017
Weighted
Restricted
stock shares
average grant-
date fair value
15.42
19.15
15.78
18.95
15.82
33.43
15.40
18.73
22.60
836,031 $
122,992
(431,155)
(28,597)
499,271
66,471
(380,956)
(21,229)
163,557 $
Performance
stock units
Weighted
average grant-
date fair value
—
18.22
—
18.22
18.22
33.22
—
21.78
23.90
— $
91,342
—
(6,047)
85,295
49,758
—
(9,971)
125,082 $
As of December 31, 2017, the total unrecognized compensation cost related to the non-vested restricted stock awards and
performance stock units totaled $1.5 million and $1.6 million, respectively, and is expected to be recognized over a weighted
average period of approximately 1.8 years and 1.8 years, respectively. Expense related to non-vested restricted stock awards
totaled $2.2 million, $2.4 million and $2.6 million during 2017, 2016 and 2015, respectively. Expense related to non-vested
performance stock units totaled $0.8 million, $0.4 million and $0.0 million during 2017, 2016 and 2015, respectively.
Expense related to non-vested restricted stock awards and units 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 are the six-month periods 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 are 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 355,159 were available for issuance.
Under the ESPP, employees purchased 11,178 shares and 19,178 shares during 2017 and 2016, respectively.
Note 16 Warrants
During 2017 and 2016, 250,750 and 475,000 warrants were exercised in a non-cash transaction, respectively, representing the
remaining outstanding warrants. 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. Refer to the consolidated
statements of changes in shareholders’ equity for additional detail.
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 at December 31, 2015. Refer to the
consolidated statements of changes in shareholders’ equity for additional detail.
106
Note 17 Common Stock
The Company had 26,875,585 and 26,386,583 shares of Class A common stock outstanding at December 31, 2017 and 2016,
respectively. Additionally, the Company had 163,557 and 499,271 shares outstanding at December 31, 2017 and 2016,
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.
On August 5, 2016, the Board of Directors authorized a 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, 2017 was $12.6 million.
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 26,875,585 and 26,386,583 shares of Class A commons stock outstanding as of December 31, 2017 and
2016, 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 2017, 2016 and 2015.
The following table illustrates the computation of basic and diluted income per share for 2017, 2016 and 2015:
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,
2016
23,060 $
(52)
23,008 $
2017
14,579 $
(56)
14,523 $
$
26,928,763
772,392
8,504
2015
4,881
(53)
4,828
34,349,996
9,321
4,170
28,313,061
704,831
73,451
29,091,343
27,709,659
$
$
0.54 $
0.53 $
34,363,487
0.14
0.14
0.81 $
0.79 $
The Company had 1,598,318, 2,185,922 and 2,596,251 outstanding stock options to purchase common stock at weighted
average exercise prices of $20.62, $19.81 and $19.84 per share at December 31, 2017, 2016 and 2015, 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, 250,750 warrants were exercised in a non-cash
transaction during 2017, representing the remaining outstanding warrants to purchase shares of the Company’s common
stock. The warrants had an exercise price of $20.00. The Company had 288,639, 499,271 and 836,031 unvested restricted
shares and units issued as of December 31, 2017, 2016 and 2015, 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 and units is dilutive.
Note 19 Income Taxes
Income tax expense attributable to income before taxes was $21.3 million, $2.9 million and $3.0 million for 2017, 2016 and
2015, respectively. During the fourth quarter of 2017, the Company re-measured its deferred tax asset as a result of the
enactment of “H.R.1”, known as the “Tax Cuts and Jobs Act”, which among other items reduces the federal corporate tax rate
to 21% effective January 1, 2018. Income tax expense recorded in 2017 included an $18.5 million non-cash one-time charge
107
primarily related to this re-measurement. The re-measurement was based on reasonable estimates using information that was
known and available from the Tax Cuts and Jobs Act as it related to our temporary differences. As additional details and
technical corrections arise related to the Tax Cuts and Jobs Act, the re-measurement estimates may be subject to future
adjustment.
(a) Income taxes
Total income taxes for 2017, 2016 and 2015 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,
2015
2016
2017
$
1,230 $
169
1,399
1,868 $
117
1,985
3,536
311
3,847
17,639
2,245
19,884
$ 21,283 $
626
336
962
2,947 $
(710)
(93)
(803)
3,044
The reconciliation between the income tax expenses and the amounts computed by applying the U.S. federal income tax rate
to pretax income is as follows:
For the years ended December 31,
2015
2016
2017
2,774
9,103 $
$ 12,550 $
142
295
(2,568)
(3,798)
(576)
(724)
3,520
(2,002)
—
—
37
—
(367)
—
82
73
3,044
2,947 $
265
(5,380)
(813)
(3,998)
18,457
—
—
202
$ 21,283 $
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
Federal and state deferred tax rate change
Warrant valuation
Bargain purchase gain
Other
Income tax expense
108
(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, 2017 and 2016 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:
Premises and equipment
Other real estate owned
Prepaid expenses
Total deferred tax liabilities
Net deferred tax asset
December 31, 2017 December 31, 2016
$
$
1,887 $
7,354
6,367
228
3,098
2,431
2,488
1,227
622
1,027
5,891
2,307
993
35,920
(113)
—
(177)
(290)
35,630 $
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
At December 31, 2017, the Company has federal and state net operating loss carryovers (NOLs) of $4.0 million and $8.9
million, respectively, which are available to offset future taxable income. The federal NOLs expire in varying amounts
through 2037, and the state NOLs expire in varying amounts between 2026 and 2037. The Company also has a minimum tax
credit carryover of $5.9 million that under the recently enacted tax law, the minimum tax credit is available to reduce income
tax obligations in future periods without limitation and eventually becomes refundable regardless of the Company’s tax
liability. 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, 2017 and 2016, 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, 2017 and 2016 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, 2014 through
2017 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.
The Company has unvested stock-based compensation awards outstanding at December 31, 2017, including stock options,
restricted stock and performance stock units. The strike prices for options range from $18.09 to $34.16, with a large portion
of the awards having strike prices of $20.00. The restricted stock vest over a range of 1-3 year period. The performance stock
units cliff vest over a range of 2-3 years and the number of shares issued is determined by the final performance results.
109
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. During 2017 and 2016, the Company recorded $4.2 million and $2.1
million, respectively, of excess tax benefit related to the settlement of 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, 2017, the Company had a $3.1 million
deferred tax asset related to stock-based compensation, $2.3 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 on the
consolidated statements of financial condition as of December 31, 2017 and 2016.
Information about the valuation methods used to measure fair value is provided in note 22.
Asset derivatives fair value
Balance Sheet December 31,
December 31, Balance Sheet
location
2017
2016
location
Liability derivatives fair value
December 31,
December 31,
2016
2017
Derivatives designated as hedging
instruments:
Interest rate products
Other assets $
10,489 $
9,528 Other liabilities $
1,167 $
1,381
Total derivatives designated as
hedging instruments
Derivatives not designated as hedging
instruments:
$
10,489 $
9,528
$
1,167 $
1,381
Interest rate products
Interest rate lock commitments
Forward contracts
Other assets $
Other assets
Other assets
2,483 $
128
5
1,900 Other liabilities $
149 Other liabilities
138 Other liabilities
2,584 $
—
7
1,898
6
20
Total derivatives not designated as
hedging instruments
Fair value hedges
$
2,616 $
2,187
$
2,591 $
1,924
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, 2017, the Company had 61 interest rate swaps with a notional amount of
$417.7 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed-rate loans.
The Company had 42 outstanding interest rate swaps with a notional amount of $313.0 million that were designated as fair
value hedges as of December 31, 2016.
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
110
on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During 2017, the Company
recognized a net loss of $995 thousand in non-interest income related to hedge ineffectiveness. During 2016, the Company
recognized a net gain of $293 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, 2017, the Company had 44 matched interest rate swap transactions with an aggregate notional amount of
$202.2 million related to this program. 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 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. 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 31 interest rate lock commitments with a notional value of $8.0 million and six forward contracts with a
notional value of $9.0 million at December 31, 2017. 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.
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 2017 and 2016:
Derivatives in fair value
hedging relationships
Interest rate products
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,
2017
2016
$
$
1,177
1,177
$
$
8,183
8,183
111
Hedged items
Interest rate products
Total
Derivatives not designated
as hedging instruments
Interest rate products
Interest rate lock commitments
Forward contracts
Total
Credit-risk-related contingent features
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,
2017
2016
$
$
(2,172)
(2,172)
$
$
(7,890)
(7,890)
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,
2017
2016
Other non-interest expense
Gain on sale of mortgages, net
Gain on sale of mortgages, net
$
$
104
(13)
(120)
(29)
$
$
129
142
118
389
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, 2017, the termination value of derivatives in a net liability position related to these agreements was $0.5
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, 2017, the Company had
posted $0.5 million in eligible collateral. If the Company had breached any of these provisions at December 31, 2017, 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 on the consolidated
statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount
recognized in the consolidated statements of financial condition. At December 31, 2017 and 2016, the Company had loan
commitments totaling $680.8 million and $602.2 million, respectively, and standby letters of credit that totaled $7.2 million
and $13.5 million, respectively. The total amounts of unused commitments do not necessarily represent future credit exposure
or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these
commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.
Total unfunded commitments at December 31, 2017 and 2016 were as follows:
Commitments to fund loans
Unfunded commitments under lines of credit
Commercial and standby letters of credit
Total unfunded commitments
December 31, 2017 December 31, 2016
149,391
$
452,851
13,532
615,774
181,904 $
498,857
7,185
687,946 $
$
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.
112
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:
• Level 1—Includes assets or liabilities in which the inputs to the valuation methodologies are based on unadjusted
quoted prices in active markets for identical assets or liabilities.
• Level 2—Includes assets or liabilities in which the inputs to the valuation methodologies are based on similar assets
or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities in inactive markets, and
inputs other than quoted prices that are observable, such as interest rates, yield curves, volatilities, prepayment
speeds, and other inputs obtained from observable market input.
• Level 3—Includes assets or liabilities in which the inputs to the valuation methodology are based on at least one
significant assumption that is not observable in the marketplace. These valuations may rely on management’s
judgment and may include internally-developed model-based valuation techniques.
Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least
transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular
asset or liability being measured and then considers the assumptions that market participants would use when pricing the
asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active
markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active
markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company
maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not
available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial
instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited
trading activity can challenge the observability of these quotations.
Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in
current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another
level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting
113
period that the transfer occurs. During 2017 and 2016, 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, 2017 and 2016, 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.
Loans held for sale—The Company has elected to record loans originated and intended for sale in the secondary market at
estimated fair value. The Company estimates fair value based on quoted market prices for similar loans in the secondary
market and is 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.
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.
114
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31, 2017 and
2016, on the consolidated statements of financial condition utilizing the hierarchy structure described above:
Level 1
Level 2
Level 3
Total
December 31, 2017
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
Loans held for sale
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
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
Loans held for sale
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
$
— $ 168,648 $
— $ 168,648
685,230
829
4,629
12,972
—
—
—
—
—
—
— $ 872,308 $
685,230
—
829
—
4,629
—
12,972
—
133
133
133 $ 872,441
— $
—
— $
3,751 $
—
3,751 $
— $
7
7 $
3,751
7
3,758
$
$
$
Level 1
Level 2
Level 3
Total
December 31, 2016
$
— $ 227,160 $
— $ 227,160
652,739
3,648
24,187
11,428
—
—
—
—
—
—
— $ 919,162 $
652,739
—
3,648
—
24,187
—
11,428
—
287
287
287 $ 919,449
— $
—
— $
3,279 $
—
3,279 $
— $
26
26 $
3,279
26
3,305
$
$
$
The table below details the changes in level 3 financial instruments during 2017:
Balance at December 31, 2016
Loss included in earnings, net
Net change in Level 3
Balance at December 31, 2017
Mortgage banking
derivatives, net
$
$
261
(135)
(135)
126
115
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, utilizing a discount rate in the range of 0%
- 25%, 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, 2017, the Company measured seven loans not
accounted for under ASC 310-30 at fair value on a non-recurring basis with a carrying balance of $7.1 million and specific
reserve balance of $1.5 million. 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 a specific reserve balance of $2.4
million.
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 $0.8 million and $0.3 million of OREO impairments in its consolidated statements of operations during 2017 and
2016, 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.
The Company may be required to record fair value adjustments on other available-for-sale and municipal securities valued at
par on a non-recurring basis.
The tables below provide information regarding the assets recorded at fair value on a non-recurring basis at December 31,
2017 and 2016:
Other real estate owned
Impaired loans
Other real estate owned
Impaired loans
$
$
December 31, 2017
Total
10,491 $
30,873
Losses from fair value changes
766
11,099
December 31, 2016
Total
15,662 $
38,282
Losses from fair value changes
154
15,200
The Company did not record any liabilities measured at fair value on a non-recurring basis during 2017 and 2016.
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.
116
The fair value of financial instruments at December 31, 2017 and 2016, 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, 2017
December 31, 2016
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
$
257,364 $
257,364 $
152,736 $
152,736
Level 2
168,648
168,648
227,160
227,160
Level 2
Level 2
Level 3
Level 3
685,230
829
219
419
685,230
829
219
419
652,739
3,648
265
419
652,739
3,648
265
419
Level 2
204,352
204,048
263,411
264,862
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
54,378
15,030
3,178,947
4,629
14,255
12,972
133
52,723
15,030
3,167,508
4,629
14,255
12,972
133
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
2,861,509
1,118,050
130,463
129,115
5,776
3,751
7
2,861,509
1,118,050
130,463
130,300
5,776
3,751
7
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
Cash and cash equivalents have a short-term nature and the estimated fair value is equal to the carrying value.
Investment securities
The estimated fair value of investment securities is based on quoted market prices or bid quotations received from securities
dealers. Other investment securities, including securities that are held for regulatory purposes are carried at cost, less any
other than temporary impairment.
Loans receivable
The estimated fair value of the loan portfolio is estimated using a discounted cash flow analysis using a discount rate based
on interest rates offered at the respective measurement dates for loans with similar terms to borrowers of similar credit
quality. The allowance for loan losses is considered a reasonable estimate of any required adjustment to fair value to reflect
117
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 an 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 is classified as level 2.
Accrued interest receivable
Accrued interest receivable is of 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 of the consolidated financial statements.
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 is of a short-term nature and the estimated fair value is equal to the carrying value.
Note 24 Subsequent Events
On January 1, 2018, the Company completed its acquisition of Peoples, Inc., the bank holding company of Colorado-based
Peoples National Bank and Kansas-based Peoples Bank. Immediately following the completion of the acquisition, Peoples
National Bank and Peoples Bank merged into NBH Bank. Pursuant to the merger agreement executed in June 2017, the
Company paid $36.2 million of cash consideration and 3,398,477 shares of the Company’s Class A common stock in
exchange for all of the outstanding common stock of Peoples. Cash paid included $10.0 million placed in escrow for certain
potential liabilities the Company is indemnified for pursuant to the merger agreement. The cash paid is included in cash and
due from banks in the Company’s consolidated statements of financial condition at December 31, 2017. The transaction has a
value of $146.4 million in the aggregate, based on the Company’s closing price of $32.43 on the acquisition date. Acquisition
related costs of $2.7 million were included in the Company’s consolidated statements of operations for the year ended
December 31, 2017.
The Company determined that this acquisition constitutes a business combination as defined in ASC Topic 805, Business
Combinations. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and liabilities
assumed at fair value. The Company determined fair values in accordance with the guidance provided in ASC Topic 820,
Fair Value Measurements and Disclosures. Fair value is established by discounting the expected future cash flows with a
market discount rate for like maturities and risk instruments. The estimation of expected future cash flows, market conditions
and other future events and actual results could differ materially. The determination of the fair values of fixed assets, loans,
118
OREO, core deposit intangible, mortgage servicing rights and mortgage repurchase reserve involves a high degree of
judgment and complexity. The Company has made the determination of provisional fair values using the best information
available at the time; however, purchase accounting is not complete and the assumptions used are subject to change and, if
changed, could have a material effect on the Company's financial position and results of operations.
The table below summarizes the provisional net assets acquired (at fair value) and consideration transferred in connection
with the Peoples acquisition:
Assets:
Cash and due from banks
Investment securities available-for-sale
Non-marketable securities
Loans
Loans held for sale
Other real estate owned
Premises and equipment
Core deposit intangible asset
Mortgage servicing rights
Other assets
Total assets acquired
Liabilities:
Total deposits
Other liabilities
Total liabilities assumed
Identifiable net assets acquired
Consideration:
NBHC common stock paid at January 1, 2018, closing price of $32.43
Cash
Total
Estimated goodwill created
$
$
$
$
$
$
$
105,173
118,553
4,846
544,233
54,260
1,436
17,931
9,839
4,233
15,740
876,244
729,911
55,973
785,884
90,360
110,213
36,189
146,402
56,042
In connection with the Peoples acquisition, the Company estimates it will record $56.0 million of goodwill, a $9.8 million
core deposit intangible asset, a $4.2 million mortgage servicing rights intangible asset and a $3.8 million mortgage
repurchase reserve, included in other liabilities. The core deposit intangible will be amortized straight-line over ten years and
the mortgage servicing rights intangible is amortized in proportion to and over the period of the estimated net servicing
income.
The following unaudited pro forma information combines the historical results of Peoples and the Company. The unaudited
pro forma financial information does not include the potential impacts of possible business model changes, current market
conditions, revenue enhancements, expense efficiencies, or other factors. The unaudited pro forma information below reflects
adjustments made to exclude acquisition-related expenses of the Company and Peoples of $13.1 million during the year
ended 2017, estimated amortization and accretion of purchase discounts and premiums of $0.9 million and $0.9 million and
estimated amortization of acquired identifiable intangibles of $1.1 million and $1.1 million during the years ended December
31, 2017 and 2016, respectively. The unaudited pro forma information is theoretical in nature and not necessarily indicative
of future consolidated results of operations of the Company or the consolidated results of operations which would have
resulted had the Company acquired Peoples during the periods presented.
If the Peoples acquisition had been completed on January 1, 2016, unaudited pro forma total revenue for the Company would
have been approximately $263.0 million and $268.1 million for the years ended December 31, 2017 and 2016, respectively.
119
Unaudited pro forma net income for the Company would have been approximately $22.6 million and $34.7 million,
respectively, for the same periods. Unaudited pro forma basic and dilutive earnings per share for the Company would have
been $0.75 and $0.73 for the year ended December 31, 2017, respectively, and $1.09 and $1.07 for the year ended December
31, 2016, respectively.
Note 25 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
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31, 2017 December 31, 2016
$
$
$
$
73,873 $
444,445
14,414
532,732 $
325 $
325
532,407
532,732 $
64,691
455,120
16,996
536,807
618
618
536,189
536,807
Condensed Statements of Operations
For the years ended December 31,
2016
2015
2017
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
$
45 $
24 $
(11,192)
28,903
—
17,756
(129,956)
155,353
—
25,421
—
(74,131)
86,000
1,048
12,917
3,680
3,587
7,267
10,489
(4,090)
14,579 $
3,529
3,578
7,107
18,314
(4,746)
23,060 $
3,349
3,597
6,946
5,971
1,090
4,881
$
120
Condensed Statements of Cash Flows
For the years ended December 31,
2016
2015
2017
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 provided by (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:
Capital contribution
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 26 Quarterly Results of Operations (unaudited)
The following is a summary of quarterly results:
$
14,579 $
11,192
3,648
(4,225)
6,680
31,874
23,060 $
(25,388)
3,492
(2,078)
418
(496)
4,881
(11,869)
3,349
3,677
(1,042)
(1,004)
—
—
—
—
—
15,353
140,000
155,353
(9,482)
—
86,000
76,518
(5,000)
(8,395)
104
—
(9,401)
—
(22,692)
9,182
64,691
73,873 $
—
(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
15,739
$
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 (benefit)
Net (loss) income
(Loss) income per share-basic
(Loss) income per share-diluted
Fourth
quarter
Third
quarter
December 31, 2017
Second
quarter
First
quarter
Total
4,681
37,898
3,880
34,018
9,551
34,605
8,964
1,733
4,976
36,913
3,272
33,641
8,883
34,028
8,496
18,615
$ 41,889 $ 42,579 $ 41,213 $ 38,740 $ 164,421
18,115
146,306
12,972
133,334
39,205
136,677
35,862
21,283
$ (10,119) $ 7,231 $ 9,209 $ 8,258 $ 14,579
0.54
$
0.53
$
4,440
36,773
4,025
32,748
12,075
33,439
11,384
2,175
4,018
34,722
1,795
32,927
8,696
34,605
7,018
(1,240)
(0.37) $
(0.37) $
0.27 $
0.26 $
0.34 $
0.33 $
0.31 $
0.30 $
121
Interest and dividend income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Income per share-basic
Income per share-diluted
Interest and dividend income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Income (loss) per share-basic
Income (loss) per share-diluted
Total
First
quarter
Third
quarter
Fourth
quarter
December 31, 2016
Second
quarter
$ 39,658 $ 40,764 $ 38,472 $ 41,554 $ 160,448
14,808
3,516
145,640
38,038
23,651
10,619
121,989
27,419
40,027
7,923
136,009
34,902
26,007
440
189
2,947
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
8,314 $
0.30 $
0.30 $
3,719
34,753
6,457
28,296
10,504
33,314
5,486
982
4,504 $
0.15 $
0.15 $
3,873
35,785
1,282
34,503
9,992
34,423
10,072
81
$ 9,991 $
0.38 $
$
0.36 $
$
Total
First
quarter
Third
quarter
Fourth
quarter
December 31, 2015
Second
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
3,563
39,929
5,423
34,506
15,419
42,230
7,695
4,355
$ 3,340 $
0.11 $
$
0.11 $
$
3,608
39,479
1,453
38,026
(479)
36,724
823
(423)
1,246 $
0.03 $
0.03 $
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
1,636 $ (1,341) $
(0.04) $
(0.04) $
0.05 $
0.05 $
122
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, 2017. 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, 2017.
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, 2017 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, 2017. 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, 2017, 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.
123
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
National Bank Holdings Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited National Bank Holdings Corporation and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, 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)
(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2017 and 2016, the related
consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial
statements), and our report dated February 27, 2018 expressed an unqualified opinion on those consolidated financial
statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Kansas City, Missouri
February 27, 2018
124
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
2018 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
2018 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
2018 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
2018 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
2018 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
125
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
74
75
76
77
78
79
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
below:
Exhibit No
Description
2.1*
3.1
3.2
4.1
4.2
4.3
Agreement and Plan Merger, dated as of June 23, 2017, by and among Peoples, Inc., National Bank
Holdings Corporation, the Significant Stockholders (as defined herein) and Winton A. Winter, Jr.,
solely in his capacity as the Holders’ Representative (incorporated herein by reference to Exhibit 2.1
to our Form 8-K dated June 23, 2017 and filed on June 27, 2017)
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)
10.1
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)^
126
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
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)^
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)^
Amendment to the NBH Holdings Corp. 2009 Equity Incentive Plan dated February 22, 2017
(incorporated herein by reference to Exhibit 10.10 to our form 10-K, filed on February 24, 2017)^
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)^
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock Unit
Award Agreement (For Management) (incorporated herein by reference to Exhibit 10.12 to our form
10-K, filed on February 24, 2017)^
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Restricted Stock Award
Agreement (For Management) (incorporated herein by reference to Exhibit 10.13 to our form 10-K,
filed on February 24, 2017)^
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Nonqualified Stock
Option Agreement (For Management) (incorporated herein by reference to Exhibit 10.14 to our form
10-K, filed on February 24, 2017)^
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Market-Based
Performance Award Agreement (For Management) (incorporated herein by reference to Exhibit
10.15 to our form 10-K, filed on February 24, 2017)^
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)^
127
10.16
10.17
21.1
23.1
31.1
31.2
32
101
Support Agreement, dated as of June 23, 2017, by and among Peoples, Inc., National Bank Holdings
Corporation and the undersigned stockholders of Peoples, Inc. (incorporated herein by reference to
Exhibit 10.1 to our Form 8-K dated June 23, 2017 and filed on June 27, 2017)
Change of Control Agreement applicable to executive officers not party to an employee agreement
(filed herewith)^
Subsidiaries of National Bank Holdings Corporation
Consent of KPMG LLP
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated 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**
* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule
or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.
** This information is deemed furnished, not filed.
^
Indicates a management contract or compensatory plan.
128
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on February 27, 2018, 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 27, 2018,
by the following persons on behalf of the registrant and in the capacities indicated.
129
/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
130
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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. through its bank subsidiary,
NBH Bank, National Bank Holdings Corporation operates a network of 105 banking centers located in Colorado, the
greater kansas City region, texas and New mexico. NBH Bank’s comprehensive residential banking group primarily
serves the bank’s core footprint with additional offices in Arizona, Nevada and Utah. NBH Bank operates under the
following brand names: Bank midwest in kansas and missouri, Community Banks of Colorado in Colorado, and
Hillcrest Bank in texas and New mexico. It also operates as Community Banks mortgage, a division of NBH Bank, in
Arizona, Colorado, Nevada and Utah. more information about National Bank Holdings Corporation 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
experienced and respected management team and board
of directors
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
Growing low-cost deposit base in attractive markets
maintenance of a strong expense management focus, with a
track record of decreasing annual expenses over the years
Remain an opportunistic and disciplined manager of capital,
steadily increasing our dividend 80% over the past 2 years
Closed accretive $146 million acquisition of peoples, Inc. on
January 1, 2018, adding meaningful scale in our attractive
markets, a best-in-class residential banking platform, a
low-cost deposit base and a complementary loan portfolio
OUR fAmILY Of bRANDS 1
LOcATIONS AND
mARKET SHARE2
Residential
Banking
offices
bANK mIDWEST
47 banking centers
3.0% deposit market share in
kansas City mSA
Ranks 5th in banking centers in
kansas City mSA
cOmmUNITY bANKS
Of cOLORADO
50 banking centers
1.5% deposit market share
across Colorado
Ranks 5th in market share of
Colorado headquartered banks
HILLcREST bANK
8 banking centers, including
two commercial and private
banking offices located in Austin
and dallas, tX and six banking
centers located in Albuquerque
and taos, Nm
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: S&P Global. Financial information and rank as of June 30, 2017. NBH Bank banking centers as of December 31, 2017 (pro-forma for Peoples).
©2018, National Bank Holdings Corporation. All rights reserved.
3/14/18 6:34 PM
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