2019
ANNUAL REPORT AND FORM 10-K
TEN YEARS OF
RELATIONSHIPS. FAIRNESS. SIMPLICITY.SM
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A LETTER FROM OUR CHAIRMAN, PRESIDENT AND CEO
TIM LANEY
FELLOW SHAREHOLDERS,
2019 marked the 10th year of the founding of our
company, and we believe our
intense focus on
developing deep relationships with our clients has
been key to delivering solid results. Simply put, we are
proud of the meaningful returns we have provided to
our shareholders. In 2019, earnings per share increased
18%* to $2.55 per share. Further, we have generated
a 60% total shareholder return through December 31,
2019, almost double that of the KBW Regional Bank
Index return of 33%, since pausing our stock repurchase
activity on October 19, 2016. Our earnings growth and
strong capital position have enabled us to increase our
dividend to $0.20 per share, a 39% increase during 2019
and a 300% increase since our first payment in 2012.
When we started our company, we believed it was
important to build on a foundation of conservative
principles in order to deliver sustainable and market-
leading returns through economic cycles and particularly
during periods of stress. At NBH, every associate
is a risk manager, and we have built comprehensive
and effective risk management capabilities.
Our
loan portfolio is diverse and granular, governed by
disciplined adherence to our concentration limits, and
stress tested twice annually. Our safety and soundness
is further bolstered by our capital strength. Cyber and
information security defenses are strong and enhanced
*Prior year comparison is to a non-GAAP measure. Please see page 40 of the Form 10-K
for a reconciliation of these measures.
on a continuous basis. Our compliance and BSA/AML
programs and teams are led by experts and staffed with
an eye toward enabling strong organic growth with
effective operational controls.
NBHC Total Shareholder Return1,2
October 19, 2016 through December 31, 2019
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
+60.2%
+42.5%
+33.5%
Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419
NBHC
Russell 2000 Index (RTY)
KBW Regional Banking Index (KRX)
1Total Shareholder Return measured based on security and index market
close prices and dividends re-invested into the same security or index.
2Past results are not a guarantee of future performance.
The markets we have carefully selected to operate in
continue to outperform national averages for economic,
population and wage growth. Colorado was cited as the
strongest state economy in the U.S., followed second by
Utah. Given our insights into Utah and the opportunity
presented, we announced a de novo expansion into the
state in 2019, and we are very pleased with the progress
10 YEARS OF RELATIONSHIPS. FAIRNESS. SIMPLICITY.SM
2010 – 2011
Began banking operations
in Colorado, the greater
Kansas City area, and Dallas
and Austin, TX with four
acquisitions in 12 months
2015
Founded the Do More Charity ChallengeTM,
an athletic and fundraising competition
generating nearly $1.3 million for charitable
organizations since it’s inception
2016
Added to the S&P
SmallCap 600® index
Announced expansion into the
Salt Lake City, Utah market
2019
2018
2012
Completed
initial public offering
(NYSE: NBHC)
2009
National Bank
Holdings Corporation
founded
2013
Developed
specialty banking
groups, catering to
highly specialized
industries
Acquired Peoples Inc., adding
meaningful scale in attractive
markets of Colorado Springs and
New Mexico and a best-in-class
residential banking platform
Recognized as one of the first
organizations in the country to
introduce an incentive program
for associates as part of the
government tax reform
48703.indd 3-4
our bankers have already made in this growing market.
As a further demonstration of the quality of our markets,
Austin, Denver and Colorado Springs were rated as the
first, second and third best places to live in the U.S.,
respectively. Also notable, Kansas City ranked among
the top 10 cities for economic growth potential and
the top 20 cities hiring the most workers. The diligent
execution of our growth strategies in all of these thriving
communities yielded record results during 2019.
I am proud of the meaningful investments we continue
to make in our communities through volunteerism,
board of director service and charitable giving. During
2019, we announced an exciting partnership between
the national USA Weightlifting team and our company,
realizing a dynamic synergy with our Do More Charity
ChallengeTM event, which we founded in 2015. To date,
the Do More Charity ChallengeTM has generated nearly
$1.3 million in charitable contributions to a wide variety
of worthy non-profits in our communities. Additionally,
among other recognition across our markets for our
community involvement, we recently received Hope
House’s 2019 Visionary of the Year award for our
dedication and commitment to their charitable work
within the Kansas City metro area. On the strength
of our net income growth, our financial performance
enabled us to form the NBH Charitable Foundation
during 2019, a charitable organization that positions
us to further expand the support of the communities
we serve.
Looking ahead, we will continue to build on this strong
and healthy foundation we established in our first decade.
100% of our deposits are originated directly with our
clients and 77.7% of our total deposits as of December 31,
2019 are transactional. We believe this demonstrates
the effectiveness of our relationship-banking model.
Furthermore, this focus on core, relationship-based
deposits strengthens our liquidity and funding flexibility.
Simply put, we are focused on maintaining high-quality
capital and liquidity positions coupled with a diverse and
granular loan portfolio.
None of these accomplishments would be possible
without the hard work of my teammates. Promoting
diversity and inclusion in our results-driven culture is
essential for my teammates’ and our company’s success.
We are proud to participate in the CEO Action for Diversity
and InclusionTM and our commitment to offering special
programs for our teammates, including events that feature
qualified panelists and keynote speakers on the topics of
women’s leadership, equality, diversity and inclusion.
Our associates’ commitment to our vision and our culture
has been instrumental in building a strong bank.
We will continue to execute on our proven growth strategy
by maintaining a disciplined focus on earning the full
relationship of our clients and working diligently to protect
our balance sheet. We look forward to the next decade of
building “win-win” relationships with our clients and the
communities we serve, while striving to deliver better-
than-peer earnings and returns for our shareholders.
SINCERELY,
TIM LANEY
CHAIRMAN, PRESIDENT AND CEO
Hope House
Visionary of the Year
award winner
Now in it’s fifth year, the Do More
Charity ChallengeTM has raised
nearly $1.3 million for charity
020-01-Annual-Report-3-3-2020-final-adjustments.indd 5
3/11/20 9:38 AM
LOCATIONS AND
MARKET SHARE 1
Headquartered in
Denver, Colorado
COMMUNITY BANKS
OF COLORADO
Ranks 3rd in market share of
Colorado headquartered banks
48 banking centers
1% deposit market share across
Colorado
Largest publicly traded bank
headquartered in Colorado
BANK MIDWEST
Ranks 7th in banking centers in
Kansas City MSA
44 banking centers
3% deposit market share in
Kansas City MSA
HILLCREST BANK
9 Banking Centers located in
Austin, TX2, Dallas, TX2, New
Mexico and Salt Lake City, UT2.
1Source: SNL Financial. Financial information and
rank as of June 30, 2019. NBH Bank banking centers
as of December 31, 2019. © 2020, National Bank
Holdings Corporation. All rights reserved.
2Location focused on serving commercial and
business banking clients.
2019 HIGHLIGHTS
DELIVERING RECORD FINANCIAL PERFORMANCE
Net income increased 19%3 to a record $80.4 million.
Earnings per share increased 18%3 to a record $2.55.
Return on average tangible assets increased by 16 basis points3 to 1.42%.
Return on average tangible common equity increased by 31 basis points3
to 13.07%.
Generated a 60% total shareholder return through December 31, 2019, almost
double that of the KBW Regional Bank Index return of 33%, since pausing our
stock repurchase activity on October 19, 2016.
3 Prior year comparison is to a non-GAAP measure. Please see page 40 of the Form 10-K for a reconciliation of these measures.
CONTINUED BUILDING FULL RELATIONSHIPS
Advanced our client-centered relationship banking strategy, with emphasis
on depository and treasury management relationships.
Pledged the CEO Action for Diversity & Inclusion™ initiative with a
commitment to cultivate a trusting environment where all ideas are
welcomed and associates feel comfortable and empowered to discuss and
advance diversity and inclusion in the workplace.
Formed the NBH Charitable Foundation in 2019 to continue the investments
we’ve made in the communities we serve.
Long-standing commitment to corporate social responsibility across all of our
business activities.
POSITIONED FOR GROWTH
Strong, diversified balance sheet with capital strength to withstand and
grow in any economic environment.
Operate in solid and attractive markets that outperform national averages.
Maintain a respected, experienced leadership team at the management
and board levels that is actively engaged and represents a diverse range of
qualifications and skills.
Strong risk management culture that is appropriately conservative while
providing excellent risk-adjusted returns.
2019 growth and expansion in Utah, with a focus on serving commercial and
business banking clients in the Wasatch Front.
Investments in technology and digital products to make client access
convenient and simple.
48703.indd 6
3/13/20 6:37 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒
For the fiscal year ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35654
NATIONAL BANK HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27-0563799
(I.R.S. Employer
Identification No.)
7800 East Orchard Road, Suite 300, Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone, including area code:
(303) 892-8715
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, Par Value $0.01
Trading Symbol
NBHC
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
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. ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $1,094,000,000 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 24, 2020, NBHC had outstanding 31,177,476 shares of Class A voting common stock with $0.01 par value per share, excluding 120,623 shares of restricted Class A common
stock issued but not yet vested.
Portions of the Registrant’s definitive proxy statement for its 2020 Annual Meeting of Shareholders to be filed within 120 days of December 31, 2019 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
68
69
122
122
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;
• effects of a government shutdown, if any;
• 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 the loans 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,
consolidations or other expansion opportunities 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;
3
• our ability to achieve organic loan and deposit growth and the composition of such growth;
• changes in sources and uses of funds, including loans, deposits and borrowings;
• increased competition in the financial services industry, including 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, including the potential of future increases to prevailing tax rates, 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 attract, 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, pandemics, 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.
4
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.
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. The Company is headquartered in Denver, 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 101 banking centers, as of December 31, 2019, located primarily in Colorado and the greater Kansas City region,
and through online and mobile banking products and services. As of December 31, 2019, we had $5.9 billion in assets, $4.4
billion in loans, $4.7 billion in deposits and $0.8 billion in shareholders’ equity.
NBH Bank is a Colorado state-chartered bank and a member of the Federal Reserve Bank of Kansas City. Through NBH
Bank, we operate under the following brand names: Community Banks of Colorado in Colorado; Bank Midwest in Kansas
and Missouri; and Hillcrest Bank in New Mexico, Texas and Utah. 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
We began banking operations in October 2010 and, as of December 31, 2019, we have completed six bank acquisitions. We
have transformed these banks into one collective banking operation with strong organic growth, prudent underwriting, and
meaningful market share with continued opportunity for expansion.
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.
The following table summarizes certain highlights of our six historic acquisitions, including deposits and assets at fair value
as of each acquisition date:
Peoples
Pine River
Community Banks
of Colorado
Bank of Choice
Bank Midwest
Hillcrest Bank
Date acquired
Banking centers(1)
Deposits (millions)
Assets (millions)
Primary Market
January 1, 2018 August 1, 2015 October 21, 2011 July 22, 2011
16
$ 760
$ 950
19
$ 730
$ 875
October 22, 2010
December 10, 2010
9
39
$ 1,234
$ 2,386
$ 1,377
$ 2,426
Colorado Greater Kansas City Region Greater Kansas City Region
4
$ 130
$ 142
Colorado
40
$ 1,195
$ 1,228
Colorado
Colorado
(1) Consolidated or sold 29 banking centers, or 22%, since inception.
Our Market Area
Our core markets are broadly defined as Colorado, the greater Kansas City region, New Mexico, Texas and Utah. In January
2019, the Company announced its expansion into Utah with a focus on serving commercial and business banking clients in
Salt Lake City’s Wasatch Front. We are the third largest banking center network among Colorado-based banks and the
seventh largest banking center network in the greater Kansas City MSA among Missouri- and Kansas-based banks ranked by
deposits as of June 30, 2019 (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; Austin-Round Rock, Texas; and Salt Lake City, Utah.
5
We believe that our established presence in our markets positions us well for growth opportunities. 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.
The table below describes certain key demographic statistics regarding our markets:
Denver, CO
Front Range, CO(3)
Kansas City, MO-KS MSA
Austin, TX
Dallas, TX
Salt Lake City, UT
U.S.(4)
# of
Median
rate(1)
growth(2)
Deposits businesses Population Unemployment Population household
(billions)
$ 87.2
118.5
61.3
42.9
292.8
38.2
(thousands)
114.9
182.7
76.0
68.1
240.9
43.2
(millions)
3.0
4.8
2.2
2.2
7.7
1.2
18.0% $ 83,768
80,902
18.4%
69,742
8.0%
82,650
30.3%
73,009
20.3%
78,785
14.4%
66,010
7.0%
2.5%
2.5%
3.2%
2.6%
3.1%
2.3%
3.5%
income
Top 3
competitor
combined
deposit
market share
53%
51%
44%
54%
59%
77%
57%
(1) Unemployment data is as of December 31, 2019.
(2) For the period 2010 through 2019.
(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, 2019, except Deposits and Top 3 Competitor Combined Deposit Market Shares,
which reflects data as of September 30, 2019.
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. The key components of our strategic plan are:
• Focus on client-centered, relationship-driven banking strategy. 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. 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
6
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.
• 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. 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 comprehensive 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, 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 or other expansionary opportunities. We expect that acquisitions or other
expansionary opportunities will continue to be a component of our growth strategy. We intend to carefully select
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 opportunities 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 or expand
into financial services franchises in markets that exhibit attractive demographic attributes and business growth
trends, 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, the greater Kansas City region, New Mexico, Texas and Utah,
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 or other expansionary opportunities in attractive markets provides
flexibility regardless of economic conditions. Our established platform for assessing, executing and integrating acquisitions
creates opportunities in an economic downturn, and our attractive market factors, franchise scale in our targeted markets and
our relationship-centered banking focus create opportunities in an improving economic environment.
Products and Services
Through the Bank, our primary business is to offer a full range of traditional banking products and financial services to our
commercial, business and consumer clients, who are predominantly located in Colorado, the greater Kansas City region, New
Mexico, Texas and Utah. We conduct our banking business through 101 banking centers, with 48 of those located in
Colorado, 44 in Kansas and Missouri, six in New Mexico, two in Texas and one in Utah as of December 31, 2019. Our
distribution network also includes 127 ATMs as well as fully integrated online banking and mobile banking services. We
offer a high level of personalized service to our clients through our relationship managers and banking center associates. We
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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:
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, food and 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, 2019, 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 and development loans. Our non-owner occupied CRE loans
include commercial properties such as office buildings, warehouse/distribution buildings, multi-family, hospitality and retail
buildings. These loans are typically secured by a first lien mortgage or deed of trust, as well as assignments of all related
leases. 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 of dedicated
CRE bankers in each of our markets 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 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 optimize 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
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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).
Business, Residential 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 added significant residential banking products, servicing capabilities and
residential loan origination channels. In addition to the referral business through our existing consumer client base, 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, health savings 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.
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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.
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 decision-
making. 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, New Mexico, Texas and Utah 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.
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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 and offer a wider range of deposit and lending instruments.
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.
Associates
At December 31, 2019, we had 1,229 full-time associates and 69 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,
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among other activities, certain insurance and securities activities. We have not yet determined whether it would be
appropriate or advisable in the future to become a financial holding company.
NBH Bank as a Colorado State-Chartered Bank
Our bank subsidiary, NBH Bank, is a Colorado state-chartered bank and 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 Federal Deposit Insurance Corporation (“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.
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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%. Effective as of January 1, 2019,
bank holding companies are 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 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.
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
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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, 2019, 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 a financial institution. 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.
In addition, federal and state laws, including the BHCA and the Change in Bank Control Act, impose additional prior notice
or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect
“control” of an FDIC-insured depository institution or bank holding company. Whether an investor “controls” a depository
institution is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is
deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of
voting securities or is entitled to appoint or elect a majority of the board of directors. For investments under those thresholds,
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regulators will examine whether the investor has the ability to exercise a controlling influence over the depository
institution’s voting shares an investor acquires as well as the number of directors the investor is able to appoint or elect.
Similarly, if an investor’s ownership of our voting securities or ability to appoint or elect directors 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.
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
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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 Community Reinvestment Act (“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 (“FRB”).
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
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.
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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, the Office of the Comptroller of the Currency (“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.
Recent Regulatory Reform
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), was enacted to modify
or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.
While EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of
the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets
of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as
NBH Bank, and their holding companies.
EGRRCPA, among other matters, expands the definition of qualified mortgages which may be held by a financial institution
and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets
of less than $10 billion by establishing a single “Community Bank Leverage Ratio” of 9 percent. Any qualifying depository
institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally
applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the
new ratio will be considered to be “well capitalized” under the prompt corrective action rules. A major effect of this change is
to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, EGRRCPA
includes regulatory relief for community banks regarding the Volcker Rule (proprietary trading prohibitions), mortgage
disclosures and risk weights for certain high-risk commercial real estate loans.
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”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at www.sec.gov.
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Item 1A. RISK FACTORS
Risks Relating to Our Banking Operations
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 core
markets of Colorado, the greater Kansas City region, New Mexico, Texas and Utah. 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, lower home sales and commercial
activity, further or prolonged pressure on energy prices, high unemployment, and the economic effects of natural disasters,
severe weather conditions, health emergencies or pandemics, cyberattacks, outbreaks of hostilities, terrorism or other
geopolitical instabilities. 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 influenced by the application of the acquisition method of accounting,
which requires 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 is subject to modification or change.
If our assumptions are incorrect and we change or modify our assumptions, it could have a material adverse effect on us or
our previously reported results. Additionally, a change in our accounting estimates, such as our ability to realize deferred tax
assets, the need for a valuation allowance or the recoverability of the goodwill recorded at the time of our acquisitions, could
have a material adverse effect on our financial results.
Our business is highly susceptible to credit risk and fluctuations in the value of real estate and other collateral securing such
credit.
As a lender, we are exposed to the risk that our clients will be unable to repay their loans according to their terms and that the
collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The risks inherent in making
any loan include risks with respect to the ability of borrowers to repay their loans and, if applicable, the period of time over
which the loan is repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic
and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the
future value of collateral. Similarly, we have credit risk embedded in our securities portfolio. Our credit standards, procedures
and policies may not prevent us from incurring substantial credit losses. 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
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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.
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.
On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, the new
accounting standard promulgated by the Financial Accounting Standards Board (“FASB”), regarding the recognition of credit
losses. This standard makes significant changes to the accounting and disclosures for credit losses on financial instruments
recorded on an amortized cost basis, including our loans held for investment. The new current expected credit loss (“CECL”)
impairment model requires an estimate of expected credit losses for financial assets measured over the contractual life of an
instrument based on historical experience, current conditions and reasonable and supportable forecasts. The standard provides
significant flexibility and requires a high degree of judgment in order to develop an estimate of expected lifetime losses.
Providing for lifetime losses for our loan portfolio is a change to the previous method of providing allowances for loan losses
that are probable and incurred. It may also result in even small changes to future forecasts having a significant impact on the
allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this
volatility.
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
OREO balances as a result of our acquisitions have led to greater expenses as we incur costs to manage and dispose of the
properties. While the carrying value of OREO from acquisitions has decreased substantially in recent years, our earnings may
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
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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 the loans held on our balance sheet, 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.
Small Business Administration lending is an important and growing part of our business. Our SBA lending program is
dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to
obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not
SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other
things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request
corrective actions or impose enforcement actions, including revocation of the lender’s SBA Preferred Lender status.
If we were to lose our status as an SBA Preferred Lender, we may lose new opportunities, and a limited number of existing
SBA loans, to lenders who are SBA Preferred Lenders. In addition, any changes to the SBA program, including changes to
the level of guarantee provided by the federal government on SBA loans, changes to program-specific rules impacting
volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress, may have
a material adverse effect on our SBA lending program. In addition, any default by the U.S. government on its obligations or
any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or collect on
guarantees in the event a borrower defaults on its obligations, and could materially adversely affect our SBA lending
business.
If we violate U.S. Department of Housing and Urban Development (“HUD”) lending requirements or if the federal
government shuts down or otherwise fails to fully fund the federal budget, our commercial FHA origination business could be
adversely affected.
We originate, sell and service loans under FHA insurance programs, and make certifications regarding compliance with
applicable requirements and guidelines. If we were to violate these requirements and guidelines, or other applicable laws, or
if the FHA loans we originate show a high frequency of loan defaults, we could be subject to monetary penalties and
indemnification claims, and could be declared ineligible for FHA programs. Any inability to engage in our commercial FHA
origination and servicing business would lead to a decrease in our net income.
In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time in
recent years. Federal governmental entities, such as HUD, that rely on funding from the federal budget, could be adversely
affected in the event of a government shutdown, which could have a material adverse effect on our commercial FHA
origination business and our results of operations.
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The fair value of our investment securities can fluctuate due to market conditions outside of our control.
We have historically taken a conservative investment strategy with our securities portfolio, with concentrations of securities
that are primarily backed by government sponsored enterprises. In the future, we may seek to increase yields through
different strategies, which may include a greater percentage of corporate securities and structured credit products. Factors
beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse
changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of
the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and
instability in the capital markets. These factors, among others, could cause other-than-temporary impairments and realized
and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse
effect on us. The process for determining whether impairment of a security is other-than-temporary usually requires complex,
subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the
security in order to assess the probability of receiving all contractual principal and interest payments on the security.
We face significant competition from other financial institutions and financial services providers, which may materially and
adversely affect us.
Consumer and commercial banking is highly competitive. Our markets contain a large number of community and regional
banks as well as a significant presence of the country’s largest commercial banks. We compete with other state and national
financial institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In
addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies,
insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers, in providing
various types of loans and other financial services. Some of these competitors have a long history of successful operations in
our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor
bases. Some of our competitors also have greater resources and access to capital and possess an advantage by being capable
of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive
promotional and advertising campaigns or operating a more developed internet platform. Competitors may also exhibit a
greater tolerance for risk and behave more aggressively with respect to pricing in order to increase their market share. 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, including internet-based or other digital 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
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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, or federal funds purchased, may be impacted by our financial strength, performance and
prospects and may also be impaired by factors that are not specific to us, such as a disruption in the financial markets or
negative views and expectations about the prospects for the financial services industry, all of which may make potential
funding sources more difficult to access, less reliable and more expensive. We may not have access to third party funding in
sufficient amounts on favorable terms, or the ability to undertake asset sales or access other sources of liquidity, when
needed, or at all, which could materially and adversely affect us.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are
affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held
by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are
directly affected by many factors, including domestic and international economic and political conditions, broad trends in
business and finance, legislation and regulation affecting the national and international business and financial communities,
monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of
short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of clients and counterparties
and the level and volatility of trading markets. Such factors can impact clients and counterparties of a financial services
institution and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the
interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing
liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at
different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income.
When interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest
rates would reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because
the magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates
would reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and liabilities, loan
and investment securities portfolios and our overall results. Changes in interest rates may also have a significant impact on
any future loan origination revenues. Historically, there has been an inverse correlation between the demand for loans and
interest rates. Loan origination volume and revenues usually decline during periods of rising or high interest rates and
increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the
carrying value of a significant percentage of the assets, both loans and investment securities, on our balance sheet. We may
incur debt in the future and that debt may also be sensitive to interest rates and any increase in interest rates could materially
and adversely affect us. Interest rates are highly sensitive to many factors beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Changes in the
Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions could materially and
adversely affect us.
Reforms to and uncertainty regarding LIBOR and certain other indices may adversely affect our business.
The U.K. Financial Conduct Authority announced in July 2017 that it will no longer persuade or require banks to submit rates
for LIBOR after 2021. This announcement, in conjunction with financial benchmark reforms more generally and changes in
the interbank lending markets, have resulted in uncertainty about the future of LIBOR and certain other rates or indices that
are used as interest rate “benchmarks.” In addition, regulators, industry groups and certain committees (e.g. the Alternative
Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked
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financial instruments, identified recommended alternatives for certain LIBOR rates (e.g. the Secured Overnight Financing
Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives
in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals
will be broadly accepted, whether they will continue to evolve and what the effect of their implementation may be on the
market for floating-rate financial instruments. Uncertainty as to the nature and effect of such reforms and actions, and the
potential or actual discontinuance of benchmark quotes, may adversely affect our financial condition or results of operations,
including the value of, return on and trading market for our financial assets and liabilities that are based on or are linked to
benchmarks, including any LIBOR-based securities, loans and derivatives. Furthermore, there can be no assurances that we
and other market participants will be adequately prepared for an actual discontinuation of benchmarks, including LIBOR, that
may have an unpredictable impact on contractual mechanics (including, but not limited to, interest rates to be paid to or by
us), which may also result in adversely affecting our financial condition or results of operations.
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, or noncompliance with evolving privacy and data protection laws 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 and regulatory relationships. 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 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
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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.
Our growth and expansion may also subject us to evolving laws and regulations regarding privacy and data protections,
including the EU General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018. It is
possible that these laws may be interpreted and applied by various jurisdictions in a manner inconsistent with our current or
future practices, or that is inconsistent with one another. If personal, confidential or proprietary information of customers or
clients in our possession is mishandled or misused, we may face regulatory, reputational and operational risks which could
have an adverse effect on our financial condition and results of operations.
The value of our mortgage servicing rights can decline during periods of falling interest rates, and we may be required to
take a charge against earnings for the decreased value.
A mortgage servicing right (“MSR”) is the right to service a mortgage loan for a fee. The majority of our MSRs were assets
assumed as part of acquisitions. We can also capitalize MSRs when we originate mortgage loans and retain the servicing
rights after we sell the loans. We carry MSRs at the lower of amortized cost or estimated fair value. Fair value is the present
value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the
likelihood of prepayment by borrowers. Changes in interest rates can affect prepayment assumptions. When interest rates fall,
borrowers are more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of
prepayment increases, the fair value of our MSRs can decrease. Each quarter we evaluate our MSRs for impairment based on
the difference between the carrying amount and fair value, and, if a temporary impairment exists, we establish a valuation
allowance through a charge that negatively affects our earnings.
We may be required to repurchase mortgage loans or reimburse investors and others as a result of breaches in contractual
representations and warranties.
We sell residential mortgage loans to various parties, including GSEs and other financial institutions that purchase mortgage
loans for investment or private label securitization. The agreements under which we sell mortgage loans and the insurance or
guaranty agreements with the FHA and VA contain various representations and warranties regarding the origination and
characteristics of the mortgage loans, including ownership of the loan, compliance with loan criteria set forth in the
applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing
the loan, and compliance with applicable origination laws. We may be required to repurchase mortgage loans, indemnify the
investor or insurer, or reimburse the investor or insurer for credit losses incurred on loans in the event of a breach of
contractual representations or warranties that is not remedied within a period (usually 90 days or less) after we receive notice
of the breach. Contracts for mortgage loan sales to the GSEs include various types of specific remedies and penalties that
could be applied to inadequate responses to repurchase requests. Similarly, the agreements under which we sell mortgage
loans require us to deliver various documents to the investor, and we may be obligated to repurchase any mortgage loan as to
which the required documents are not delivered or are defective. We establish a mortgage repurchase liability related to the
various representations and warranties that reflect management's estimate of losses for loans which we have a repurchase
obligation. Our mortgage repurchase liability represents management's best estimate of the probable loss that we may expect
to incur for the representations and warranties in the contractual provisions of our sales of mortgage loans. Because the level
of mortgage loan
24
repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change
over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and
requires considerable management judgment. If economic conditions and the housing market deteriorate or future investor
repurchase demand and our success at appealing repurchase requests differ from past experience, we could experience
increased repurchase obligations and increased loss severity on repurchases, requiring additions to the repurchase liability.
The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and
interest income in current periods and lower net interest margins and interest income in future periods.
Under U.S. GAAP, we are required to record loans acquired through acquisitions at fair value. Estimating the fair value of
such loans requires management to make estimates based on available information, facts, and circumstances on the
acquisition date. Any discount on acquired loans is accreted into interest income over the weighted average remaining
contractual life of the loans. Therefore, our net interest margins may initially increase due to the discount accretion. We
expect the yields on the total loan portfolio will decline as our acquired loan portfolios pay down or mature and the
corresponding accretion of the discount decreases. We expect downward pressure on our interest income to the extent that the
runoff of our acquired loan portfolios is not replaced with comparable high-yielding loans. This could result in higher net
interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
We have recorded goodwill as a result of acquisitions that can significantly affect our earnings if it becomes impaired.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an
annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit
below its carrying value.
Risks Relating to our Growth Strategy
We may not be able to effectively manage our growth or other expansionary activity.
Our expansionary activity, whether through de novo branching, acquisitions or organic growth has placed, and it may
continue to place, significant demands on our operations and management. The success of our expansionary activity 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;
• attract and retain the client base; and
• attract and retain management talent.
We may not successfully implement improvements to, or integrate, our management information and control systems,
procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In
particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the
infrastructure that comes with new banking centers and banks. Thus, our growth strategy may divert management from our
existing franchises and may require us to incur additional expenditures to expand our administrative and operational
infrastructure and, if we are unable to effectively manage and grow our financial services franchise, we could be materially
and adversely affected. In addition, if we are unable to manage future expansion in our operations, we may experience
compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond
current projections to support such growth, any one of which could materially and adversely affect us.
25
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; 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.
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 organic loan growth and strategic acquisitions of financial services
franchises. 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
26
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 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 a majority 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.
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.
27
Risks Relating to the Regulation of Our Industry
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, including the effects of the Dodd Frank Act Wall Street Reform and Consumer Protection Act of 2010, 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.
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.
28
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
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 or 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
29
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 declare in its unilateral discretion. Dividends are paid 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.
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, 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.
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, 2019, we
operated 48 banking centers in Colorado, 44 in Kansas and Missouri, six in New Mexico, two in Texas and one in Utah. Of
these banking centers, 31 locations were leased and 70 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 are traded on the New York Stock Exchange (“NYSE”) under the symbol “NBHC”.
The following table presents the cash dividends paid for the periods indicated:
Quarter
Fourth
Third
Second
First
Total
2019
2018
0.20
0.19
0.19
0.17
0.75
$
$
0.17
0.14
0.14
0.09
0.54
$
$
In October 2012, upon the initial public offering, the Company commenced the payment of a $0.05 per share quarterly cash
dividend to holders of its common stock. As of December 31, 2019, the quarterly cash dividend was $0.20 per share,
representing a cumulative increase of 300% since the initial public offering.
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, 2014, with dividends invested on a total return basis.
Total Return Performance
e
u
l
a
V
x
e
d
n
I
235
230
225
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
115
110
105
100
95
90
85
12/31/14
NBHC
KBW Regional Banking Index
Russell 2000 Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Index
NBHC
KBW Regional Banking Index
Russell 2000 Index
12/31/14
100.00
100.00
100.00
12/31/15
111.21
106.00
95.59
12/31/16
167.55
147.46
115.93
12/31/17
172.19
150.13
132.88
12/31/18
166.28
123.87
118.23
12/31/19
193.81
153.44
148.36
Period Ending
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2019:
Period
October 1 - October 31, 2019(1)
November 1 - November 30, 2019(1)
Total
of shares purchased paid per share
34.29
740 $
35.89
35.61
3,445
4,185 $
Total number
Average price announced plans
Total number of
shares purchased
as part of publicly
or programs
Maximum
approximate dollar
value of shares
that may yet be
purchased under the
plans or programs (2)
12,562,825
12,562,825
12,562,825
— $
—
— $
(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, $12.6 million remained available for purchase at December 31, 2019.
32
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, 2019, the aggregate number of Company common stock
available for issuance under the 2014 Plan was 4,996,156 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% of the fair market value of
Company common stock on the last day of the offering period. As of December 31, 2019, the aggregate number of Company
common stock available for issuance under the ESPP was 326,088 shares.
See note 16 to the consolidated financial statements for further detail related to these equity compensation plans.
Plan Category
Equity plans approved by security holders
Equity plans not approved by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
657,114 $
—
657,114 $
26.69
—
26.69
Number of securities
remaining available for
future issuance under
equity compensation plans
5,322,244
—
5,322,244
33
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth a summary of selected historical financial information derived from our audited consolidated
financial statements as of and for the five years ended December 31, 2019. This information should be read together with the
related notes thereto as well as “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 and per share data, or as otherwise noted.
Summary of Selected Historical Consolidated Financial Data
Consolidated Statements 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
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
$
2019
110,190 $
638,249
182,884
29,751
4,415,406
(39,064)
4,376,342
117,444
7,300
112,151
126,388
194,813
2018
109,556 $
791,102
235,398
27,555
4,092,308
(35,692)
4,056,616
48,120
10,596
109,986
128,497
159,240
December 31, December 31, December 31, December 31, December 31,
2017
257,364 $
855,345
258,730
15,030
3,178,947
(31,264)
3,147,683
4,629
10,491
93,708
61,237
139,248
2015
166,092
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
$ 5,895,512 $ 5,676,666 $ 4,843,465 $ 4,573,046 $ 4,683,908
$ 4,737,132 $ 4,535,621 $ 3,979,559 $ 3,868,649 $ 3,840,677
225,687
4,066,364
617,544
$ 5,895,512 $ 5,676,666 $ 4,843,465 $ 4,573,046 $ 4,683,908
2016
152,736 $
884,232
332,505
14,949
2,860,921
(29,174)
2,831,747
24,187
15,662
95,671
66,579
154,778
391,460
5,128,592
766,920
331,499
4,311,058
532,407
446,039
4,981,660
695,006
168,208
4,036,857
536,189
(1) Total loans are net of unearned discounts and deferred fees and costs.
34
Consolidated Statements 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:
Earnings per share, basic
Earnings per share, diluted
Dividends paid
Book value per share
Tangible common book value per share(1)
Total shareholders' equity to total assets
Tangible common equity to tangible assets(1)
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
Common shares outstanding
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2019
242,601 $
36,771
205,830
11,643
194,187
82,752
180,745
96,194
15,829
80,365 $
2018
221,391 $
23,954
197,437
5,197
192,240
70,775
189,334
73,681
12,230
61,451 $
2017
164,421 $
18,115
146,306
12,972
133,334
39,205
136,677
35,862
21,283
14,579 $
2016
160,448 $
14,808
145,640
23,651
121,989
40,027
136,009
26,007
2,947
23,060 $
2015
171,407
14,462
156,945
12,444
144,501
21,448
158,024
7,925
3,044
4,881
$
$
$
2.57 $
2.55
0.75
24.60
20.89
13.01%
11.27%
31,175,825
31,530,817
31,176,627
2.00 $
1.95
0.54
22.59
18.77
12.24%
10.39%
30,748,234
31,430,074
30,769,063
0.54 $
0.53
0.34
19.81
17.94
10.99%
10.06%
26,928,763
27,709,659
26,875,585
0.81 $
0.79
0.22
20.32
18.15
11.72%
10.61%
28,313,061
29,091,343
26,386,583
0.14
0.14
0.20
20.34
18.22
13.18%
11.98%
34,349,996
34,363,487
30,358,509
(1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. 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
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2017
2015
2019
2018
2016
Key Ratios
Return on average assets
Return on average tangible assets(1)
Return on average tangible assets, adjusted(1)
Return on average equity
Return on average tangible common equity(1)
Return on average tangible common equity, adjusted(1)
Loan to deposit ratio (end of period)
Non-interest bearing deposits to total deposits (end of
period)
Net interest margin(3)
Net interest margin FTE(1)(3)(8)
Interest rate spread FTE(4)(8)
Yield on earning assets(2)
Yield on earning assets FTE(1)(2)(8)
Cost of interest bearing liabilities
Cost of deposits
Non-interest income to total revenue FTE(8)
Non-interest expense to average assets
Non-interest expense to average assets, adjusted(1)
Efficiency ratio
Efficiency ratio FTE(1)(8)
Total Loans Asset Quality Data(5)(6)(7)
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
1.38%
1.42%
1.42%
10.89%
13.07%
13.07%
93.21%
25.01%
3.83%
3.93%
3.65%
4.52%
4.61%
0.96%
0.64%
28.18%
3.10%
3.10%
62.22%
61.15%
1.10%
1.15%
1.26%
9.28%
11.60%
12.76%
90.23%
23.64%
3.85%
3.93%
3.77%
4.31%
4.40%
0.63%
0.45%
25.95%
3.38%
3.23%
69.78%
68.64%
0.31%
0.38%
0.82%
2.67%
3.61%
7.75%
80.00%
22.68%
3.36%
3.50%
3.35%
3.78%
3.91%
0.56%
0.41%
20.49%
2.90%
2.84%
70.80%
68.63%
0.49%
0.66%
0.88%
179.62%
0.19%
0.60%
0.85%
0.87%
145.94%
0.02%
0.66%
0.99%
0.98%
148.88%
0.36%
0.50%
0.57%
0.57%
3.95%
5.04%
5.04%
74.58%
21.89%
3.39%
3.49%
3.38%
3.74%
3.84%
0.46%
0.36%
21.09%
2.92%
2.92%
70.30%
68.79%
1.07%
1.61%
1.02%
94.98%
0.80%
0.10%
0.17%
0.17%
0.70%
1.29%
1.29%
67.72%
21.22%
3.54%
3.60%
3.48%
3.86%
3.92%
0.44%
0.36%
11.84%
3.27%
3.27%
85.55%
84.28%
0.99%
1.81%
1.05%
105.74%
0.12%
(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 or loans are excluded from interest-earning assets.
(3) Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average
interest earning assets.
(4) Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average
cost of interest bearing liabilities.
(5) Non-performing loans consist of non-accruing loans and restructured loans on non-accrual, but exclude any loans accounted for
under ASC 310-30 in which the pool is still performing. These ratios may, therefore, not be comparable to similar ratios of our
peers.
(6) Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
(7) Total loans are net of unearned discounts and fees.
(8) Presented on a fully taxable equivalent basis using the statutory rate of 21% for 2019 and 2018 and 35% for prior years. The taxable
equivalent adjustments included above are $5,065, $4,482, $5,852, $4,081 and $2,695 for the years ended 2019, 2018, 2017, 2016
and 2015, 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 common equity,” “tangible common book value,” “tangible common book value per share,”
“tangible common equity,” “tangible common equity to tangible assets,” “adjusted non-interest expense,” “adjusted non-
interest expense to average assets,” “adjusted net income,” “adjusted earnings per share - diluted,” “adjusted return on
average tangible assets,” “adjusted return on average tangible common equity,” 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 expenses or assets that we believe are
not indicative of our primary business operating results or by presenting certain metrics on an 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 core deposit intangible assets, net
Add: deferred tax liability related to goodwill
Tangible common equity (non-GAAP)
Total assets
Less: goodwill and core deposit 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 core deposit intangible
assets, net
Tangible common equity to tangible assets (non-GAAP)
Tangible common book value per share calculations:
Tangible common equity (non-GAAP)
Divided by: ending shares outstanding
Tangible common book value per share (non-GAAP)
Tangible common book value per share, excluding
accumulated other comprehensive (income) loss
calculations:
Tangible common equity (non-GAAP)
Accumulated other comprehensive (income) loss, net of
$
December 31, December 31, December 31, December 31, December 31,
2017
532,407 $
(61,237)
10,873
482,043 $
2019
766,920 $
(123,758)
8,241
651,403 $
2018
695,006 $
(124,941)
7,327
577,392 $
2016
536,189 $
(66,580)
9,323
478,932 $
2015
617,544
(72,060)
7,772
553,256
$
$ 5,895,512 $ 5,676,666 $ 4,843,465 $ 4,573,046 $ 4,683,908
(72,060)
7,772
$ 5,779,995 $ 5,559,052 $ 4,793,101 $ 4,515,789 $ 4,619,620
(123,758)
8,241
(124,941)
7,327
(66,580)
9,323
(61,237)
10,873
13.01%
12.24%
10.99%
11.72%
13.18%
(1.74)%
11.27%
(1.85)%
10.39%
(0.93)%
10.06%
(1.11)%
10.61%
(1.20)%
11.98%
$
651,403 $
577,392 $
482,043 $
478,932 $
31,176,627
30,769,063
26,875,585
26,386,583
$
20.89 $
18.77 $
17.94 $
18.15 $
553,256
30,358,509
18.22
$
651,403 $
577,392 $
482,043 $
478,932 $
553,256
tax
(2,062)
11,275
6,242
1,762
(95)
Tangible common book value, excluding accumulated
other comprehensive (income) loss, net of tax (non-
GAAP)
Divided by: ending shares outstanding
Tangible common book value per share, excluding
accumulated other comprehensive (income) loss, net of
tax (non-GAAP)
649,341
31,176,627
588,667
30,769,063
488,285
26,875,585
480,694
26,386,583
553,161
30,358,509
$
20.83 $
19.13 $
18.17 $
18.22 $
18.22
38
Return on Average Tangible Assets and Return on Average Tangible Equity
Net income
Add: impact of core deposit intangible amortization expense,
after tax
Net income adjusted for impact of core deposit intangible
December 31,
December 31,
December 31,
December 31,
December 31,
2019
2018
2017
2016
2015
$
80,365
$
61,451
$
14,579
$
23,060
$
4,881
As of and for the years ended
899
1,649
3,259
3,343
3,295
amortization expense, after tax
$
81,264
$
63,100
$
17,838
$
26,403
$
8,176
Average assets
Less: average goodwill and core deposit intangible asset, net
of deferred tax liability related to goodwill
Average tangible assets (non-GAAP)
Average shareholders' equity
Less: average goodwill and core deposit intangible asset, net
of deferred tax liability related to goodwill
Average tangible common equity (non-GAAP)
$
5,837,121
$
5,607,532
$
4,705,241
$
4,651,953
$
4,831,070
(116,104)
5,721,017
(118,546)
5,488,986
$
(52,958)
4,652,283
$
(59,977)
4,591,976
(66,549)
4,764,521
$
$
737,923
$
662,420
$
546,716
$
583,686
$
701,476
(116,104)
621,819
$
(118,546)
543,874
$
(52,958)
493,758
$
(59,977)
523,709
$
(66,549)
634,927
$
$
$
Return on average assets
Return on average tangible assets (non-GAAP)
Return on average equity
Return on average tangible common equity (non-GAAP)
1.38%
1.42%
10.89%
13.07%
1.10%
1.15%
9.28%
11.60%
0.31%
0.38%
2.67%
3.61%
0.50%
0.57%
3.95%
5.04%
0.10%
0.17%
0.70%
1.29%
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
Interest income
Add: impact of taxable equivalent adjustment
Interest income FTE (non-GAAP)
Net interest income
Add: impact of taxable equivalent adjustment
Net interest income FTE (non-GAAP)
Average earning assets
Yield on earning assets
Yield on earning assets FTE (non-GAAP)
Net interest margin
Net interest margin FTE (non-GAAP)
Efficiency Ratio
Net interest income
Add: impact of taxable equivalent adjustment
Net interest income, FTE (non-GAAP)
Non-interest income
Non-interest expense
Less: core deposit intangible asset amortization
Non-interest expense, adjusted for core deposit intangible
As of and for the years ended
December 31,
December 31,
December 31,
December 31,
December 31,
$
$
$
$
$
2019
242,601
5,065
247,666
205,830
5,065
210,895
5,368,073
4.52%
4.61%
3.83%
3.93%
$
$
$
$
$
2018
221,391
4,482
225,873
197,437
4,482
201,919
5,131,694
4.31%
4.40%
3.85%
3.93%
$
$
$
$
$
2017
164,421
5,852
170,273
146,306
5,852
152,158
4,353,320
3.78%
3.91%
3.36%
3.50%
$
$
$
$
$
2016
160,448
4,081
164,529
145,640
4,081
149,721
4,290,171
3.75%
3.84%
3.39%
3.49%
$
$
$
$
$
2015
171,407
2,695
174,102
156,945
2,695
159,640
4,439,139
3.86%
3.92%
3.54%
3.60%
As of and for the years ended
December 31,
December 31,
December 31,
December 31,
December 31,
$
$
$
$
2019
205,830
5,065
210,895
82,752
180,745
(1,183)
$
$
$
$
2018
197,437
4,482
201,919
70,775
189,334
(2,170)
$
$
$
$
2017
146,306
5,852
152,158
39,205
136,677
(5,342)
$
$
$
$
2016
145,640
4,081
149,721
40,027
136,009
(5,480)
$
$
$
$
2015
156,945
2,695
159,640
21,448
158,024
(5,401)
asset amortization
$
179,562
$
187,164
$
131,335
$
130,529
$
152,623
Efficiency ratio
Efficiency ratio FTE (non-GAAP)
62.22%
61.15%
69.78%
68.64%
70.80%
68.63%
70.30%
68.79%
85.55%
84.28%
39
Adjusted Financial Results
Adjustments to net income:
Net income
Adjustments(1)
Adjusted net income (non-GAAP)
Adjustments to earnings per share:
Earnings per share
Adjustments(1)
Adjusted earnings per share - diluted (non-GAAP)
Adjustments to return on average tangible assets:
Adjusted net income (non-GAAP)
Add: impact of core deposit intangible amortization
expense, after tax
Net income adjusted for impact of core deposit
intangible amortization expense, after tax
Average tangible assets (non-GAAP)
Adjusted return on average tangible assets (non-GAAP)
December 31,
December 31,
December 31,
December 31,
December 31,
2019
2018
2017
2016
2015
As of and for the years ended
$
$
$
$
80,365 $
—
80,365 $
61,451 $
6,321
67,772 $
14,579 $
20,430
35,009 $
23,060 $
—
23,060 $
4,881
—
4,881
2.55 $
—
2.55 $
1.95 $
0.21
2.16 $
0.53 $
0.73
1.26 $
0.79 $
—
0.79 $
0.14
—
0.14
$
80,365 $
67,772 $
35,009 $
23,060 $
4,881
899
1,649
3,259
3,343
3,295
81,264
5,721,017
1.42%
69,421
5,488,986
1.26%
38,268
4,652,283
0.82%
26,403
4,591,976
0.57%
8,176
4,764,521
0.17%
Adjustments to return on average tangible common
equity:
Net income adjusted for impact of core deposit
intangible amortization expense, after tax
Average tangible common equity (non-GAAP)
Adjusted return on average tangible common equity
$
81,264 $
69,421 $
38,268 $
26,403 $
621,819
543,874
493,758
523,709
8,176
634,927
(non-GAAP)
13.07%
12.76%
7.75%
5.04%
1.29%
Adjustments to non-interest expense:
Non-interest expense
Adjustments(1)
Adjusted non-interest expense (non-GAAP)
Non-interest expense to average assets, adjusted (non-
GAAP)
(1) Adjustments:
Non-interest expense adjustments:
$
180,745 $
—
180,745
189,334 $
7,957
181,377
136,677 $
3,182
133,495
136,009 $
—
136,009
158,024
—
158,024
3.10%
3.23%
2.84%
2.92%
3.27%
Non-recurring Peoples acquisition-related expenses
Tax reform bonus(2)
$
— $
—
7,957 $
—
2,691 $
491
— $
—
Total non-interest expense adjustments (non-
GAAP)
Total pre-tax adjustments (non-GAAP)
Collective tax expense impact
Deferred tax asset remeasurement
Adjustments (non-GAAP)
$
$
$
— $
7,957 $
3,182 $
— $
— $
—
—
— $
7,957 $
(1,636)
—
6,321 $
3,182 $
(1,209)
18,457
20,430 $
— $
—
—
— $
—
—
—
—
—
—
—
(2) Represents a special $1,000 bonus payment to 491 associates made in connection with the Tax Cuts and Jobs Act enacted in 2017.
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, 2019,
2018, and 2017, 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.
Management’s discussion focuses on 2019 results compared to 2018. For a discussion of 2018 results compared to 2017,
refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
All amounts are in thousands, except share and per share data, or as otherwise noted.
Overview
Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in
providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial
services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We
also believe that our established presence in core markets that are outperforming national averages positions us well for
growth opportunities. As of December 31, 2019, we had $5.9 billion in assets, $4.4 billion in loans, $4.7 billion in deposits
and $0.8 billion in equity.
Completing 2019 marks the 10th year in our Company’s history. During our first decade, we completed six acquisitions and
built a bank with a balance sheet and capital position that we believe will withstand any economic environment. We are proud
of our industry-leading credit quality metrics and our high-quality client relationships. We have positioned ourselves in strong
markets and created meaningful value for our clients, associates, communities and shareholders. We begin the next decade
with a solid foundation, strong capital and momentum for future growth.
Operating Highlights and Key Challenges
Increased profitability and returns
• Net income was a record $80.4 million, or $2.55 per diluted share, for 2019, compared to net income of $61.5
million, or $1.95 per diluted share, for 2018. Net income during 2018 included $6.3 million, after tax, of expenses
related to the acquisition of Peoples. Adjusting for these expenses, net income would have been $67.8 million, or
$2.16 per diluted share for 2018.
• The return on average tangible assets was 1.42% for 2019, compared to 1.15% for 2018. Adjusting for the non-
recurring Peoples acquisition expenses, the return on average tangible assets was 1.26% for 2018.
• The return on average tangible common equity was 13.07% for 2019, compared to 11.60% for 2018. Adjusting for
the non-recurring Peoples acquisition expenses, the return on average tangible common equity was 12.76% for 2018.
Strategic execution
• As part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients,
we consolidated four banking centers in our Colorado and Kansas City markets during the fourth quarter of 2019. A
fair value impairment charge of $0.9 million was recorded to other non-interest expense during the third quarter of
2019 related to the consolidations, with an expected earn back of less than one year.
• Announced expansion into Utah in January 2019, with a focus on serving commercial and business banking clients
in Salt Lake City’s Wasatch Front.
• Delivered full year originated and acquired loan growth of 8.5% fueled by a second consecutive year of $1.2 billion
of new loan originations.
41
• 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 transaction deposit growth of $223.9
million, or 6.5%, since December 31, 2018.
Loan portfolio
• Total loans ended the year at $4.4 billion and increased $323.1 million, or 7.9%, since December 31, 2018.
• Grew originated and acquired loans outstanding to $4.4 billion, an increase of $339.9 million, or 8.5%, since
December 31, 2018, led by originated and acquired commercial loan growth of $352.8 million, or 13.4%.
• Loan originations during the year totaled $1.2 billion, led by commercial loan originations of $781.7 million.
Credit quality
• Provision for loan losses totaled $11.6 million and $5.2 million during 2019 and 2018, respectively. The current
provision was recorded to support originated loan growth and net charge-offs including a $6.6 million charge-off of
one previously acquired commercial loan.
• Net charge-offs of $8.3 million and $0.8 million were recorded during 2019 and 2018, respectively, and included
$6.6 million during 2019 related to the one acquired loan described above. Net charge-offs to average total loans
totaled 0.19% and 0.02% for 2019 and 2018, respectively.
• Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs)
decreased to 0.49% of total loans at December 31, 2019, compared to 0.60% at December 31, 2018. Non-performing
assets to total loans and OREO totaled 0.66% at December 31, 2019 compared to 0.85% at December 31, 2018.
Client deposit funded balance sheet
• Average non-interest bearing demand deposits during the fourth quarter of 2019 increased $73.5 million, or 26.4%
annualized, compared to the same period in the prior year.
• Time deposits averaged $1.1 billion during the fourth quarter of 2019, decreasing $36.7 million, or 13.2% annualized,
compared to the same period in 2018.
• Non-interest bearing demand deposits were 25.0% of total deposits at December 31, 2019, increasing from 23.6% at
December 31, 2018. The mix of transaction deposits to total deposits improved to 77.7% at December 31, 2019 from
76.2% at December 31, 2018 due to our continued focus on developing long-term banking relationships.
• Cost of deposits totaled 0.64% for the year ended December 31, 2019, increasing from 0.45% for the prior year.
Revenues
• Fully taxable equivalent net interest income totaled $210.9 million for the year ended December 31, 2019 and
increased $9.0 million, or 4.4%, compared to prior year.
• Average earning assets increased $236.4 million, or 4.6%, during 2019 compared to the prior year, primarily driven
by average originated and acquired loan growth of $492.2 million, partially offset by a decrease in average
investment securities of $221.1 million.
• The FTE net interest margin remained consistent at 3.93% for the year ended December 31, 2019 and 2018 as the
increase in average earning assets and earning asset yields were offset by an increase in the cost of funds. The yield
on earning assets increased 21 basis points, led by a 28 basis point increase in the originated loan portfolio yields due
to higher new loan yields. The cost of funds increased 33 basis points from 0.63% to 0.96% for the year ended
December 31, 2019.
• Non-interest income totaled a record $82.8 million during 2019, increasing $12.0 million from the prior year.
Mortgage banking income increased $12.2 million, or 40.7%, other non-interest income increased $0.5 million and
service charges and bank card fees remained consistent with last year. Income from OREO properties decreased $0.6
million during the year ended December 31, 2019.
42
Expenses
• Non-interest expense totaled $180.7 million during 2019, representing a decrease of $8.6 million, or 4.5%, primarily
driven by a $6.7 million increase in net gains on the sale of OREO properties and efficiencies gained from the
integration of the Peoples acquisition. Salaries and benefits increased $7.8 million primarily due to higher mortgage
banking commissions. Other non-interest expense included banking center consolidation expenses of $0.9 million
recorded during 2019. Additionally, included in the prior year were $8.0 million of non-recurring acquisition costs.
• Income tax expense totaled $15.8 million during 2019 compared to $12.2 million during 2018. Tax expense was
lowered by $2.2 million and $1.3 million of tax benefit from stock compensation activity during 2019 and 2018,
respectively. Adjusting for the stock compensation activity, the 2019 and 2018 effective tax rate was 18.7% and
18.3%, respectively.
Strong capital management
• Capital ratios are strong as our capital position remains in excess of federal bank regulatory well-capitalized
thresholds. As of December 31, 2019, our consolidated tier 1 leverage ratio was 11.0% and our consolidated tier 1
risk-based capital and common equity tier 1 risk-based capital ratios were both 13.2%.
• At December 31, 2019, common book value per share was $24.60, while tangible common book value per share was
$20.89.
• The Company increased its annual dividend rate 38.9% over 2018 to $0.75 per share for 2019.
• From early 2013 through October 2016, we repurchased 26.6 million shares, or 51.7% of our 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. We face continual challenges implementing our
business strategy, including growing the assets, particularly loans, and deposits of our business amidst intense competition,
changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined
acquisition and other expansionary opportunities in a very competitive environment. While at the beginning of 2019 we
anticipated a generally rising rate environment throughout the year, prevailing interest rates began decreasing during the third
quarter and generally have continued to decrease since that time, as a result of three Federal Reserve rate cuts from August
2019 through October 2019.
General economic conditions remained stable in 2019. Amidst national economic concerns surrounding trade tensions and
indicators of decreasing consumer confidence, residential real estate values remain strong in our markets and nationally, with
many markets, including Denver, hitting new post-crisis highs. We continue to see our markets outperforming national
averages on many key indicators. Commercial real estate property fundamentals also remain strong, with stable occupancy
and increasing lease rates, along with cyclically low capitalization rates leading to increasing valuations. 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.
The agriculture industry is in the fifth year of depressed commodity prices. Our food and agriculture portfolio is only 5.6% of
total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 1.4%
of total loans. We have maintained relationships with food and agriculture clients that generally possess low leverage and,
correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.
Our originated and acquired loans outstanding portfolio at December 31, 2019 totaled $4.4 billion, representing an increase
of $339.9 million, or 8.5%, compared to December 31, 2018. Our 310-30 loans have produced higher yields than our
originated and acquired loans, due to accretion of fair value adjustments. During 2019, our weighted average rate on new
loans funded at the time of origination was 4.96% (fully taxable equivalent), compared to the weighted average yield of our
originated loan portfolio of 4.78% (fully taxable equivalent). Fully taxable equivalent net interest income reached an
inflection point in the second quarter of 2017 and continued through the fourth quarter of 2019 as the yields and volumes of
originated and acquired loans outpaced the decrease in higher yielding 310-30 loan balances. The inflection point was driven
43
by strong new loan originations. Future growth in our interest income will ultimately be dependent on our ability to continue
to generate sufficient volumes of high-quality originated loans as well as Federal Reserve interest rate policy decisions.
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, including fintechs, are expanding into traditional banking
products. While certain external factors are out of our control and may provide obstacles to our business strategy, 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 determination of the allowance
for loan losses. See additional discussion of our ALLL policy in note 2 – Summary of Significant Accounting Policies in the
notes to our consolidated financial statements for the year ended December 31, 2019.
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.
Future Accounting Pronouncements
The expected impact of accounting pronouncements recently issued but not yet required to be adopted is discussed below.
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. We will adopt ASU 2016-13
effective January 1, 2020 using a modified retrospective approach. Using a third-party vendor solution, we have developed a
discounted cash flow model that estimates an allowance for expected lifetime credit losses of the loan and securities
portfolios. As of the implementation date, the Company expects to recognize an increase of up to $6.0 million in its
allowance for credit losses with a corresponding maximum reduction to its common equity tier 1 capital ratio of 12 basis
points. The overall estimate for the current expected credit loss (“CECL”) methodology is significantly influenced by the
composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions
and forecasts.
44
Other Pronouncements—The Company reviewed ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes, and ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement and ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment and does not expect the adoption of these pronouncements to have a material impact on its
financial statements.
Financial Condition
Total assets increased to $5.9 billion at December 31, 2019 from $5.7 billion at December 31, 2018, primarily driven by
increases in total loans of $323.1 million, or 7.9%, and loans held for sale of $69.3 million, or 144.1%, which were partially
offset by a decrease in total investment securities of $203.2 million, or 19.3%.
During 2019, lower cost demand, savings and money market deposits (“transaction deposits”) increased $223.9 million, or
6.5%, as we continue to develop full banking relationships with our clients. The increase in transaction deposits provided low
cost funding utilized to fund loan growth.
Investment securities
Available-for-sale
Total investment securities available-for-sale were $638.2 million at December 31, 2019, compared to $791.1 million at
December 31, 2018, a decrease of $152.9 million. During 2019 and 2018, maturities and paydowns of available-for-sale
securities totaled $195.5 million and $216.1 million, respectively. Purchases of available-for-sale securities during 2019 and
2018 totaled $45.7 million and $72.6 million, respectively. Proceeds from sales of available-for-sale securities during 2019
and 2018 totaled $20.4 million and $33.6 million, respectively.
Available-for-sale investment securities are summarized as follows as of the dates indicated:
December 31, 2019
December 31, 2018
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
portfolio
yield
cost
Fair
value
Weighted
Percent of average
portfolio
yield
Mortgage-backed securities ("MBS"):
Residential mortgage pass-through
securities issued or guaranteed by U.S.
Government agencies or sponsored
enterprises
Other residential MBS issued or guaranteed
by U.S. Government agencies or
sponsored enterprises
Municipal securities
Other securities
Total investment securities available-for-sale
$
93,770 $ 95,256
14.9%
2.59% $ 147,283 $ 146,642
18.5%
2.53%
543,275
495
469
542,037
487
469
$ 638,009 $ 638,249
84.9%
0.1%
0.1%
100.0%
643,381
2.13%
610
3.60%
0.00%
469
2.20% $ 809,725 $ 791,102
661,354
619
469
81.3%
0.1%
0.1%
100.0%
2.15%
3.67%
0.00%
2.22%
As of December 31, 2019 and 2018, nearly all the 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.
Mortgage-backed securities may have actual maturities that 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 2.9 years and 3.2 years at December 31, 2019 and December 31, 2018,
respectively. This estimate is based on assumptions and actual results may differ. At December 31, 2019 and December 31,
2018, the duration of the total available-for-sale investment portfolio was 2.7 years and 3.0 years, respectively.
45
At December 31, 2019 and 2018, adjustable rate securities comprised 2.8% and 3.7%, 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 2.40% per annum and 2.39% per annum at December 31, 2019 and
2018, respectively.
The available-for-sale investment portfolio included $0.2 million of net unrealized gains and $18.6 million of net unrealized
losses at December 31, 2019 and 2018, respectively. We believe any unrecognized losses during 2018 were 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, 2019, we held $182.9 million of held-to-maturity investment securities, compared to $235.4 million at
December 31, 2018, a decrease of $52.5 million, or 22.3%. During 2019 and 2018, maturities and paydowns of held-to-
maturity securities totaled $60.9 million and $61.9 million, respectively. Purchases of held-to-maturity securities totaled
$10.2 million and $40.7 million during 2019 and 2018, respectively.
Held-to-maturity investment securities are summarized as follows as of the dates indicated:
December 31, 2019
December 31, 2018
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
portfolio
yield
cost
Fair
value
Weighted
Percent of average
portfolio
yield
Mortgage-backed securities:
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-
$ 127,560 $ 128,770
69.7%
3.19% $ 157,115 $ 154,412
66.7%
3.24%
55,324
54,971
30.3%
1.90%
78,283
76,514
33.3%
2.25%
maturity
$ 182,884 $ 183,741
100.0%
2.80% $ 235,398
$ 230,926
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.
The fair value of the held-to-maturity investment portfolio was $183.7 million and $230.9 million, at December 31, 2019 and
2018, respectively, and included $0.9 million of net unrealized gains and $4.5 million of net unrealized losses for the
respective periods.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment
characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the
total held-to-maturity portfolio as of December 31, 2019 and December 31, 2018 was 2.4 years and 2.8 years, respectively.
This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity portfolio was
2.3 years and 2.5 years as of December 30, 2019 and December 31, 2018, respectively.
Loans overview
At December 31, 2019, our loan portfolio was comprised of new loans that we have originated and loans that were acquired
in connection with our six acquisitions to date. Loans that exhibit signs of credit deterioration at the date of acquisition are
accounted for in accordance with the provisions of ASC 310-30.
46
The table below shows the loan portfolio composition at the respective dates:
Originated:
Commercial:
Commercial and industrial
Owner-occupied commercial real estate
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total originated
Acquired:
Commercial:
Commercial and industrial
Owner-occupied commercial real estate
Food and agriculture
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total acquired
ASC 310-30 loans
Total loans
December 31, 2019
December 31, 2018
December 31, 2019 vs.
December 31, 2018
% Change
$
2,171,436 $
414,477
245,320
42,519
2,873,752
505,479
651,656
21,030
4,051,917
34,561
65,429
3,265
103,255
92,639
112,755
746
309,395
1,877,221
337,258
217,294
49,204
2,480,977
407,431
657,633
22,895
3,568,936
53,926
84,408
4,862
143,196
144,388
163,187
1,722
452,493
$
54,094
4,415,406 $
70,879
4,092,308
15.7%
22.9%
12.9%
(13.6)%
15.8%
24.1%
(0.9)%
(8.1)%
13.5%
(35.9)%
(22.5)%
(32.8)%
(27.9)%
(35.8)%
(30.9)%
(56.7)%
(31.6)%
(23.7)%
7.9%
The table below shows the originated and acquired loans by loan segment at the respective dates:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total originated and acquired loans
December 31, 2019 vs.
December 31, 2018
December 31, 2019
December 31, 2018
% Change
$
$
$
2,977,007
598,118
764,411
21,776
4,361,312 $
2,624,173
551,819
820,820
24,617
4,021,429
13.4%
8.4%
(6.9)%
(11.5)%
8.5%
Our loan portfolio totaled $4.4 billion at December 31, 2019, increasing $323.1 million, or 7.9%, since December 31, 2018,
driven by new loan originations. The strong originations were the result of continued market penetration benefiting from our
focus on building client relationships. Originated and acquired loans grew $339.9 million, or 8.5%, led by originated and
acquired commercial loan growth of $352.8 million, or 13.4%. The acquired 310-30 loan portfolio declined $16.8 million, or
23.7%, from December 31, 2018.
Our commercial and industrial loan portfolio is comprised of diverse industry segments, and our ability to generate new
relationships with small- to medium-sized businesses has driven strong loan growth within these segments. At December 31,
2019, these segments included government and municipal loans of $531.3 million, finance and financial services, primarily
lender finance loans, of $361.5 million, healthcare-related loans of $199.6 million, manufacturing-related loans of $156.3
million, and a variety of smaller subcategories of commercial and industrial loans. Food and agriculture loans, which are
well-diversified across food production, crop and livestock types, totaled $253.1 million and were 37.1% of the Company’s
risk-based capital. Crop and livestock loans represent 1.4% of total loans.
Originated and acquired non-owner occupied CRE loans were 87.6% of the Company’s risk based capital, or 13.5% of total
loans, and no specific property type comprised more than 4.0% of total loans. The Company maintains very little exposure to
47
retail properties, comprising less than 1.7% of total loans. Multi-family loans totaled $55.8 million, or 1.3% of total loans as
of December 31, 2019.
When considering the loan portfolio in its entirety, 76.7% of loans were located within our footprint of Colorado, the greater
Kansas City region, New Mexico, Texas and Utah as of December 31, 2019, based on the domicile of the borrower or, in the
case of collateral-dependent loans, the geographical location of the collateral.
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 $1.2 billion during 2019, led by
commercial loan originations of $781.7 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 2019 and 2018:
Fourth quarter
2019
Third quarter
2019
Second quarter
2019
First quarter
2019
Total
2019
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
118,969
46,965
20,348
(3,807)
182,475
41,256
43,493
2,315
269,539
$ 172,969 $
16,149
(4,894)
3,067
187,291
79,929
49,022
2,986
$ 319,228 $
163,138 $ 153,547 $
41,380
18,217
(12,098)
210,637
36,632
40,012
3,264
608,623
130,899
26,405
48,884
15,213
(6,700)
6,138
781,706
201,303
226,942
69,125
171,154
38,627
10,523
1,958
290,545 $ 311,013 $ 1,190,325
Included in originations are net fundings under revolving lines of credit of $1,756, $37,062, $48,955 and $105,235 as of the
fourth quarter 2019, third quarter 2019, second quarter 2019 and first quarter 2019, respectively.
Fourth quarter Third quarter Second quarter First quarter
2018
2018
2018
2018
Total
2018
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and agriculture
Energy
Total Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
213,335
34,727
14,046
7,640
269,748
41,031
51,017
2,592
364,388
$ 123,440 $
35,549
23,833
5,412
188,234
42,300
40,293
3,797
$ 274,624 $
232,643 $ 123,984 $
19,009
38,220
(929)
288,943
28,316
30,259
3,588
693,402
112,861
23,576
101,972
25,873
1,345
(10,778)
909,580
162,655
132,341
20,694
143,267
21,698
13,215
3,238
351,106 $ 208,285 $ 1,198,403
Included in originations are net fundings under revolving lines of credit of $6,263, $34,070, $151,888 and $59,236 as of the
fourth quarter 2018, third quarter 2018, second quarter 2018 and first quarter 2018, respectively.
48
The tables below show the contractual maturities of our loans for the dates indicated:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and 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
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans
December 31, 2019
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
158,769 $
18,663
57,159
4,636
239,227
85,188
27,251
6,600
358,266 $
1,102,774 $
170,092
168,827
37,613
1,479,306
377,850
49,818
11,978
1,918,952 $
944,995 $
301,367
27,142
270
1,273,774
167,868
693,348
3,198
2,138,188 $
December 31, 2018
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
191,088 $
37,284
53,845
9,397
291,614
87,581
30,376
7,748
417,319 $
844,015 $
124,289
143,909
39,807
1,152,020
330,282
56,914
12,997
1,552,213 $
896,910 $
273,737
30,290
—
1,200,937
174,349
743,525
3,965
2,122,776 $
$
$
$
$
Total
2,206,538
490,122
253,128
42,519
2,992,307
630,906
770,417
21,776
4,415,406
Total
1,932,013
435,310
228,044
49,204
2,644,571
592,212
830,815
24,710
4,092,308
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 originated and acquired loans with maturities over one year is as follows at the dates
indicated:
Fixed
December 31, 2019
Variable
Total
Balance
Weighted
average rate
Balance
Weighted
average rate
Balance
Weighted
average rate
Commercial
Commercial and industrial(1)
Owner occupied commercial real estate
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans with > 1 year maturity
$ 1,073,181
229,757
49,147
270
1,352,355
230,368
323,792
12,156
$ 1,918,671
974,133
232,968
143,270
37,613
1,387,984
3.97% $
4.87%
5.19%
4.99%
4.22%
288,016
4.75%
413,370
3.66%
5.52%
3,020
4.20% $ 2,092,390
4.36% $ 2,047,314
462,725
4.79%
192,417
4.61%
37,883
4.38%
2,740,339
4.46%
518,384
4.46%
737,162
4.54%
4.94%
15,176
4.48% $ 4,011,061
4.16%
4.99%
4.76%
4.39%
4.34%
4.59%
4.15%
5.40%
4.34%
49
Fixed
December 31, 2018
Variable
Total
Balance
Weighted
average rate
Balance
Weighted
average rate
Balance
Weighted
average rate
Commercial
Commercial and industrial(1)
Owner occupied commercial real estate
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans with > 1 year maturity
$
933,202
195,354
44,351
21
1,172,928
209,759
361,147
13,672
$ 1,757,506
807,139
192,133
124,234
39,786
1,163,292
3.92% $
4.61%
5.00%
4.50%
4.14%
273,115
4.70%
429,909
3.56%
5.27%
3,196
4.10% $ 1,869,512
4.98% $ 1,740,341
387,487
5.09%
168,585
5.21%
39,807
4.81%
2,336,220
5.02%
482,874
5.11%
791,056
4.61%
5.57%
16,868
4.94% $ 3,627,018
4.41%
5.04%
5.15%
4.81%
4.58%
4.93%
4.13%
5.33%
4.53%
(1) Included in commercial fixed rate loans are loans totaling $403,700 and $473,440 as of December 31, 2019 and 2018,
respectively, that have been swapped to variable rates at current market pricing. Included in the commercial segment
are tax exempt loans totaling $701,825 and $685,644 with a weighted average rate of 3.41% and 3.27% at
December 31, 2019 and 2018, respectively.
Accretable yield
At December 31, 2019, the accretable yield balance on loans accounted for under ASC 310-30 was $28.1 million compared
to $35.9 million at December 31, 2018. We have remeasured the expected cash flows during 2019 for all 22 remaining loan
pools accounted for under ASC 310-30 utilizing the same cash flow methodology used at the time of acquisition. This
remeasurement resulted in a net $5.3 million and $8.5 million reclassification from non-accretable difference to accretable
yield during 2019 and 2018, respectively.
In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on loans outside the
scope of ASC 310-30 are also accreted to interest income over the life of the loans. Total remaining accretable yield and fair
value mark were as follows for the dates indicated:
Remaining accretable yield on loans accounted for under ASC 310-30
Remaining accretable fair value mark on acquired loans
Total remaining accretable yield and fair value mark
Asset quality
December 31, 2019 December 31, 2018
35,901
$
8,659
44,560
28,134 $
34,861 $
6,727
$
Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our 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
50
are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more
detail below.
Our internal risk rating system uses a series of grades which reflect our assessment of the credit quality of loans based on an
analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements. Loans that
are perceived to have acceptable risk are categorized as “Pass” loans. “Special mention” loans represent loans that have
potential credit weaknesses that deserve close attention. Special mention loans include borrowers that have potential
weaknesses or unwarranted risks that, unless corrected, may threaten the borrower's ability to meet debt service requirements.
However, these borrowers are still believed to have the ability to respond to and resolve the financial issues that threaten their
financial situation. Loans classified as “Substandard” have a well-defined credit weakness and are inadequately protected by
the current paying capacity of the obligor or of the collateral pledged, if any. Although these loans are identified as potential
problem loans, they may never become non-performing. Substandard loans have a distinct possibility of loss if the
deficiencies are not corrected. “Doubtful” loans are loans that management believes that collection of payments in
accordance with the terms of the loan agreement are highly questionable and improbable. Doubtful loans are deemed
impaired and put on non-accrual status.
In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan
agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its
original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to
borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered “troubled debt
restructurings” or "TDRs" in accordance with ASC 310-40. 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 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 and past due loans
Non-performing assets consist of non-accrual loans, TDRs on non-accrual and OREO. Non-accrual loans and TDRs 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. Interest income that would have been recorded had non-accrual loans
performed in accordance with their original contract terms during 2019 and 2018 was $1.7 million and $1.4 million,
respectively.
All loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2019 and 2018, 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.
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. Originated and acquired loans that are 90 days or more past due are put on non-accrual status unless
the loan is well secured and in the process of collection.
51
The following table sets forth the originated and acquired non-performing assets and past due loans as of the dates presented:
December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015
Non-accrual loans:
Non-accrual loans, excluding
restructured loans
Restructured loans on non-accrual
Non-performing loans
OREO
Other repossessed assets
$
Total non-performing assets
$
16,894 $
4,854
21,748
7,300
—
29,048 $
21,017 $
3,439
24,456
10,596
—
35,052 $
13,745 $
7,255
21,000
10,491
—
31,491 $
14,009 $
16,708
30,717
15,662
—
46,379 $
7,854
17,793
25,647
20,814
894
47,355
Loans 30-89 days past due and
still accruing interest
Loans 90 days or more past due
and still accruing interest
Non-accrual loans
Total past due and non-accrual
loans
Accruing restructured loans
ALL
Non-performing loans to total
loans
Total 90 days past due and still
accruing interest and non-
accrual loans to total originated
and acquired loans
Total non-performing assets to
total loans and OREO
ALL to non-performing loans
$
5,772 $
4,610 $
3,681 $
2,296 $
6,716
958
21,748
895
24,456
150
21,000
—
30,717
$
$
28,478 $
6,885 $
39,064
29,961 $
5,944 $
35,692
24,831 $
8,461 $
31,264
33,013 $
5,766 $
29,174
166
25,647
32,529
8,403
27,119
0.49%
0.60%
0.66%
1.07%
0.99%
0.52%
0.63%
0.69%
1.13%
1.08%
0.66%
179.62%
0.85%
145.94%
0.99%
148.88%
1.61%
94.98%
1.81%
105.74%
During 2019, total non-performing loans decreased $2.7 million, or 11.1%, from December 31, 2018. During 2019, accruing
restructured loans increased $0.9 million. Total non-performing assets to total loans and OREO decreased to 0.66% at
December 31, 2019 from 0.85% at December 31, 2018.
Loans 30-89 days past due and still accruing interest increased $1.2 million from December 31, 2018 to December 31, 2019
and loans 90 days or more past due and still accruing interest increased $0.1 million from December 31, 2018 to
December 31, 2019. During 2018, total non-performing loans increased $3.5 million, or 16.5%, from December 31, 2017 due
to acquired Peoples loans, partially offset by paydowns during the period.
52
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, 2019:
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
$ 2,165,361 $ 2,165,853 100.0% $ 8,229 $ 5,583 67.8% $ 2,173,590 $ 2,171,436 99.9%
413,733
245,459
41,836
2,866,389
413,041
99.8%
245,003 99.8%
41,585 99.4%
2,865,482 100.0%
2,188
320
5,559
16,296
1,436
65.6%
317 99.1%
934 16.8%
50.7%
8,270
415,921
245,779
47,395
2,882,685
414,477
99.7%
245,320 99.8%
42,519 89.7%
99.7%
2,873,752
507,180
648,313
20,990
4,042,872
99.7%
505,479
648,741 100.1%
20,990 100.0%
4,040,692 99.9%
—
3,047
46
19,389
—
2,915
0.0%
95.7%
40 87.0%
11,225 57.9%
507,180
651,360
21,036
4,062,261
99.7%
505,479
651,656 100.1%
21,030 99.9%
4,051,917 99.7%
32,800
30,749
93.7%
9,245
3,812
41.2%
42,045
34,561
82.2%
65,901
3,354
102,055
93,817
109,183
722
305,777
64,601
3,265
98,615
92,180
107,341
98.0%
97.3%
96.6%
98.3%
98.3%
736 101.9%
298,872 97.7%
1,048
—
10,293
576
6,483
10
17,362
828
—
4,640
459
5,414
79.0%
—
45.1%
79.7%
83.5%
10 100.0%
10,523 60.6%
66,949
3,354
112,348
94,393
115,666
732
323,139
65,429
3,265
103,255
92,639
112,755
97.7%
97.3%
91.9%
98.1%
97.5%
746 101.9%
309,395 95.7%
19,179
15,300 79.8%
42,780
10,370
—
32,788 76.6%
6,006 57.9%
0.0%
—
—
—
—
—
—
0.0%
19,179
15,300 79.8%
—
—
—
0.0%
0.0%
0.0%
42,780
10,370
—
32,788 76.6%
6,006 57.9%
0.0%
—
72,329
54,094 74.8%
$ 4,420,978 $ 4,393,658 99.4% $ 36,751 $ 21,748 59.2% $ 4,457,729 $ 4,415,406 99.1%
54,094 74.8%
72,329
0.0%
—
—
Originated:
Commercial:
Commercial and industrial
Owner occupied commercial real
estate
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner
occupied
Residential real estate
Consumer
Total originated loans
Acquired:
Commercial:
Commercial and industrial
Owner occupied commercial real
estate
Food and agriculture
Total commercial
Commercial real estate
Residential real estate
Consumer
Total acquired 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
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.
53
Originated and acquired ALL
For all originated and acquired loans, 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 and commercial real estate 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. We have identified four primary loan segments that are further
stratified into 11 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
Food and 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. In order to address our
lack of historical loss data encompassing a full economic cycle, 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”). For originated and acquired 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.
The collective resulting ALL for originated and acquired loans 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.
54
During 2019, the Company recorded $11.7 million of provision for originated and acquired loan losses to support originated
loan growth and net charge-offs. Included in provision expense was $6.6 million related to one previously acquired
commercial loan that was charged-off during 2019. For originated and acquired loans, the Company recorded charge-offs of
$8.6 million and recoveries of $0.3 million during the year ended December 31, 2019. Specific reserves on impaired loans
totaled $1.8 million at December 31, 2019.
During 2018, the Company recorded $5.0 million of provision for originated and acquired loan losses to support originated
loan growth and net charge-offs. For originated and acquired loans, the Company recorded charge-offs of $2.1 million, which
were mostly offset by recoveries of $1.4 million during the year ended December 31, 2018. Specific reserves on impaired
loans totaled $1.2 million at December 31, 2018.
310-30 ALL
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 2019 and 2018,
these remeasurements 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.
During 2019, loans accounted for under ASC 310-30 had recoupment of $51 thousand. During 2018, loans accounted for
under ASC 310-30 had provision of $222 thousand.
Total ALL
After considering the above-mentioned factors, we believe that the ALL of $39.1 million is adequate to cover probable losses
inherent in the loan portfolio at December 31, 2019. 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.
55
The following table presents, by class stratification, the changes in the ALL during the years listed:
December 31, 2019
Originated
ASC
and acquired 310-30
loans
loans
As of and for the years ended
December 31, 2018
December 31, 2017
Originated ASC
and acquired 310-30
loans
loans
Originated ASC
and acquired 310-30
loans
loans
Total
Total
Total
$
35,461 $
231 $
35,692 $
31,193 $
71 $
31,264 $
28,949 $
225 $
29,174
(7,422)
—
(7,422)
(833)
(62)
(895)
(10,342)
—
(10,342)
(116)
(124)
(937)
(8,599)
328
(8,271)
—
—
—
—
—
—
(116)
(11)
—
(11)
—
(124)
(937)
(8,599)
328
(8,271)
(118)
(1,134)
(2,096)
1,389
(707)
—
—
(62)
—
(62)
(118)
(1,134)
(2,158)
1,389
(769)
(236)
(737)
(11,315)
433
(10,882)
—
—
—
—
—
—
—
(236)
(737)
(11,315)
433
(10,882)
11,694
(51)
11,643
4,975
222
5,197
13,126
(154)
12,972
Beginning allowance for
loan losses
Charge-offs:
Commercial
Commercial real
estate non-owner
occupied
Residential real
estate
Consumer
Total charge-offs
Recoveries
Net charge-offs
Provision
(recoupment) for
loan loss
Ending allowance for loan
losses
$
38,884 $
180 $
39,064 $
35,461 $
231 $
35,692 $
31,193 $
71 $
31,264
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
0.20%
0.00%
0.19%
0.02%
0.07%
0.02%
0.38%
0.00%
0.36%
0.89%
0.33%
0.88%
0.88%
0.33%
0.87%
1.02%
0.06%
0.98%
178.79%
148.88%
0.00%
$ 4,361,312 $ 54,094 $ 4,415,406 $ 4,021,429 $ 70,879 $ 4,092,308 $ 3,058,324 $ 120,623 $ 3,178,947
148.54%
145.00%
145.94%
179.62%
0.00%
0.00%
4,228,007
21,748
60,219
—
4,288,226
21,748
3,728,817
24,456
90,786
—
3,819,603
24,456
2,897,316
21,000
132,130
—
3,029,446
21,000
56
Beginning allowance for loan losses
Charge-offs:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total charge-offs
Recoveries
Net charge-offs
Provision (recoupment) for loan loss
Ending allowance for loan losses
Ratio of net charge-offs to average total loans during the
$
period, respectively
Ratio of ALL to total loans outstanding at period end,
respectively
Ratio of ALL to total non-performing loans at period end,
respectively
Total loans
Average total loans outstanding during the period
Non-performing loans
As of and for the years ended
December 31, 2016
ASC
310-30
loans
Originated
and acquired
loans
26,042 $
$
Total
1,077 $
27,119
December 31, 2015
ASC
310-30
loans
Originated
and acquired
loans
16,892 $
$
(20,684)
(280)
(408)
(771)
(22,143)
594
(21,549)
24,456
28,949 $
—
(41)
—
(6)
(47)
—
(47)
(805)
225 $
(20,684)
(321)
(408)
(777)
(22,190)
594
(21,596)
23,651
29,174
$
(1,911)
(222)
(208)
(1,196)
(3,537)
609
(2,928)
12,078
26,042 $
721 $
—
—
—
(10)
(10)
—
(10)
366
1,077 $
Total
17,613
(1,911)
(222)
(208)
(1,206)
(3,547)
609
(2,938)
12,444
27,119
0.85%
0.03%
0.80%
0.36%
0.01%
0.12%
1.07%
0.15%
1.02%
1.09%
0.53%
1.05%
94.24%
$ 2,715,069 $
2,530,464
30,717
0.00%
145,852 $
170,330
—
94.98%
101.54%
2,860,921 $ 2,384,843 $
2,700,794
30,717
2,323,527
25,647
0.00%
105.74%
202,830 $ 2,587,673
2,532,795
209,268
25,647
—
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
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
$
$
$
$
December 31, 2019
Total loans
% of total loans
Related ALL
2,992,307
630,906
770,417
21,776
4,415,406
67.8% $
14.3%
17.4%
0.5%
100.0% $
December 31, 2018
Total loans
% of total loans
Related ALL
2,644,571
592,212
830,815
24,710
4,092,308
64.6% $
14.5%
20.3%
0.6%
100.0% $
December 31, 2017
Total loans
% of total loans
Related ALL
ALL as a %
of total ALL
77.9%
12.4%
8.9%
0.8%
100.0%
30,442
4,850
3,468
304
39,064
ALL as a %
of total ALL
76.1%
12.3%
10.6%
1.0%
100.0%
27,137
4,406
3,800
349
35,692
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
1,874,605
563,049
716,237
25,056
3,178,947
59.0% $
17.7%
22.5%
0.8%
100.0% $
57
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Deposits
$
$
$
$
December 31, 2016
Total loans
% of total loans
Related ALL
1,560,430
526,792
744,885
28,814
2,860,921
54.6% $
18.4%
26.0%
1.0%
100.0% $
December 31, 2015
Total loans
% of total loans
Related ALL
1,427,420
442,885
684,002
33,366
2,587,673
55.2% $
17.1%
26.4%
1.3%
100.0% $
ALL as a %
of total ALL
64.6%
19.3%
15.0%
1.1%
100.0%
18,821
5,642
4,387
324
29,174
ALL as a %
of total ALL
63.6%
15.4%
19.5%
1.5%
100.0%
17,261
4,166
5,281
411
27,119
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, 2019 and 2018:
Increase (decrease)
Non-interest bearing demand deposits
Interest bearing demand deposits
Savings accounts
Money market accounts
Total transaction deposits
Time deposits < $250,000
Time deposits > $250,000
Total time deposits
Total deposits
December 31, 2019
December 31, 2018
Amount
$ 1,184,945
738,496
542,531
1,213,007
3,678,979
894,459
163,694
1,058,153
23.6% $ 112,916
50,241
15.2%
2,050
11.9%
58,680
25.5%
223,887
76.2%
(34,243)
20.5%
11,867
3.3%
(22,376)
23.8%
$ 4,737,132 100.0% $ 4,535,621 100.0% $ 201,511
25.0% $ 1,072,029
688,255
15.6%
540,481
11.5%
1,154,327
25.6%
3,455,092
77.7%
928,702
18.9%
151,827
3.4%
1,080,529
22.3%
% Change
10.5%
7.3%
0.4%
5.1%
6.5%
(3.7)%
7.8%
(2.1)%
4.4%
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to
$250,000 as of December 31, 2019:
Three months or less
Over 3 months through 6 months
Over 6 months through 12 months
Thereafter
Total time deposits > $250,000
$
December 31, 2019
21,142
30,773
54,079
57,700
163,694
$
Total deposits increased $201.5 million, or 4.4% from the prior year, driven by transaction deposit growth. The mix of
transaction deposits to total deposits improved to 77.7% at December 31, 2019, from 76.2% at December 31, 2018, due to
our continued focus on developing long-term banking relationships.
At December 31, 2019 and 2018, time deposits that were scheduled to mature within 12 months totaled $726.9 million and
$685.4 million, respectively. Of the $726.9 million in time deposits scheduled to mature within 12 months at December 31,
58
2019, $106.0 million were in denominations of $250,000 or more, and $620.9 million were in denominations less than
$250,000. The aggregate amount of certificates of deposit in denominations that meet or exceed the FDIC insurance limit was
$163.7 million and $151.8 million at December 31, 2019 and 2018, respectively. Note 12 to the consolidated financial
statements provides a maturity schedule of time deposits outstanding at December 31, 2019.
Other borrowings
As of December 31, 2019 and 2018, the Bank sold securities under agreements to repurchase totaling $56.9 million and $66.0
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 $1.1 billion at December 31, 2019. The Bank utilizes its FHLB line of credit as a
funding mechanism for originated loans and loans held for sale. At December 31, 2019 and 2018, the Bank had $192.7
million and $234.3 million in line of credit advances from the FHLB, respectively, that mature within a day. At December 31,
2019, the Bank had one term advance totaling $15.0 million, which had a fixed interest rate of 2.33% and a maturity date in
October 2020. At December 31, 2018, the Bank had $67.3 million in term advances from the FHLB with fixed interest rates
between 1.55% - 2.33% and maturity dates of 2019 - 2020. The Bank pledged investment securities and loans as collateral for
FHLB advances. Investment securities pledged were $17.6 million at December 31, 2019 and $16.0 million at December 31,
2018. Loans pledged were $1.5 billion at December 31, 2019 and $1.6 billion at December 31, 2018. Interest expense related
to FHLB advances totaled $6.2 million and $2.6 million for the years ended December 31, 2019 and 2018, respectively.
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, 2019
and 2018, our subsidiary bank and the consolidated holding company exceeded all capital ratio requirements under prompt
corrective action and other regulatory requirements, as further detailed in note 14 of our consolidated financial statements.
Results of Operations
Our net income depends largely on net interest income, which is the difference between interest income from interest earning
assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan
losses and non-interest income, such as service charges, bank card income, 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
We recorded net income of $80.4 million, or $2.55 per diluted share, during 2019, compared to net income of $61.5 million,
or $1.95 per diluted share, during 2018. Net income during 2018 included $6.3 million, after tax, in non-recurring expenses
related to the acquisition of Peoples. Adjusting for this item, net income was $67.8 million, or $2.16 per diluted share.
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.
59
The table below presents the components of net interest income on a fully taxable equivalent basis for the years ended
December 31, 2019, 2018 and 2017. 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 and loans.
Interest earning assets:
Originated loans FTE(1)(2)(3)
Acquired loans
ASC 310-30 loans
Loans held for sale
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(2)
For the year ended
December 31, 2019
For the year ended
December 31, 2018
For the year ended
December 31, 2017
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
$ 3,838,229 $ 183,502
4.78% $ 3,166,374
562,443
22,951
6.00%
90,786
13,041 21.66%
73,644
4,407 3.89%
382,806
60,219
113,183
4.50% $ 2,779,344 $ 112,817
$ 142,461
7,256
117,972
32,610
5.80%
22,505
19,155 21.10%
132,130
523
3,380 4.59%
8,231
4.06%
6.15%
17.03%
6.35%
713,686
15,472
2.17%
883,737
18,493
2.09%
875,430
16,615
1.90%
207,784
28,060
5,825
1,770
2.80%
6.31%
258,809
18,093
7,252
1,096
2.80%
6.06%
296,093
15,249
8,226
839
2.78%
5.50%
24,106
698
2.90%
77,808
1,426
1.83%
128,871
1,492
1.16%
$ 5,368,073 $ 247,666
4.61% $ 5,131,694
$ 225,873
4.40% $ 4,353,320 $ 170,273
3.91%
Cash and due from banks
Other assets
Allowance for loan losses
Total assets
76,788
430,402
(38,142)
$ 5,837,121
88,847
419,607
(32,616)
67,993
315,660
(31,732)
$ 5,607,532
$ 4,705,241
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
Demand deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders'
equity
Net interest income FTE(2)
Interest rate spread FTE(2)
Net interest earning assets
Net interest margin FTE(2)
Average transaction deposits
Average total deposits
Ratio of average interest earning
assets to average interest bearing
liabilities
$ 2,426,963 $ 13,277
16,526
1,074,506
0.55% $ 2,418,326
1,132,748
1.54%
$
8,758
12,283
0.36% $ 1,895,852 $
1.08% 1,146,380
6,003
10,169
0.32%
0.89%
60,445
269,207
668
6,300
1.11%
2.34%
87,691
133,932
295
2,618
0.34%
1.95%
88,390
113,433
164
1,779
$ 3,831,121 $ 36,771
0.96% $ 3,772,697
$ 23,954
0.63% $ 3,244,055 $ 18,115
0.19%
1.57%
0.56%
1,159,080
108,997
5,099,198
737,923
$ 5,837,121
1,082,158
90,257
4,945,112
662,420
$ 5,607,532
873,265
41,205
4,158,525
546,716
$ 4,705,241
$ 210,895
$ 201,919
$ 152,158
$ 1,536,952
$ 1,358,997
$ 1,109,265
3.65%
3.77%
3.93%
3.93%
$ 3,586,043
4,660,549
$ 3,500,484
4,633,232
$ 2,769,117
3,915,497
3.35%
3.50%
140.12%
136.02%
134.19%
(1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2) Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for 2019 and 2018 and 35% for 2017. The taxable equivalent
adjustments included above are $5,065, $4,482 and $5,852 for the years ended 2019, 2018 and 2017, respectively.
(3) Loan fees included in interest income totaled $6,328, $6,027 and $5,208 during 2019, 2018 and 2017, respectively.
60
Net interest income totaled $205.8 million, $197.4 million and $146.3 million during the years ended 2019, 2018 and 2017,
respectively. Fully taxable equivalent net interest income totaled $210.9 million, $201.9 million and $152.2 million during
2019, 2018 and 2017, respectively. The fully taxable equivalent net interest margin remained consistent at 3.93% during 2019
and 2018 as the increase in average earning assets and earning asset yields were offset by an increase in the cost of funds. The
yield on earning assets increased 21 basis points, led by a 28 basis point increase in the originated loan portfolio yields due to
higher new loan yields. The cost of funds increased 33 basis points to 0.96% for the year ended December 31, 2019. The
yield on the ASC 310-30 loan portfolio was 21.66% and 21.10% during 2019 and 2018, respectively.
Average loans and loans held for sale comprised $4.4 billion, or 81.9%, of total average interest earning assets during 2019,
compared to $3.9 billion, or 75.9%, during 2018. The increase in average loan balances was driven by a $671.9 million
increase in originated loans. Originated loan yields were 4.78% and 4.50% during 2019 and 2018, respectively, benefiting
from higher new loan yields. The yield on the ASC 310-30 loan portfolio was 21.66% and 21.10% during 2019 and 2018,
respectively.
Average investment securities comprised 17.2% and 22.3% of total interest earning assets during 2019 and 2018,
respectively. The decrease in the investment portfolio was a result of scheduled paydowns and increased pre-payments of
MBS and reflects the re-mixing of the interest-earning assets as we have utilized the paydowns of the investment portfolio to
fund loan originations.
Average balances of interest bearing liabilities increased $58.4 million during 2019 compared to 2018. The increase was
driven by FHLB advances of $135.3 million and interest bearing demand, savings and money market deposits of $8.6
million, partially offset by decreases in time deposits and securities sold under agreements to repurchase of $58.2 million and
$27.2 million, respectively. Average balances of interest bearing liabilities increased $528.6 million during 2018 compared to
2017. The increase in average balances of interest bearing liabilities during 2018 was driven by interest bearing demand,
savings and money market deposits of $522.5 million and FHLB advances of $20.5 million, partially offset by decreases in
time deposits and securities sold under agreements to repurchase of $14.3 million. The Peoples acquisition added $730
million in total deposits on January 1, 2018. Total interest expense related to interest bearing liabilities was $36.8 million and
$24.0 million during 2019 and 2018, respectively, at an average cost of 0.96% and 0.63% during 2019 and 2018, respectively.
Additionally, the cost of deposits increased 19 basis points to 0.64% during 2019, compared to 0.45% during 2018, due to
higher savings, money market and time deposits rates.
61
The following table summarizes the changes in net interest income on a fully 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
2019, 2018 and 2017:
The year ended December 31, 2019
The year ended December 31, 2018
compared to
the year ended December 31, 2018
Increase (decrease) due to
compared to
the year ended December 31, 2017
Increase (decrease) due to
Volume
Rate
Net
Volume
Rate
Net
Interest income:
Originated loans FTE(1)(2)(3)
Acquired loans
ASC 310-30 loans
Loans held for sale
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:
$ 32,120 $ 8,921 $ 41,041 $ 17,413 $ 12,231 $ 29,644
25,354
(3,350)
2,857
1,878
(974)
257
(10,770)
(6,620)
1,540
(3,687)
(1,430)
629
(9,659)
(6,114)
1,027
(3,021)
(1,427)
674
25,771
(8,723)
3,002
174
(1,045)
172
(417)
5,373
(145)
1,704
71
85
1,111
506
(513)
666
3
45
(1,555)
(66)
$ 10,227 $ 11,566 $ 21,793 $ 35,828 $ 19,772 $ 55,600
(936)
(728)
870
827
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
$
$
47 $ 4,472 $ 4,519 $ 1,892 $
5,139
674
516
10,801
863 $ 2,755
2,114
(148)
131
(2)
839
401
5,839
2,143
765 $ 8,976 $ 33,685 $ 16,076 $ 49,761
4,243
373
3,682
12,817
2,262
133
438
3,696
(896)
(301)
3,166
2,016
8,211 $
(1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2) Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for 2019 and 2018 and 35% for 2017.
The taxable equivalent adjustments included above are $5,065, $4,482 and $5,852 for the years ended 2019, 2018 and
2017, respectively.
(3) Loan fees included in interest income totaled $6,328, $6,027 and $5,208 for the years ended December 31, 2019, 2018
and 2017, 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, 2019
December 31, 2018
December 31, 2019
December 31, 2018
Average
balance
Average
rate
paid
Average
Average
balance
rate
paid
Average
balance
$ 1,177,958 0.00%
679,884
1,221,719
527,814
1,062,511
$ 4,669,886
0.23%
671,362
0.69% 1,204,351
0.43%
539,914
1.67% 1,099,205
0.64% $ 4,619,243
$ 1,104,411 0.00% $ 1,159,080
686,862
0.13%
1,201,377
0.61%
538,724
0.46%
1.22%
1,074,506
0.52% $ 4,660,549
Average
balance
Average
rate
paid
0.00% $ 1,082,158
0.22%
677,252
0.75% 1,178,768
0.50%
562,306
1.54% 1,132,748
0.64% $ 4,633,232
Average
rate
paid
0.00%
0.13%
0.48%
0.40%
1.08%
0.45%
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 $6.7 million on originated and acquired loans that were established at the time of
62
acquisition. The determination of the ALL, and the resultant provision for loan losses, is subjective and involves significant
estimates and assumptions.
Below is a summary of the provision for loan losses recorded in the consolidated statements of operations for the years
indicated:
Provision for loan losses on originated and acquired loans
(Recoupment) provision for loans accounted for under ASC 310-30
Total provision for loan losses
2019
$ 11,694
(51)
$ 11,643
2018
$ 4,975
222
$ 5,197
2017
$ 13,126
(154)
$ 12,972
Provision for loan loss expense of $11.6 million and $5.2 million was recorded during 2019 and 2018, respectively. To
support loan growth and net charge-offs, the Company recorded $11.7 million of provision for loan losses on originated and
acquired loans during 2019, including $6.6 million related to one previously acquired commercial loan. Net charge-offs on
originated and acquired loans during 2019 and 2018 totaled $8.3 million and $0.7 million, respectively. The originated and
acquired allowance for loan losses was 0.89% of total originated and acquired loans at December 31, 2019 compared to
0.88% at December 31, 2018.
During 2019 and 2018 we recorded recoupment of $51 thousand and provision of $222 thousand, respectively, for loans
accounted for under ASC 310-30 in connection with our remeasurements 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 for the years presented:
For the years ended December 31,
2019 vs 2018
Increase (decrease)
2018 vs 2017
Increase (decrease)
Service charges
Bank card fees
Mortgage banking income
Bank-owned life insurance income
Other non-interest income
OREO-related income
$
Total non-interest income
$
2019
17,895 $
14,595
42,346
1,713
5,888
315
82,752 $
2018
18,092 $
14,489
30,107
1,791
5,379
917
70,775 $
2017
14,634
12,026
2,154
1,871
8,082
438
39,205
$
$
(197)
106
12,239
(78)
509
(602)
11,977
(1.1)%
0.7 %
40.7 %
(4.4)%
9.5 %
(65.6)%
16.9 %
$
$
% Change
23.6 %
20.5 %
>100%
(4.3)%
(33.4)%
>100%
80.5 %
3,458
2,463
27,953
(80)
(2,703)
479
31,570
Amount
% Change Amount
Non-interest income totaled $82.8 million and $70.8 million during 2019 and 2018, respectively. Mortgage banking income
increased $12.2 million, when compared to the prior year, primarily due to higher levels of 1-4 family mortgage loans sold in
the secondary market during 2019. Other non-interest income increased $0.5 million for the year ended December 31, 2019,
compared to the prior year, primarily due to increases in swap fee income. OREO-related income decreased $0.6 million
during the year ended December 31, 2019. 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. Services charges and bank
card fees decreased $0.1 million during the year ended December 31, 2019 compared to 2018.
63
Non-interest expense
The table below details the components of non-interest expense for the years presented:
Salaries and benefits
Occupancy and equipment
Telecommunications and data
processing
Marketing and business
development
FDIC deposit insurance
Bank card expenses
Professional fees
Other non-interest expense
Problem asset workout
Gain on OREO sales, net
Core deposit intangible asset
amortization
Total non-interest expense
$
For the years ended December 31,
2019 vs 2018
Increase (decrease)
2018 vs 2017
Increase (decrease)
$
2019
122,732
27,336
$
2018
114,939
28,493
$
2017
80,188
20,994
Amount
$
7,793
(1,157)
% Change Amount
6.8 % $
(4.1)%
34,751
7,499
% Change
43.3 %
35.7 %
8,754
10,098
7,188
(1,344)
(13.3)%
2,910
40.5 %
3,897
1,049
4,780
3,256
11,765
3,186
(7,193)
4,513
2,475
5,453
6,059
13,073
2,549
(488)
2,683
2,762
3,986
3,330
10,360
3,994
(4,150)
(616)
(1,426)
(673)
(2,803)
(1,308)
637
(6,705)
(13.6)%
(57.6)%
(12.3)%
(46.3)%
(10.0)%
25.0 %
>100%
1,830
(287)
1,467
2,729
2,713
(1,445)
3,662
1,183
180,745
2,170
189,334
$
5,342
136,677
$
$
(987)
(8,589)
(45.5)%
(4.5)% $
(3,172)
52,657
68.2 %
(10.4)%
36.8 %
82.0 %
26.2 %
(36.2)%
(88.2)%
(59.4)%
38.5 %
Non-interest expense totaled $180.7 million and $189.3 million during 2019 and 2018, respectively. The decrease during
2019 was primarily driven by an increase of net gains on the sale of OREO properties of $6.7 million and efficiencies gained
from the integration of the Peoples acquisition. FDIC deposit insurance decreased during 2019 due to assessment credits and
improved ratings. Salaries and benefits increased $7.8 million primarily due to higher mortgage banking commissions. The
increases in 2018 were primarily driven by the Peoples acquisition. Included in non-interest expense for the year ended
December 31, 2018 were non-recurring acquisition costs totaling $8.0 million, or $6.3 million after tax.
As part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients, the
Company consolidated four banking centers in the Colorado and Kansas City markets during 2019. A fair value impairment
charge of $0.9 million was recorded to other non-interest expense related to the consolidations, with an expected earn back of
less than one year.
Income taxes
Income taxes are accounted for in accordance with ASC Topic 740. 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 $15.8 million during 2019 compared to $12.2 million during 2018, an increase of $3.6 million.
Included in income tax expense was $2.2 million and $1.3 million of tax benefits from stock compensation activity during
2019 and 2018, respectively. Adjusting for the above mentioned stock compensation activity, the effective tax rate for 2019
was 18.7% compared to an adjusted rate of 18.3% for 2018. As of December 31, 2019, our marginal tax rate (the rate we pay
on each incremental dollar of earnings) was approximately 23%. 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. The lower effective tax rates compared to the federal statutory tax rate
was primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of
these items to pre-tax income.
64
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, 2019 and 2018:
Cash and due from banks
Interest bearing bank deposits
Unencumbered investment securities, at fair value
Total
$
December 31, 2019 December 31, 2018
109,056
500
573,637
683,193
109,690
500
324,918
435,108
$
$
$
Total on-balance sheet liquidity decreased $248.1 million from December 31, 2018 to December 31, 2019. The decrease was
due to lower unencumbered available-for-sale and held-to-maturity securities balances of $248.7 million.
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. The Bank pledged investment securities and loans as
collateral for FHLB advances. Investment securities pledged were $17.6 million at December 31, 2019 and $16.0 million at
December 31, 2018. The Bank also had loans pledged as collateral for FHLB advances of $1.5 billion at December 31, 2019
and $1.6 billion at December 31, 2018. FHLB advances, lines of credit and other short-term borrowing availability totaled
$1.1 billion, of which $207.7 million was used at December 31, 2019. The Bank can obtain additional liquidity through
FHLB advances if required, and also has access to federal funds lines of credit with correspondent banks.
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 anticipate having
access to other third party funding sources, including the ability to raise funds through the issuance of shares of our common
stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, that may also be a source of
liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a 12-month
period.
Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of
repurchase agreements, capital expenditures, operating expenses, and share repurchases. For additional information regarding
our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying
consolidated financial statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are originations, pay-offs and
pay downs of loans and purchases and sales of investment securities. At December 31, 2019, pledgeable investment securities
represented a significant 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 $0.8 billion at
December 31, 2019, inclusive of pre-tax net unrealized gains of $0.2 million on the available-for-sale securities portfolio.
Additionally, our held-to-maturity securities portfolio had $0.9 million of pre-tax net unrealized gains at December 31, 2019.
The gross unrealized gains and losses are detailed in note 4 of our consolidated financial statements. As of December 31,
2019, our investment securities portfolio consisted primarily of MBS, 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, 2019, $726.9 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 portion of those maturing time deposits
with transaction deposits and market-rate time deposits.
65
Under the Basel III Capital requirements, at December 31, 2019, 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 14 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. On
August 5, 2016, the Company announced that its Board of Directors authorized a 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, 2019
was $12.6 million. During the year ended December 31, 2019, we did not repurchase any shares of our common stock.
On January 21, 2020, our Board of Directors declared a quarterly dividend of $0.20 per common share, payable on March 13,
2020 to shareholders of record at the close of business on February 28, 2020.
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 utilizing 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.
66
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at
December 31, 2019 and 2018. During the year ended December 31, 2019, we decreased our asset sensitivity for a declining
rate environment as a result of the balance sheet mix toward more fixed rate assets. The table below illustrates the impact of
an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest
income based on the interest rate risk model at December 31, 2019 and 2018:
Hypothetical
shift in interest
rates (in bps)
200
100
(100)
% change in projected net interest income
December 31, 2019
December 31, 2018
6.16%
3.13%
(3.82)%
5.86%
2.98%
(4.84)%
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 longer duration loans. The strategy with respect to
liabilities has been to continue to emphasize transaction account growth, particularly non-interest or low interest bearing non-
maturing deposit accounts while building long-term client relationships. Non-maturing deposit accounts totaled 77.7% of
total deposits at December 31, 2019, compared to 76.2% at December 31, 2018. We currently have no brokered time
deposits.
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, 2019 and 2018, we had loan commitments totaling $850.3 million and $773.5 million, respectively, and
standby letters of credit that totaled $11.9 million and $10.6 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, 2019 and the expected timing of those payments:
Within
one year
After one but After three but
within three
years
within five
years
After five
years
— $
— $
Total
207,675
38,770
15,624
8,228
23,392
—
887
23,959
1,058,153
1,040
33,074 $ 16,664 $ 1,327,990
Federal Home Loan Bank advances
Operating lease obligations
Purchase obligations
Time deposits
Total
—
$ 207,675 $
9,651
5,267
10,075
12,430
726,903
306,251
$ 952,275 $ 325,977
$
$
67
Impact of Inflation and Changing Prices
The primary impact of inflation on our operations is reflected in increasing operating costs and 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.
68
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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, 2019 and 2018, the related consolidated statements of operations,
comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2019, 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, 2019, 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 26, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan losses related to loans collectively evaluated for impairment
As discussed in Notes 2 and 7 to the consolidated financial statements, the Company’s allowance for loan losses related
to loans collectively evaluated for impairment (general allowance) was $37.1 million of a total allowance for loan losses
of $39.1 million as December 31, 2019, or 0.88% of total loans. The Company estimated the general allowance by first
disaggregating the loan portfolio into segments based upon broad characteristics such as primary use and underlying
collateral. Within these segments, the portfolio was further disaggregated into classes of loans with similar attributes
69
and risk characteristics. The general allowance is determined at the class level, utilizing risk ratings, as well as internal
and peer loss ratios based upon historical losses to these classes. The general allowance is then adjusted by the estimated
loss emergence period for each loan class. Qualitative adjustments based upon specific factors, at the loan class level,
may then be determined and applied to the general allowance.
We identified the assessment of the general allowance as a critical audit matter because it involved significant
measurement uncertainty requiring complex auditor judgment, and knowledge and specialized skills in the industry. This
assessment encompassed the evaluation of the process used to estimate the quantitative reserve and qualitative
adjustments of the general allowance taking into consideration: (1) the historical loss rates and their key factors and
assumptions, including, (i) the disaggregation of the loan portfolio (both at the segment and class levels); (ii) the
Company’s own historical losses, including adjustments to those historical losses using industry peer loss data when the
Company’s own historical losses were insufficient or not representative of incurred losses; (iii) the evaluation of credit
risk through the loans’ assigned risk ratings; (iv) the determination of the length of time between a specific loss event and
when the first loss was identified (known as the estimated loss emergence period) and (2) qualitative adjustments that
were likely to cause the general allowance to differ from historical experience.
The primary procedures we performed to address the critical audit matter included the following. We tested certain
internal controls over the: (1) development and approval of the general allowance methodology; (2) historical loss rates
and their key factors and assumptions; (3) development of qualitative framework and the related adjustments; and (4)
analysis of the general allowance results, trends, and ratios. We evaluated the Company’s process to develop the general
allowance estimate by testing certain sources of data, factors, and assumptions that the Company used and considered
their relevance, including an evaluation of whether additional factors and alternative assumptions should be used. In
addition, we involved professionals with specialized skills, industry knowledge and experience in credit risk who
assisted in:
•
•
•
•
evaluating individual loan risk ratings for a selection of loans,
evaluating the Company’s general allowance methodology for compliance with U.S. generally accepted accounting
principles,
testing the development and determination of the Company’s historical loss rates and their key factors and
assumptions, and
evaluating the key assumptions in developing the qualitative factors and related framework, including the effect of
those factors on the general allowance.
We have served as the Company’s auditor since 2010.
Kansas City, Missouri
February 26, 2020
70
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2019 and 2018
(In thousands, except share and per share data)
December 31, 2019 December 31, 2018
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 $183,741 and $230,926 at
December 31, 2019 and December 31, 2018, 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:
$
$
$
109,690 $
500
110,190
638,249
182,884
29,751
4,415,406
(39,064)
4,376,342
117,444
7,300
112,151
115,027
11,361
194,813
5,895,512 $
1,184,945 $
738,496
1,755,538
1,058,153
4,737,132
56,935
207,675
126,850
5,128,592
Common stock, par value $0.01 per share: 400,000,000 shares authorized;
51,487,907 and 51,498,016 shares issued; 31,176,627 and 30,769,063 shares
outstanding at December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Retained earnings
Treasury stock of 20,189,082 and 20,582,459 shares at December 31, 2019 and
December 31, 2018, respectively, at cost
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
515
1,009,223
164,082
(408,962)
2,062
766,920
5,895,512 $
$
See accompanying notes to the consolidated financial statements.
109,056
500
109,556
791,102
235,398
27,555
4,092,308
(35,692)
4,056,616
48,120
10,596
109,986
115,027
13,470
159,240
5,676,666
1,072,029
688,255
1,694,808
1,080,529
4,535,621
66,047
301,660
78,332
4,981,660
515
1,014,399
106,990
(415,623)
(11,275)
695,006
5,676,666
71
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2019, 2018 and 2017
(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
Mortgage banking income
Bank-owned life insurance income
Other non-interest income
OREO-related income
Total non-interest income
Non-interest expense:
Salaries and benefits
Occupancy and equipment
Telecommunications and data processing
Marketing and business development
FDIC deposit insurance
Bank card expenses
Professional fees
Other non-interest expense
Problem asset workout
Gain on OREO sales, net
Core deposit intangible asset amortization
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Earnings per share—basic
Earnings per share—diluted
Weighted average number of common shares outstanding:
Basic
Diluted
2019
2018
2017
$
218,836 $
193,124 $
21,297
1,770
698
242,601
29,803
6,968
36,771
205,830
11,643
194,187
17,895
14,595
42,346
1,713
5,888
315
82,752
25,746
1,096
1,425
221,391
21,041
2,913
23,954
197,437
5,197
192,240
18,092
14,489
30,107
1,791
5,379
917
70,775
122,732
27,336
8,754
3,897
1,049
4,780
3,256
11,765
3,186
(7,193)
1,183
180,745
96,194
15,829
80,365 $
2.57 $
2.55
114,939
28,493
10,098
4,513
2,475
5,453
6,059
13,073
2,549
(488)
2,170
189,334
73,681
12,230
61,451 $
2.00 $
1.95
$
$
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
31,175,825
31,530,817
30,748,234
31,430,074
26,928,763
27,709,659
See accompanying notes to the consolidated financial statements.
72
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2019, 2018 and 2017
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Securities available-for-sale:
2019
80,365
$
2018
61,451
$
2017
14,579
$
Net unrealized gains (losses) arising during the period, net of tax
(expense) benefit of ($4,510), $876 and $1,871 for the years ended
December 31, 2019, 2018 and 2017, respectively.
Less: amortization of net unrealized holding gains to income, net of tax
benefit of $320, $361 and $828 for the years ended December 31,
2019, 2018 and 2017, respectively.
Other comprehensive income (loss)
Comprehensive income
14,352
(2,243)
(3,128)
(1,015)
13,337
93,702
$
(1,311)
(3,554)
57,897
$
(1,352)
(4,480)
10,099
$
See accompanying notes to the consolidated financial statements.
73
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended 2019, 2018 and 2017
(In thousands, except share and per share data)
Accumulated
Additional
Common
stock
paid-in
capital
984,087 $
—
3,648
Retained
earnings
55,454 $
14,579
—
Treasury
stock
(502,104) $
—
—
514 $
—
—
other
comprehensive
(loss) income, net
(1,762) $
—
—
Total
536,189
14,579
3,648
Balance, December 31, 2016
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(1)
Other comprehensive loss
Balance, December 31, 2017
Net income
Stock-based compensation
Issuance of stock under purchase and equity
compensation plans, including gain on reissuance
of treasury stock of $7,998, net
Reissuance of treasury stock of 3,398,477 shares for
acquisition of Peoples, Inc.
Cash dividends declared ($0.54 per share)
Reclassification of certain tax effects from
accumulated other comprehensive income(2)
Cumulative effect adjustment(3)
Other comprehensive loss
Balance, December 31, 2018
Net income
Stock-based compensation
Issuance of stock under purchase and equity
compensation plans, including gain on reissuance
of treasury stock of $6,010, net
Cash dividends declared ($0.75 per share)
Cumulative effect adjustment(4)
Other comprehensive income
Balance, December 31, 2019
$
$
$
$
1
—
—
—
515
—
—
—
—
—
—
—
—
515
—
—
—
—
—
—
515
(15,134)
—
(1,933)
—
970,668
—
4,420
$
—
(9,238)
—
—
60,795
61,451
—
6,842
—
1,933
—
(493,329) $
—
—
$
$
—
—
—
(4,480)
(6,242) $
—
—
(8,291)
(9,238)
—
(4,480)
532,407
61,451
4,420
(2,932)
—
9,736
42,243
—
—
(16,761)
67,970
—
—
—
—
1,479
26
—
106,990
80,365
—
—
—
—
(415,623) $
—
—
$
(1,479)
—
(3,554)
(11,275) $
—
—
6,804
110,213
(16,761)
—
26
(3,554)
695,006
80,365
4,869
—
(23,529)
256
—
164,082
6,661
—
—
—
(408,962) $
$
—
—
—
13,337
2,062
(3,384)
(23,529)
256
13,337
766,920
$
—
—
—
$ 1,014,399
—
4,869
(10,045)
—
—
—
$ 1,009,223
$
$
(1) The Company issued warrants to certain lead investors in 2009 and 2010. The remaining warrants were exercised
during the first quarter of 2017.
(2) Related to the adoption of Accounting Standards Update No. 2018-02, Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income.
(3) Related to the adoption of Accounting Standards Update No. 2017-12, Derivatives and Hedging: Targeted
Improvements to Accounting for Hedging Activities.
(4) Related to the adoption of Accounting Standards Update No. 2016-02, Leases. Refer to note 3 – Recent Accounting
Pronouncements of our consolidated financial statements for further details.
See accompanying notes to the consolidated financial statements.
74
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019, 2018 and 2017
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2019
2018
2017
$
80,365
$
61,451
$
14,579
Provision for loan losses
Depreciation and amortization
Current income tax receivable
Deferred income taxes
Net excess tax benefit 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
Gain on the sale of other real estate owned, net
Impairment on other real estate owned
Impairment on fixed assets related to banking center consolidations
Stock-based compensation
Operating lease payments
Acquisition-related costs
Change in other assets
Change in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of FHLB stock
Proceeds from redemption of FHLB stock
Purchase of FRB 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 held-to-maturity
Purchase of investment securities available-for-sale
Net increase in loans
Purchases of premises and equipment, net
Purchase of bank-owned life insurance
Proceeds from sales of loans
Proceeds from sales of other real estate owned
Net cash activity from acquisition
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Net (decrease) increase in repurchase agreements and other short-term borrowings
Advances from FHLB
FHLB repayments
Issuance of stock under purchase and equity compensation plans
Proceeds from exercise of stock options
Payment of dividends
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information during the period:
Cash paid for interest
Net tax payments (refunds)
Supplemental schedule of non-cash 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
Lease right-of-use assets obtained
Treasury stock reissued for acquisition
$
$
$
11,643
15,038
1,955
8,793
(2,160)
2,047
(15,590)
(39,922)
(1,317,547)
1,289,877
(1,713)
(7,193)
1,082
898
4,869
(5,294)
—
(697)
16,025
42,476
(16,761)
14,565
—
—
60,948
195,467
20,378
—
(10,201)
(45,745)
(312,844)
(11,204)
(20,000)
—
12,112
—
(113,285)
201,511
(9,112)
1,477,447
(1,571,432)
(6,229)
2,788
(23,530)
71,443
634
119,556
120,190
34,458
9,271
2,705
7,372
1,732
(30,474)
—
$
$
$
5,197
11,522
4,246
9,092
(1,286)
2,911
(23,115)
(27,009)
(1,005,850)
1,030,906
(1,791)
(488)
230
—
4,420
—
(7,957)
(3,654)
14,749
73,574
(16,463)
12,062
(4,716)
1,371
61,913
216,077
33,637
67
(40,735)
(72,555)
(382,441)
(6,277)
—
713
26,346
68,984
(102,017)
(173,849)
(64,416)
889,416
(750,696)
(772)
7,576
(16,624)
(109,365)
(137,808)
257,364
119,556
22,714
(2,345)
24,940
(21,202)
1,038
—
110,213
$
$
$
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
—
3,648
—
(2,691)
3,187
12,125
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
—
—
See accompanying notes to the consolidated financial statements.
75
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018 and 2017
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. The Company is headquartered in Denver, 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 101 banking centers as of December 31, 2019, located primarily 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 U.S. generally
accepted accounting principles (“GAAP”) and where applicable, with general practices in the banking industry or guidelines
prescribed by bank regulatory agencies. The consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the results presented. All such adjustments are of a normal recurring
nature. All significant intercompany balances and transactions have been eliminated in consolidation. Certain
reclassifications of prior years' amounts are made whenever necessary to conform to current period presentation. All amounts
are in thousands, except share data, or as otherwise noted.
The Company's significant accounting policies followed in the preparation of the consolidated financial statements are
disclosed in note 2. GAAP requires management to make estimates that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment
and available information. Management has made significant estimates in certain areas, such as the amount and timing of
expected cash flows from assets, the valuation of other real estate owned, 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 valuation of mortgage servicing rights, the
fair values of financial instruments, the allowance for loan losses, 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) 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.
b) 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
76
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 AOCI. 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.
c) Non-marketable securities—Non-marketable securities include FRB stock and FHLB stock. These securities have been
acquired for debt facility or regulatory purposes and are carried at cost.
d) 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 Topic 310 or ASC 310-30 (see additional information below). 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 Topic 310. Estimated fair values of acquired loans are based on a discounted cash flow methodology that considers
various factors including the type of loan and related collateral, the expected timing of cash flows, classification status, fixed
or variable interest rate, term of loan and whether or not the loan is amortizing, and a discount rate reflecting the Company’s
assessment of risk inherent in the cash flow estimates. Acquired 310-30 loans are grouped together according to similar
characteristics such as type of loan, loan purpose, geography, risk rating and underlying collateral and are treated as distinct
pools when applying various valuation techniques and, in certain circumstances, for the ongoing monitoring of the credit
quality and performance of the pools. Each pool is accounted for as a single loan for which the integrity is maintained
throughout the life of the asset. Discounts created when the loans are recorded at their estimated fair values at acquisition are
accreted over the remaining term of the loan as an adjustment to the related loan’s yield. Similar to originated loans described
below, the accrual of interest income on acquired loans that are not accounted for under ASC 310-30 is discontinued when the
collection of principal or interest, in whole or in part, is doubtful.
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. 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.
77
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. 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 originated and acquired 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.
e) 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 mortgage banking income 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.
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 net as a component of mortgage banking income 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.
f) 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.
78
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 6.
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.
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 remeasurement 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.
The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, effective January 1, 2020.
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.
g) 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, 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.
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.
79
h) 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.
i) Mortgage Servicing– Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is
retained, are initially capitalized at fair value and included in intangible assets, net on the consolidated statements of financial
condition. For subsequent measurement purposes, the Company measures servicing assets based on the lower of cost or
market using the amortization method. The values of these capitalized servicing rights are amortized as an offset to the loan
servicing income earned in relation to the servicing revenue expected to be earned. The carrying values of these rights are
reviewed quarterly for impairment based on the fair value of those assets. For purposes of impairment evaluation and
measurement, management stratifies MSRs based on the predominant risk characteristics of the underlying loans, including
loan type and loan term. If, by individual stratum, the carrying amount of these MSRs exceeds fair value, a valuation
allowance is established and the impairment is recognized in mortgage banking income. If the fair value of impaired MSRs
subsequently increases, management recognizes the increase in fair value in current period mortgage banking income and,
through a reduction in the valuation allowance, adjusts the carrying value of the MSRs to a level not in excess of amortized
cost.
j) Reserve for Mortgage Loan Repurchase Losses–The Company sells mortgage loans to various third parties, including
government-sponsored entities, under contractual provisions that include various representations and warranties that typically
cover ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing
the loan, absence of delinquent taxes or liens against the property securing the loan, and similar matters. The Company may
be required to repurchase the mortgage loans with identified defects, indemnify the investor or insurer, or reimburse the
investor for credit loss incurred on the loan (collectively “repurchase”) in the event of a material breach of such contractual
representations or warranties. Risk associated with potential repurchases or other forms of settlement is managed through
underwriting and quality assurance practices.
The Company establishes mortgage repurchase reserves related to various representations and warranties that reflect
management’s estimate of losses based on a combination of factors. Such factors incorporate actual and historic loss history,
delinquency trends in the portfolio and economic conditions. The Company establishes a reserve at the time loans are sold
and updates the reserve estimate quarterly during the estimated loan life. The repurchase reserve is included in other
liabilities on the consolidated statements of financial condition.
80
k) 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. Costs associated with maintaining
property, such as utilities and maintenance, are charged to expense in the period in which they occur, while costs relating to
the development and improvement of property are capitalized to the extent the balance does not exceed fair value. All OREO
acquired through acquisition is recorded at fair value, less cost to sell, at the date of acquisition.
l) Bank-owned life insurance—The Company is the owner and beneficiary of bank-owned life insurance ("BOLI”) policies
that it purchased on certain associates of the Company. The BOLI is carried at net realizable value with changes in net
realizable value recorded in non-interest income on the consolidated statements of operations.
m) 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.
n) Stock-based compensation—The Company accounts for stock-based compensation in accordance with ASC Topic 718.
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 are again made available for awards under the Plan.
All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are
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.
81
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) Earnings per share—The Company applies the two-class method of computing earnings 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 earnings 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, or other
contracts to issue common shares (“common stock equivalents”) using the treasury stock method. Common stock equivalents
are excluded from the computation of diluted earnings per common share in periods in which they have an anti-dilutive
effect.
q) Interest Rate Swap Derivatives—The Company carries all derivatives on the statement of financial condition at fair value.
All derivative instruments are recognized as either assets or liabilities depending on the rights or obligations under the
contracts. All gains and losses on the derivatives due to changes in fair value are recognized in earnings each period.
The Company offers interest rate swap products to certain of its clients to manage potential changes in interest rates. Each
contract between the Company and a client is offset with a contract between the Company and an institutional counterparty,
thus minimizing the Company's exposure to rate changes. The Company's portfolio consists of a “matched book,” and as
such, changes in fair value of the swap pairs will largely offset in earnings. In accordance with applicable accounting
guidance, if certain conditions are met, a derivative may be designated as (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk
(referred to as a fair value hedge) or (2) a hedge of the exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that is attributable to a particular risk (referred to as a cash flow hedge). The Company
documents all hedging relationships at the inception of each hedging relationship and uses industry accepted methodologies
and ranges to determine the effectiveness of each hedge. The fair value of the hedged item is calculated using the estimated
future cash flows of the hedged item and applying discount rates equal to the market interest rate for the hedged item at the
inception of the hedging relationship (inception benchmark interest rate plus an inception credit spread), adjusted for changes
in the designated benchmark interest rate thereafter.
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.
82
s) 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”) Topic 805. 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.
Note 3 Recent Accounting Pronouncements
Revenue from Contracts with Customers—In May 2014, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“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 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 are not
affected. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach.
Additionally, the Company 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. Accounting policies and procedures
did not change materially as the principles of revenue recognition from the ASU are largely consistent with existing guidance
and current practices applied by the Company. Refer to note 15 of our consolidated financial statements for required
disclosures 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 established 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 are classified as either finance or operating, with classification affecting the pattern of expense recognition in
the income statements. ASU 2016-02 became effective for the Company on January 1, 2019 and initially required transition
using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements. In July 2018, the Financial Accounting Standards Board issued ASU 2018-11
which, among other things, provided an additional transition method that allows entities to not apply the guidance in ASU
2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. We elected to apply certain practical
expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or
contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases.
We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related
accounting guidance). The updates did not significantly change lease accounting requirements applicable to lessors and did
not significantly impact our financial statements in relation to contracts whereby we act as a lessor. We applied the modified-
retrospective transition approach prescribed by ASU 2018-11. Upon adoption of ASU 2016-02 and ASU 2018-11 on
January 1, 2019, we recognized right-of-use assets and related lease liabilities totaling $30.5 million with a cumulative-effect
adjustment to beginning retained earnings of $0.3 million, after tax. Refer to note 8 – Leases of our consolidated financial
statements for further detail.
83
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. The Company early adopted ASU 2017-12 during the first quarter of 2018 and recorded a
cumulative effect adjustment of $26 thousand within equity in the consolidated statements of financial condition.
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 (“AOCI”) 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. The
Company early adopted ASU 2018-02 in the first quarter of 2018, resulting in a $1.5 million reclassification from
accumulated other comprehensive loss to retained earnings on the consolidated statements of financial condition and the
consolidated statements of changes in shareholders’ equity.
Other Pronouncements—The Company early adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use
Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service
Contract (Subtopic 350-40) on a prospective basis with no material impact on its financial statements. The Company also
adopted ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting; 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 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic
610-20) with no 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 $0.8 billion at December 31, 2019 and included $0.6 billion of available-for-sale
securities and $0.2 billion of held-to-maturity securities. At December 31, 2018, investment securities totaled $1.0 billion and
included $0.8 billion of available-for-sale securities and $0.2 billion of held-to-maturity securities.
Available-for-sale
At December 31, 2019 and 2018, the Company held $638.2 million and $791.1 million of available-for-sale investment
securities, respectively. Available-for-sale securities are summarized as follows as of the dates indicated:
Amortized
Gross
Gross
cost
unrealized gains unrealized losses
Fair value
December 31, 2019
Mortgage-backed securities:
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
$
93,770 $
1,497 $
(11) $
95,256
543,275
495
469
638,009 $
$
3,818
—
—
5,315 $
(5,056)
(8)
—
542,037
487
469
(5,075) $ 638,249
84
Amortized
Gross
Gross
cost
unrealized gains unrealized losses
Fair value
December 31, 2018
Mortgage-backed securities:
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
$
147,283 $
1,232 $
(1,873) $ 146,642
661,354
619
469
809,725 $
$
1,056
—
—
2,288 $
(19,029)
(9)
—
643,381
610
469
(20,911) $ 791,102
At December 31, 2019 and 2018, 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 FHLMC, FNMA and 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:
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Other residential MBS issued or guaranteed
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2019
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 10,413 $
(7) $
1,421 $
(4)
$ 11,834 $
(11)
by U.S. Government agencies or sponsored
enterprises
Municipal securities
Total
41,983
—
$ 52,396 $
(281)
—
(4,775)
254,380
(8)
372
(288) $ 256,173 $ (4,787)
296,363
372
(5,056)
(8)
$ 308,569 $ (5,075)
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2018
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
Mortgage-backed securities:
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises
$ 30,853 $
Other residential MBS issued or guaranteed
(392) $ 69,169 $ (1,481) $ 100,022 $ (1,873)
by U.S. Government agencies or sponsored
enterprises
Municipal securities
Total
127,767
441
(19,029)
(9)
$ 159,061 $ (1,551) $ 523,831 $ (19,360) $ 682,892 $ (20,911)
454,662
—
582,429
441
(17,879)
—
(1,150)
(9)
The unrealized losses in the Company’s investment portfolio at December 31, 2019 were caused by changes in interest rates.
The portfolio included 67 securities, having an aggregate fair value of $308.6 million, which were in an unrealized loss
position at December 31, 2019, compared to 211 securities, with an aggregate fair value of $682.9 million at December 31,
2018.
Management evaluated all of the available for sale securities in an unrealized loss position at December 31, 2019 and
December 31, 2018 and concluded no OTTI existed. During the year ended December 31, 2018, the Company recorded a
85
$0.2 million recovery included in other non-interest expense related to one security with an aggregate fair value of $0.3
million, which had previously incurred OTTI of $0.2 million during the year ended December 31, 2017. 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 FRB and FHLB, if needed. The fair value of available-for-sale investment securities pledged as
collateral totaled $352.3 million and $318.1 million at December 31, 2019 and 2018, respectively. The Bank also had
investment securities pledged as collateral for FHLB advances totaling $17.6 million and $16.0 million at December 31, 2019
and 2018, respectively.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment
characteristics and experience of the underlying financial instruments.
As of December 31, 2019, the entire municipal securities portfolio with an amortized cost and fair value of $0.5 million was
due between one to five years. Other securities of $0.5 million as of December 31, 2019 have no stated contractual maturity
date.
Held-to-maturity
At December 31, 2019 and 2018, the Company held $182.9 million and $235.4 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:
Residential mortgage pass-through securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
$ 127,560 $ 1,239 $
(29) $ 128,770
December 31, 2019
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
54,971
55,324
$ 182,884 $ 1,321 $ (464) $ 183,741
(435)
82
December 31, 2018
Gross
Gross
unrealized unrealized
gains
losses
Fair value
Amortized
cost
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
$ 157,115 $
2
$ (2,705) $ 154,412
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Total investment securities held-to-maturity
78,283
$ 235,398 $
—
2
(1,769)
76,514
$ (4,474) $ 230,926
86
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:
Residential mortgage pass-through securities
issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Other residential MBS issued or guaranteed
by U.S. Government agencies or sponsored
enterprises
Total
Mortgage-backed securities:
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, 2019
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 10,478
$
(26) $
338
$
(3)
$ 10,816
$
(29)
3,925
$ 14,403
$
(9)
28,554
(35) $ 28,892
(426)
(429)
32,479
$ 43,295
$
(435)
(464)
$
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2018
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 26,660
$
(381) $ 126,475 $ (2,324) $ 153,135
$ (2,705)
35,235
$ 61,895
$
(79)
76,514
(460) $ 167,754 $ (4,014) $ 229,649
41,279
(1,690)
(1,769)
$ (4,474)
The held-to-maturity portfolio included 13 securities, having an aggregate fair value of $43.3 million, which were in an
unrealized loss position at December 31, 2019, compared to 49 securities, with a fair value of $229.6 million, at
December 31, 2018.
The unrealized losses in the Company’s investments at December 31, 2019 and December 31, 2018 were caused by changes
in interest rates. Management evaluated all of the held-to-maturity securities in an unrealized loss position and concluded that
no OTTI existed at December 31, 2019 or December 31, 2018. 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 $144.2 million and $133.1 million
at December 31, 2019 and 2018, respectively.
Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment
characteristics and experience of the underlying financial instruments.
Note 5 Non-marketable Securities
Non-marketable securities include FRB stock and FHLB stock. At December 31, 2019, the Company held $13.9 million of
FRB stock and $15.8 million of FHLB stock for regulatory or debt facility purposes. At December 31, 2018, the Company
held $13.9 million of FRB stock and $13.6 million of FHLB stock.
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, 2019 or December 31, 2018.
87
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 originated and acquired loans
and loans accounted for under ASC 310-30, as of the dates shown. The carrying value of originated and acquired loans is net
of discounts, fees, costs and fair value marks of $8.4 million and $10.2 million at December 31, 2019 and 2018, respectively.
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
Originated and
acquired loans
2,977,007
598,118
764,411
21,776
4,361,312
$
$
Originated and
acquired loans
2,624,173
551,819
820,820
24,617
4,021,429
$
December 31, 2019
ASC
310-30 loans
Total loans
% of total
15,300
32,788
6,006
—
54,094
$
$
2,992,307
630,906
770,417
21,776
4,415,406
67.8%
14.3%
17.4%
0.5%
100.0%
December 31, 2018
ASC
310-30 loans
Total loans
% of total
20,398
40,393
9,995
93
70,879
$
$
2,644,571
592,212
830,815
24,710
4,092,308
64.6%
14.5%
20.3%
0.6%
100.0%
$
$
$
$
Delinquency for originated and acquired loans is shown in the following tables at December 31, 2019 and 2018:
December 31, 2019
30-89 days
past due and
accruing
Greater
than 90 days
past due and
accruing
Non-accrual
Total past
due and
loans
non-accrual Current
Total
originated and
acquired loans
Originated and acquired loans:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and 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 originated and acquired loans
$
2,478
569
179
—
3,226
—
—
—
438
438
1,747
245
1,992
116
5,772
$
$
879
—
—
—
879
—
—
—
—
—
—
79
79
—
958
$
9,396
2,264
317
934
12,911
$
12,753
2,833
496
934
17,016
$ 2,193,244
477,073
248,089
41,585
2,959,991
$ 2,205,997
479,906
248,585
42,519
2,977,007
—
416
—
43
459
—
416
—
481
897
77,733
14,623
54,693
450,172
597,221
77,733
15,039
54,693
450,653
598,118
7,597
731
8,328
50
21,748
$
9,344
1,055
10,399
166
28,478
663,353
90,659
754,012
21,610
$ 4,332,834
672,697
91,714
764,411
21,776
$ 4,361,312
$
88
December 31, 2018
30-89 days
past due and
accruing
Greater
than 90 days
past due and
accruing
Non-accrual
Total past
due and
loans
non-accrual
Current
Total
originated and
acquired loans
Originated and acquired loans:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and 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 originated and acquired loans
$
495
893
141
—
1,529
—
—
—
328
328
2,106
556
2,662
91
4,610
$
$
74
—
125
—
199
—
—
—
132
132
548
—
548
16
895
$
$
5,510
6,931
768
742
13,951
1,208
121
—
572
1,901
7,790
772
8,562
42
24,456
$
$
6,079
7,824
1,034
742
15,679
1,208
121
—
1,032
2,361
10,444
1,328
11,772
149
29,961
$ 1,925,068
413,842
221,122
48,462
2,608,494
$ 1,931,147
421,666
222,156
49,204
2,624,173
93,646
19,529
56,685
379,598
549,458
94,854
19,650
56,685
380,630
551,819
712,592
96,456
809,048
24,468
$ 3,991,468
723,036
97,784
820,820
24,617
$ 4,021,429
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 non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual
status. Non-accrual originated and acquired loans totaled $21.7 million at December 31, 2019, decreasing $2.7 million, or
11.1% from December 31, 2018.
The Company’s 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
and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”.
89
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows at December 31,
2019 and 2018, respectively:
Pass
Special
mention
Substandard
Doubtful
Total
December 31, 2019
Originated and acquired loans:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and agriculture
Energy
Total commercial
Commercial real estate non-owner occupied:
$
$
2,162,045
430,793
246,282
41,585
2,880,705
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total originated and acquired loans
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
Originated and acquired loans:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and 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 originated and acquired loans
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
77,733
14,585
54,210
434,694
581,222
664,387
90,517
754,904
21,725
4,238,556
12,523
32,109
4,089
—
48,721
4,287,277
Pass
1,890,710
393,404
220,004
48,462
2,552,580
92,731
19,529
56,685
355,776
524,721
710,972
96,456
807,428
24,575
3,909,304
17,579
39,322
7,484
—
64,385
3,973,689
90
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
28,144
39,597
1,219
—
68,960
—
—
—
15,238
15,238
80
365
445
1
84,644
659
71
360
—
1,090
85,734
$
$
$
$
$
14,287
9,516
1,052
739
25,594
—
454
483
721
1,658
8,230
832
9,062
50
36,364
2,118
608
1,557
—
4,283
40,647
$
$
$
$
$
1,521
—
32
195
1,748
$
2,205,997
479,906
248,585
42,519
2,977,007
—
—
—
—
—
—
—
—
—
1,748
—
—
—
—
—
1,748
77,733
15,039
54,693
450,653
598,118
672,697
91,714
764,411
21,776
4,361,312
15,300
32,788
6,006
—
54,094
4,415,406
$
$
$
$
December 31, 2018
Special
mention
Substandard
Doubtful
Total
16,531
16,349
1,260
—
34,140
915
—
—
23,243
24,158
3,571
415
3,986
—
62,284
537
246
908
—
1,691
63,975
$
$
$
$
$
22,919
11,828
847
742
36,336
1,208
121
—
1,611
2,940
8,493
913
9,406
42
48,724
2,282
825
1,603
93
4,803
53,527
$
$
$
$
$
987
85
45
—
1,117
$
1,931,147
421,666
222,156
49,204
2,624,173
—
—
—
—
—
—
—
—
—
1,117
—
—
—
—
—
1,117
94,854
19,650
56,685
380,630
551,819
723,036
97,784
820,820
24,617
4,021,429
20,398
40,393
9,995
93
70,879
4,092,308
$
$
$
$
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 originated and acquired loans
on non-accrual status, loans in bankruptcy, and 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, 2019 and 2018, the Company’s recorded investment in impaired loans were $32.8 million and $31.1
million, respectively, of which $6.9 million and $4.1 million, respectively, were accruing TDRs. Impaired loans had a
collective related allowance for loan losses allocated to them of $1.8 million and $1.2 million at December 31, 2019 and
2018, respectively.
Additional information regarding impaired loans at December 31, 2019 and 2018 is set forth in the table below:
$
$
$
With no related allowance recorded:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and 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
Food and 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, 2019
December 31, 2018
Unpaid
principal
balance
Allowance
for loan
losses
allocated
Recorded
investment
Unpaid
principal
balance
Recorded
investment
Allowance
for loan
losses
allocated
$
16,001
3,265
1,468
—
20,734
$
10,548
2,385
1,220
—
14,153
—
458
—
90
548
4,355
311
4,666
57
—
415
—
26
441
3,967
269
4,236
50
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
4,374 $
7,130
1,468
5,366
18,338
$
3,029
6,609
1,260
742
11,640
1,435
378
—
641
2,454
4,229
409
4,638
46
1,208
121
—
547
1,876
3,814
341
4,155
42
26,005
$
18,880
$
—
$
25,476 $
17,713
$
$
8,209
711
757
5,559
15,236
—
—
—
232
232
5,808
1,074
6,882
—
5,501
505
751
934
7,691
—
—
—
171
171
5,034
987
6,021
—
$
$
1,530
3
35
195
1,763
7,252 $
1,362
883
—
9,497
—
—
—
1
1
25
6
31
—
—
—
—
313
313
6,032
1,408
7,440
—
$
4,627
1,169
845
—
6,641
—
—
—
254
254
5,178
1,293
6,471
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
996
90
46
—
1,132
—
—
—
2
2
27
8
35
—
allowance recorded
Total impaired loans
$
$
22,350
48,355
$
$
13,883
32,763
$
$
1,795
1,795
$
$
17,250 $
42,726 $
13,366
31,079
$
$
1,169
1,169
91
The table below shows additional information regarding the average recorded investment and interest income recognized on
impaired loans for the years presented:
With no related allowance recorded:
Commercial:
Commercial and industrial
Owner occupied commercial real estate
Food and 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
Food and 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, 2019
For the years ended
December 31, 2018
December 31, 2017
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
$
$ 13,062
2,849
1,316
—
17,227
248
27
—
—
275
$
3,248
6,799
1,259
884
12,190
$
168 $
38
98
—
304
5,609
4,155
1,422
8,004
19,190
$
—
575
—
28
603
4,081
287
4,368
11
—
—
—
—
—
1
2
3
—
1,208
606
—
573
2,387
3,904
355
4,259
12
—
—
—
—
—
—
2
2
—
—
—
—
878
878
326
—
326
—
152
80
244
156
632
—
—
—
22
22
—
—
—
—
$ 22,209
$
278
$ 18,848
$
306 $ 20,394
$
654
$
$
5,788
554
796
865
8,003
—
—
—
207
207
5,241
1,034
6,275
49
—
17
12
—
29
—
—
—
14
14
66
34
100
—
143
421
$
4,677
1,220
862
—
6,759
—
—
—
288
288
5,412
1,331
6,743
36
$
$
— $
19
5
—
24
7,331
747
2,092
—
10,170
—
—
—
16
16
57
43
100
—
188
—
30
213
431
5,986
1,225
7,211
163
$ 13,826
$ 32,674
$
$
140 $ 17,975
446 $ 38,369
$
$
—
20
5
—
25
—
—
1
9
10
67
42
109
—
144
798
Total impaired loans with a related allowance
recorded
Total impaired loans
$ 14,534
$ 36,743
$
$
Interest income recognized on impaired loans noted in the tables above, primarily represents interest earned on accruing
TDRs. Interest income recognized on impaired loans during the years ended December 31, 2019, 2018 and 2017 was $0.4
million, $0.4 million and $0.8 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
92
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.
During 2019, the Company restructured 15 loans with a recorded investment of $7.1 million at December 31, 2019 to
facilitate repayment. 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, 2019 and 2018:
December 31, 2019
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 investment principal balance
5,788 $
172
1,178
—
7,138 $
5,714 $
192
1,206
—
7,112 $
5,615 $
141
1,129
—
6,885 $
December 31, 2018
Recorded
investment
Unpaid
Average year-to-date
recorded investment principal balance
2,827 $
260
1,163
—
4,250 $
3,155 $
280
1,121
—
4,556 $
2,730 $
229
1,114
—
4,073 $
Unfunded commitments
to fund TDRs
Unfunded commitments
to fund TDRs
—
—
12
—
12
—
—
12
—
12
The following table summarizes the Company’s carrying value of non-accrual TDRs as of December 31, 2019 and 2018:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total non-accruing TDRs
December 31, 2019
December 31, 2018
$
$
1,891 $
410
2,553
—
4,854 $
1,854
—
1,584
—
3,438
Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for
a period of time. The Company had two TDRs totaling $0.7 million that were modified within the past 12 months that had
defaulted on their restructured terms during the year ended December 31, 2019. For purposes of this disclosure, the Company
considers “default” to mean 90 days or more past due on principal or interest. 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 TDRs.
During 2018, the Company had one TDR totaling $0.1 million that had been modified within the prior twelve months that
defaulted on its restructured terms.
Loans accounted for under ASC 310-30
Loan pools accounted for under ASC 310-30 are periodically remeasured to determine expected future cash flows. In
determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller homogeneous loans
are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the
years in which the loans were originated, and whether the loans are fixed or variable rate loans. Prepayments may be assumed
93
on loans if circumstances specific to that loan warrant a prepayment assumption. The remeasurement of loans accounted for
under ASC 310-30 resulted in the following changes in the carrying amount of accretable yield during 2019 and 2018:
Accretable yield beginning balance
Reclassification from non-accretable difference
Reclassification to non-accretable difference
Accretion
Accretable yield ending balance
December 31, 2019
$
35,901 $
6,195
(921)
(13,041)
28,134 $
December 31, 2018
46,568
10,751
(2,263)
(19,155)
35,901
$
Below is the composition of the net book value for loans accounted for under ASC 310-30 at December 31, 2019 and 2018:
Contractual cash flows
Non-accretable difference
Accretable yield
Loans accounted for under ASC 310-30
$
Note 7 Allowance for Loan Losses
December 31, 2019
$
391,167 $
(308,939)
(28,134)
54,094 $
December 31, 2018
420,994
(314,214)
(35,901)
70,879
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, 2019 and 2018:
Commercial
$
Year ended December 31, 2019
Non-owner
occupied
commercial
real estate
Residential
real estate
Consumer
Total
27,137 $
26,946
(7,422)
102
10,636
30,262
191
—
—
(11)
180
30,442 $
4,406 $
4,406
(116)
12
548
4,850
—
—
—
—
—
4,850 $
3,800 $
3,760
(124)
34
(202)
3,468
40
—
—
(40)
—
3,468 $
349 $
349
(937)
180
712
304
—
—
—
—
—
304 $
35,692
35,461
(8,599)
328
11,694
38,884
231
—
—
(51)
180
39,064
Beginning balance
Originated and acquired beginning balance
Charge-offs
Recoveries
Provision
Originated and acquired ending balance
ASC 310-30 beginning balance
Charge-offs
Recoveries
Recoupment
ASC 310-30 ending balance
Ending balance
$
Ending allowance balance attributable to:
Originated and acquired loans individually
evaluated for impairment
$
1,763 $
1 $
31 $
— $
1,795
Originated and acquired loans collectively
evaluated for impairment
ASC 310-30 loans
Total ending allowance balance
$
Loans:
Originated and acquired loans individually
28,499
180
30,442 $
4,849
—
4,850 $
3,437
—
3,468 $
304
—
304 $
37,089
180
39,064
evaluated for impairment
$
21,844 $
612 $
10,257 $
50 $
32,763
Originated and acquired loans collectively
evaluated for impairment
ASC 310-30 loans
Total loans
2,955,163
15,300
597,506
32,788
754,154
6,006
$ 2,992,307 $ 630,906 $ 770,417 $
21,726
—
21,776 $
4,328,549
54,094
4,415,406
94
Commercial
$
Year ended December 31, 2018
Non-owner
occupied
commercial
real estate
Residential
real estate
Consumer
Total
21,385 $
21,340
(833)
1,171
5,268
26,946
45
(62)
—
208
191
27,137 $
5,609 $
5,583
(11)
—
(1,166)
4,406
26
—
—
(26)
—
4,406 $
3,965 $
3,965
(118)
14
(101)
3,760
—
—
—
40
40
3,800 $
305 $
305
(1,134)
204
974
349
—
—
—
—
—
349 $
31,264
31,193
(2,096)
1,389
4,975
35,461
71
(62)
—
222
231
35,692
Beginning balance
Originated and acquired beginning balance
Charge-offs
Recoveries
Provision
Originated and acquired ending balance
ASC 310-30 beginning balance
Charge-offs
Recoveries
Provision (recoupment)
ASC 310-30 ending balance
Ending balance
Ending allowance balance attributable to:
Originated and acquired loans individually
$
evaluated for impairment
$
1,132 $
2 $
35 $
— $
1,169
Originated and acquired loans collectively
evaluated for impairment
ASC 310-30 loans
Total ending allowance balance
$
Loans:
Originated and acquired loans individually
25,814
191
27,137 $
4,404
—
4,406 $
3,725
40
3,800 $
349
—
349 $
34,292
231
35,692
evaluated for impairment
$
18,282 $
2,129 $
5,169 $
5,499 $
31,079
Originated and acquired loans collectively
evaluated for impairment
ASC 310-30 loans
Total loans
2,605,891
20,398
549,690
40,393
815,651
9,995
$ 2,644,571 $ 592,212 $ 830,815 $
19,118
93
24,710 $
3,990,350
70,879
4,092,308
In evaluating the loan portfolio for an appropriate ALL level, non-impaired originated and acquired loans were grouped into
segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was
further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of applying loss ratios
and determining applicable subjective adjustments to the ALL. The application of subjective adjustments was based upon
qualitative risk factors, including economic trends and conditions, industry conditions, asset quality, loss trends, lending
management, portfolio growth and loan review/internal audit results.
Net charge-offs on originated and acquired loans during 2019 were $8.3 million and included $6.6 million for one previously
identified acquired commercial loan that was charged-off during 2019. Management’s evaluation of credit quality resulted in
provision for originated and acquired loan losses of $11.7 million during 2019 and included $6.6 million related to the loan
described above. Provision for originated and acquired loans during the year ended December 31, 2018 was $5.0 million and
was lowered by a recovery of $1.1 million.
During 2019 and 2018, the Company re-estimated the expected cash flows of the loan pools accounted for under ASC 310-
30. The remeasurement in 2019 resulted in recoupment of $51 thousand. The remeasurement in 2018 resulted in provision of
$222 thousand, primarily driven by the commercial segment.
Note 8 Leases
The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019. As a result of the adoption, the Company
recorded right-of-use (“ROU”) lease assets and lease liabilities of $30.5 million with a cumulative effect adjustment to
beginning retained earnings of $0.3 million. As of December 31, 2019, ROU assets totaled $29.2 million included in other
95
assets and the related lease liabilities totaled $29.5 million included in other liabilities on the consolidated statements of
financial condition.
The ROU assets represent the Company’s right to use, or control the use of, an underlying asset for the lease term and the
lease liabilities represent the Company’s obligation to make lease payments arising from the lease terms. The updates did not
significantly change lease accounting requirements applicable to lessors and did not significantly impact our financial
statements in relation to contracts whereby we act as a lessor.
The Company has operating leases for banking centers, corporate offices and ATM locations, with remaining lease terms
ranging from one year to ten years. The Company only included reasonably certain renewal options in the lease terms. The
weighted-average remaining lease term for our operating leases was 5.1 years at December 31, 2019. As of December 31,
2019, the weighted-average discount rate was 3.36%, utilizing the Company’s incremental FHLB borrowing rate for
borrowings of a similar term at the date of lease commencement.
Rent expense totaled $5.7 million for the year ended December 31, 2019, and was recorded within occupancy and equipment
on the consolidated statements of operations. Lease payments do not include non-lease components such as real estate taxes,
insurance and common area maintenance.
The tables below represent undiscounted future cash flows under the current and prior lease guidance. Current guidance per
ASC Topic 842 requires that optional renewal periods be included when it is reasonably certain they will be exercised.
Below is a summary of undiscounted future minimum lease payments as of December 31, 2019 per ASC Topic 842:
Years ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Imputed interest
Present value of operating lease liabilities
Amount
5,267
5,046
4,605
4,308
3,920
15,624
38,770
(9,254)
29,516
$
$
Below is a summary of undiscounted future minimum lease payments as of December 31, 2018 per ASC Topic 840:
Years ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Amount
3,092
2,981
3,091
3,052
2,047
10,163
24,426
$
$
96
Note 9 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2019 and 2018:
Land
Buildings and improvements
Equipment
Total premises and equipment, at cost
Less: accumulated depreciation and amortization
Premises and equipment, net
December 31, 2019 December 31, 2018
32,058
$
88,955
52,354
173,367
(63,381)
109,986
32,911 $
94,260
56,523
183,694
(71,543)
112,151 $
$
The Company recorded $8.2 million, $8.6 million and $7.6 million of depreciation expense during 2019, 2018 and 2017,
respectively, as a component of occupancy and equipment expense in the consolidated statements of operations. The
Company disposed of $0.0 million, $1.7 million and $2.3 million of premises and equipment, net, during 2019, 2018 and
2017, respectively. During 2019, the Company recognized $0.9 million of impairments in its consolidated statements of
operations from the consolidation of four banking centers classified as held-for-sale totaling $3.4 million.
During 2018, the Company consolidated one banking center acquired in the Peoples acquisition that was valued at fair value
less cost to sell at the date of acquisition. The banking center totaled $4.6 million and was classified as held-for-sale at
December 31, 2018.
Note 10 Other Real Estate Owned
A summary of the activity in OREO during 2019 and 2018 is as follows:
Beginning balance
Acquired through acquisition
Transfers from loan portfolio, at fair value
Impairments
Sales
Ending balance
For the years ended December 31,
2019
10,596 $
—
2,705
(1,082)
(4,919)
7,300
$
2018
10,491
1,253
24,940
(230)
(25,858)
10,596
$
$
OREO totaled $7.3 million at December 31, 2019 and decreased $3.3 million from December 31, 2018. During 2019, the
Company sold OREO properties with net book balances of $4.9 million compared to $25.9 million during 2018. The sales
resulted in net OREO gains of $7.2 million and $0.5 million which were included within other non-interest expense in the
consolidated statements of operations for the years ended December 31, 2019 and 2018, respectively.
Note 11 Goodwill and Intangible Assets
Goodwill and core deposit intangible
In connection with our acquisitions, the Company recorded goodwill of $115.0 million and core deposit intangible assets of
$48.8 million. Goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets
acquired. No goodwill impairment was recorded during the years ended December 31, 2019 or December 31, 2018.
97
The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at December 31, 2019
and December 31, 2018, are presented as follows:
Gross
carrying
amount
December 31, 2019
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
December 31, 2018
Accumulated
amortization
Net
carrying
amount
Core deposit intangible
$
48,834 $
(40,103) $
8,731 $
48,834 $
(38,920) $
9,914
The accumulated amortization of the core deposit intangible assets was $40.1 million and $38.9 million at December 31,
2019 and 2018, respectively.
The Company is amortizing the core deposit intangibles from acquisitions on a straight line basis over 7-10 years from the
date of the respective acquisition, which represents the expected useful life of the assets. The Company recognized core
deposit intangible amortization expense of $1.2 million, $2.2 million and $5.3 million during 2019, 2018 and 2017,
respectively.
The following table shows the estimated future amortization expense for the core deposit intangibles as of December 31,
2019:
Years ending December 31,
2020
2021
2022
2023
2024
Mortgage servicing rights
$
Amount
1,183
1,183
1,127
1,048
1,048
Mortgage servicing rights represent rights to service loans originated by the Company and sold to government sponsored
enterprises including FHLMC, FNMA, GNMA and FHLB. Mortgage loans serviced for others were $308.4 million at
December 31, 2019 and $389.0 million at December 31, 2018 and are included in other assets in the consolidated statements
of financial condition.
Below are the changes in the MSRs for the years presented:
Beginning balance
Acquired through acquisition
Originations
Impairment
Amortization
Ending balance
Fair value of mortgage servicing rights
For the years ended December 31,
2019
2018
$
$
$
3,556
—
27
(129)
(824)
2,630
2,630
$
$
$
—
4,301
30
(21)
(754)
3,556
3,884
The fair value of MSRs was determined based upon a discounted cash flow analysis. The cash flow analysis included
assumptions for discount rates and prepayment speeds. Discount rates ranged from 9.5% to 10.5% and the constant
prepayment speed ranged from 14.8% to 22.0% for the December 31, 2019 valuation. Discount rates ranged from 9.5% to
10.5% and the constant prepayment speed ranged from 12.2% to 17.2% for the December 31, 2018 valuation. Included in
mortgage banking income in the consolidated statements of operations were service fees of $1.0 million and $1.1 million for
the years ended December 31, 2019 and 2018.
MSRs are evaluated and impairment is recognized to the extent fair value is less than the carrying amount. The Company
evaluates impairment by stratifying MSRs based on the predominant risk characteristics of the underlying loans, including
98
loan type and loan term. The Company is amortizing the MSRs in proportion to and over the period of the estimated net
servicing income of the underlying loans. The Company recognized MSRs amortization expense of $0.8 million and $0.8
million during the years ended December 31, 2019 and 2018, respectively.
The following table shows the estimated future amortization expense for the MSRs as of December 31, 2019:
Years ending December 31,
2020
2021
2022
2023
2024
Note 12 Deposits
$
Amount
512
412
332
267
215
Total deposits were $4.7 billion and $4.5 billion at December 31, 2019 and 2018, respectively. Time deposits were $1.1
billion and $1.1 billion at December 31, 2019 and 2018, respectively. The following table summarizes the Company’s time
deposits by remaining contractual maturity:
Years ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total time deposits
The Company incurred interest expense on deposits as follows during the years indicated:
$
Amount
726,903
211,787
94,464
19,696
4,263
1,040
$ 1,058,153
Interest bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Total
$
$
For the years ended December 31,
2018
2017
2019
1,514 $
9,046
2,717
16,526
29,803 $
887 $
5,622
2,249
12,283
21,041 $
445
4,077
1,481
10,169
16,172
The Federal Reserve System requires cash balances to be maintained at the FRB based on certain deposit levels. There was
no minimum reserve requirement for the Bank at December 31, 2019.
Note 13 Borrowings
The following table sets forth selected information regarding repurchase agreements during 2019, 2018 and 2017:
As of and for the years ended December 31,
2019
2018
2017
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
$ 68,600 $ 142,292 $ 130,463
88,390
0.19%
60,445
1.11%
87,691
0.34%
The Company enters into repurchase agreements to facilitate the needs of its clients. As of December 31, 2019, 2018 and
2017, the Company sold securities under agreements to repurchase totaling $56.9 million, $66.0 million and $130.5 million,
respectively. The Company had pledged mortgage-backed securities with a fair value of approximately $65.6 million, $73.9
99
million and $136.1 million, as of December 31, 2019, 2018 and 2017, respectively, for these agreements. The Company
monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of
the underlying securities. There was $7.0 million, $5.9 million and $5.7 million of excess collateral pledged for repurchase
agreements at December 31, 2019, 2018 and 2017, respectively.
The vast majority of the Company’s repurchase agreements are overnight transactions with clients that mature the day after
the transaction. At December 31, 2019, 2018 and 2017, 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 $1.1 billion at December 31, 2019. At December 31, 2019, 2018 and 2017, the Bank had $192.7 million, $234.3
million and $0.0 million in line of credit advances from the FHLB, respectively, that mature within a day. At December 31,
2019, 2018 and 2017, the Bank had $15.0 million, $67.3 million and $129.1 million in term advances from the FHLB,
respectively, with fixed interest rates between 1.55% - 2.33% and maturity dates of 2019 - 2020. The Bank had investment
securities and loans pledged as collateral for FHLB advances. Investment securities pledged were $17.6 million, $16.0
million and $28.1 million at December 31, 2019, 2018 and 2017, respectively. Loans pledged were $1.5 billion, $1.6 billion
and $1.2 billion at December 31, 2019, 2018 and 2017, respectively. Interest expense related to FHLB advances and other
short-term borrowings totaled $6.3 million, $2.6 million and $1.8 million for the years ended December 31, 2019, 2018 and
2017, respectively.
Note 14 Regulatory Capital
As a bank holding company, the Company is subject to 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.
Under the Basel III requirements, at December 31, 2019 and 2018, the Company and the Bank met all capital requirements
including the capital conservation buffer of 2.5%, which was fully phased in on January 1, 2019. The Bank had regulatory
capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below.
December 31, 2019
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized(1)
Ratio
Amount
Ratio
Amount
Ratio
Actual
Amount
11.0% $
9.1%
640,440
528,028
N/A
5.0% $
N/A
289,926
4.0% $
4.0%
231,950
231,940
13.2% $
10.9%
640,440
528,028
N/A
6.5% $
N/A
376,903
7.0% $
7.0%
405,912
405,896
13.2% $
10.9%
640,440
528,028
N/A
8.0% $
N/A
387,701
8.5% $
8.5%
412,620
411,932
14.1% $
11.8%
682,645
570,233
N/A
10.0% $
N/A
484,626
10.5% $
10.5%
509,707
508,857
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
100
December 31, 2018
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized(1)
Ratio
Amount
Ratio
Amount
Ratio
Actual
Amount
10.5% $
9.0%
580,504
498,283
N/A
5.0% $
N/A
275,703
4.0% $
4.0%
220,988
220,563
12.9% $
11.1%
580,504
498,283
N/A
6.5% $
N/A
358,414
7.0% $
7.0%
386,728
385,984
12.9% $
11.1%
580,504
498,283
N/A
8.0% $
N/A
358,938
8.5% $
8.5%
382,306
381,372
13.8% $
12.0%
620,275
538,054
N/A
10.0% $
N/A
448,672
10.5% $
10.5%
472,261
471,106
Tier 1 leverage ratio:
Consolidated
NBH Bank
Common equity tier 1 risk-based capital:
Consolidated
NBH Bank
Tier 1 risk-based capital ratio:
Consolidated
NBH Bank
Total risk-based capital ratio:
Consolidated
NBH Bank
(1) As of the fully phased-in date of January 1, 2019, including the capital conservation buffer.
Note 15 Revenue from Contracts with Clients
Revenue is recognized when obligations under the terms of a contract with clients are satisfied. Below is the detail of the
Company’s revenue from contracts with clients.
Service charges and other fees
Service charge fees are primarily comprised of monthly service fees, check orders, and other deposit account related fees.
Other fees include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The
Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related
revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are
largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized,
at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following
month through a direct charge to clients’ accounts.
Bank card fees
Bank card fees are primarily comprised of debit card income, ATM fees, merchant services income, and other fees. Debit card
income is primarily comprised of interchange fees earned whenever the Bank’s debit cards are processed through card
payment networks such as Visa. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-
Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their
debit card transactions. The Company’s performance obligation for bank card fees are largely satisfied, and related revenue
recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the
following month.
Gain on OREO sales, net
Gain on OREO Sales, net is recognized when the Company meets its performance obligation to transfer title to the buyer. The
gain or loss is measured as the excess of the proceeds received compared to the OREO carrying value. Sales proceeds are
received in cash at the time of transfer.
101
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and
non-interest expense in-scope of Topic 606 for the years ended December 31, 2019, 2018 and 2017.
Non-interest income
In-scope of Topic 606:
Service charges and other fees
Bank card fees
Gain on banking center divestiture
Non-interest income (in-scope of Topic 606)
Non-interest income (out-of-scope of Topic 606)
Total non-interest income
Non-interest expense
In-scope of Topic 606:
Gain on OREO sales, net
Total revenue in-scope of Topic 606
Contract acquisition costs
For the years ended December 31,
2019
2018
2017
$
$
$
19,720
14,595
—
34,315
48,437
82,752
7,193
41,508
$
$
$
20,408
14,489
—
34,897
35,878
70,775
488
35,385
$
$
$
19,070
12,026
2,942
34,038
5,167
39,205
4,150
38,188
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense,
certain incremental costs of obtaining a contract with a client if these costs are expected to be recovered. The incremental
costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a client that it would not have
incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient
which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from
capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract
acquisition costs.
Note 16 Stock-based Compensation and Benefits
The Company provides stock-based compensation in accordance with shareholder-approved plans. In 2014, shareholders
approved the 2014 Omnibus Incentive Plan (the "2014 Plan"). The 2014 Plan replaces the NBH Holdings Corp. 2009 Equity
Incentive Plan (the "Prior Plan"), pursuant to which the Company granted equity awards prior to the approval of the 2014
Plan. Pursuant to the 2014 Plan, the Compensation Committee of the Board of Directors has the authority to grant, from time
to time, awards of 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, 2019, the aggregate number of Class A common stock available for issuance under the 2014 Plan is
4,996,156 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 issues stock options, 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 or have vested over 1-4 years of
continuous service and have 10-year contractual terms.
102
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 2019, 2018 and 2017:
Weighted average fair value
Weighted average risk-free interest rate (1)
Expected volatility (2)
Expected term (years) (3)
Dividend yield (4)
$
$
2019
6.31
2.35%
20.56%
6.05
2.00%
$
2018
7.43
2.69%
20.75%
6.10
1.13%
2017
7.84
2.14%
21.61%
6.09
0.83%
(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 historical volatility of the Company’s stock price for a period commensurate
with the expected term of the options. For periods prior to the third quarter of 2018, expected volatility was calculated
using a historical volatility of the Company’s stock price 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 calculated in accordance with the Company’s dividend policy at the time of grant. For historical
dividend rates, refer to the table under Item 5 on page 31.
The Company issued stock options in accordance with the 2014 Plan during 2019. The following table summarizes stock
option activity for 2019:
Weighted
average
Outstanding at December 31, 2018
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
Options exercisable at December 31, 2019
Options vested and expected to vest
Weighted remaining
average
exercise
price
contractual Aggregate
intrinsic
value
term in
years
Options
1,264,876 $ 22.33
149,290
34.21
(705,474)
20.12
31.47
(51,578)
657,114 $ 26.69
22.30
405,225
26.40
631,916
3.92 $ 11,387
6.41 $ 5,626
5,240
4.98
5,590
6.31
Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $0.7
million, $0.8 million and $0.7 million for 2019, 2018 and 2017, respectively. At December 31, 2019, there was $0.8 million
of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to
be recognized over a weighted average period of 2.0 years.
103
The following table summarizes the Company’s outstanding stock options:
Options outstanding
Weighted average
Number
outstanding
remaining contractual
life (years)
Weighted average
exercise price
73,868
168,189
78,041
337,016
3.83 $
5.77
1.48
8.43
18.60
19.38
20.05
33.64
Options exercisable
Number
exercisable
73,868
168,189
78,041
85,127
Weighted average
exercise price
$
18.60
19.38
20.05
33.32
$
Range of exercise price
18.00 - 18.99
19.00 - 19.99
20.00 - 20.99
21.00 and above
Restricted stock awards
The Company issues primarily time-based restricted stock awards that 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.
Performance stock units
During the years ended December 2019, 2018 and 2017, the Company granted 60,781, 77,125, and 49,758 performance stock
units in accordance with the 2014 Plan, respectively. The Company grants performance stock units which represent initial
target awards and do not reflect potential increases or decreases resulting from the final performance results, which are to be
determined at the end of the three-year performance period (vesting date). The actual number of shares to be awarded at the
end of the performance period will range from 0% - 150% of the initial target awards. 60% of the award is based on the
Company’s cumulative earnings per share (EPS target) during the performance period, and 40% of the award is based on the
Company’s cumulative total shareholder return (TSR target), or TSR, during the performance period. On the vesting date, the
Company’s TSR will be compared to the respective TSRs of the companies comprising the KBW Regional Index at the grant
date to determine the shares awarded. The fair value of the EPS target portion of the award was determined based on the
closing stock price of the Company’s common stock on the grant date. The fair value of the TSR target portion of the award
was determined using a Monte Carlo Simulation at the grant date. The weighted-average grant date fair value per unit for
awards granted during 2019 of the EPS target portion and the TSR target portion was $34.08 and $27.01, respectively.
During 2019, the Company awarded an additional 22,246 units due to final performance results related to performance stock
units granted in 2016.
The following table summarizes restricted stock and performance stock unit activity during 2019 and 2018:
Unvested at December 31, 2017
Granted
Vested
Forfeited
Unvested at December 31, 2018
Granted
Adjustment due to performance
Vested
Forfeited
Unvested at December 31, 2019
Restricted
stock shares
stock units
125,082 $
77,125
—
Weighted
average grant- Performance
date fair value
22.60
33.69
23.71
29.37
28.19
35.05
—
25.21
32.68
34.19
(10,158)
192,049
60,781
22,246
(95,308)
(20,894)
158,874 $
Weighted
average grant-
date fair value
23.90
30.38
—
25.90
26.40
30.85
17.36
18.02
31.48
31.19
163,557 $
92,133
(94,775)
(14,421)
146,494
86,689
—
(85,266)
(25,719)
122,198 $
As of December 31, 2019, the total unrecognized compensation cost related to the non-vested restricted stock awards and
performance stock units totaled $2.0 million and $2.7 million, respectively, and is expected to be recognized over a weighted
average period of approximately 1.9 years and 1.7 years, respectively. Expense related to non-vested restricted stock awards
104
totaled $2.2 million, $2.1 million and $2.2 million during 2019, 2018 and 2017, respectively. Expense related to non-vested
performance stock units totaled $2.0 million, $1.5 million and $0.8 million during 2019, 2018 and 2017, 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. Employees purchased 16,556 shares and 12,515 shares during 2019 and 2018,
respectively. The total number of shares of common stock reserved for issuance under the ESPP totaled 400,000 shares, of
which 326,088 were available for issuance at December 31, 2019.
Note 17 Common Stock
The Company had 31,176,627 and 30,769,063 shares of Class A common stock outstanding at December 31, 2019 and 2018,
respectively. Additionally, the Company had 122,198 and 146,494 shares outstanding at December 31, 2019 and 2018,
respectively, of restricted Class A common stock issued but not yet vested under the 2014 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 new share repurchase program for up to $50.0 million from time to
time in either the open market or through privately negotiated transactions. The remaining authorization under this program
at December 31, 2019 was $12.6 million.
Note 18 Earnings Per Share
The Company calculates earnings per share under the two-class method, as certain non-vested share awards contain non-
forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the
Company. Non-vested shares are discussed further in note 16.
The Company had 31,176,627 and 30,769,063 shares of Class A common stock outstanding as of December 31, 2019 and
2018, 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 earnings per share because to do so would
have been anti-dilutive for 2019, 2018 and 2017.
The following table illustrates the computation of basic and diluted earnings per share for 2019, 2018 and 2017:
For the years ended December 31,
2018
61,451 $
(70)
61,381 $
2019
80,365 $
(94)
80,271 $
2017
14,579
(56)
14,523
26,928,763
772,392
8,504
Net income
Less: income allocated to participating securities
Income allocated to common shareholders
$
$
Weighted average shares outstanding for basic earnings per common share 31,175,825
354,992
Dilutive effect of equity awards
—
Dilutive effect of warrants
30,748,234
681,840
—
Weighted average shares outstanding for diluted earnings per common
share
Basic earnings per share
Diluted earnings per share
105
31,530,817
$
2.57 $
2.55
31,430,074
27,709,659
0.54
0.53
2.00 $
1.95
The Company had 657,114, 1,264,876 and 1,598,318 outstanding stock options to purchase common stock at weighted
average exercise prices of $26.69, $22.33 and $20.62 per share at December 31, 2019, 2018 and 2017, 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. The Company had 281,072, 338,543 and 288,639 unvested
restricted shares and units issued as of December 31, 2019, 2018 and 2017, 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 $15.8 million, $12.2 million and $21.3 million for 2019, 2018
and 2017, respectively. Included in income tax expense was $2.2 million, $1.3 million and $4.2 million of tax benefits from
stock compensation activity during 2019, 2018 and 2017, respectively. During the fourth quarter of 2017, the Company
remeasured its deferred tax asset as a result of the enactment of the “Tax Cuts and Jobs Act”, which among other items
reduced 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 primarily related to this remeasurement.
(a) Income taxes
Total income taxes for 2019, 2018 and 2017 were allocated as follows:
Current expense:
U.S. federal
State and local
Total current income tax expense
Deferred expense:
U.S. federal
State and local
Total deferred income tax expense
Income tax expense
(b) Tax Rate Reconciliation
For the years ended December 31,
2017
2018
2019
$
8,947 $
2,280
11,227
427 $
1,530
1,957
1,230
169
1,399
4,115
487
4,602
17,639
2,245
19,884
$ 15,829 $ 12,230 $ 21,283
10,110
163
10,273
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,
2018
2017
2019
$ 20,201 $ 15,473 $ 12,550
265
(5,380)
(813)
(3,998)
18,457
202
$ 15,829 $ 12,230 $ 21,283
2,186
(4,354)
(475)
(1,925)
—
196
1,337
(4,089)
136
(1,207)
—
580
Income tax at federal statutory rates (21%, 21% and 35%, respectively)
State income taxes, net of federal benefits
Tax-exempt loan interest income
Bank-owned life insurance income
Stock-based compensation
Deferred tax rate change
Other
Income tax expense
106
(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, 2019 and 2018 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
Lease liability
Net unrealized losses on investment securities
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Net unrealized gains on investment securities
Premises and equipment
Right of use assets
Prepaid expenses
Net deferred loan fees
Mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax asset
December 31, 2019 December 31, 2018
$
$
2,053 $
9,414
—
810
1,945
3,425
1,885
1,051
63
707
7,113
—
1,910
30,376
(327)
(647)
(1,852)
(7,033)
(209)
—
(634)
(196)
(10,898)
19,478 $
3,076
8,521
1,937
439
2,889
3,046
2,199
1,357
—
807
—
3,543
1,960
29,774
—
—
(114)
—
(210)
(174)
(854)
(71)
(1,423)
28,351
At December 31, 2019, the Company had federal and state net operating loss carryovers (NOLs) of $2.7 million and $3.7
million, respectively, which are available to offset future taxable income. The federal NOLs expire in varying amounts
through 2034, and the state NOLs expire in varying amounts between 2026 and 2034. 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, 2019 and 2018, 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, 2019 and 2018 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, 2016 through
2019 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.
107
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, 2019 and 2018.
Information about the valuation methods used to measure fair value is provided in note 22.
Derivatives designated as hedging
instruments:
Balance Sheet
location
Asset derivatives fair value
December 31,
2019
2018
December 31, Balance Sheet
Liability derivatives fair value
December 31, December 31,
Location
2019
2018
Interest rate products
Other assets
$
1,171 $
17,436 Other liabilities $
13,537 $
Total derivatives designated as
hedging instruments
Derivatives not designated as hedging
instruments:
$
1,171 $
17,436
$
13,537 $
228
228
Interest rate products
Interest rate lock commitments
Forward contracts
Other assets
Other assets
Other assets
$
9,004 $
1,499
16
3,191 Other liabilities $
871 Other liabilities
— Other liabilities
9,021 $
141
299
3,349
72
472
Total derivatives not designated
as hedging instruments
Fair value hedges
$
10,519 $
4,062
$
9,461 $
3,893
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, 2019, the Company had interest rate swaps with a notional amount of
$403.7 million that were designated as fair value hedges of interest rate risk. These interest rate swaps were associated with
$405.9 million of the Company’s fixed-rate loans, excluding a gain of $13.9 million from the fair value hedge adjustment in
the carrying amount. The Company’s fixed rate loans are included in loans receivable on the statements of financial
condition.
As of December 31, 2018, the Company had interest rate swaps with a notional amount of $473.4 million that were
designated as fair value hedges. These interest rate swaps were associated with $522.7 million of the Company’s fixed-rate
loans as of December 31, 2018, excluding a loss of $13.2 million from the fair value hedge adjustment in the carrying amount
as of December 31, 2018.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss
or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss
on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.
108
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, 2019, the Company had matched interest rate swap transactions with an aggregate notional amount of
$478.9 million related to this program. As of December 31, 2018, the Company had matched interest rate swap transactions
with an aggregate notional amount of $206.8 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 clients 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 assets. The fair value of the underlying assets is impacted by
current interest rates, remaining origination fees, costs of production to be incurred, and 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 interest rate lock commitments with a notional value of $99.8 million and forward contracts with a
notional value of $181.5 million at December 31, 2019. The Company had interest rate lock commitments with a notional
value of $50.1 million and forward contracts with a notional value of $77.6 million at December 31, 2018.
Effect of derivative instruments on the consolidated statements of operations
The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of
operations for 2019 and 2018:
Derivatives in fair value
hedging relationships
Interest rate products
Total
Hedged items
Interest rate products
Total
Location of gain (loss)
recognized in income on
derivatives
Interest and fees on loans
Amount of gain (loss) recognized in income on derivatives
For the years ended December 31,
2019
2018
$
$
10,397
10,397
$
$
13,513
13,513
Location of gain (loss)
recognized in income on
hedged items
Interest and fees on loans
Amount of gain (loss) recognized in income on hedged items
For the years ended December 31,
2019
2018
$
$
(9,603)
(9,603)
$
$
(13,972)
(13,972)
109
Derivatives not designated
as hedging instruments
Interest rate products
Interest rate lock commitments
Forward contracts
Total
Location of gain (loss)
recognized in income on
derivatives
Other non-interest expense
Mortgage banking income
Mortgage banking income
Amount of gain (loss) recognized in income on derivatives
For the years ended December 31,
2019
2018
$
$
133
1,138
189
1,460
$
$
55
(1,329)
1,324
50
Credit-risk-related contingent features
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on
any of its indebtedness for reasons other than an error or omission of an administrative or operational nature, including
default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared
in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company
fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to terminate the
derivative positions and the Company would be required to settle its obligations under the agreements.
As of December 31, 2019, the termination value of derivatives in a net liability position related to these agreements was
$22.6 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, 2019, the
Company had posted $26.2 million in eligible collateral. If the Company had breached any of these provisions at December
31, 2019, 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, 2019 and 2018, the Company had loan
commitments totaling $850.3 million and $773.5 million, respectively, and standby letters of credit that totaled $11.9 million
and $10.6 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, 2019 and 2018 were as follows:
Commitments to fund loans
Unfunded commitments under lines of credit
Commercial and standby letters of credit
Total unfunded commitments
December 31, 2019 December 31, 2018
183,946
$
589,573
10,558
784,077
249,914 $
600,407
11,929
862,250 $
$
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.
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.
110
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
Mortgage loans sold to investors may be subject to repurchase or indemnification in the event of specific default by the
borrower or subsequent discovery that underwriting standards were not met. The Company established a reserve liability for
expected losses related to these representations and warranties based upon management’s evaluation of actual and historic
loss history, delinquency trends in the portfolio and economic conditions. The Company recorded a repurchase reserve of
$2.6 million and $3.4 million at December 31, 2019 and 2018, respectively, which is included in other liabilities on the
consolidated statements of financial condition.
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 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. While third party price indications may be available in those cases, limited trading
activity can challenge the observability of those inputs.
111
Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in
current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another
level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting
period that the transfer occurs. During 2019 and 2018, 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, 2019 and 2018, 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 portfolio consists primarily of fixed rate residential mortgage loans that are sold within 45 days. 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 and Credit Support Annexes 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.
112
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31, 2019 and
2018, on the consolidated statements of financial condition utilizing the hierarchy structure described above:
Level 1
Level 2
Level 3
Total
December 31, 2019
Assets:
Investment securities available-for-sale:
Mortgage-backed securities:
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:
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
$
— $ 95,256 $
— $ 95,256
542,037
372
117,444
10,175
—
—
—
—
—
—
— $ 765,284 $
542,037
—
372
—
117,444
—
10,175
—
1,515
1,515
1,515 $ 766,799
— $ 22,558 $
—
— $ 22,558 $
—
— $ 22,558
440
440
440 $ 22,998
$
$
$
Level 1
Level 2
Level 3
Total
December 31, 2018
$
— $ 146,642 $
— $ 146,642
643,381
441
48,120
20,627
—
—
—
—
—
—
— $ 859,211 $
643,381
—
441
—
48,120
—
20,627
—
871
871
871 $ 860,082
— $
—
— $
3,577 $
—
3,577 $
— $
544
544 $
3,577
544
4,121
$
$
$
The table below details the changes in level 3 financial instruments during 2019:
Balance at December 31, 2018
Gain included in earnings, net
Fees and costs included in earnings, net
Balance at December 31, 2019
Mortgage banking
derivatives, net
$
$
327
1,327
(579)
1,075
113
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.
Impaired loans—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, 2019, the Company recorded a specific
reserve of $1.8 million related to seven originated and acquired loans with a carrying balance of $5.9 million. At
December 31, 2018, the Company recorded a specific reserve balance of $1.1 million related to four originated and acquired
loans at fair value on a non-recurring basis with a carrying balance of $4.9 million.
OREO—OREO is recorded at the fair value of the collateral less estimated selling costs. The estimated fair values of OREO
are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized $1.1 million
and $0.2 million of OREO impairments in its consolidated statements of operations during 2019 and 2018, 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 value of OREO properties are considered
level 3 inputs in the fair value hierarchy.
Mortgage servicing rights—Mortgage servicing rights represent the value associated with servicing residential real estate
loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined
through discounted cash flow analysis and utilizes discount rates ranging from 9.5% to 10.5% at December 31, 2019 and
prepayment speed assumption ranges of 14.8% to 22.0% at December 31, 2019 as inputs. Discount rates ranged from 9.5% to
10.5% and the prepayment speed ranged from 12.2% to 17.2% for the December 31, 2018 valuation. Mortgage servicing
rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon
the calculation of fair value. For purposes of measuring impairment, the rights are stratified into certain risk characteristics
including note type and note term. If the valuation model reflects a value less than the carrying value, mortgage servicing
rights are adjusted to fair value through a valuation allowance. The Company recognized $129 thousand and $21 thousand of
mortgage servicing rights impairment during the years ended December 31, 2019 and 2018, which is included in mortgage
banking income on the consolidated statements of operations. The inputs used to determine the fair values of mortgage
servicing rights are considered level 3 inputs in the fair value hierarchy.
Premises and equipment—During the fourth quarter of 2019, the Company consolidated four banking centers in the Colorado
and Kansas City markets. Premise and equipment held-for-sale are written down to estimated fair value less costs to sell in
the period in which the held-for-sale criteria are met. Fair value is estimated in a process which considers current local
commercial real estate market conditions and the judgment of the sales agent and often involves obtaining third party
appraisals from certified real estate appraisers. These fair value measurements are classified as Level 3. Unobservable inputs
to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily
quantifiable. The Company recognized $0.9 million of impairment in its consolidated statements of operations related to
banking centers classified as held-for-sale totaling $3.4 million during the year ended December 31, 2019.
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.
114
The tables below provide information regarding the assets recorded at fair value on a non-recurring basis at December 31,
2019 and 2018. The premises and equipment loss was measured as of the third quarter of 2019.
December 31, 2019
Impaired loans
Other real estate owned
Premises and equipment
Mortgage servicing rights
Total
Impaired loans
Other real estate owned
Mortgage servicing rights
Total
$
$
$
$
Total
32,763 $
7,300
3,385
2,630
46,078 $
Losses from fair value changes
8,271
1,082
898
129
10,380
December 31, 2018
Total
31,079 $
10,596
3,556
45,231 $
Losses from fair value changes
2,120
230
21
2,371
The Company did not record any liabilities measured at fair value on a non-recurring basis during 2019 and 2018.
Note 23 Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that would be exchanged between willing parties, other than in a forced
liquidation. Fair value is determined based upon quoted market prices to the extent possible; however, in many instances,
there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other valuation techniques that may be significantly
impacted by the assumptions used, including the discount rate and estimates of future cash flows. Changes in any of these
assumptions could significantly affect the fair value estimates. The fair value of the financial instruments listed below does
not reflect a premium or discount that could result from offering all of the Company’s holdings of financial instruments at
one time, nor does it reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation methodologies and are based on the exit price
concept within ASC Topic 825 and applied to this disclosure on a prospective basis. Considerable judgment is required to
interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current market exchange.
115
The fair value of financial instruments at December 31, 2019 and 2018 are set forth below:
ASSETS
hierarchy
Level in fair value
measurement
December 31, 2019
December 31, 2018
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 available-for-sale
Municipal securities available-for-sale
Other available-for-sale securities
Mortgage-backed securities—residential mortgage
pass-through securities issued or guaranteed by U.S.
Government agencies or sponsored enterprises held-
to-maturity
Mortgage-backed securities—other residential
mortgage-backed securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
held-to-maturity
Non-marketable securities
Loans receivable
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
Level 1
$
110,190 $
110,190 $
109,556 $
109,556
Level 2
95,256
95,256
146,642
146,642
Level 2
Level 2
Level 3
Level 3
542,037
372
115
469
542,037
372
115
469
643,381
441
169
469
643,381
441
169
469
Level 2
127,560
128,770
157,115
154,412
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
55,324
29,751
4,415,406
117,444
19,157
10,175
1,515
54,971
29,751
4,481,209
117,444
19,157
10,175
1,515
78,283
27,555
4,092,308
48,120
17,852
20,627
871
76,514
27,555
4,082,146
48,120
17,852
20,627
871
3,678,979
1,058,153
56,935
207,675
9,328
22,558
440
3,678,979
1,058,354
56,935
207,890
9,328
22,558
440
3,445,092
1,080,529
66,047
301,660
6,889
3,577
544
3,445,092
1,068,233
66,047
301,933
6,889
3,577
544
116
Note 24 Parent Company Only Financial Statements
Parent company only financial information for National Bank Holdings Corporation is summarized as follows:
Condensed Statements of Financial Condition
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Operations
December 31, 2019 December 31, 2018
$
$
$
$
105,012 $
654,508
18,095
777,615 $
10,695 $
10,695
766,920
777,615 $
71,997
612,784
21,002
705,783
10,777
10,777
695,006
705,783
For the years ended December 31,
2017
2018
2019
$
— $
112 $
28,133
55,725
83,858
19,682
47,338
67,132
45
(11,192)
28,903
17,756
3,680
4,455
4,925
3,587
4,467
2,463
7,267
8,922
7,388
10,489
58,210
76,470
(3,895)
(4,090)
(3,241)
80,365 $ 61,451 $ 14,579
$
Income
Interest income
Equity in undistributed earnings (losses) of subsidiaries
Distributions from subsidiaries
Total income
Expenses
Salaries and benefits
Other expenses
Total expenses
Income before income taxes
Income tax benefit
Net income
117
Condensed Statements of Cash Flows
For the years ended December 31,
2017
2018
2019
$ 80,365 $ 61,451 $ 14,579
11,192
3,648
(4,225)
6,680
31,874
(28,133)
4,869
(2,160)
5,045
59,986
(19,682)
4,420
(1,286)
9,230
54,133
—
—
(36,189)
(36,189)
—
—
—
(6,229)
2,788
(23,530)
(26,971)
33,015
81,997
(5,000)
(8,395)
104
(9,401)
(22,692)
9,182
64,691
$ 115,012 $ 81,997 $ 73,873
—
(772)
7,576
(16,624)
(9,820)
8,124
73,873
First
Total
quarter
Third
quarter
December 31, 2019
Second
Fourth
quarter
quarter
$ 59,616 $ 61,372 $ 62,193 $ 59,420 $ 242,601
36,771
205,830
11,643
194,187
82,752
180,745
96,194
15,829
$ 19,519 $ 21,642 $ 20,282 $ 18,922 $ 80,365
2.57
$
2.55
8,254
51,166
1,534
49,632
17,051
44,394
22,289
3,367
9,702
52,491
3,239
49,252
20,660
46,451
23,461
3,179
9,587
51,785
5,690
46,095
24,759
43,793
27,061
5,419
9,228
50,388
1,180
49,208
20,282
46,107
23,383
3,864
0.61 $
0.60
0.65 $
0.64
0.69 $
0.69
0.62 $
0.62
Cash flows from operating activities:
Net income
Equity in undistributed (earnings) losses of subsidiaries
Stock-based compensation expense
Net excess tax benefit on stock-based compensation
Other
Net cash provided by operating activities
Cash flows from investing activities:
Outlay for business combinations
Net cash used in investing activities
Cash flows from financing activities:
Capital contribution
Issuance of stock under purchase and equity compensation plans
Proceeds from exercise of stock options
Payment of dividends
Net cash used in financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at end of the year
Note 25 Quarterly Results of Operations (unaudited)
The following is a summary of quarterly results:
Interest and dividend income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Earnings per share-basic
Earnings per share-diluted
118
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
Earnings per share-basic
Earnings per share-diluted
Interest and dividend income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense (benefit)
Net (loss) income
(Loss) earnings per share-basic
(Loss) earnings per share-diluted
Note 26 Acquisition Activities
First
Total
quarter
Third
quarter
December 31, 2018
Second
Fourth
quarter
quarter
$ 57,780 $ 55,909 $ 54,911 $ 52,791 $ 221,391
23,954
197,437
5,197
192,240
70,775
189,334
73,681
12,230
$ 17,235 $ 18,240 $ 17,512 $ 8,464 $ 61,451
2.00
$
1.95
5,144
47,647
41
47,606
17,835
55,282
10,159
1,695
5,525
49,386
1,873
47,513
19,562
46,763
20,312
2,800
6,137
49,772
807
48,965
18,061
44,432
22,594
4,354
7,148
50,632
2,476
48,156
15,317
42,857
20,616
3,381
0.28 $
0.27
0.57 $
0.56
0.59 $
0.58
0.56 $
0.55
December 31, 2017
First
Total
quarter
Third
quarter
Fourth
quarter
4,976
36,913
3,272
33,641
8,883
34,028
8,496
18,615
Second
quarter
$ 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
4,018
34,722
1,795
32,927
8,696
34,605
7,018
(1,240)
4,440
36,773
4,025
32,748
12,075
33,439
11,384
2,175
4,681
37,898
3,880
34,018
9,551
34,605
8,964
1,733
(0.37) $
(0.37)
0.31 $
0.30
0.34 $
0.33
0.27 $
0.26
On January 1, 2018, the Company completed its acquisition of Peoples, Inc. (“Peoples”), 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. Included in the cash consideration is $10.0 million of
restricted cash placed in escrow for certain potential liabilities for which the Company is indemnified pursuant to the merger
agreement. The restricted cash is included in other assets in the Company’s consolidated statements of financial condition at
December 31, 2019. The transaction was valued at $146.4 million in the aggregate, based on the Company’s closing price of
$32.43 on the acquisition date. Acquisition-related costs of $8.0 million on a pre-tax basis were included in the Company’s
consolidated statements of operations for the year ended December 31, 2018. The results of Peoples are included in the
results of the Company subsequent to the acquisition date.
The Company determined that this acquisition constitutes a business combination as defined in ASC Topic 805. 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 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, OREO, core deposit intangible, mortgage servicing rights and
mortgage repurchase reserve involves a high degree of judgment and complexity.
119
The table below summarizes the 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
FHLB borrowings
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
Goodwill
$
105,173
118,512
4,796
542,707
54,260
1,253
18,584
10,477
4,301
15,361
875,424
729,911
33,825
20,683
784,419
$
91,005
$
110,213
36,189
146,402
$
55,397
In connection with the Peoples acquisition, the Company recorded $55.4 million of goodwill, a $10.5 million core deposit
intangible asset, a $4.3 million mortgage servicing rights intangible asset and a $4.0 million mortgage repurchase reserve,
included in other liabilities. The core deposit intangible is being 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 FHLB
borrowings of $33.8 million were paid off during the first quarter of 2018. The goodwill associated with this transaction is
not tax deductible.
At the date of acquisition, the gross contractual amounts receivable, inclusive of all principal and interest, was $713.6
million. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected was $2.1
million.
The following unaudited pro forma information combines the historical results of Peoples and the Company. In accordance
with the merger agreement, the Peoples national mortgage business was wound down prior to acquisition. Accordingly, the
pro forma information excludes the results of the Peoples national mortgage business for prior periods presented. The pro
forma financial information does not include the potential impacts of possible business model changes, current market
conditions, revenue enhancements, expense efficiencies, or other factors.
If the Peoples acquisition had been completed on January 1, 2017, pro forma total revenue for the Company would have been
approximately $268.2 million and $266.5 million for the years ended December 31, 2018 and 2017, respectively. Pro forma
net income for the Company would have been approximately $67.8 million and $16.6 million for the years ended
December 31, 2018 and 2017, respectively. Pro forma basic and dilutive earnings per share for the Company would have
been $2.20 and $2.16 for the year ended December 31, 2018, respectively, and $0.55 and $0.53 for the year ended
December 31, 2017, respectively.
120
For the year ended December 31, 2018, the pro forma information reflects adjustments made to exclude acquisition-related
expenses of the Company of $8.0 million. For the year ended December 31, 2017, the pro-forma information reflects
adjustments made to exclude acquisition-related expenses of the Company of $2.7 million and include estimated amortization
and accretion of purchase discounts and premiums of $0.7 million in addition to estimated amortization of acquired
identifiable intangibles of $1.0 million. The pro forma information is theoretical in nature and not necessarily indicative of
future consolidated results of operations of the Company or the consolidated results of operations which would have resulted
had the Company acquired Peoples during the periods presented.
The Company has determined that it is impractical to report the amounts of revenue and earnings of legacy Peoples since the
acquisition date. Peoples operations were completely integrated shortly after the acquisition date. Accordingly, reliable and
separate complete revenue and earnings information is no longer available. In addition, such amounts would require
significant estimates related to the proper allocation of merger cost savings that cannot be objectively made.
Note 27 Subsequent Event
On February 26, 2020, the Company’s Board of Directors authorized a new program to repurchase up to $50.0 million of the
Company’s common stock from time to time either in the open market or in privately negotiated transactions in accordance
with applicable regulations of the Securities and Exchange Commission. Total authorization under the Company’s
repurchase programs is $62.6 million, including $12.6 million remaining from the previously authorized stock repurchase
program announced in August 2016.
121
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, 2019. 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, 2019.
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, 2019 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, 2019. 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, 2019, 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.
122
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, 2019, 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, 2019, 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, 2019 and 2018, the related
consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2019 and the related notes (collectively, the consolidated financial
statements), and our report dated February 26, 2020 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.
123
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 26, 2020
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
2020 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
2020 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
2020 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
2020 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
2020 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
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Page
71
72
73
74
75
76
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
10.1
10.2
10.3
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)
Description of Capital Stock (filed herewith)
Form of Indemnification Agreement by and between NBH Holdings Corp. and each of its directors
and executive officers (incorporated herein by reference to Exhibit 10.6 to our Form S-1 Registration
Statement (Registration Statement No. 333-177971), filed on September 10, 2012)˄
Employment Agreement, dated May 22, 2010, by and between G. Timothy Laney and NBH Holdings
Corp. (incorporated herein by reference to Exhibit 10.1 to our Form S-1 Registration Statement
(Registration Statement No. 333-177971), filed on September 10, 2012)˄
First Amendment to Employment Agreement, dated November 17, 2015, by and between G. Timothy
Laney and National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.2 to
our Form 8-K, filed on November 20, 2015)˄
126
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
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)˄
Transition Agreement, dated May 2, 2018, by and between Brian F. Lilly and National Bank
Holdings Corporation (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on
May 2, 2018)˄
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)˄
Employment Agreement, dated May 2, 2018, by and between Aldis Birkans and National Bank
Holdings Corporation (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on
May 2, 2018)˄
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) (filed herewith)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Restricted Stock Award
Agreement (For Management) (filed herewith)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Nonqualified Stock
Option Agreement (For Management) (filed herewith)˄
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)˄
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
(incorporated herein by reference to Exhibit 10.17 to our form 10-K, filed on February 28, 2018)˄
127
21.1
23.1
31.1
31.2
32
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
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
XBRL Instance – the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Labels
XBRL Taxonomy Extension Presentation
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* 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.
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 26, 2020, 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 26, 2020,
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/ ALDIS BIRKANS
Aldis Birkans
Chief Financial Officer
(principal financial officer)
/s/ NICOLE VAN DENABEELE
Nicole Van Denabeele
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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Corporate Headquarters
National Bank Holdings Corporation
7800 East Orchard Road, Suite 300
Greenwood Village, CO 80111
Tel: 720.554.6640
www.nationalbankholdings.com
Stock Exchange Listings
NYSE
Symbol: NBHC
Independent Accountants
KPMG LLP
Kansas City, MO
Transfer Agent, Registrar and
Dividend Disbursing Agent
Equiniti (EQ Shareowner Services)
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
Tel (Inside US): 800-468-9716
Tel (Outside US): 651-450-4064
www.equiniti.com
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 101 banking centers. Our core markets are Colorado, the
greater Kansas City region, New Mexico, Texas and Utah. More information about National Bank Holdings Corporation
can be found at www.nationalbankholdings.com.
RECENT HISTORY AND PERFORMANCE
Began banking operations in 2010/2011 with four acquisitions in 12 months, with two subsequent acquisitions completed
in 2015 and 2018.
Created meaningful scale and market share in the attractive markets of Colorado and Kansas City MSA.
Experienced, respected and accomplished management team and board of directors.
Continuous improvement of profitability and returns.
Execution of client-centered and relationship-based strategies
focused on small-to-medium sized business and individuals,
delivering accelerating organic revenue growth.
Built a granular and well-diversified loan portfolio with
self-imposed concentration limits to protect against downside
risk that is well positioned to absorb stress while providing
excellent risk-adjusted returns.
Growing an attractive relationship-based and low-cost deposit
base in strong markets.
Maintenance of a strong expense management focus and culture,
with a track record of improving operating efficiencies.
Consolidated four banking centers in Q4-2019, bringing
total banking center consolidations or sales to 29, or 22%,
since inception.
Remain an opportunistic and disciplined manager of capital,
steadily increasing our dividend 122% over the past 2 years.
OUR FAMILY OF BRANDS 2
Diluted EPS
Return on Average Tangible Assets
Return on Average Tangible Equity
5.04%
0.57%
$0.79
2016
7.75%
0.82%
$1.26
20171
Adjusted
12.76%
13.07%
1.26%
1.42%
$2.16
20181
Adjusted
$2.55
2019
Fully Diluted EPS
ROATA1
ROATCE1
1Represents a non-GAAP measure. Please see page 40 of the Form 10-K
for a reconciliation of these measures.
2NBH Bank operates under the following brand names: Community Banks of Colorado and Community Banks Mortgage, a division of NBH Bank, in Colorado, Bank Midwest and
Bank Midwest Mortgage in Kansas and Missouri, and Hillcrest Bank and Hillcrest Bank Mortgage in New Mexico, Texas and Utah. NBH Bank, Community Banks of Colorado, Bank
Midwest, Hillcrest Bank, and the corresponding logo marks, are registered trademarks and service marks, as applicable, of National Bank Holdings Corporation.
3/19/20 6:49 PM
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