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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, 2020
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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $796,000,000 based on the closing sale price as
reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 22, 2021, NBHC had outstanding 30,642,692 shares of Class A voting common stock with $0.01 par value per share, excluding 165,940 shares of restricted Class A common
stock issued but not yet vested.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2021 Annual Meeting of Shareholders to be filed within 120 days of December 31, 2020 will be incorporated by reference into Part
III of this Form 10-K.
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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
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71
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127
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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 any potential government shutdowns;
● 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;
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● our ability to achieve organic loan and deposit growth and the composition of such growth;
● changes in sources and uses of funds, including loans, deposits and borrowings;
● increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other things,
lower returns;
● 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
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 credit 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;
● adverse effects due to the novel Coronavirus Disease 2019 (“COVID-19”) on the Company and its clients, counterparties,
employees and third-party service providers, and the adverse impacts on our business, financial position, results of
operations and prospects;
● 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;
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● other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and
Exchange Commission; and
● our success at managing the risks involved in the foregoing items.
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-
looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of
unanticipated events or circumstances, except as required by applicable law.
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"). The Company provides a variety of banking products and services to both commercial
and consumer clients through a network of 90 banking centers, as of December 31, 2020, located primarily in Colorado and the greater
Kansas City region, and through online and mobile banking products and services. As of December 31, 2020, we had $6.7 billion in
assets, $4.4 billion in loans, $5.7 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 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
Texas, Utah and New Mexico. 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.
We began banking operations in October 2010 and, as of December 31, 2020, we have completed six bank acquisitions. We have
transformed these banks into one collective banking operation with a strong capital position, organic growth, prudent underwriting, a
granular and well-diversified loan portfolio and meaningful market share with continued opportunity for expansion.
Our Market Area
Our core markets are broadly defined as Colorado, the greater Kansas City region, Texas, Utah and New Mexico. We are the third
largest banking center network among Colorado-based banks and the eighth largest banking center network in the greater Kansas City
metropolitan statistical area (“MSA”) among Missouri- and Kansas-based banks ranked by deposits as of June 30, 2020 (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.
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.
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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)
Deposits
(billions)
$ 106.6
144.1
72.4
51.3
375.1
59.7
# of
businesses
(thousands)
148.3
235.1
102.8
94.7
> 250.0
54.4
Population Unemployment Population
rate(1)
(millions)
growth(2)
Median
household
income
3.0
4.8
2.2
2.2
7.7
1.2
8.5%
8.4%
4.8%
5.4%
6.7%
3.8%
6.7%
18.0% $ 83,768
18.4% 80,902
8.0% 69,742
30.3%
19.2%
14.4%
7.0% 66,010
82,650
73,009
78,785
Top 3
competitor
combined
deposit
market share
50%
50%
43%
51%
60%
80%
56%
(1) Unemployment data is as of December 31, 2020.
(2) For the period 2010 through 2020.
(3) Colorado Front Range is a population weighted average of the following Colorado MSAs: Denver, Boulder, Colorado Springs,
Fort Collins and Greeley.
(4) Top 3 competitor combined deposit market share based on U.S. Top 20 MSAs (determined by population).
Source: S&P Global as of December 31, 2020, except Deposits and Top 3 Competitor Combined Deposit Market Shares, which
reflects data as of June 30, 2020.
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.
While we remain focused on executing on our business strategies, in 2020 the COVID-19 pandemic necessitated a shift to focus our
immediate attention on the following three priorities: 1) protecting the health of our associates and clients, 2) ensuring the safety and
soundness of our bank, and 3) acting on every opportunity to prudently support our clients and the communities where we do business.
We continue to leverage our digital banking platform with our clients and have been working diligently to support our clients who are
experiencing financial hardship through participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program
(“PPP”) created under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), including assistance with PPP loan
forgiveness applications for the first draw loans, PPP loan applications for the second draw and loan modifications, as needed.
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 SBA
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providing a leveraged platform for growth in the business lending segment. We believe we are well-positioned to leverage
our operating and risk management infrastructure through organic growth, and we intend to continue to add or repurpose our
commercial relationship managers to higher growth opportunities and markets in order to drive increased profitability.
●
Expansion through organic growth and competitive product offerings. We believe that our focus on serving consumers and
small- to medium-sized businesses, coupled with our competitive product offerings, will provide an expanded revenue base
and new sources of fee income. We conduct regular market and competitive analysis to determine which products and
services are best suited for our clients. Our teams also continue to pursue opportunities to deepen client relationships, which
we believe will further increase our organic loan origination volumes and attract new transaction accounts that offer lower
cost of funds and higher fee generating activity.
● 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, including banking center consolidations.
● 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. In light
of the strain placed on certain industries by the COVID-19 pandemic, the Company has prudently evaluated and continues to
closely monitor our entire loan portfolio. To manage credit risk and yield, we are taking a very careful approach to extending
new credit. 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 main focus is on our primary markets of Colorado, the greater Kansas City
region, Texas, Utah and New Mexico, including teams, asset portfolios, specialty commercial finance businesses, and whole
banks. From time to time, we also consider other types of opportunities that would be expected to improve our profitability,
leverage greater scale and/or leverage technology to grow our digital offerings.
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. While the pandemic has created operating stress for many
businesses, our teams continually monitor the financial health of our clients in order to manage the increased risk presented by the
pandemic and its impact to the global economy. Our strong capital and liquidity
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have allowed us to prudently navigate a challenging economy, and we believe we are well positioned to continue to support our clients
and communities.
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, Texas, Utah
and New Mexico. We conduct our banking business through 90 banking centers, with 45 of those located in Colorado, 37 in Kansas
and Missouri, two in Texas, one in Utah and five in New Mexico as of December 31, 2020. Our distribution network also includes 128
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 believe that a personalized 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 and commercial real estate investors/developers 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 positions us well for continued growth in our originated loan
portfolio. During 2020, our teams have also been working diligently to support our clients who are experiencing financial hardship due
to COVID-19 through participation in the SBA’s Paycheck Protection Program, including assistance with PPP loan forgiveness
applications, and loan modifications, as needed. 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 agribusiness 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 one to three years, 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, 2020, 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 the lessor of a 75% or less loan to cost or loan to value ratio.
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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. During 2020, we participated in the CARES Act Paycheck
Protection Program, and continue to do so, by offering PPP loans to provide support and funding to our clients affected by the
COVID-19 pandemic. Our approach to PPP loans has been to provide the greatest value to our clients both with a thorough and
efficient PPP loan origination process and through efficient and expeditious PPP forgiveness.
Commercial Deposit and Treasury Management 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
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. 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. Currently,
conventional loans in states where the bank has market presence may be sold with servicing retained or with servicing released.
Government loans and conventional loans in states where the bank does not have a market presence are generally sold with servicing
released. We have 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
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by second lien positions on residential real estate, and residential construction loans to consumers and builders for the construction of
residential real estate. We do not originate or purchase negatively amortizing or sub-prime residential loans.
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.
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. In light of the strain placed on certain industries by the COVID-19 pandemic, the Company has prudently
evaluated and continues to closely monitor our entire loan portfolio. To manage credit risk and yield, we are taking a very careful
approach to extending new credit. The principal risk evaluated 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.”
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Competition
The banking landscape in our primary markets of Colorado, Kansas City region, Texas, Utah and New Mexico 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, especially during the COVID-19 pandemic, our digital banking platform.
We recognize that there are banks and other financial services companies with which we compete that have greater financial
resources, access to more capital and higher lending capacity 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.
Human Capital
Our core values Integrity, Meritocracy, Teamwork and Citizenship, represent our belief that our Company’s long-term success is
deeply tied to having a dedicated and engaged workforce and a commitment to the communities we serve. We are committed to
building and contributing to a healthy workplace environment for our associates by investing in competitive compensation and benefit
packages, promoting inclusion of diverse viewpoints and backgrounds, providing training and career development opportunities and
promoting qualified associates within our organization.
Associate Statistics
We are committed to attracting, developing, and retaining associates who reflect the communities in which we serve. Partnerships with
professional associations, schools and universities imbedded within our local footprint, and the use of various technology solutions
assist us in connecting and building relationships with a diverse pool of candidates. As of December 31, 2020, we employed 1,166
full-time and 58 part-time associates throughout the six states in our business footprint.
The market for top talent is highly competitive. We recognize that workforce turnover is not only financially costly, but it does not
align with our commitment to our team. We believe we are best served when we can invest through meritocracy within our current
talent pool. The average tenure of service of our associates is approximately seven years.
Equity, Diversity and Inclusion
We strongly believe that equity, diversity and inclusion are important elements in building and sustaining a successful organization
and positive, results-driven culture. Additionally, equity, diversity and inclusion helps us to connect and build better relationships
within our Company and communities. As a result of our efforts:
●
68% of the Company’s workforce is female and 57% of the Company’s managerial roles are female, as of December 31,
2020.
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● Minorities represent 24% of the Company’s workforce and 20% of the Company’s managerial roles, as of December 31,
●
●
2020.
In 2020, we hired 390 associates, and 74% of those new associates were female and 33% were minorities.
In 2020, 228 associates, or 19% of our workforce, were promoted, and 68% of those individuals were female and 21% were
minorities.
The Company oversees its Equity, Diversity and Inclusion efforts through its Equity, Diversity and Inclusion Committee that is
comprised of a multi-disciplinary group of associates throughout NBH Bank with oversight by the executive management team. To
further our diversity goals for our workforce, the Company has also implemented programs developed to foster equality and leadership
opportunities for the entire associate base, including events with keynote speakers, panels and Q&A forums to enable associate
feedback. Our management team also plays an integral part in championing women in business by hosting networking events, serving
on panels and sponsoring relevant events that foster understanding and engagement, such as the ATHENA leadership awards.
Associate Development and Training
We believe that building the best team requires investing in our associates’ professional development. Associates have access to our
learning center, NBH University, which offers a variety of courses that center around professional development. Additionally, we have
connection mentors in place to assist new associates with expanding their network, building professional skills, helping navigate the
organization and assist in onboarding.
Compensation and Benefits
Our Company offers comprehensive benefits packages to our associates, including medical and prescription drug insurance, dental
insurance and vision insurance as well as several voluntary benefit options. Our compensation structure recognizes the individual
performance of our associates through merit-based salary increases with a focus on variable pay and paying for performance.
We also encourage our associates to think about their long-term financial stability. Our associates have the opportunity to participate
in our 401(k) plan, which includes contribution matches from the Company. Additionally, we offer a stock purchase plan (ASPP) to
our associates which allows those who work 20 hours or more per week to purchase shares in our Company through payroll
deductions at a 10% discount.
Community Engagement
We strive to make a positive impact in the communities we serve through consistent engagement, as well as maintaining strong
partnerships with a wide range of charitable organizations and causes. All bank associates are granted up to eight paid hours each year
to donate their time to non-profit organizations that align with our CRA initiatives.
Safety and Respect in the Workplace
We are committed to providing a safe and secure work environment in accordance with applicable labor, safety, health, anti-
discrimination and other workplace laws. We strive for all of our associates to feel safe and empowered at work. To that end, we
maintain a whistleblower hotline that allows associates and others to anonymously voice concerns. We prohibit retaliation against an
individual who reported a concern or assisted with an inquiry or investigation.
Our Company has taken workplace safety very seriously during the COVID-19 pandemic. From the onset of the pandemic and into the
month of May, we provided “premium pay” for banking center and operations associates whose job functions required them to be
physically present. We have restricted services in our banking center lobbies to by appointment-only, maintained drive-thru services
for our clients, provided two weeks paid time off for our associates affected by COVID-19 illness and/or quarantines, waived medical
plan cost-sharing and co-pays for COVID-19 testing and treatment, instituted daily health assessments for associates who are working
in our physical locations and have followed applicable health and governmental guidelines on quarantining.
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SUPERVISION AND REGULATION
The U.S. banking industry is highly regulated under federal and state law. Banking laws, regulations, and policies affect the operations
of the Company and its subsidiary. Investors should understand that the primary objective of the U.S. bank regulatory regime is the
protection of depositors, the Depositors Insurance Fund (“DIF”), and the banking system as a whole, not the protection of the
Company’s shareholders.
As a bank holding company, we are subject to inspection, examination, supervision and regulation by the Board of Governors of the
Federal Reserve System (the “Federal Reserve”). Our bank subsidiary, NBH Bank, is a Colorado state-chartered bank and a member
of the Federal Reserve Bank of Kansas City. As such, NBH Bank is subject to examination, supervision and regulation by both the
Colorado Division of Banking and the Federal Reserve. In addition, we expect that any additional businesses that we may invest in or
acquire will be regulated by various state and/or federal banking regulators.
Banking statutes and regulations are subject to continual review and revision by Congress, state legislatures and federal and state
regulatory agencies. A change in such statutes or regulations, including changes in how they are interpreted or implemented, could
have a material effect on our business. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy
statements, interpretive letters and similar written guidance pursuant to such laws and regulations, which are binding on us and our
subsidiaries.
Banking statutes, regulations and policies could restrict our ability to diversify into other areas of financial services, acquire depository
institutions and make distributions or pay dividends on our equity securities. They may also require us to provide financial support to
any bank that we control, maintain capital balances in excess of those desired by management and pay higher deposit insurance
premiums as a result of a general deterioration in the financial condition of NBH Bank or other depository institutions we control.
The description below summarizes certain elements of the applicable bank regulatory framework. This description is not intended to
describe all laws and regulations applicable to us and our subsidiaries. The description is qualified in its entirety by reference to the
full text of the statutes, regulations, policies, interpretive letters and other written guidance that are described.
National Bank Holdings Corporation as a Bank Holding Company
As a bank holding company, we are subject to regulation under the Bank Holding Company Act (“BHCA”) and to supervision,
examination, and enforcement by the Federal Reserve. Federal Reserve jurisdiction also extends to any company that we may directly
or indirectly control, such as non-bank subsidiaries and other companies in which we have a controlling interest. While subjecting us
to supervision and regulation, we believe that our status as a bank holding company (as opposed to being a non-controlling investor)
broadens the investment opportunities available to us among public and private financial institutions.
The BHCA generally prohibits a bank holding company from engaging, directly or indirectly, in activities other than banking or
managing or controlling banks, except for activities determined by the Federal Reserve to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Financial Modernization Act of 1999
(the “GLB Act”) expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under
the regulations implementing the GLB Act, a financial holding company may engage in additional activities that are financial in nature
or incidental or complementary to financial activity. Those activities include, among other activities, certain insurance and securities
activities. We have not yet determined whether it would be appropriate or advisable in the future to become a financial holding
company.
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NBH Bank as a Colorado State-Chartered Bank
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.
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%. Additionally, bank holding
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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.
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. The
EGRRCPA directed the federal banking agencies to develop a “Community Bank Leverage Ratio”, calculated by dividing tangible
equity capital by average consolidated total assets. In October 2019, the federal banking agencies adopted a Community Bank
Leverage Ratio of 9%. If a “qualified community bank”, generally a depository institution or depository institution holding company
with consolidated assets of less than $10 billion, has a leverage ratio which exceeds the Community Bank Leverage Ratio, then the
institution is considered to have met all generally applicable leverage and risk based capital requirements, the capital ratio
requirements for “well capitalized” status under the prompt corrective action rules and any other leverage or capital requirements to
which it is subject. At this time the Company and NBH Bank has not elected to apply this regime.
Prompt Corrective Action
The FDI Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of the prompt corrective
action provisions will depend upon how its capital levels compare to various capital measures and certain other factors, as established
by regulation. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the
capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized. Our regulatory capital ratios and those of NBH Bank are in
excess of the levels established for “well-capitalized” institutions.
Bank Holding Companies as a Source of Strength
The Federal Reserve requires that a bank holding company serve as a source of financial and managerial strength to each bank that it
controls and, under appropriate circumstances, commit resources to support each such controlled bank. This support may be required
at times when the bank holding company may not have the resources to provide the support. Because we are a bank holding company,
the Federal Reserve views the Company (and its consolidated assets) as a source of financial and managerial strength for any
controlled depository institutions.
Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require its bank
holding company to guarantee a capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s
activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the
Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The
regulators may require these and other actions in support of controlled banks even if such action is not in the best interests of the bank
holding company or its shareholders.
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The Dodd-Frank Act codified the requirement that holding companies, like the Company, serve as a source of financial strength for
their subsidiary depository institutions, by providing financial assistance to its insured depository institution subsidiaries in the event
of financial distress. Under the source of strength doctrine, the Company could be required to provide financial assistance to NBH
Bank should it experience financial distress.
In addition, capital loans by us to NBH Bank will be subordinate in right of payment to deposits and certain other indebtedness of
NBH Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of NBH
Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiaries. Because the Company’s consolidated net income consists
largely of the net income of NBH Bank, the Company’s ability to pay dividends depends upon its receipt of dividends from its
subsidiary. The ability of a bank to pay dividends and make other distributions is limited by federal and state law. The specific limits
depend on a number of factors, including the bank’s type of charter, recent earnings, recent dividends, level of capital and regulatory
status. As a member of the Federal Reserve System and a Colorado state-chartered bank, NBH Bank is subject to Regulation H and
limitations under Colorado law with respect to the payment of dividends. Non-bank subsidiaries are also limited by certain federal and
state statutory provisions and regulations covering the amount of dividends that may be paid in any given year.
The ability of a bank holding company to pay dividends and make other distributions can also be limited. The Federal Reserve has
authority to prohibit a bank holding company from paying dividends or making other distributions. A bank holding company should
not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s
financial health, such as by borrowing. In addition, as a Delaware corporation, the Company is subject to certain limitations and
restrictions under Delaware corporate law with respect to the payment of dividends and other distributions.
Depositor Preference
The FDI Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of
depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative
expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If our insured
depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured,
nondeposit creditors, including us, with respect to any extensions of credit they have made to such insured depository institution.
Limits on Transactions with Affiliates
Federal law restricts the amount and the terms of both credit and non-credit transactions (generally referred to as “Covered
Transactions”) between a bank and its non-bank affiliates. Covered Transactions with any single affiliate may not exceed 10% of the
capital stock and surplus of the bank, and Covered Transactions with all affiliates may not exceed, in the aggregate, 20% of the bank’s
capital and surplus. For a bank, capital stock and surplus refers to the bank’s tier 1 and tier 2 capital, as calculated under the risk-based
capital guidelines, plus the balance of the allowance for credit losses (“ACL”) 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, 2020, the Company did not have any outstanding Covered
Transactions.
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Regulatory Notice and Approval Requirements for Acquisitions of Control
We must generally receive federal bank regulatory approval before we can acquire 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, 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.
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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 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
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this cost on to its clients, including in the form of lower interest rates on deposits, or fees to some depositors, depending on market
conditions.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe
or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or
condition enacted or imposed by the institution’s regulatory agency. If deposit insurance for a banking business we invest in or acquire
were to be terminated, that would have a material adverse effect on that banking business and potentially on the Company as a whole.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (the “Riegle-Neal Act”), a bank holding company may
acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a
minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or
following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or,
unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state (or such
lesser or greater amount set by the state). Bank holding companies must be well capitalized and well managed, not merely adequately
capitalized and adequately managed, in order to acquire a bank located outside of the bank holding company’s home state.
The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate banking centers. A national or state
bank, with the approval of its regulator, may open a de novo banking center in any state if the law of the state in which the banking
center is proposed would permit the establishment of the banking center if the bank were a bank chartered in that state.
The Federal Reserve, 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.
COVID-19 Legislation and Regulatory Response
The COVID-19 pandemic is creating extensive disruptions to the global economy, to businesses, and to the lives of individuals
throughout the world. There have been a number of regulatory actions intended to help mitigate the adverse economic impact of the
COVID-19 pandemic on borrowers, including several mandates from the bank regulatory agencies, requiring financial institutions to
work constructively with borrowers affected by the COVID-19 pandemic.
On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2.2 trillion economic stimulus bill that intended to
provide relief in the wake of the COVID-19 pandemic. Several provisions within the CARES Act led to action from the bank
regulatory agencies. There are also separate provisions within the legislation that directly impact financial institutions, including
affording borrowers with federally-backed mortgage loans experiencing a financial hardship due to the COVID-19 pandemic the
option to request forbearance, regardless of delinquency status, for up to 360 days. In addition, servicers of federally-backed mortgage
loans were prohibited from initiating foreclosures during what was initially a 60-day
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period beginning March 18, 2020, but has since been extended several times and is currently in effect. The CARES Act also
established the directive to provide loans to businesses impacted by COVID through the PPP.
The bank regulatory agencies have stressed the importance of financial institutions continuing to assist borrowers impacted by the
COVID-19 pandemic, and indicated that adequate flexibility will be given to financial institutions who work with such borrowers. On
April 3, 2020, the bank regulatory agencies issued a joint policy statement to facilitate mortgage servicers’ ability to place consumers
in short-term payment forbearance programs, and followed with a final rule on June 23, 2020 that makes it clear servicers do not
violate Regulation X (which places restrictions and requirements upon lenders related to consumers who apply for and receive
mortgage loans) by offering certain COVID-19-related loss mitigation options based on an evaluation of limited information collected
from the borrower. Additionally, on September 29, 2020, the bank regulatory agencies issued a rule that deferred appraisal and
evaluation requirements after the closing of certain residential and CRE transactions through December 31, 2020. On January 20,
2021, the new Administration issued an Executive Order extending the federal eviction moratorium through March 31, 2021. This
eviction moratorium could be further extended through September 30, 2021 if the COVID-19 relief package proposed by the new
Administration is adopted by Congress in its current form.
On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which
also contains provisions that could directly impact financial institutions. The act directs financial regulators to support community
development financial institutions and minority depository institutions and directs Congress to re-appropriate $429 billion in
unobligated CARES Act funds through a newly structured PPP.
The Federal Reserve, in cooperation with the Department of the Treasury, has established many financing and liquidity programs. The
Main Street Lending Program is intended to keep credit flowing to small and mid-sized businesses that were in sound financial
condition before the coronavirus pandemic but now need financing to maintain operations. The Paycheck Protection Program
Liquidity Facility supplies liquidity to PPP participating financial institutions through term financing backed by PPP loans. Further,
the federal bank regulatory agencies issued several interim final rules throughout the course of 2020 to neutralize the regulatory
capital and liquidity effects for banks that participate in the Federal Reserve liquidity facilities.
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.
Item 1A. RISK FACTORS
Risks Relating to Our Banking Operations
The COVID-19 pandemic is adversely affecting us, our clients and third-party service providers, and the adverse impacts on our
business, financial position, operations and prospects has been and could continue to be significant.
The COVID-19 pandemic has impacted our business and financial results, and its ultimate impact on our business will depend on
highly uncertain and unpredictable future developments, including the magnitude and duration of the pandemic and actions taken by
governmental authorities in response to the pandemic, particularly within our geographic footprint. The pandemic and resultant
governmental action have severely restricted economic activity, reduced economic output, and resulted in a deterioration in economic
conditions. This has resulted in temporary closures of many businesses, some of which include our borrowers, the institution of social
distancing and sheltering in place requirements, high rates of unemployment and underemployment, historically low interest rates, and
disruptions in consumer spending, among other things. These negative economic conditions have negatively impacted our financial
results and are expected to have a continued adverse effect on our business, including adversely impacting the demand for our
products and services, our net
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interest income and our liquidity and regulatory capital requirements. Additionally, as interest rates remain at historically low levels or
if unemployment continues to remain high, the increased demand for mortgage products, including refinancing, may decrease.
Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our
allowance for credit losses, particularly if businesses remain closed or operate at reduced capacities, the impact on the national
economy continues to worsen, or more clients draw on their lines of credit or seek additional loans to help finance their businesses.
Small and mid-sized businesses make up a large portion of our commercial loan portfolio and are particularly vulnerable to the
financial effects of the COVID-19 pandemic due to their increased reliance on continuing cash flow to fund day-to-day operations.
Although government programs have sought, and may further seek, to provide relief to these types of businesses, there can be no
assurance that these programs will succeed. Our participation directly or on behalf of our clients in U.S. government programs, such as
the Paycheck Protection Program and the Main Street Lending Program, that are designed to support individuals, households and
businesses impacted by the economic disruptions caused by the COVID-19 pandemic, could be criticized and subject us to increased
governmental and regulatory scrutiny, negative publicity or increased exposure to litigation, which could increase our operational,
legal and compliance costs and damage our reputation. In addition, we may be exposed to credit risk on a PPP loan if a determination
is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced. In such a case, the
SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek
recovery of any related loss from us.
Our business operations may also be disrupted if significant portions of our workforce, key personnel or third-party service providers
are unable to work effectively, including because of illness, unavailability, quarantines, government actions, internal or external
failure of information technology infrastructure, or other restrictions in connection with the pandemic. Until the COVID-19 pandemic
subsides, it will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and
liquidity ratios and may also have the effect of heightening many of the other risk factors.
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. The COVID-19 pandemic has impacted our local economics through continued temporary closures or other
restrictions on businesses, higher unemployment rates and disruption to consumer spending. 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,
including as a result of the new administration, 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
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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. The COVID-19 pandemic may negatively impact commercial real estate values, particularly hospitality and
leisure, office and retail properties. Residential real estate may also be negatively impacted by higher unemployment driven in part by
the pandemic.
We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their services.
The execution of our strategy depends in large part on the skills of our executive management team and our ability to motivate and
retain these and other key personnel, including key personnel added through mergers and acquisitions. Accordingly, the loss of service
of one or more of our executive officers or key personnel could reduce our ability to successfully implement our growth strategy and
materially and adversely affect us. Our success also depends on the experience of our banking center managers and relationship
managers and on their relationships with the clients and communities they serve. The loss of these key personnel could negatively
impact our banking operations. Further surges in COVID-19 cases may increase the risk of maintaining adequate staffing in our
banking centers and other key areas.
Our allowance for credit losses and fair value adjustments may prove to be insufficient to absorb losses inherent in our loan or other
real estate owned (“OREO”) portfolio.
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 made 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. The unique and unprecedented impacts of the
COVID-19 pandemic may also lead to greater volatility in economic conditions, potentially increasing volatility in the required
allowance amount.
The determination of the appropriate level of the allowance for credit 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 credit losses. If the real estate
markets deteriorate, we expect that we will experience increased delinquencies
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and credit losses, particularly with respect to construction, land development and land loans. In addition, our regulators periodically
review our allowance for credit losses and may require an increase in the allowance for credit 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 credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for
credit losses will result in a decrease in net income and capital and may have a material adverse effect on us.
We hold and acquire an amount of OREO from time to time, which may lead to volatility in operating expenses and vulnerability to
declines in real property values.
When necessary, we foreclose on and take title to the real estate serving as collateral for our loans as part of our business. Real estate
that we own but do not use in the ordinary course of our operations is referred to as OREO property. While our OREO portfolio is
smaller than it has been in recent years, the COVID-19 pandemic and future acquisitions could result in a higher OREO balance,
which could negatively affect our earning as a result of 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. In addition, the COVID-19 pandemic may negatively impact commercial real
estate values, particularly hospitality and leisure, office and retail properties. Residential real estate may also be negatively impacted
by higher unemployment driven in part by the pandemic.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property, and we could become subject to environmental liabilities with
respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties
securing defaulted loans. There is a risk that hazardous or toxic substances could be found on these properties, and we may be liable
for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the
hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial
expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the
affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may
increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review
before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a
material adverse effect on us.
The expanding body of federal, state and local regulation of loan servicing, collections or other aspects of our business may increase
the cost of compliance and the risks of noncompliance.
We service 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
significant additional costs to comply with such requirements which may further adversely affect us. The CARES Act and related
legislation have imposed additional restrictions with respect to foreclosures and the handling of delinquent payments. 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. There is also uncertainty regarding what legislative or regulatory changes may
occur as a result of the change in leadership resulting from the recent elections, or, if changes occur, the ultimate effect they would
have upon our financial condition or results of operations.
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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.
With respect to the PPP, we could be criticized and subject to increased governmental and regulatory scrutiny, negative publicity or
increased exposure to litigation, which could increase our operational, legal and compliance costs and damage our reputation. In
addition, we may be exposed to credit risk on a PPP loan if a determination is made by the SBA that there is a deficiency in the
manner in which the loan was originated, funded or serviced. In such a case, the SBA may deny its liability under the guaranty, reduce
the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any related loss from us.
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.
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 (“GSE”). 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.
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We face significant competition from other financial institutions and financial services providers, which may materially and adversely
affect us.
Consumer and commercial banking is highly competitive. Our markets contain a large number of community and regional banks as
well as a significant presence of the country’s largest commercial banks. We compete with other state and national financial
institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In addition, we compete
with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities
firms, mutual funds and several government agencies, as well as major retailers, in providing various types of loans and other financial
services. Some of these competitors have a long history of successful operations in our markets, greater ties to local businesses and
more expansive banking relationships, as well as better established depositor bases. Some of our competitors also have greater
resources and access to capital and possess an advantage by being capable of maintaining numerous banking locations in more
convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more
developed online banking 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, including relative to our digital banking platform;
● the ability to operate our business effectively and efficiently; and
● industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could materially and adversely
affect us.
We may not be able to meet the cash flow requirements of deposit withdrawals and other business needs unless we maintain sufficient
liquidity.
We require liquidity to make loans and to repay deposit and other liabilities as they become due or are demanded by clients. We
principally depend on checking, savings and money market deposit account balances and other forms of client deposits as our primary
source of funding for our lending activities. As a result of a decline in overall depositor confidence, an increase in interest rates paid
by competitors, general interest rate levels, higher returns being available to clients on alternative investments and general economic
conditions, a substantial number of our clients could withdraw their bank deposits with us from time to time, resulting in our deposit
levels decreasing substantially, and our cash on hand may not be able to cover such withdrawals and our other business needs,
including amounts necessary to operate and grow our business. This would require us to seek third party funding or other sources of
liquidity, such as asset sales. Our access to third party funding sources, including our ability to raise funds through the issuance of
additional shares of our common stock or other equity or equity-related securities, incurrence of debt, 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.
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Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are affected by a
variety of factors, including changes in interest rates, which can impact the value of financial instruments held by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are directly
affected by many factors, including domestic and international economic and political conditions, broad trends in business and
finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal
policies, inflation, currency values, market conditions, the availability and terms (including cost) of short-term or long-term funding
and capital, the credit capacity or perceived creditworthiness of clients and counterparties and the level and volatility of trading
markets. Such factors can impact clients and counterparties of a financial services institution and may impact the value of financial
instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the interest
income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as
deposits and borrowings. Because different types of assets and liabilities may react differently and at different times to market interest
rate changes, changes in interest rates can increase or decrease our net interest income. When interest-bearing liabilities mature or
reprice more quickly than interest earning assets in a period, an increase in interest rates would reduce net interest income. Similarly,
when interest earning assets mature or reprice more quickly, and because the magnitude of repricing of interest earning assets is often
greater than interest bearing liabilities, falling interest rates would reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and liabilities, loan and
investment securities portfolios and our overall results. Changes in interest rates may also have a significant impact on any future loan
origination revenues. Historically, there has been an inverse correlation between the demand for loans and interest rates. Loan
origination volume and revenues usually decline during periods of rising or high interest rates and increase during periods of declining
or low interest rates. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of the
assets, both loans and investment securities, on our balance sheet. We may incur debt in the future and that debt may also be sensitive
to interest rates and any increase in interest rates could materially and adversely affect us. Interest rates are highly sensitive to many
factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies,
particularly the Federal Reserve. The Federal Reserve lowered interest rates significantly in 2020. A continued low interest rate
environment 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.
In 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it will no longer persuade or require banks
to submit rates for the London Interbank Offered Rate (“LIBOR”) after 2021. Subsequently, in November 2020, the FCA proposed
end dates immediately following the December 31, 2021 publication for the one-week and two-month LIBOR settings, and the June
30, 2023 publication for other LIBOR tenors. These announcements, 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 financial
instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate (“SOFR”) 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. We began indexing new retail adjustable rate mortgages to SOFR in the third quarter of 2020 and are in the process of
addressing LIBOR-based commercial loans, including updating International Swaps and Derivative Association (“ISDA”) protocols in
interest rate derivatives.
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
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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. Such transition may also result in litigation with counterparties impacted by the transition
as well as increased regulatory scrutiny and other adverse consequences. Any replacement benchmark ultimately adopted as a
substitute for LIBOR may behave differently than LIBOR in a manner detrimental to our financial performance.
We are highly dependent on the internet, cloud technologies and third-party providers. Systems failures or interruptions could have a
material adverse effect on us.
Our business is highly dependent on the increasing use of the internet, mobile devices and cloud technologies. Further, we have and
will continue to be subject to an increasing risk of operational disruption and information security incidents as a result. These events
can arise from a variety of sources, many of which are not under our control because of our reliance on third party technology systems
and outsourcing services for key processes including data processing, loan servicing and deposit processing; and for key services
including internet, and mobile technology. Potential causes for incidents may include human error, electrical or telecommunication
outages, hardware failures, and malicious activity. Any of these events could cause interruption to the Company’s operations, as well
as the operations of our clients. If significant, sustained or repeated, these events 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, or could trigger further
regulatory and financial penalty if determined to be non-compliant with evolving privacy and data protection laws. These events could
have a material adverse effect on the Company.
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. The COVID-19 pandemic has heightened these risks as vulnerabilities for our clients and the Company have increased given
work from home and shelter at home orders as well as consumer behaviors independent of jurisdictional orders. Furthermore, crisis
conditions caused by the pandemic may lead to more attempts by both domestic and international parties to commit cyber-attacks or
other fraudulent acts.
Our systems and network are subject to ongoing cyber incidents such as unauthorized access, loss or destruction of data, account
takeovers, unavailability of service, computer viruses or other malicious code, phishing schemes, ransomware and other similar
events. Third parties with whom we do business may also be sources of cybersecurity risks. 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 cause serious negative consequences, including reputational damage, litigation exposure and,
regulatory scrutiny, and could result in a violation of applicable privacy and data protection laws. 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
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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 or ransomware attacks are designed to disrupt key business
services, such as client-facing web sites. We are not able to anticipate or implement preventive measures against all security breaches
of these types, especially because the techniques used change frequently and 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 third-party
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 significantly on numerous other third party service providers to
conduct other aspects of our business operations and face similar risks relating to them. While many of our agreements with third
parties contain indemnification provisions, we may not be able to recover sufficiently, or at all, under the provisions to offset any
losses we may incur from third-party cyber incidents.
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. We 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 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
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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.
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
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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 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. As a result of the
COVID-19 pandemic and the ensuing economic uncertainty, our ability to develop consistent organic loan growth has been challenged
as the Company continues to take a very careful approach to extending new credit.
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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 write-downs 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. Valuations for
acquired assets are more challenging because of the COVID-19 pandemic, creating a risk of greater volatility in the future. 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, including with respect to the CARES Act, 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.
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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. This risk could be
intensified by the COVID-19 pandemic, which may negatively impact commercial real estate values, particularly hospitality and
leisure, office and retail properties. Residential real estate may also be negatively impacted by higher unemployment driven in part by
the pandemic.
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
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penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be
corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory
actions, we could be materially and adversely affected.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide
variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible
for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws
and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions
on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation.
The Federal Reserve may require us to commit capital resources to support our subsidiary bank.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding company to act as a source
of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source
of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary
bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to
such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly
or indirectly control an insured depository institution serve as a source of strength for the institution. Under this requirement, we could
be required to provide financial assistance to our subsidiary bank should our subsidiary bank experience financial distress.
A capital injection may be required at times when we do not have the resources to provide it and therefore we may be required to
borrow the funds or raise additional equity capital from third parties. Any loans by a holding company to its subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding
company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment
will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of
its indebtedness. Any financing that must be done by the holding company in 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.
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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 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, 2020, we operated 45
banking centers in Colorado, 37 in Kansas and Missouri, five in New Mexico, two in Texas and one in Utah. Of these banking centers,
66 were owned and 24 locations were leased.
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Item 3. LEGAL PROCEEDINGS.
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We do not believe that any of
our pending legal proceedings, individually or in the aggregate, will have a material adverse effect on our business, prospects,
financial condition, results of operations or liquidity.
Item 4. MINE SAFETY DISCLOSURES.
None.
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
Company had 184 shareholders of record as of February 22, 2021. Management estimates that the number of beneficial owners is
significantly greater.
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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, 2015, with dividends invested on a total return basis.
Index
NBHC
KBW Regional Banking Index
Russell 2000 Index
12/31/15
100.00
100.00
100.00
12/31/16
150.66
139.12
121.28
12/31/17
154.84
141.63
139.02
12/31/18
149.53
116.86
123.69
12/31/19
174.28
144.76
155.21
12/31/20
166.50
132.18
186.15
Period Ending
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2020:
Period
October 1 - October 31, 2020(1)
November 1 - November 30, 2020(1)
Total
Total number
of shares purchased
552
5,467
6,019
Average price
paid per share
26.36
$
30.15
29.80
$
Total number of
shares purchased
as part of publicly
announced plans
or programs
Maximum
approximate dollar
value of shares
that may yet be
purchased under the
plans or programs (2)
43,101,943
43,101,943
43,101,943
— $
—
— $
(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 February 26, 2020, the Company’s Board of Directors authorized the repurchase of up to an additional $50.0 million of
common stock. Under this authorization, $43,101,943 remained available for purchase at December 31, 2020.
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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, 2020, the aggregate number of Company common stock available for issuance under the 2014
Plan was 4,314,726 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, 2020, the aggregate number of Company common stock available for issuance
under the ESPP was 302,876 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
Item 6. SELECTED FINANCIAL DATA.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
768,129
—
768,129
Weighted-average
exercise price of
outstanding options,
warrants and rights
$
26.35
—
26.35
$
Number of securities
remaining available for
future issuance under
equity compensation
plans
4,617,602
—
4,617,602
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, 2020. 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.
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Table of Contents
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 credit 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
December 31, December 31, December 31, December 31, December 31,
$
2020
605,565
661,955
376,615
16,493
4,353,726
(59,777)
4,293,949
247,813
4,730
106,982
132,955
212,893
$ 6,659,950
$ 5,676,232
163,027
5,839,259
820,691
$ 6,659,950
$
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
$ 5,895,512
$ 4,737,132
391,460
5,128,592
766,920
$ 5,895,512
$
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
$ 5,676,666
$ 4,535,621
446,039
4,981,660
695,006
$ 5,676,666
$
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
$ 4,843,465
$ 3,979,559
331,499
4,311,058
532,407
$ 4,843,465
$
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
$ 4,573,046
$ 3,868,649
168,208
4,036,857
536,189
$ 4,573,046
(1) Total loans are net of unearned discounts and deferred fees and costs.
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
Adjusted earnings per share, diluted(1)
Dividends paid
Book value per share
Tangible common book value per share(2)
Total shareholders' equity to total assets
Tangible common equity to tangible assets(2)
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
Common shares outstanding
December 31,
2020
218,002
25,056
192,946
17,630
175,316
140,258
206,177
109,397
20,806
88,591
$
$
$
$
$
December 31,
2019
242,601
36,771
205,830
11,643
194,187
82,752
180,745
96,194
15,829
80,365
As of and for the years ended
December 31,
2018
221,391
23,954
197,437
5,197
192,240
70,775
189,334
73,681
12,230
61,451
December 31,
2017
164,421
18,115
146,306
12,972
133,334
39,205
136,677
35,862
21,283
14,579
$
$
$
$
December 31,
2016
160,448
14,808
145,640
23,651
121,989
40,027
136,009
26,007
2,947
23,060
$
$
2.87
2.85
2.91
0.80
26.79
23.09
12.32%
10.80%
30,857,086
31,075,857
30,634,291
$
2.57
2.55
2.57
0.75
24.60
20.89
13.01%
11.27%
31,175,825
31,530,817
31,176,627
$
2.00
1.95
2.16
0.54
22.59
18.77
12.24%
10.39%
30,748,234
31,430,074
30,769,063
$
0.54
0.53
1.26
0.34
19.81
17.94
10.99%
10.06%
26,928,763
27,709,659
26,875,585
$
0.81
0.79
0.79
0.22
20.32
18.15
11.72%
10.61%
28,313,061
29,091,343
26,386,583
(1) Represents a non-GAAP financial measure. See non-GAAP reconciliation below.
(2) 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.”
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Table of Contents
Key Ratios
As of and for the years ended
December 31, December 31, December 31,
2019
2020
2018
December 31,
2017
December 31,
2016
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)
Efficiency ratio FTE, adjusted(1)(8)
Total Loans Asset Quality Data(5)(6)(7)
Non-performing loans to total loans
Non-performing loans to total loans excluding PPP loans
Non-performing assets to total loans and OREO
Non-performing assets to total loans and OREO excluding
PPP loans
Allowance for credit losses to total loans
Allowance for credit losses to total loans excluding PPP
loans
Allowance for credit losses to non-performing loans
Net charge-offs to average loans
1.40%
1.44%
1.47%
11.24%
13.27%
13.54%
76.70%
37.19%
3.33%
3.42%
3.21%
3.76%
3.85%
0.64%
0.45%
41.46%
3.26%
3.22%
61.52%
60.59%
59.90%
0.47%
0.49%
0.58%
0.60%
1.37%
1.38%
1.42%
1.43%
10.89%
13.07%
13.18%
93.21%
25.01%
3.83%
3.93%
3.65%
4.52%
4.61%
0.96%
0.64%
28.18%
3.10%
3.08%
62.22%
61.15%
60.84%
0.49%
0.49%
0.66%
0.66%
0.88%
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%
65.72%
0.60%
0.60%
0.85%
0.85%
0.87%
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%
66.97%
0.66%
0.66%
0.99%
0.99%
0.98%
1.43%
293.21%
0.06%
0.88%
179.62%
0.19%
0.87%
145.94%
0.02%
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%
68.79%
1.07%
1.07%
1.61%
1.61%
1.02%
1.02%
94.98%
0.80%
(1)
(2)
Ratio represents a non-GAAP financial measure. See non-GAAP reconciliation below.
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
(5)
(6)
(7)
(8)
of interest bearing liabilities.
Non-performing loans consist of non-accruing loans and restructured loans on non-accrual.
Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
Total loans are net of unearned discounts and fees.
Presented on a fully taxable equivalent (“FTE”) basis using the statutory rate of 21% for 2020, 2019 and 2018 and 35% for 2017 and 2016.
The taxable equivalent adjustments included above are $5,103, $5,065, $4,482, $5,852 and $4,081 for the years ended 2020, 2019, 2018,
2017, and 2016, respectively.
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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.
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Table of Contents
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)
December 31,
2020
820,691
(122,575)
9,155
707,271
$
$
December 31,
2019
766,920
(123,758)
8,241
651,403
$
$
December 31,
2018
695,006
(124,941)
7,327
577,392
$
$
December 31,
2017
532,407
(61,237)
10,873
482,043
$
$
December 31,
2016
536,189
(66,580)
9,323
478,932
$
$
Total assets
Less: goodwill and core deposit intangible assets, net
Add: deferred tax liability related to goodwill
Tangible assets (non-GAAP)
$ 6,659,950
(122,575)
9,155
$ 6,546,530
$ 5,895,512
(123,758)
8,241
$ 5,779,995
$ 5,676,666
(124,941)
7,327
$ 5,559,052
$ 4,843,465
(61,237)
10,873
$ 4,793,101
$ 4,573,046
(66,580)
9,323
$ 4,515,789
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
calculations:
Tangible common equity (non-GAAP)
Accumulated other comprehensive income, net of tax
Tangible common book value, excluding accumulated
other comprehensive income, net of tax (non-
GAAP)
Divided by: ending shares outstanding
Tangible common book value per share, excluding
12.32%
13.01%
12.24%
10.99%
11.72%
(1.52)%
(1.74)%
(1.85)%
(0.93)%
(1.11)%
10.80%
11.27%
10.39%
10.06%
10.61%
707,271
$
30,634,291
23.09
$
651,403
$
31,176,627
20.89
$
577,392
$
30,769,063
18.77
$
482,043
$
26,875,585
17.94
$
478,932
$
26,386,583
18.15
$
$
707,271
(9,766)
$
651,403
(2,062)
$
577,392
11,275
$
482,043
6,242
$
478,932
1,762
697,505
30,634,291
649,341
31,176,627
588,667
30,769,063
488,285
26,875,585
480,694
26,386,583
accumulated other comprehensive income, net of tax
(non-GAAP)
$
22.77
$
20.83
$
19.13
$
18.17
$
18.22
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Return on Average Tangible Assets and Return on Average Tangible Equity
As of and for the years ended
December 31, December 31, December 31, December 31, December 31,
2018
2019
2016
2020
2017
Net income
Add: impact of core deposit intangible amortization
expense, after tax
Net income adjusted for impact of core deposit intangible
amortization expense, after tax
$
$
88,591
$
80,365
$
61,451
$
14,579
$
23,060
910
899
1,649
3,259
3,343
89,501
$
81,264
$
63,100
$
17,838
$
26,403
Average assets
Less: average goodwill and core deposit intangible asset,
net of deferred tax liability related to goodwill
Average tangible assets (non-GAAP)
$ 6,326,268
$ 5,837,121
$ 5,607,532
$ 4,705,241
$ 4,651,953
(114,031)
$ 6,212,237
(116,104)
$ 5,721,017
(118,546)
$ 5,488,986
(52,958)
$ 4,652,283
(59,977)
$ 4,591,976
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)
$
$
788,286
(114,031)
674,255
$
$
737,923
(116,104)
621,819
$
$
662,420
(118,546)
543,874
$
$
546,716
(52,958)
493,758
$
$
583,686
(59,977)
523,709
Return on average assets
Return on average tangible assets (non-GAAP)
Return on average equity
Return on average tangible common equity (non-GAAP)
1.40%
1.44%
11.24%
13.27%
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%
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
As of and for the years ended
Interest income
Add: impact of taxable equivalent adjustment
Interest income FTE (non-GAAP)
$
December 31, December 31, December 31, December 31, December 31,
2018
221,391
4,482
225,873
2019
242,601
5,065
247,666
2020
218,002
5,103
223,105
2017
164,421
5,852
170,273
2016
160,448
4,081
164,529
$
$
$
$
$
$
$
$
$
Net interest income
Add: impact of taxable equivalent adjustment
Net interest income FTE (non-GAAP)
$
$
192,946
5,103
198,049
$
$
205,830
5,065
210,895
$
$
197,437
4,482
201,919
$
$
146,306
5,852
152,158
$
$
145,640
4,081
149,721
Average earning assets
Yield on earning assets
Yield on earning assets FTE (non-GAAP)
Net interest margin
Net interest margin FTE (non-GAAP)
$ 5,795,864
3.76%
3.85%
3.33%
3.42%
$ 5,368,073
4.52%
4.61%
3.83%
3.93%
$ 5,131,694
4.31%
4.40%
3.85%
3.93%
$ 4,353,320
3.78%
3.91%
3.36%
3.50%
$ 4,290,171
3.75%
3.84%
3.39%
3.49%
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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 asset amortization
Non-interest expense, adjusted for core deposit
intangible asset amortization
Banking center consolidation-related expense
Non-recurring Peoples acquisition-related expenses
Tax reform bonus(1)
Adjusted non-interest expense (non-GAAP)
$
$
$
$
$
$
$
December 31,
2020
192,946
5,103
198,049
140,258
206,177
(1,183)
$
$
$
$
December 31,
2019
205,830
5,065
210,895
As of and for the years ended
December 31,
2018
197,437
4,482
201,919
December 31,
2017
146,306
5,852
152,158
$
$
$
$
December 31,
2016
145,640
4,081
149,721
$
$
82,752
180,745
(1,183)
$
$
70,775
189,334
(2,170)
$
$
39,205
136,677
(5,342)
$
$
40,027
136,009
(5,480)
204,994
$
179,562
$
187,164
$
131,335
$
130,529
204,994
(2,348)
—
—
202,646
$
$
179,562
(898)
—
—
178,664
$
$
187,164
—
(7,957)
—
179,207
$
$
131,335
—
(2,691)
(491)
128,153
$
$
130,529
—
—
—
130,529
70.30%
68.79%
68.79%
Efficiency ratio
Efficiency ratio FTE (non-GAAP)
Adjusted efficiency ratio FTE (non-GAAP)
61.52%
60.59%
59.90%
62.22%
61.15%
60.84%
69.78%
68.64%
65.72%
70.80%
68.63%
66.97%
(1)
Represents a special $1,000 bonus payment to 491 associates made in connection with the Tax Cuts and Jobs Act enacted in 2017.
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Adjusted Financial Results
December 31,
2020
December 31,
2019
December 31,
2018
December 31,
2017
December 31,
2016
As of and for the years ended
Adjustments to net income:
Net income
Adjustments(1)(2)
Adjusted net income (non-GAAP)
Adjustments to earnings per share:
Earnings per share - diluted
Adjustments(1)(2)
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)
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
(non-GAAP)
Adjustments to non-interest expense:
Non-interest expense
Adjustments(1)(2)
Adjusted non-interest expense (non-GAAP)
Non-interest expense to average assets, adjusted
(non-GAAP)
(1) Adjustments:
Non-interest expense adjustments:
Banking center consolidation-related expense
Non-recurring Peoples acquisition-related
expenses
Tax reform bonus(3)
Total non-interest expense adjustments (non-
GAAP)
Total pre-tax adjustments (non-GAAP)
Collective tax expense impact
Deferred tax asset remeasurement
Adjustments (non-GAAP)
$
$
$
$
$
$
$
$
$
$
$
88,591
1,806
90,397
2.85
0.06
2.91
$
$
$
$
80,365 $
689
81,054 $
61,451
6,321
67,772
2.55 $
0.02
2.57 $
1.95
0.21
2.16
$
$
$
$
14,579 $
20,430
35,009 $
23,060
—
23,060
0.53 $
0.73
1.26 $
0.79
—
0.79
90,397
$
81,054 $
67,772
$
35,009 $
23,060
910
899
1,649
3,259
3,343
91,307
6,212,237
81,953
5,721,017
69,421
5,488,986
38,268
4,652,283
26,403
4,591,976
1.47%
1.43%
1.26%
0.82%
0.57%
91,307
674,255
$
81,953 $
621,819
69,421
543,874
$
38,268 $
493,758
26,403
523,709
13.54%
13.18%
12.76%
7.75%
5.04%
206,177 $
2,348
203,829
180,745 $
898
179,847
189,334 $
7,957
181,377
136,677 $
3,182
133,495
136,009
—
136,009
3.22%
3.08%
3.23%
2.84%
2.92%
2,348
$
898 $
— $
— $
—
—
2,348
2,348
(542)
—
1,806
$
$
$
—
—
898 $
898 $
(209)
—
689 $
7,957
—
7,957
7,957
(1,636)
—
6,321
$
$
$
2,691
491
3,182 $
3,182 $
(1,209)
18,457
20,430 $
—
—
—
—
—
—
—
—
(2)
(3)
Non-GAAP adjustments for the year ended December 31, 2019 have been updated to conform to the current period presentation.
Represents a special $1,000 bonus payment to 491 associates made in connection with the Tax Cuts and Jobs Act enacted in 2017.
44
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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, 2020, 2019, and
2018, 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 2020 results compared to 2019. For a discussion of 2019 results compared to 2018, refer to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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 our core markets of Colorado, the greater Kansas City region, Texas, Utah and New Mexico, which are
outperforming national averages, positions us well for growth opportunities. As of December 31, 2020, we had $6.7 billion in assets,
$4.4 billion in loans, $5.7 billion in deposits and $0.8 billion in equity.
Recent Events
The COVID-19 pandemic has caused substantial disruption to the communities we serve and has changed the way we live and work.
We continue to remain committed to ensuring our associates, clients and communities are receiving the support they need during these
challenging times. Our banking centers remain operational through our drive-thru services and on an appointment-only basis in the
lobbies. We have continued to leverage our digital banking platform with our clients. Our teams have been working diligently to
support our clients who are experiencing financial hardship due to COVID-19 through participation in the SBA’s Paycheck Protection
Program, including assistance with PPP loan forgiveness applications, and loan modifications, as needed. While the initial release of
the vaccine is promising, the length of time that the government-mandated measures must remain in place to address COVID-19 is
unknown. The pandemic has already had a significantly negative impact to the U.S. labor market, consumer spending and business
operations, and it is not clear how quickly the vaccine can be widely deployed and when government-mandated measures will be
removed.
Operating Highlights and Key Challenges
Profitability and returns
● Net income increased $8.2 million, or 10.2%, to $88.6 million, as of December 31, 2020, compared to the prior year.
Net income during 2020 included $1.8 million, after tax, of expenses related to banking center consolidations. Adjusting
for these expenses, net income would have been $90.4 million, or $2.91 per diluted share. Net income during 2019
included $0.7 million, after tax, of expenses related to banking center consolidations. Adjusting for these expenses, net
income would have been $81.1 million, or $2.57 per diluted share.
● A CECL model-driven provision for loan losses totaled $17.6 million, including a $0.1 million provision for unfunded
loan commitment reserves, driven by deteriorating economic conditions caused by the impact of COVID-19. The year
ended December 31, 2019 included a loan loss provision of $11.6 million.
● The return on average tangible assets was 1.44% for 2020, compared to 1.42% for 2019. Adjusting for the banking
center consolidation-related expense, the return on average tangible assets for the years ended December 31, 2020 and
2019 was 1.47% and 1.43%, respectively.
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● The return on average tangible common equity was 13.27% for 2020, compared to 13.07% for 2019. Adjusting for the
banking center consolidation-related expense, the return on average tangible common equity for the years ended
December 31, 2020 and 2019 was 13.54% and 13.18%, respectively.
Strategic execution
● Continue to pro-actively address the impacts of the COVID-19 pandemic through executing on our priorities as detailed
in the “Recent Events” section above.
● Funded $358.9 million in SBA Paycheck Protection Program loans for 2,164 clients. In assisting our clients through the
forgiveness process we had achieved forgiveness on 50% of our original PPP loan balances with the remaining balance
totaling $176.1 million as of December 31, 2020.
● As part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients, we
consolidated 11 banking centers during 2020 and one in January of 2021. Consolidation-related expense of $2.3 million
was recorded to non-interest expense during the year ended December 31, 2020. Additionally, in January 2021, we
announced the consolidation of seven additional banking centers across our markets that are expected to be substantially
completed in the first half of 2021. Once completed, this will bring our total banking center network down by 22%,
compared to the third quarter of 2019 when we began these initiatives.
● Maintain 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.
● We continue to carefully monitor our entire loan portfolio and have no industry exposure exceeding 5% of total loans for
industries highly impacted by COVID-19, such as restaurants, retailers, hospital/medical, multifamily, oil and gas, hotels
and lodging.
Loan portfolio
● Loans outstanding totaled $4.4 billion, decreasing $61.7 million, or 1.4%, from the prior year, largely due to lower
commercial and industrial loans of $140.9 million, or 10.0%, that were offset by PPP loans of $176.1 million.
● We are taking a very careful approach to extending new credit as well as continuing an intense focus on managing credit
risk and yield. Total loan originations during the year ended December 31, 2020 were $1.2 billion, led by commercial
loan originations of $807.3 million, which included PPP loan originations of $358.9 million.
● COVID-related loan modifications are handled individually on a relationship basis. As of December 31, 2020, $173.6
million, or 4.0%, of total loans were on a COVID-related modification plan.
Credit quality
● Provision for loan losses totaled $17.6 million and $11.6 million during 2020 and 2019, respectively. During 2020,
provision for loan losses was recorded to provide coverage for the impact of deteriorating economic conditions as a
result of COVID-19 and included a $0.1 million provision for unfunded loan commitment reserves.
● Allowance for credit losses increased by 53.0% from December 31, 2019 to December 31, 2020 due to the adoption of
CECL on January 1, 2020 and to provide coverage for the economic impact of the COVID-19 pandemic. The ACL
totaled 1.37% of total loans compared to 0.88% at December 31, 2019. Excluding PPP loans, the ACL totaled 1.43% of
total loans at December 31, 2020.
● Net charge-offs of $2.7 million and $8.3 million were recorded during 2020 and 2019, respectively. Net charge-offs to
average total loans totaled 0.06% and 0.19% for 2020 and 2019, respectively.
● Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual troubled debt
restructured loans) decreased to 0.47% of total loans at December 31, 2020, compared to 0.49% at December 31, 2019.
Non-performing assets to total loans and OREO totaled 0.58% at December 31, 2020 compared to 0.66% at December
31, 2019. Excluding PPP loans, non-performing loans to total loans were 0.49%, and non-performing assets to total
loans and OREO were 0.60% at December 31, 2020.
● Loans 30 days or more past due and still accruing interest totaled three basis points of total loans, the lowest level in our
company’s history, as of December 31, 2020.
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Client deposit funded balance sheet
● Average transaction deposits for the fourth quarter of 2020 totaled $4.6 billion, increasing 28.8%, compared to $3.6
billion for the same period in the prior year.
● Average total deposits for the fourth quarter of 2020 totaled $5.7 billion, increasing 21.1%, compared to $4.7 billion for
the same period in the prior year.
● The mix of transaction deposits to total deposits improved 490 basis points to 82.6% at December 31, 2020 from 77.7%
at December 31, 2019.
● Cost of deposits totaled 0.45% for the year ended December 31, 2020, decreasing 19 basis points compared to the year
ended December 31, 2019.
Revenues
● Fully taxable equivalent net interest income totaled $198.0 million for the year ended December 31, 2020 and decreased
$12.8 million, or 6.1%, compared to the prior year due to the decline in short-term interest rates as a result of monetary
policy actions by the Federal Reserve.
● The FTE net interest margin narrowed 51 basis points to 3.42% for the year ended December 31, 2020, as compared to
the prior year due to lower earning asset yields. The yield on earning assets decreased 76 basis points, led by an 73 basis
point decrease in the originated loan portfolio yields due to the decline in short-term interest rates. The cost of funds
decreased 28 basis points to 0.46%.
● Non-interest income totaled $140.3 million during 2020, increasing $57.5 million, or 69.5%, from 2019, primarily
driven by record mortgage banking income totaling $102.4 million. During 2020, service charges and bank card fees
decreased a combined $2.1 million due to changes in consumer behavior due to the COVID-19 pandemic.
Expenses
● Non-interest expense totaled $206.2 million during 2020, representing an increase of $25.4 million, or 14.1%, from
2019. Salaries and benefits increased $18.4 million due to higher mortgage banking compensation-related expense.
Banking center consolidation-related expense totaling $2.3 million was incurred during 2020, compared to $0.9 million
during the same period in the last year. Additionally, included in the prior period were net gains on the sale of OREO of
$7.2 million, compared to minimal net gains on the sale of OREO recorded in 2020.
● Income tax expense totaled $20.8 million during 2020, compared to $15.8 million during 2019. Tax expense was
lowered by $2.2 million of tax benefit from stock compensation activity during 2019. Adjusting for the stock
compensation activity, the 2020 and 2019 effective tax rate was 19.0% and 18.7%, respectively.
Strong capital position
● Capital ratios continue to be strong and in excess of federal bank regulatory agency “well capitalized” thresholds. As of
December 31, 2020, our consolidated tier 1 leverage ratio was 10.70%, and our common equity tier 1 and consolidated
tier 1 risk based capital ratios were 14.70%.
● At December 31, 2020, common book value per share was $26.79. The tangible common book value per share increased
$2.20 to $23.09 at December 31, 2020, compared to December 31, 2019, as the earnings and positive fair market value
adjustments in the available-for-sale securities portfolio outpaced the share repurchases, dividends and CECL
cumulative effect adjustment.
● The Bank maintains ample liquidity with excess cash liquidity of $365 million and access to $2.2 billion in readily
available funds.
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. Prevailing interest rates began
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decreasing in mid-2019, remain low and are expected to remain near zero for the foreseeable future as a result of monetary policy
actions by the Federal Reserve.
The COVID-19 pandemic has caused disruption and is likely to continue to present challenges to our business. Temporary closures
and sheltering in place policies have altered the way our clients and associates live and work. Our banking centers remain operational
through our drive-thru services and on an appointment-only basis in the lobbies, and we have continued to leverage our digital banking
platform with our clients. Our teams have been working diligently to support our clients who are experiencing financial hardship due
to COVID-19 through participation in the SBA’s Paycheck Protection Program, including assistance with PPP loan forgiveness
applications, and loan modifications, as needed. While conditions regarding the pandemic may be improving, there is continued
uncertainty regarding economic recovery, the success of vaccine distribution and the effectiveness of administered vaccines.
Our markets have historically outperformed the national averages on many key indicators; however, the economic impact from the
COVID-19 pandemic continues to cause economic strain nationally and across all of our markets. We are taking a very careful
approach to extending new credit as well as continuing an intense focus on managing credit risk and yield. 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.
As of December 31, 2020, the Company had low exposure to industries highly impacted by the COVID-19 pandemic. Within the
commercial loan segment, restaurants were 4.8%, retailers 2.9%, hospital/medical 4.8% and oil and gas 0.7% of total loans. Within the
commercial real estate non-owner occupied loan segment, hotel and lodging was 4.2%, multifamily 1.6% and retail 1.2% of total
loans. The Company had no direct exposure to other industries and loan types more highly impacted by the pandemic including
aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, convention centers, credit cards, malls and
taxi/ride share businesses. Furthermore, the Company had no consumer credit card, indirect auto or car leasing exposure.
The agriculture industry is in the sixth year of depressed commodity prices and is also being impacted by the COVID-19 pandemic.
Our food and agribusiness portfolio is only 4.8% of total loans and is well-diversified across food production, crop and livestock
types. Crop and livestock loans represent 0.8% of total loans. We have maintained relationships with food and agribusiness clients that
generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.
Our loans outstanding at December 31, 2020 totaled $4.4 billion, representing a decrease of $61.7 million, or 1.4%, compared to
December 31, 2019, largely due to lower commercial and industrial loans of $140.9 million, or 10.0%. The decrease was partially
offset by PPP loans, which totaled $176.1 million as of December 31, 2020. During 2020, our weighted average rate on new loans
funded at the time of origination was 3.06%, compared to the weighted average yield of our originated loan portfolio of 4.05% (FTE).
Future growth in our interest income will ultimately be dependent on our ability to continue to generate sufficient volumes of high-
quality originated loans and other high-quality earning assets 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
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for credit losses. See additional discussion of our ACL policy in note 2 – Summary of Significant Accounting Policies in the notes to
our consolidated financial statements for the year ended December 31, 2020.
The determination of the ACL, which represents management’s estimate of lifetime credit losses inherent in our loan portfolio at the
balance sheet date, involves a high degree of judgment and complexity. The Company estimates the collective ACL by first
disaggregating the loan portfolio into segments based upon broad characteristics such as primary use and underlying collateral. Within
these segments, the portfolio is further disaggregated into classes of loans with similar attributes and risk characteristics. The
collective ACL is determined at the class level, analyzing loss history based upon specific loss drivers and risk factors affecting each
loan class. The Company utilizes a discounted cash flow (“DCF”) model that incorporates forecasts of certain national
macroeconomic factors (reasonable and supportable forecasts) which drive the losses predicted in establishing the Company’s
collective ACL. Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting
alternate forecast scenarios. For periods beyond the reasonable and supportable forecast period, the Company reverts to historical
long-term average loss rates on a straight-line basis. Additionally, the collective ACL calculation includes subjective adjustments for
qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. Changes in these
assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition. For further
discussion of the ACL, see notes 2 and 7 to our consolidated financial statements.
Future Accounting Pronouncements
The Company is still evaluating the impact from ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting and does not expect the adoption of that pronouncement to have a material impact on
its financial statements.
Financial Condition
Total assets were $6.7 billion at December 31, 2020, compared to $5.9 billion at December 31, 2019, an increase of $764.4 million, or
13.0%. Cash and cash equivalents increased $495.4 million, and total loans decreased $61.7 million, or 1.4%. The allowance for credit
losses increased $20.7 million, or 53.0%, to $59.8 million at December 31, 2020. It included a CECL adoption Day 1 increase of $5.8
million, partially offsetting the increase in total assets.
During 2020, lower cost demand, savings and money market deposits (“transaction deposits”) increased $1.0 billion, or 27.5%,
compared to the prior year, as we benefited from cash inflows resulting from the CARES Act economic stimulus and continued
developing full banking relationships with our clients. Our clients used their core operating accounts for PPP funds and economic
stimulus checks, which aided the strong deposit growth. In addition to providing excess cash liquidity, the increase in transaction
deposits provided low-cost funding utilized to fund PPP loans and pay off short-term borrowings.
Investment securities
Available-for-sale
Total investment securities available-for-sale were $662.0 million at December 31, 2020, compared to $638.2 million at December 31,
2019, an increase of $23.7 million, or 3.71%. During 2020 and 2019, purchases of available-for-sale securities totaled $286.1 million
and $45.7 million, respectively. Maturities and paydowns of available-for-sale securities during 2020 and 2019 totaled $271.5 million
and $195.5 million, respectively. There were no sales of available-for-sale securities during 2020. Proceeds from sales of available-
for-sale securities during 2019 totaled $20.4 million.
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Available-for-sale 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
Other residential MBS issued or guaranteed
by U.S. Government agencies or
sponsored enterprises
Municipal securities
Corporate debt
Other securities
Total investment securities available-for-sale
December 31, 2020
December 31, 2019
Amortized
cost
Fair
value
Percent of
portfolio
Weighted
average
yield
Amortized
cost
Fair
value
Percent of
portfolio
Weighted
average
yield
$ 193,424
$ 196,334
29.6%
1.36% $
93,770
$ 95,256
14.9%
2.59%
454,345
362
2,000
469
$ 650,600
462,779
375
1,998
469
$ 661,955
69.9%
0.1%
0.3%
0.1%
100.0%
543,275
1.45%
495
3.46%
—
5.83%
0.00%
469
1.44% $ 638,009
542,037
487
—
469
$ 638,249
84.9%
0.1%
—
0.1%
100.0%
2.13%
3.60%
—
0.00%
2.20%
As of December 31, 2020 and 2019, 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 (“MBS”) 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 2.7 years and 2.9 years at December 31, 2020 and December 31, 2019, respectively. This
estimate is based on assumptions and actual results may differ. At December 31, 2020 and December 31, 2019, the duration of the
total available-for-sale investment portfolio was 2.6 years and 2.7 years, respectively.
At December 31, 2020 and 2019, adjustable rate securities comprised 2.3% and 2.8%, respectively, of the available-for-sale mortgage-
backed security 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 2.00% per annum and 2.40% per annum at December 31, 2020 and 2019,
respectively.
The available-for-sale investment portfolio included $11.7 million and $5.3 million of unrealized gains and $0.4 million and $5.1
million of unrealized losses at December 31, 2020 and December 31, 2019, respectively. We believe any unrealized losses are a result
of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management
believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed
securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and
FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.
Held-to-maturity
At December 31, 2020, we held $376.6 million of held-to-maturity investment securities, compared to $182.9 million at December 31,
2019, an increase of $193.7 million, or 105.9%. Purchases of held-to-maturity securities totaled $284.2 million and $10.2 million
during 2020 and 2019, respectively. Maturities and paydowns of held-to-maturity securities totaled $88.1 million and $60.9 million
during 2020 and 2019, respectively.
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Table of Contents
Held-to-maturity investment securities are summarized as follows as of the dates indicated:
December 31, 2020
Amortized
cost
Fair
value
Weighted
Percent of average Amortized
yield
portfolio
cost
December 31, 2019
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-
maturity
$ 306,187
$ 310,930
81.3%
1.39%
$ 127,560
$ 128,770
69.7%
3.19%
70,428
70,761
18.7%
0.41%
55,324
54,971
30.3%
1.90%
$ 376,615
$ 381,691
100.0%
1.21%
$ 182,884
$ 183,741
100.0%
2.80%
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 included $5.3 million and $1.3 million of unrealized gains and $0.3 million
and $0.5 million of unrealized losses at December 31, 2020 and December 31, 2019, respectively.
The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss
information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the
amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either
U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this
governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio
generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to
sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost
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 held-to-
maturity mortgage-backed securities portfolio as of December 31, 2020 and December 31, 2019 was 2.4 years and 2.4 years,
respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity portfolio
was 2.4 years and 2.3 years as of December 30, 2020 and December 31, 2019, respectively.
Loans overview
At December 31, 2020, 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.
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The table below shows the loan portfolio composition at the respective dates:
Originated:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner-occupied commercial real estate
Food and agribusiness
PPP loans(1)
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total originated
Acquired:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner-occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total acquired
Total loans
December 31, 2020
December 31, 2019
December 31, 2020 vs.
December 31, 2019
% Change
$
$
1,248,530
870,410
464,417
205,189
176,106
2,964,652
542,642
581,555
18,581
4,107,430
22,102
381
51,821
5,108
79,412
89,354
77,105
425
246,296
4,353,726
$
$
1,380,248
833,707
414,477
245,320
—
2,873,752
505,479
651,656
21,030
4,051,917
31,284
3,819
75,645
7,807
118,555
125,426
118,762
746
363,489
4,415,406
(9.5)%
4.4%
12.0%
(16.4)%
100.0%
3.2%
7.4%
(10.8)%
(11.6)%
1.4%
(29.4)%
(90.0)%
(31.5)%
(34.6)%
(33.0)%
(28.8)%
(35.1)%
(43.0)%
(32.2)%
(1.4)%
(1) PPP loan balances are net of fees and costs and include principal totaling $179,531 as of December 31, 2020.
Our loan portfolio decreased $61.7 million, or 1.4%, since December 31, 2019. We are taking a careful approach to extending credit
and focusing on managing credit risk and yield. Year-to-date loan originations through December 31, 2020 totaled $1.2 billion,
including $358.9 million of PPP loan originations, which were offset by elevated levels of paydowns and payoffs.
Our commercial and industrial loan portfolio is comprised of diverse industry segments. At December 31, 2020, these segments
included finance and financial services, primarily lender finance loans of $257.9 million, hospital/medical loans of $207.8 million,
manufacturing-related loans of $111.2 million, and a variety of smaller subcategories of commercial and industrial loans. Food and
agribusiness loans, which are well-diversified across food production, crop and livestock types, totaled $210.3 million and were 28.0%
of the Company’s risk based capital. Crop and livestock loans represent 0.8% of total loans.
Non-owner occupied CRE loans were 84.3% of the Company’s risk based capital, or 14.5% of total loans, and no specific property
type comprised more than 5.0% of total loans. The Company maintains very little exposure to retail properties, comprising 4.1% of
total loans. Multi-family loans totaled $71.4 million, or 1.6% of total loans as of December 31, 2020.
The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. In light of the strain
placed on certain industries by the COVID-19 pandemic, the Company has carefully evaluated and continues to closely monitor our
entire loan portfolio. Within the commercial loan segment, certain highly impacted industries are noted as follows: restaurants were
4.8%, retailers 2.9%, hospital/medical 4.8% and oil and gas 0.7% of total loans. Within the commercial real estate non-owner
occupied loan segment, hotel and lodging was 4.2%, multifamily 1.6% and retail 1.2% of total loans. The Company had no direct
exposure to other industries more highly impacted by the pandemic including aviation, cruise lines, energy services, auto
manufacturing/dealer floor plans, hedge funds, convention centers, credit cards, malls and taxi/ride share businesses. Furthermore, the
Company had no consumer credit card, indirect auto or car leasing exposure.
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When considering the loan portfolio in its entirety, 77.0% of loans were located within our footprint of Colorado, the greater Kansas
City region, Texas, Utah and New Mexico as of December 31, 2020, 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 over the past 12 months, led by commercial loan
originations of $807.3 million, which included PPP loan originations of $358.9 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 2020 and 2019:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
PPP loans
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Fourth quarter Third quarter Second quarter First quarter
2020
2020
2020
2020
Total
2020
$
$
96,625
25,348
36,085
19,191
—
177,249
52,018
41,355
1,858
272,480
$
11,354
6,083
23,758
13,876
122
55,193
24,937
49,786
2,980
$ 132,896
$
$
(8,726) $ 118,999
13,968
49,679
37,372
22,078
(6,787)
(10,480)
—
358,798
163,552
411,349
80,792
18,992
46,273
29,024
2,206
2,320
$ 292,937
461,571
$
218,252
95,078
119,293
15,800
358,920
807,343
176,739
166,438
9,364
$ 1,159,884
Included in originations are net fundings (paydowns) under revolving lines of credit of $50,982, ($27,899), ($55,826) and $48,789 as
of the fourth quarter 2020, third quarter 2020, second quarter 2020 and first quarter 2020, respectively.
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
PPP loans
Total Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
Fourth quarter Third quarter Second quarter First quarter
2019
2019
2019
2019
Total
2019
$
$
69,048
46,114
46,965
20,348
—
182,475
41,256
43,493
2,315
269,539
$ 144,554
31,482
16,149
(4,894)
—
187,291
79,929
49,022
2,986
$ 319,228
$
$
125,527
25,513
41,380
18,217
—
210,637
36,632
40,012
3,264
290,545
$ 138,106
21,579
26,405
15,213
—
201,303
69,125
38,627
1,958
$ 311,013
$
477,235
124,688
130,899
48,884
—
781,706
226,942
171,154
10,523
$ 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.
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The tables below show the contractual maturities of our loans for the dates indicated:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
PPP loans
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans
December 31, 2020
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
109,586
42,222
24,510
80,691
—
257,009
72,486
18,569
5,167
353,231
$
$
927,881
164,994
177,311
105,815
176,106
1,552,107
426,291
36,747
10,886
2,026,031
$
$
233,165
663,575
314,418
23,791
—
1,234,949
133,219
603,343
2,953
1,974,464
December 31, 2019
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
137,396
26,009
18,663
57,159
239,227
85,188
27,251
6,600
358,266
$
$
1,013,753
126,634
170,092
168,827
1,479,306
377,850
49,818
11,978
1,918,952
$
$
260,382
684,883
301,367
27,142
1,273,774
167,868
693,348
3,198
2,138,188
$
$
$
$
$
$
$
$
Total
1,270,632
870,791
516,239
210,297
176,106
3,044,065
631,996
658,659
19,006
4,353,726
Total
1,411,531
837,526
490,122
253,128
2,992,307
630,906
770,417
21,776
4,415,406
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 total loans with maturities over one year is as follows at the dates indicated:
Commercial
Commercial and industrial
Municipal and non-profit(1)
Owner occupied commercial real estate
Food and agribusiness
PPP loans
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans with > 1 year maturity
Fixed
December 31, 2020
Variable
Balance
Weighted
average rate
Balance
Weighted
average rate
Total
Weighted
Balance
average rate
$ 320,745
803,350
261,406
57,360
176,106
1,618,967
253,879
298,759
11,384
$ 2,182,989
25,219
230,323
72,246
—
1,168,089
4.68% $ 840,301
3.55%
4.82%
5.02%
1.00%
3.79%
305,631
4.65%
341,332
3.60%
2,455
4.92%
3.86% $ 1,817,507
828,569
491,729
129,606
176,106
2,787,056
3.11% $ 1,161,046
2.83%
3.88%
3.67%
—
3.29%
559,510
3.42%
640,091
4.14%
13,839
3.50%
3.47% $ 4,000,496
3.54%
3.53%
4.51%
4.27%
1.00%
3.58%
3.98%
3.89%
4.66%
3.68%
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Commercial
Commercial and industrial
Municipal and non-profit(1)
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total loans with > 1 year maturity
Fixed
December 31, 2019
Variable
Balance
Weighted
average rate
Balance
Weighted
average rate
Total
Weighted
Balance
average rate
294,406
779,293
235,337
50,287
1,359,323
243,201
326,210
12,156
$ 1,940,890
32,224
236,122
145,682
4.95% $ 979,730
3.60%
4.87%
5.19%
4.22% 1,393,758
302,516
4.75%
416,955
3.66%
5.52%
3,020
4.20% $ 2,116,249
811,517
471,459
195,969
4.39% $ 1,274,136
3.60%
4.79%
4.61%
4.46% 2,753,081
545,717
4.46%
743,165
4.54%
4.94%
15,176
4.48% $ 4,057,139
4.52%
3.60%
4.99%
4.76%
4.34%
4.59%
4.15%
5.40%
4.34%
(1) Included in municipal and non-profit fixed rate loans are loans totaling $387,105 and $403,700 that have been swapped to
variable rates at current market pricing at December 31, 2020 and 2019, respectively. Included in the municipal and non-profit
segment are tax exempt loans totaling $711,582 and $701,825 with a weighted average rate of 3.33% and 3.41% at December
31, 2020 and 2019, respectively.
Asset quality
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 for the Company. Asset quality is monitored by our credit risk management department and evaluated based on
quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered,
particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and
guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the
number of days past due and on an internal risk rating system, and both are discussed in more detail below.
Our internal risk rating system uses a series of grades which reflect our assessment of the credit quality of loans based on an analysis
of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements. Loans that are perceived to
have acceptable risk are categorized as “Pass” loans. “Special mention” loans represent loans that have potential credit weaknesses
that deserve close attention. Special mention loans include borrowers that have potential weaknesses or unwarranted risks that, unless
corrected, may threaten the borrower's ability to meet debt service requirements. However, these borrowers are still believed to have
the ability to respond to and resolve the financial issues that threaten their financial situation. Loans classified as “Substandard” have a
well-defined credit weakness and are inadequately protected by the current paying capacity of the obligor or of the collateral pledged,
if any. Although these loans are identified as potential problem loans, they may never become non-performing. Substandard loans
have a distinct possibility of loss if the deficiencies are not corrected. “Doubtful” loans are loans that management believes that
collection of payments in accordance with the terms of the loan agreement are highly questionable and improbable. Doubtful loans are
deemed impaired and put on non-accrual status.
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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 TDRs in accordance with ASC 310-40. 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. Interest income that would have been recorded
had non-accrual loans performed in accordance with their original contract terms during 2020 and 2019 was $1.2 million and $1.7
million, respectively.
Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual
principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled
payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of
collection.
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The following table sets forth the non-performing assets and past due loans as of the dates presented:
December 31, 2020 December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016
$
$
$
$
$
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
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
Allowance for credit losses
Non-performing loans to total loans
Non-performing loans to total loans
excluding PPP loans
Total 90 days past due and still
accruing interest and non-accrual
loans to total loans
Total non-performing assets to total
loans and OREO
Total non-performing assets to total
loans and OREO, excluding PPP
loans
ACL to non-performing loans
12,190
8,197
20,387
4,730
17
25,134
$
$
$
16,894
4,854
21,748
7,300
$
21,017
3,439
24,456
10,596
$
13,745
7,255
21,000
10,491
—
$
29,048
—
$
35,052
—
$
31,491
14,009
16,708
30,717
15,662
—
46,379
968
$
6,349
$
5,066
$
5,124
$
3,626
162
20,387
$
$
21,517
13,945
59,777
0.47%
1,662
21,748
$
$
29,759
6,885
39,064
0.49%
1,047
24,456
$
$
30,569
5,944
35,692
0.60%
25,407
21,000
$
$
51,531
8,461
31,264
0.66%
40,470
30,717
74,813
5,766
29,174
1.07%
0.49%
0.49%
0.60%
0.66%
1.07%
0.47%
0.58%
0.53%
0.66%
0.62%
0.85%
1.46%
0.99%
0.60%
293.21%
0.66%
179.62%
0.85%
145.94%
0.99%
148.88%
2.49%
1.61%
1.61%
94.98%
During 2020, total non-performing loans decreased $1.4 million, or 6.3%, from December 31, 2019. During 2020, accruing TDRs
increased $7.1 million.
Loans 30-89 days past due and still accruing interest decreased $5.4 million from December 31, 2019 to December 31, 2020, and
loans 90 days or more past due and still accruing interest decreased $1.5 million from December 31, 2019 to December 31, 2020, for a
collective decrease in total past due loans of $6.9 million. Loans 30 days or more past due were 0.03% of total loans at December 31,
2020, the lowest level in our Company’s history.
The Company continues to monitor the operating status and trends of our clients to enable us to quickly detect credit deterioration and
take action where needed. The CARES Act afforded financial institutions the option to modify loans within certain parameters in
response to the COVID-19 pandemic without requiring the modifications to be classified as TDRs under ASC Topic 310 if the
borrower has been adversely impacted by COVID-19 and was current on their loan payments as of December 31, 2019. During 2020,
the Company has executed COVID-related loan modifications totaling $519.0 million. Loans with COVID-related modifications
during 2020 totaled 11.9% of the total loan portfolio at December 31, 2020. Of those loans, $345.4 million have resumed making
principal or interest payments or paid in full as of December 31, 2020. Modified loans that remained on a payment deferral plan at
December 31, 2020 totaled $173.6 million, or 4.0% of the total loan portfolio, of which 26.2% were a subsequent modification.
Monthly interest payments were required on 96.2% of the COVID modified loans as of December 31, 2020. All COVID modified
loans were classified as performing as of December 31, 2020.
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The following table sets forth COVID-19 loan modifications currently on a deferral plan as of the date presented:
Loans outstanding
Loans modified
Modification type
Percentage of
Percentage of
3-month
4 to 6-month 7 to 12-month 3 to 6-month full
6 to 12-month full
December 31, 2020
Commercial
Commercial real
estate non-
owner occupied
Residential real
estate
Consumer
Total excluding
PPP loans
PPP loans
Total loans
Balance
$ 2,867,959
loan portfolio
Balance
loan segment
interest only
interest only
66.0% $ 44,655
1.6% $
— $
— $
interest only
40,097
payment deferral
649
$
payment deferral
3,909
$
631,996
14.5% 126,423
20.0%
—
—
126,423
—
658,659
19,006
15.1%
0.4%
2,495
4
$ 4,177,620
176,106
$ 4,353,726
96.0% $ 173,577
—
100.0% $ 173,577
4.0%
0.4%
0.0%
4.2% $
0.0%
4.0% $
—
4
4
—
4
$
$
356
—
158
—
356
—
356
$
$
166,678
—
166,678
$
$
1,693
—
2,342
—
2,342
$
$
—
288
—
4,197
—
4,197
Allowance for credit losses
The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at
the balance sheet date and involves a high degree of judgment and complexity. On January 1, 2020, the Company adopted ASU 2016-
13, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology for recognizing credit
losses with a CECL model. The Company utilizes a DCF model developed within a third-party software tool to establish expected
lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the
projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and
renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing
delays. The model incorporates forecasts of certain national macroeconomic factors, including unemployment rates, home price index
(“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the
ACL accounting policy involves judgments, estimates and uncertainties that are subject to change. For periods beyond the reasonable
and supportable forecast period, we revert to historical long-term average loss rates on a straight-line basis.
We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary
loan segments within the ACL model 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 risk factors affecting each loan class. Generally,
the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans
that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following
are the loan classes within each of the four primary loan segments:
Commercial
Commercial and industrial
Owner occupied commercial real estate
Food and agribusiness
Municipal and non-profit
Non-owner occupied
commercial real estate
Construction
Acquisition and development
Multifamily
Non-owner occupied
Residential real estate
Consumer
Senior lien
Junior lien
Consumer
Loans on non-accrual, in bankruptcy and TDRs with a balance greater than $250,000 are excluded from the pooled analysis and are
evaluated individually. If management determines that foreclosure is probable, expected credit losses are evaluated based on the
criteria listed below, adjusted for selling costs as appropriate. Typically, these loans consist of commercial, commercial real estate and
agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are
determined by collectively analyzing:
● the borrower’s resources, ability and willingness to repay in accordance with the terms of the loan agreement;
● the likelihood of receiving financial support from any guarantors;
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● 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.
The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated
loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and
class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the
ACL 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.
Provision for loan losses for funded loans of $17.5 million, and provision for unfunded loan commitments of $0.1 million was
recorded during the year ended December 31, 2020 to provide coverage for the impact of deteriorating economic conditions as a result
of COVID-19 and to support net charge-offs. Net charge-offs on loans during the year ended December 31, 2020 were $2.7 million, or
0.06% of total loans. Specific reserves on loans totaled $1.9 million at December 31, 2020.
During the year ended December 31, 2019, provision for loan losses of $11.6 million was recorded to support originated loan growth
and cover net charge-offs. Net charge-offs were $8.3 million, or 0.19% of total loans, and specific reserves on individually evaluated
loans totaled $1.8 million at December 31, 2019.
The Company has elected to exclude accrued interest receivable (“AIR”) from the ACL calculation. When a loan is placed on non-
accrual, any recorded AIR is reversed against interest income. As of December 31, 2020 and December 31, 2019, AIR from loans
totaled $16.7 million and $17.2 million, respectively.
Total ACL
After considering the above mentioned factors, we believe that the ACL of $59.8 million is adequate to cover estimated lifetime losses
inherent in the loan portfolio at December 31, 2020. However, it is likely that future adjustments to the ACL will be necessary. Any
changes to the underlying assumptions, circumstances or estimates, including but not limited to impacts of COVID-19 on the macro-
economic forecast, used in determining the ACL, could adversely affect the Company's results of operations, liquidity or financial
condition.
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The following schedule presents, by class stratification, the changes in the ACL during the years listed:
December 31,
2020
Total loans
December 31,
2019
Total loans
As of and for the years ended
December 31,
2018
Total loans
December 31,
2017
Total loans
Beginning balance
Cumulative effect adjustment(1)
Charge-offs:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total charge-offs
Recoveries
Net charge-offs
Provision for loan loss
Ending allowance for credit losses
Ratio of annualized net charge-offs to average total loans
during the period
Ratio of ACL to total loans outstanding at period end
Ratio of ACL to total loans outstanding, excluding PPP
loans at period end
Ratio of ACL to total non-performing loans at period end
Total loans
Average total loans outstanding during the period
Average total loans outstanding, excluding PPP loans
during the period
Non-performing loans
$
$
$
39,064
5,836
$
35,692
—
$
31,264
—
$
29,174
—
$
(2,023)
(412)
(67)
(726)
(3,228)
571
(2,657)
17,534
59,777
0.06%
1.37%
1.43%
293.21%
4,353,726
4,578,894
4,352,984
20,387
$
$
(7,422)
(116)
(124)
(937)
(8,599)
328
(8,271)
11,643
39,064
0.19%
0.88%
0.88%
179.62%
4,415,406
4,288,226
4,288,226
21,748
$
$
(895)
(11)
(118)
(1,134)
(2,158)
1,389
(769)
5,197
35,692
0.02%
0.87%
0.87%
145.94%
4,092,308
3,819,603
3,819,603
24,456
$
$
(10,342)
—
(236)
(737)
(11,315)
433
(10,882)
12,972
31,264
0.36%
0.98%
0.98%
148.88%
3,178,947
3,029,446
3,029,446
21,000
$
$
December 31,
2016
Total loans
27,119
—
(20,684)
(321)
(408)
(777)
(22,190)
594
(21,596)
23,651
29,174
0.80%
1.02%
1.02%
94.98%
2,860,921
2,700,794
2,700,794
30,717
(1) Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.
Refer to note 1 – Basis of Presentation and note 7 – Allowance for Credit Losses of our consolidated financial statements for
further details.
The following tables present the allocation of the ACL and the percentage of the total amount of loans in each loan category listed as
of the dates presented:
Commercial
PPP loans(1)
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
(1) PPP loans are fully guaranteed by the SBA.
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total
$
$
$
$
December 31, 2020
Total loans
% of total loans
Related ACL
2,867,959
176,106
631,996
658,659
19,006
4,353,726
66.0% $
4.0%
14.5%
15.1%
0.4%
100.0% $
ACL as a %
of total ACL
50.8%
0.0%
29.2%
19.2%
0.8%
100.0%
30,376
—
17,448
11,492
461
59,777
December 31, 2019
Total loans
% of total loans
Related ACL
67.8% $
14.3%
17.4%
0.5%
100.0% $
30,442
4,850
3,468
304
39,064
2,992,307
630,906
770,417
21,776
4,415,406
60
ACL as a %
of total ACL
77.9%
12.4%
8.9%
0.8%
100.0%
Table of Contents
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
Deposits
Total loans
% of total loans
Related ACL
ACL as a %
of total ACL
December 31, 2018
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
27,137
4,406
3,800
349
35,692
76.1%
12.3%
10.6%
1.0%
100.0%
Total loans
% of total loans
Related ACL
1,874,605
563,049
716,237
25,056
3,178,947
59.0% $
17.7%
22.5%
0.8%
100.0% $
21,385
5,609
3,965
305
31,264
ACL as a %
of total ACL
68.4%
17.9%
12.7%
1.0%
100.0%
Total loans
% of total loans
Related ACL
ACL as a %
of total ACL
December 31, 2016
1,560,430
526,792
744,885
28,814
2,860,921
54.6% $
18.4%
26.0%
1.0%
100.0% $
18,821
5,642
4,387
324
29,174
64.6%
19.3%
15.0%
1.1%
100.0%
$
$
$
$
$
$
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, 2020 and 2019:
Increase (decrease)
December 31, 2020
December 31, 2019
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
$ 2,111,045
514,286
646,829
1,417,940
4,690,100
820,229
165,903
986,132
$ 5,676,232
37.1% $ 1,184,945
738,496
9.1%
542,531
11.4%
1,213,007
25.0%
3,678,979
82.6%
894,459
14.5%
163,694
2.9%
17.4%
1,058,153
100.0% $ 4,737,132
61
Amount
926,100
25.0% $
(224,210)
15.6%
104,298
11.5%
204,933
25.6%
77.7% 1,011,121
(74,230)
18.9%
2,209
3.4%
(72,021)
22.3%
939,100
100.0% $
% Change
78.2%
(30.4)%
19.2%
16.9%
27.5%
(8.3)%
1.3%
(6.8)%
19.8%
Table of Contents
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $250,000 as of
December 31, 2020:
Three months or less
Over 3 months through 6 months
Over 6 months through 12 months
Thereafter
Total time deposits > $250,000
$
December 31, 2020
19,672
18,467
65,364
62,400
165,903
$
At December 31, 2020 and 2019, time deposits that were scheduled to mature within 12 months totaled $659.5 million and $726.9
million, respectively. Of the time deposits scheduled to mature within 12 months at December 31, 2020, $103.5 million were in
denominations of $250,000 or more, and $556.0 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 $165.9 million and $163.7 million at
December 31, 2020 and 2019, respectively. Note 12 to the consolidated financial statements provides a maturity schedule of time
deposits outstanding at December 31, 2020.
Other borrowings
As of December 31, 2020 and 2019, the Bank sold securities under agreements to repurchase totaling $22.9 million and $56.9 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 $0.9 billion at December 31, 2020. The Bank utilizes its FHLB line of credit as a funding mechanism for
originated loans and loans held for sale. At December 31, 2020, the Bank had no outstanding borrowings with the FHLB. At
December 31, 2019, the Bank had $192.7 million in line of credit advances from the FHLB that matured within a day and one term
advance totaling $15.0 million with a fixed interest rate of 2.33% and a maturity date in October 2020. The Bank may pledge
investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at December 31, 2020.
At December 31, 2019, investment securities pledged totaled $17.6 million. Loans pledged were $1.2 billion at December 31, 2020
and $1.5 billion at December 31, 2019. Interest expense related to FHLB advances totaled $1.3 million and $6.2 million for the years
ended December 31, 2020 and 2019, 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, 2020 and 2019, 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 $88.6 million, or $2.85 per diluted share, during 2020, compared to net income of $80.4 million, or $2.55
per diluted share, during 2019. Adjusting for the banking center consolidation-related expense, net income was $90.4 million, or $2.91
per diluted share, during 2020, and $81.1 million, or $2.57 per diluted share, during 2019.
62
Table of Contents
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.
63
Table of Contents
The table below presents the components of net interest income on a FTE basis for the years ended December 31, 2020, 2019 and
2018. 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.
For the year ended
December 31, 2020
For the year ended
December 31, 2019
For the year ended
December 31, 2018
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
Interest earning assets:
Originated loans FTE(1)(2)(3)
Acquired loans
Loans held for sale
Investment securities available-for-
sale
Investment securities held-to-maturity
Other securities
Interest earning deposits and securities
$ 4,237,091 $ 171,592
27,909
5,628
299,901
185,182
4.05% $ 3,838,229 $ 183,502
35,992
443,025
9.31%
4,407
113,183
3.04%
4.78% $ 3,166,374 $ 142,461
51,765
653,229
8.12%
3,380
73,644
3.89%
591,870
248,006
26,903
11,406
5,099
1,157
1.93%
2.06%
4.30%
713,686
207,784
28,060
15,472
5,825
1,770
2.17%
2.80%
6.31%
883,737
258,809
18,093
18,493
7,252
1,096
4.50%
7.92%
4.59%
2.09%
2.80%
6.06%
purchased under agreements to
resell
Total interest earning assets
FTE(2)
Cash and due from banks
Other assets
Allowance for credit losses
Total assets
Interest bearing liabilities:
Interest bearing demand, savings and
money market deposits
Time deposits
Securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Total interest bearing liabilities
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
206,911
314
0.15%
24,106
698
2.90%
77,808
1,426
1.83%
$ 5,795,864 $ 223,105
74,461
511,721
(55,778)
$ 6,326,268
3.85% $ 5,368,073 $ 247,666
76,788
430,402
(38,142)
$ 5,837,121
4.61% $ 5,131,694 $ 225,873
88,847
419,607
(32,616)
$ 5,607,532
$ 2,730,857 $
1,038,107
8,605
15,024
0.32% $ 2,426,963 $ 13,277
16,526
1,074,506
1.45%
0.55% $ 2,418,326 $
1,132,748
1.54%
8,758
12,283
28,585
95,418
132
1,295
$ 3,892,967 $ 25,056
1,497,940
147,075
5,537,982
788,286
668
60,445
0.46%
1.36%
6,300
269,207
0.64% $ 3,831,121 $ 36,771
1,159,080
108,997
5,099,198
737,923
87,691
133,932
295
1.11%
2.34%
2,618
0.96% $ 3,772,697 $ 23,954
1,082,158
90,257
4,945,112
662,420
$ 6,326,268
$ 5,837,121
$ 5,607,532
$ 198,049
$ 210,895
$ 201,919
$ 1,902,897
$ 4,228,797
5,266,904
148.88%
3.21%
3.42%
$ 1,536,952
$ 3,586,043
4,660,549
140.12%
3.65%
3.93%
$ 1,358,997
$ 3,500,484
4,633,232
136.02%
4.40%
0.36%
1.08%
0.34%
1.95%
0.63%
3.77%
3.93%
(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 an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $5,103,
$5,065 and $4,482 for the years ended 2020, 2019 and 2018, respectively.
(3) Loan fees included in interest income totaled $15,713, $6,328 and $6,027 during 2020, 2019 and 2018, respectively.
64
Table of Contents
Net interest income totaled $192.9 million, $205.8 million and $197.4 million during the years ended 2020, 2019 and 2018,
respectively. The yield on earning assets decreased 76 basis points, led by a decrease in the originated portfolio yields due to monetary
policy actions by the Federal Reserve. During 2020, the cost of funds decreased 28 basis points, compared to the prior year.
Average loans comprised $4.5 billion, or 78.3%, of total average interest earning assets during 2020, compared to $4.3 billion, or
79.8%, during 2019. The increase in average loan balances was primarily driven by an increase in average PPP loans. During 2020,
we took a very careful approach to extending new credit as well as continuing an intense focus on managing credit risk and yield. This
led to loan originations of $1.2 billion, during 2020, which were more than offset by higher levels of paydowns and payoffs. We
continue to maintain a granular and well diversified loan portfolio with self-imposed concentration limits. In light of the strain placed
on industries by the COVID-19 pandemic, we have carefully evaluated and continue to closely monitor our entire loan portfolio.
Higher deposits, loan paydowns and loan payoffs, combined with lower loan originations, drove a higher average cash and cash
equivalent balance of $281.4 million during the year ended December 31, 2020, compared to an average balance of $100.9 million
during the year ended December 31, 2019.
Average investment securities comprised 14.5% and 17.2% of total interest earning assets during 2020 and 2019, respectively. For the
year-ended December 31, 2020, investment security purchases totaled $570.3 million and were partially offset by maturities of $359.6
million.
Average balances of interest bearing liabilities increased $61.8 million during 2020 compared to 2019. The increase was driven by
interest bearing demand, savings and money market deposits of $303.9 million, partially offset by decreases in FHLB advances, time
deposits and securities sold under agreements to repurchase of $173.8 million, $36.4 million and $31.9 million, respectively.
Total interest expense related to interest bearing liabilities was $25.1 million and $36.8 million during 2020 and 2019, respectively, at
an average cost of 0.64% and 0.96% during 2020 and 2019, respectively. Additionally, the cost of deposits decreased 19 basis points
to 0.45% during 2020, compared to 0.64% during 2019, due to the decline in short-term interest rates as a result of monetary policy
actions by the Federal Reserve.
65
Table of Contents
The following table summarizes the changes in net interest income on an FTE basis by major category of interest earning assets and
interest bearing liabilities, identifying changes related to volume and changes related to rates for 2020, 2019 and 2018:
The year ended December 31, 2020
compared to
the year ended December 31, 2019
Increase (decrease) due to
Rate
Net
Volume
The year ended December 31, 2019
compared to
the year ended December 31, 2018
Increase (decrease) due to
Volume
Rate
Net
Interest income:
Originated loans FTE(1)(2)(3)
Acquired 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:
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
$ 16,153
(13,319)
2,188
(2,348)
827
(50)
277
3,728
958
(527)
(147)
(2,359)
(2,075)
5,803
$
$
$
$ (28,063) $ (11,910) $ 32,120
(17,077)
1,540
(3,687)
(1,430)
629
5,236
(967)
(1,718)
(1,553)
(563)
(8,083)
1,221
(4,066)
(726)
(613)
(661)
(1,555)
$ (28,289) $ (24,561) $ 10,540
(384)
$ 8,921
1,304
(513)
666
3
45
$ 41,041
(15,773)
1,027
(3,021)
(1,427)
674
827
$ 11,253
(728)
$ 21,793
$ (5,630) $ (4,672) $
(975)
(389)
(2,646)
(9,640)
(1,502)
(536)
(5,005)
(11,715)
$ (18,649) $ (12,846) $
47
(896)
(301)
3,166
2,016
8,524
$ 4,472
5,139
674
516
10,801
452
$
$
$
4,519
4,243
373
3,682
12,817
8,976
(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 all periods presented. The taxable equivalent
(3)
adjustments included above are $5,103, $5,065 and $4,482 for the years ended 2020, 2019 and 2018, respectively.
Loan fees included in interest income totaled $15,713, $6,328 and $6,027 for the years ended December 31, 2020, 2019 and
2018, respectively.
Below is a breakdown of average deposits and the average rates paid during the periods indicated:
For the three months ended
For the years ended
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
Average
balance
$ 1,898,171
660,817
1,459,528
626,252
1,008,297
$ 5,653,065
Non-interest bearing demand
Interest bearing demand
Money market accounts
Savings accounts
Time deposits
Total average deposits
Provision for loan losses
Average
rate
paid
Average
rate
paid
Average
balance
Average
balance
0.00% $ 1,177,958 0.00% $ 1,497,940 0.00% $ 1,159,080 0.00%
679,884
0.22%
0.21%
1,221,719
0.75%
0.31%
0.50%
527,814
0.18%
1.54%
1.16%
1,062,511
0.33% $ 4,669,886
0.64%
821,813
0.23%
1,318,764
0.69%
590,280
0.43%
1.67%
1,038,107
0.64% $ 5,266,904
686,862
0.23%
0.41% 1,201,377
0.23%
538,724
1.45% 1,074,506
0.45% $ 4,660,549
Average
balance
Average
rate
paid
Average
rate
paid
The provision for loan losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate
to absorb estimated lifetime losses inherent in the loan portfolio as of the balance sheet date. The determination of the ACL, and the
resultant provision for loan losses, is subjective and involves significant estimates and assumptions.
66
Table of Contents
Provision for loan losses of $17.6 million was recorded under the CECL model during 2020, including a $0.1 million provision for
unfunded loan commitment reserves, to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19
and to cover net charge-offs. Provision of $11.6 million was recorded under the prior incurred loss model during 2019 to support
originated loan growth and net charge-offs. The allowance for credit losses totaled 1.37% of total loans at December 31, 2020,
compared to 0.88% at December 31, 2019, and included a CECL adoption Day 1 increase of $5.8 million. Excluding PPP loans, the
allowance for credit losses totaled 1.43% of loans at December 31, 2020.
Non-interest income
The table below details the components of non-interest income for the years presented:
Service charges
Bank card fees
Mortgage banking income
Bank-owned life insurance income
Other non-interest income
OREO-related income
Total non-interest income
For the years ended December 31,
$
2020
14,962
15,446
102,384
2,360
4,719
387
$ 140,258
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
$
$
2020 vs 2019
Increase (decrease)
2019 vs 2018
Increase (decrease)
Amount
% Change
Amount
$
$
(2,933)
851
60,038
647
(1,169)
72
57,506
(16.4)% $
5.8 %
141.8 %
37.8 %
(19.9)%
22.9 %
69.5 % $
(197)
106
12,239
(78)
509
(602)
11,977
% Change
(1.1)%
0.7 %
40.7 %
(4.4)%
9.5 %
(65.6)%
16.9 %
Non-interest income totaled $140.3 million and $82.8 million during 2020 and 2019, respectively. During 2020, mortgage banking
income reached a record $102.4 million, increasing $60.0 million, or 141.8%, compared to the prior year. The mortgage banking
income increase was driven by higher loan production due to lower prevailing interest rates. During 2020, bank card fees increased
$0.9 million, or 5.8%, and service charges decreased $2.9 million, or 16.4%, due to changes in consumer behavior as a result of the
COVID-19 pandemic.
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
Banking center consolidation-related expense
Total non-interest expense
For the years ended December 31,
2020 vs 2019
Increase (decrease)
2019 vs 2018
Increase (decrease)
2020
$ 141,170
27,473
9,042
2,802
1,168
4,388
2,946
10,547
3,148
(38)
1,183
2,348
$ 206,177
2019
$ 122,732
27,336
8,754
3,897
1,049
4,780
3,256
10,867
3,186
(7,193)
1,183
898
$ 180,745
2018
$ 114,939
28,493
10,098
4,513
2,475
5,453
6,059
13,073
2,549
(488)
2,170
—
$ 189,334
$
$
Amount
% Change
Amount
18,438
137
288
(1,095)
119
(392)
(310)
(320)
(38)
7,155
—
1,450
25,432
15.0 % $
0.5 %
3.3 %
(28.1)%
11.3 %
(8.2)%
(9.5)%
(2.9)%
(1.2)%
(99.5)%
0.0 %
161.5 %
14.1 % $
7,793
(1,157)
(1,344)
(616)
(1,426)
(673)
(2,803)
(2,206)
637
(6,705)
(987)
898
(8,589)
% Change
6.8 %
(4.1)%
(13.3)%
(13.6)%
(57.6)%
(12.3)%
(46.3)%
(16.9)%
25.0 %
>100.0%
(45.5)%
100.0 %
(4.5)%
During 2020, non-interest expense increased $25.4 million, or 14.1%, compared to 2019, largely due to higher mortgage banking
performance-related compensation. Banking center consolidation-related expense totaled $2.3 million, compared to $0.9 million
during the prior year. The consolidations of 12 banking centers were announced in the second quarter of 2020 and were substantially
complete at December 31, 2020. Additionally, included in the prior period were net gains on the sale of OREO of $7.2 million,
compared to minimal net gains on the sale of OREO recorded in 2020.
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Table of Contents
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 $20.8 million during 2020 compared to $15.8 million during 2019. Included in income tax expense was
$2.2 million of tax benefits from stock compensation activity during 2019. Adjusting for the stock compensation activity, the effective
tax rate for 2020 was 19.0% compared to an adjusted rate of 18.7% for 2019. As of December 31, 2020, 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 differs from our marginal rate largely due to 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.
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, 2020 and 2019:
Cash and due from banks
Interest bearing bank deposits
Unencumbered investment securities, at fair value
Total
$
December 31, 2020 December 31, 2019
109,690
500
324,918
435,108
605,065
500
513,945
1,119,510
$
$
$
Total on-balance sheet liquidity increased $684.4 million from December 31, 2019 to December 31, 2020, primarily driven by strong
deposit growth.
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 may pledge investment securities and loans as collateral for FHLB
advances. There were no investment securities pledged at December 31, 2020. At December 31, 2019, investment securities totaling
$17.6 million were pledged as collateral for FHLB advances. The Bank had loans pledged as collateral for FHLB advances of $1.2
billion at December 31, 2020 and $1.5 billion at December 31, 2019. FHLB advances, lines of credit and other short-term borrowing
availability totaled $0.9 billion at December 31, 2020. The Bank can obtain additional liquidity through the FHLB facility, if required,
and also has access to the Paycheck Protection Program Liquidity Facility (“PPPLF”) and 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.
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Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase
agreements, capital expenditures, operating expenses, and share repurchases. For additional information regarding our operating,
investing and financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial
statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and pay
downs of loans and purchases and sales of investment securities. At December 31, 2020, 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 $1.0 billion at December 31, 2020,
inclusive of pre-tax net unrealized gains of $11.4 million on the available-for-sale securities portfolio. Additionally, our held-to-
maturity securities portfolio had $5.1 million of pre-tax net unrealized gains at December 31, 2020. The gross unrealized gains and
losses are detailed in note 4 of our consolidated financial statements. As of December 31, 2020, 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, 2020, $659.5 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.
Under the Basel III requirements, at December 31, 2020, 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 February 26,
2020, the Board of Directors authorized a new share repurchase program for up to $50.0 million from time to time in either the open
market or through privately negotiated transactions. This authorization was in addition to the $12.6 million remaining for share
repurchase that was previously approved by the Board on August 5, 2016. During the first quarter of 2020, the Company repurchased
734,117 shares for $19.5 million. This completed the previous authorization approved in August 2016. The remaining authorization
under the program approved in February 2020 was $43.1 million at December 31, 2020.
On January 21, 2021, our Board of Directors declared a quarterly dividend of $0.21 per common share, payable on March 15, 2021 to
shareholders of record at the close of business on February 26, 2021.
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
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Committee with direction from the Board of Directors. The Asset Liability Committee meets monthly to review, among other things,
the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset
Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable
changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize
various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans
and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net
interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic
value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of
changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses
on net interest income.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at December 31, 2020
and 2019. During the year ended December 31, 2020, our asset sensitivity increased slightly for a rising rate environment as a result of
the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 25
basis point decrease in interest rates on net interest income based on the interest rate risk model at December 31, 2020 and 2019:
Hypothetical
shift in interest
rates (in bps)
200
100
(25)
% change in projected net interest income
December 31, 2020
December 31, 2019
14.22%
7.46%
(0.46)%
6.16%
3.13%
(0.54)%
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 a balanced approach to loan origination with an emphasis on shorter duration loans as well as
variable rate loans given the current low rate environment. 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 82.6% of total deposits at December 31, 2020, compared to 77.7% at
December 31, 2019. 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, 2020 and 2019, we had loan
commitments totaling $848.6 million and $850.3 million, respectively, and standby letters of credit that totaled $7.3 million and $11.9
million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments
often expire without being drawn upon. We do not anticipate any material losses arising from commitments or contingent liabilities,
and we do not believe that there are any material commitments to extend credit that represent risks of an unusual nature.
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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, 2020 and the expected timing of those payments:
Operating lease obligations
Purchase obligations
Time deposits
Total
Impact of Inflation and Changing Prices
After one but After three but
$
Within
one year
5,276
12,135
659,509
$ 676,920
within three
years
$
9,425
9,209
293,985
$ 312,619
within five
years
$
$
7,675
549
31,657
39,881
After five
years
$ 12,294
$
—
981
$ 13,275
Total
34,670
21,893
986,132
$ 1,042,695
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.
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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, 2020 and 2019, 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, 2020, and
the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial condition of the Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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 24, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for the
recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments –
Credit Losses.
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 judgments. 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 separate opinion on the critical audit matter or on
the accounts or disclosures to which it relates.
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Allowance for credit losses for loans evaluated on a collective basis
As discussed in Note 3 to the consolidated financial statements, the Company adopted ASU No. 2016-13, Financial Instruments –
Credit Losses (ASC Topic 326), as of January 1, 2020. The allowance for credit losses related to loans collectively evaluated for
impairment (the collective ACL) was $43.1 million of a total ACL of $44.9 million as of January 1, 2020. As discussed in Note 7
to the consolidated financial statements, the Company’s collective ACL was $57.9 million of a total allowance for credit losses of
$59.8 million as of December 31, 2020. The Company estimated the January 1, 2020 collective ACL and December 31, 2020
collective ACL (together, the 2020 collective ACL) 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 and risk characteristics. The 2020 collective ACL was determined at the class level,
analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. The Company utilized a
discounted cash flow (DCF) model developed within a third-party software tool to establish expected lifetime credit losses for the
loan portfolio. The 2020 collective ACL was calculated as the difference between the amortized cost basis and the projections
from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals,
using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing delays.
The model incorporates forecasts of certain national macroeconomic factors (reasonable and supportable forecasts) which drive
correlated Probability of Default (“PD”) and Loss Given Default (“LGD”) rates, which in turn, drive the losses predicted in
establishing the Company’s 2020 collective ACL. Management accounts for the inherent uncertainty of the underlying economic
forecast by reviewing and weighting alternate forecast scenarios. PD and LGD rates along with prepayment rates and loss
recovery time delays are determined at a loan class level making use of both internal and peer historical loss rate data. For periods
beyond the reasonable and supportable forecast period, the Company reverts to historical long-term average loss rates on a
straight-line basis. The length of the forecast period spans four quarters. The length of the reversion period is based on
management’s assessment of the length and pattern of the current economic cycle and typically ranges from four to eight quarters.
Additionally, the 2020 collective ACL calculation includes subjective adjustments for qualitative risk factors that are likely to
cause estimated credit losses to differ from historical experience.
We identified the assessment of the January 1, 2020 collective ACL and December 31,2020 collective ACL as a critical audit
matter. A high degree of audit effort, including specialized skills and knowledge in the industry, and subjective and complex
auditor judgment was involved in the assessment of the 2020 collective ACL. Specifically, the assessment encompassed the
evaluation of the 2020 collective ACL methodology, including (1) the DCF model and significant assumptions: PD, LGD,
prepayment rates, loss recovery time delays, peer data, portfolio segmentation, the length and weighting of the reasonable and
supportable forecast, and the reversion period, and (2) the qualitative risk factors. The assessment also included an evaluation of
the conceptual soundness and performance of the underlying models and assumptions. In addition, auditor judgment was required
to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested
the operating effectiveness of certain internal controls related to the Company’s measurement of the 2020 collective ACL
estimates, including controls over the:
● development and approval of the 2020 collective ACL methodology
● development of the DCF model and significant assumptions
● development of the qualitative risk factors
● analysis of the overall ACL results, trends, and ratios.
We evaluated the Company’s process to develop the 2020 collective ACL estimates by testing certain sources of data, factors, and
significant assumptions that the Company used, and considered the relevance and reliability of such data, factors, and significant
assumptions, including an evaluation of whether additional factors or alternative assumptions should be used. In addition, we
involved credit risk professionals with specialized skills and knowledge, who assisted in:
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● evaluating the Company’s 2020 collective ACL methodology for compliance with U.S. generally accepted accounting
principles
● assessing the conceptual soundness and performance testing of the DCF model by inspecting the model documentation to
determine whether the models are suitable for their intended use
● evaluating judgments made by the Company in the development of the PD, LGD, prepayment rates, loss recovery time
delays, peer data, and the reversion period assumptions by comparing them to relevant Company-specific metrics and trends, and
the applicable industry and regulatory practices
● evaluating the reasonable and supportable forecast judgments used to develop (i) the weighting of alternate forecast scenarios
by comparing it to the Company’s business environment, relevant industry practices, and comparisons to publicly available
forecasts, and (ii) the length of that period by comparing to specific portfolio risk characteristics and trends
● determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business
environment and relevant industry practices
● evaluating the methodology used to develop the qualitative factors and the effect of those factors on the 2020 collective ACL
compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying DCF
model.
We also assessed the sufficiency of the audit evidence obtained related to the 2020 collective ACL estimates by evaluating the:
● cumulative results of the audit procedures performed
● qualitative aspects of the Company’s accounting practices
● the potential bias in accounting estimates.
We have served as the Company’s auditor since 2010.
Kansas City, Missouri
February 24, 2021
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2020 and 2019
(In thousands, except share and per share data)
ASSETS
Cash and due from banks
Interest bearing bank deposits
Cash and cash equivalents
Investment securities available-for-sale (at fair value)
Investment securities held-to-maturity (fair value of $381,691 and $183,741 at
December 31, 2020 and December 31, 2019, respectively)
Non-marketable securities
Loans
Allowance for credit 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:
Common stock, par value $0.01 per share: 400,000,000 shares authorized;
51,487,907 and 51,487,907 shares issued; 30,634,291 and 31,176,627 shares
outstanding at December 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
Retained earnings
Treasury stock of 20,686,986 and 20,189,082 shares at December 31, 2020 and
December 31, 2019, respectively, at cost
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31, 2020 December 31, 2019
$
$
$
$
$
605,065
500
605,565
661,955
376,615
16,493
4,353,726
(59,777)
4,293,949
247,813
4,730
106,982
115,027
17,928
212,893
6,659,950
2,111,045
514,286
2,064,769
986,132
5,676,232
22,897
$
$
—
140,130
5,839,259
515
1,011,362
223,175
(424,127)
9,766
820,691
6,659,950
$
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
515
1,009,223
164,082
(408,962)
2,062
766,920
5,895,512
See accompanying notes to the consolidated financial statements.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2020, 2019 and 2018
(In thousands, except share and per share data)
2020
2019
2018
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
Banking center consolidation-related expense
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
$
$
$
200,026
16,505
1,157
314
218,002
23,629
1,427
25,056
192,946
17,630
175,316
14,962
15,446
102,384
2,360
4,719
387
140,258
141,170
27,473
9,042
2,802
1,168
4,388
2,946
10,547
3,148
(38)
1,183
2,348
206,177
109,397
20,806
88,591
2.87
2.85
$
$
$
218,836
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
122,732
27,336
8,754
3,897
1,049
4,780
3,256
10,867
3,186
(7,193)
1,183
898
180,745
96,194
15,829
80,365
2.57
2.55
$
$
$
193,124
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
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
30,857,086
31,075,857
31,175,825
31,530,817
30,748,234
31,430,074
See accompanying notes to the consolidated financial statements.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Securities available-for-sale:
2020
2019
2018
$
88,591
$
80,365
$
61,451
Net unrealized gains (losses) arising during the period, net of tax (expense)
benefit of ($2,634), ($4,510) and $876 for the years ended December 31,
2020, 2019 and 2018, respectively.
Less: amortization of net unrealized holding gains to income, net of tax benefit
of $248, $320 and $361 for the years ended December 31, 2020, 2019 and
2018, respectively.
Other comprehensive income (loss)
Comprehensive income
8,482
14,352
(2,243)
(778)
7,704
96,295
$
(1,015)
13,337
93,702
$
(1,311)
(3,554)
57,897
$
See accompanying notes to the consolidated financial statements.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended 2020, 2019 and 2018
(In thousands, except share and per share data)
Accumulated
Balance, December 31, 2017
$
Cumulative effect adjustment(1)
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
Other comprehensive loss
Balance, December 31, 2018
—
—
—
—
$
515
$ 1,014,399
Common
stock
$
515
—
—
—
Additional
paid-in
capital
970,668
—
—
$
4,420
Retained
earnings
$
60,795
26
61,451
—
Treasury
stock
(493,329) $
—
—
—
other
comprehensive
(loss) income, net
(6,242) $
—
—
—
Total
532,407
26
61,451
4,420
—
(2,932)
—
9,736
—
6,804
42,243
—
—
(16,761)
67,970
—
—
—
Balance, December 31, 2019
$
515
$ 1,009,223
Cumulative effect adjustment(2)
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)
Other comprehensive income
—
—
—
—
—
—
Cumulative effect adjustment(3)
Net income
Stock-based compensation
Issuance of stock under purchase and equity
compensation plans, including gain on reissuance of
treasury stock of $1,588, net
Repurchase of 734,117 shares
Cash dividends declared ($0.80 per share)
Other comprehensive income
—
—
—
—
—
—
—
Balance, December 31, 2020
$
515
$ 1,011,362
—
—
$
—
—
1,479
—
$
106,990
256
80,365
4,869
—
—
—
(415,623) $
—
—
—
(10,045)
—
6,661
—
—
$
—
—
—
—
—
$
5,299
(3,160)
(23,529)
—
$
164,082
(4,623)
88,591
—
—
—
(408,962) $
—
—
—
—
—
4,311
(19,476)
(24,875)
—
$
223,175
—
—
(424,127) $
110,213
(16,761)
—
(3,554)
695,006
256
80,365
4,869
(3,384)
(23,529)
13,337
766,920
(4,623)
88,591
5,299
1,151
(19,476)
(24,875)
7,704
820,691
(1,479)
(3,554)
(11,275) $
—
—
—
—
—
13,337
2,062
—
—
—
$
—
—
—
7,704
9,766
$
(1) Related to the adoption of Accounting Standards Update No. 2017-12, Derivatives and Hedging: Targeted Improvements to
Accounting for Hedging Activities.
(2) 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.
(3) Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.
Refer to note 3 – Recent Accounting Pronouncements of our consolidated financial statements for further details.
See accompanying notes to the consolidated financial statements.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
2020
2019
2018
$
88,591
$
80,365
$
61,451
Provision for loan losses
Provision (release) for mortgage loan repurchases
Depreciation and amortization
Change in current income tax receivable
Change in deferred income taxes
Net excess tax expense (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
Originations of mortgage serving rights
Impairment of mortgage servicing rights
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 (used in) 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 decrease (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 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
Repurchase of common stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents and restricted cash(1)
Cash, cash equivalents and restricted cash at beginning of the year(1)
Cash, cash equivalents and restricted cash at end of period(1)
Supplemental disclosure of cash flow information during the period:
Cash paid for interest
Net tax payment
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value
(Decrease) increase 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
17,630
662
14,449
(2,371)
3,477
51
3,374
(11,694)
(98,250)
(2,376,660)
2,348,166
(2,360)
(38)
(10,354)
751
470
1,631
5,299
(5,414)
—
(21,323)
34,045
(9,868)
(451)
13,709
—
—
88,071
271,508
—
—
(284,170)
(286,130)
49,209
(4,352)
—
—
3,671
—
(148,935)
939,100
(34,038)
947,431
(1,155,106)
(749)
1,832
(24,816)
(19,476)
654,178
495,375
120,190
615,565
27,622
22,111
1,533
(16,351)
3,625
—
—
$
$
11,643
(366)
15,038
1,955
8,793
(2,160)
2,047
(15,590)
(39,922)
(1,317,547)
1,289,877
(1,713)
(7,193)
(27)
129
1,082
898
4,869
(5,294)
—
(799)
16,391
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
370
11,522
4,246
9,092
(1,286)
2,911
(23,115)
(27,009)
(1,005,850)
1,030,906
(1,791)
(488)
(30)
21
230
—
4,420
—
(7,957)
(3,645)
14,379
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
$
$
(1)
Included in restricted cash is $10.0 million placed in escrow for certain potential liabilities the Company is indemnified for pursuant to the Peoples merger agreement. The restricted cash
is included in other assets in the Company’s consolidated statements of financial condition at December 31, 2020, 2019 and 2018.
See accompanying notes to the consolidated financial statements.
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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020, 2019 and 2018
Note 1 Basis of Presentation
National Bank Holdings Corporation 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 90 banking centers as of December 31, 2020, 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. During the first quarter of 2020, the Company updated the loan classifications in its allowance
for credit losses model and loans previously referred to as “310-30” were reclassified to “acquired loans.” Certain loan classifications
within the consolidated financial disclosures have been updated to reflect this change. The prior period presentations have been
reclassified to conform to the current period presentations. Refer to note 6 for further discussion. All amounts are in thousands, except
share data and per share data, or as otherwise noted.
General economic conditions declined during 2020 as a result of the COVID-19 pandemic, which has caused substantial disruption to
the communities we serve and has changed the way we live and work. The length of the pandemic and the efficacy of the
extraordinary government-mandated measures that have been put into place to address it are still unknown, but have already had, and
are likely to continue to have, a significant impact to the financial condition and operations of the Company.
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, the valuation of stock-based compensation, the valuation of MSRs, the fair
values of financial instruments, the allowance for credit 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.
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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 in an unrealized loss position on a quarterly basis, and more frequently when economic or
market conditions warrant such evaluation. 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 security is written down to fair value and the entire loss is recorded in earnings. If
either of the above criteria is not met, we evaluate whether the decline in fair value is the result of credit losses or other factors. In
making the assessment, we may consider various factors including the extent to which fair value is less than amortized cost,
performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to
make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates
that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the
security and any excess is recorded as an allowance for credit loss. When the loss is not considered a result of credit loss, the cost basis
of the security is written down to fair value, with the loss charge recognized in AOCI. The Company does not measure expected credit
losses for U.S. agency-backed held-to-maturity securities, since the risk of nonpayment of the amortized cost basis is zero. Credit
losses are not estimated for AIR from investment securities as interest deemed uncollectible is written off through interest income.
Prior to the adoption of ASU 2016-13, declines in the fair value of held-to-maturity and available-for-sale securities below their cost
that were deemed to be other-than-temporarily impaired were reflected in earnings as realized losses. In estimating other-than-
temporary-impairment prior to January 1, 2020, the Company considered, 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 had the intent to sell the security; and whether it was more likely than not that the Company would 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. 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.
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. 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 is discontinued when the collection of principal or interest, in whole or in part, is doubtful.
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Interest income on acquired loans 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.
The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19
pandemic without requiring the modifications to be classified as TDRs if the borrower has been adversely impacted by COVID-19 and
was current on their loan payments. The Company has modified loans due to the effects of the COVID-19 pandemic that were not
classified as TDRs. Modifications include deferral of principal as well as full-payment deferral for a period ranging from three months
to one year. The number and aggregate balance of COVID-related loan modifications substantially decreased during the third quarter,
and we continue to monitor the remaining COVID loan modifications closely.
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. Currently, conventional loans in states where the bank
has market presence may be sold with servicing retained or with servicing released. Government loans and conventional loans in states
where the bank does not have a market presence are generally sold with servicing 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 in the underwriting process.
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 credit losses—The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments,
effective January 1, 2020.
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The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The Company
measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified four
primary loan segments that are further stratified into 11 loan classes to provide more granularity in analyzing loss history based upon
specific loss drivers and risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan classes will
follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an
individual basis and are not included in the collective evaluation. Those loans include 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 expected 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.
The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the
loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis.
The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest
rates and repayment schedules adjusted for estimated prepayment rates and loss recovery timing delays. The model incorporates
forecasts of certain national macroeconomic factors, including unemployment rates, HPI, retail sales and GDP, which drive correlated
probability of default (“PD”) and loss given default (“LGD”) rates. PD and LGD, in turn, drive the losses predicted in establishing our
ACL. PD and LGD rates along with prepayment rates and loss recovery time delays are determined at a loan class level making use of
both internal and peer historical loss rate data. The determination and application of the ACL accounting policy involves judgments,
estimates, and uncertainties that are subject to change. For periods beyond the reasonable and supportable forecast period, we revert to
historical long-term average loss rates on a straight-line basis. The length of the forecast period spans four quarters. The length of the
reversion period is based on management’s assessment of the length and pattern of the current economic cycle and typically ranges
from four to eight quarters.
Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting alternate forecast
scenarios. Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause
estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and
include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio
trends, loan portfolio growth and industry concentrations. The Company has elected to exclude AIR from the allowance for credit
losses calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income.
The determination and application of the ACL 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. Various regulatory agencies, as an integral part of the examination process, periodically
review the ACL. Such agencies may require the Company to recognize additions to the ACL or reserve increases to adversely graded
classified loans based on their judgments about information available to them at the time of their examinations.
The ACL is decreased by net charge-offs and is increased by provisions for loan losses that are charged to the statements of
operations. Charge-offs, if any, are typically measured for each loan based on a thorough analysis of the most probable source of
repayment, such as 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. When it is determined that specific loans, or
portions thereof, are uncollectible, these amounts are charged off against the ACL.
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
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Table of Contents
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. Credit quality indicators are reviewed and updated in accordance
with internal policy based on loan balance and risk rating. Interest accrual is discontinued on doubtful loans and certain substandard
loans, as is more fully discussed in note 4.
Unfunded loan commitments
In addition to the ACL for funded loans, the Company maintains reserves to cover the risk of loss associated with off-balance sheet
unfunded loan commitments. The allowance for off-balance sheet credit losses is maintained within the other liabilities in the
statements of financial condition. Under the CECL framework, adjustments to this liability are recorded as provision for credit losses
in the statements of operations. Unfunded loan commitment balances are evaluated by loan class and further segregated by revolving
and non-revolving commitments. In order to establish the required level of reserve, the Company applies average historical utilization
rates and ACL loan model loss rates for each loan class to the outstanding unfunded commitment balances.
Prior to the adoption of ASU 2016-13, the Company’s determination of the allowance took 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 acquisitions, loan structures, growth factors and other
elements that warrant recognition.
Under the prior incurred loss methodology, the Company routinely evaluated adversely risk-rated credits for impairment. Impairment,
if any, was 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 were established for loans with similar
characteristics. In this process, general allowance factors were 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 were likely to cause estimated credit losses to differ from historical experience. To the extent that the data supporting such
factors had limitations, management’s judgment and experience played a key role in determining the allowance estimates.
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.
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
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Table of Contents
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.
MSRs associated with loans originated and sold, where servicing is retained, are initially capitalized at fair value and included in
intangible assets 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.
i) 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.
j) Other real estate owned—OREO consists of property that has been foreclosed on or repossessed by deed in lieu of foreclosure. The
assets are initially recorded at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged
to the ALL. Subsequent downward valuation adjustments, if any, in addition to gains and losses realized on sales and net operating
expenses, are recorded in non-interest expense. Costs associated with maintaining property, such as utilities and maintenance, are
charged to expense in the period in which they occur, while costs relating to the development and improvement of property are
capitalized to the extent the balance does not exceed fair value. All OREO acquired through acquisition is recorded at fair value, less
cost to sell, at the date of acquisition.
k) Bank-owned life insurance—The Company 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.
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l) Securities purchased under agreements to resell and securities sold under agreements to repurchase—The Company periodically
enters into purchases or sales of securities under agreements to resell or repurchase as of a specified future date. The securities
purchased under agreements to resell are accounted for as collateralized financing transactions and are reflected as an asset in the
consolidated statements of financial condition. The securities pledged by the counterparties are held by a third party custodian and
valued daily. The Company may require additional collateral to ensure full collateralization for these transactions. The repurchase
agreements are considered financing agreements and the obligation to repurchase assets sold is reflected as a liability in the
consolidated statements of financial condition of the Company. The repurchase agreements are collateralized by debt securities that
are under the control of the Company.
m) Stock-based compensation—The Company accounts for stock-based compensation in accordance with ASC Topic 718. 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.
n) 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.
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o) 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.
p) 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.
q) 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.
r) 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.
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Note 3 Recent Accounting Pronouncements
Revenue from Contracts with Customers—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.
This update supersedes revenue recognition requirements in ASC Topic 605, Revenue Recognition, including most industry-specific
revenue recognition guidance in the FASB Accounting Standards Codification. The new guidance stipulates that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. The guidance provides specific steps that entities
should apply in order to achieve this principle.
The 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 FASB 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.
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 CECL 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
adopted ASU 2016-13 on January 1, 2020 using a modified retrospective approach. Results for reporting periods beginning after
January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously
applicable GAAP. Upon adoption, the Company recognized a $5.8 million increase in the allowance for credit losses with a
corresponding reduction to retained earnings, net of tax, of $4.6 million. Since the investment securities portfolio was comprised of
mortgage-backed securities issued by government sponsored entities as of January 1, 2020, no credit loss allowance was required upon
adoption.
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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 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 adopted 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; ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment; ASU
2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20); ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting; and ASU 2018-
13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement with no material impact on its financial statements. 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.
Note 4 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities. These
investment securities totaled $1.0 billion at December 31, 2020 and included $0.6 billion of available-for-sale securities and $0.4
billion of held-to-maturity securities. At December 31, 2019, investment securities totaled $0.8 billion and included $0.6 billion of
available-for-sale securities and $0.2 billion of held-to-maturity securities.
Available-for-sale
Available-for-sale 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
Other residential MBS issued or guaranteed by U.S.
Government agencies or sponsored enterprises
Municipal securities
Corporate debt
Other securities
Total investment securities available-for-sale
Amortized
cost
Gross
unrealized gains
Gross
unrealized losses
Fair value
December 31, 2020
$
193,424
$
2,952
$
(42) $
196,334
454,345
362
2,000
469
650,600
$
8,778
13
—
—
11,743
$
(344)
—
(2)
—
(388) $
462,779
375
1,998
469
661,955
$
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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
December 31, 2019
Amortized
cost
Gross
unrealized gains
Gross
unrealized losses
Fair value
$
93,770
$
1,497
$
(11) $
95,256
543,275
495
469
638,009
$
$
3,818
—
—
$
5,315
(5,056)
(8)
—
(5,075) $
542,037
487
469
638,249
During 2020 and 2019, purchases of available-for-sale securities totaled $286.1 million and $45.7 million, respectively. Maturities and
paydowns of available-for-sale securities during 2020 and 2019 totaled $271.5 million and $195.5 million, respectively. There were no
sales of available-for-sale securities during 2020. Proceeds from sales of available-for-sale securities during 2019 totaled $20.4
million.
At December 31, 2020 and 2019, the Company’s available-for-sale investment portfolio was primarily comprised of mortgage-backed
securities, and all mortgage-backed securities were backed by GSE collateral such as FHLMC and FNMA and the government owned
agency 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 by U.S.
Government agencies or sponsored enterprises
Corporate debt
Total
Less than 12 months
December 31, 2020
12 months or more
Total
Fair
value
Unrealized Fair
value
losses
Unrealized
losses
Fair
value
Unrealized
losses
$ 26,878
$
(42) $
1
$
— $ 26,879
$
(42)
95,888
1,998
$ 124,764
$
(328)
(2)
2,138
—
(372) $ 2,139
$
98,026
(16)
1,998
—
(16) $ 126,903
$
(344)
(2)
(388)
Less than 12 months
Fair
value
Unrealized
losses
December 31, 2019
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
Other residential MBS issued or guaranteed by U.S.
Government agencies or sponsored enterprises
Municipal securities
Total
$ 10,413
$
(7) $
1,421
$
(4) $
11,834
$
(11)
41,983
—
$ 52,396
$
(281)
—
254,380
372
(288) $ 256,173
(4,775)
(8)
296,363
372
$ (4,787) $ 308,569
(5,056)
(8)
$ (5,075)
Management evaluated all of the available-for-sale securities in an unrealized loss position at December 31, 2020 and December 31,
2019. The portfolio included 22 securities, which were in an unrealized loss position at December 31, 2020,
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compared to 67 securities at December 31, 2019. The unrealized losses in the Company’s investment portfolio at December 31, 2020
were caused by changes in interest rates. The Company has no intention to sell these securities and believes it will not be required to
sell the securities before the recovery of their amortized cost. Management believes that default of the available-for-sale securities is
highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities have a long history of zero credit losses, an
explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based
on market views of prepayment and liquidity risk rather than credit risk.
Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing
capacity at the FRB, if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $385.8 million
and $352.3 million at December 31, 2020 and 2019, respectively. The Bank may also pledge available-for-sale investment securities
as collateral for FHLB advances. No securities were pledged for this purpose at December 31, 2020, and securities totaling $13.6
million were pledged as collateral at December 31, 2019.
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, 2020, municipal securities of $0.1 million
was due in one year or less and municipal securities of $0.3 million was due between one to five years. Corporate debt securities of
$2.0 million were due after five years through ten years. Other securities of $0.5 million as of December 31, 2020 have no stated
contractual maturity date.
As of December 31, 2020 and December 31, 2019, AIR from available-for-sale investment securities totaled $1.1 million and $1.3
million, respectively, and was included within other assets on the statements of financial condition.
Held-to-maturity
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
$ 306,187
$ 4,940
$
(197) $ 310,930
Other residential MBS issued or guaranteed by U.S. Government agencies or
December 31, 2020
Gross
Gross
unrealized unrealized
gains
losses
Fair value
Amortized
cost
sponsored enterprises
Total investment securities held-to-maturity
70,428
$ 376,615
396
$ 5,336
$
(63)
70,761
(260) $ 381,691
December 31, 2019
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
$ 127,560
$ 1,239
$
(29) $ 128,770
Other residential MBS issued or guaranteed by U.S. Government agencies or
sponsored enterprises
Total investment securities held-to-maturity
55,324
$ 182,884
82
$ 1,321
$
54,971
(435)
(464) $ 183,741
During 2020 and 2019, purchases of held-to-maturity securities totaled $284.2 million and $10.2 million, respectively. Maturities and
paydowns of held-to-maturity securities totaled $88.1 million and $60.9 million during 2020 and 2019, respectively.
The held-to-maturity portfolio included nine securities which were in an unrealized loss position at December 31, 2020, compared to
13 securities at December 31, 2019. 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:
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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, 2020
12 months or more
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
$ 53,453
$
(197) $
— $
— $ 53,453
$
(197)
19,554
$ 73,007
$
(63)
(260) $
—
— $
—
19,554
— $ 73,007
$
(63)
(260)
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)
(35) $
28,554
28,892
$
32,479
(426)
(429) $ 43,295
$
(435)
(464)
The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss
information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the
amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either
U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this
governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio
generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to
sell any held-to-maturity securities and believes it will not be required to sell any held-to-maturity 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, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $140.6
million and $144.2 million at December 31, 2020 and December 31, 2019, respectively. The Bank had no held-to-maturity investment
securities pledged as collateral for FHLB advances at December 31, 2020 and $4.0 million of held-to-maturity investment securities
pledged at the FHLB at December 31, 2019.
Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and
experience of the underlying financial instruments.
As of December 31, 2020 and December 31, 2019, AIR from held-to-maturity investment securities totaled $0.7 million and $0.5
million, respectively, and was included within other assets on the statements of financial condition.
Note 5 Non-marketable Securities
Non-marketable securities include FRB stock and FHLB stock. At December 31, 2020, the Company held $13.9 million of FRB stock
and $2.6 million of FHLB stock for regulatory or debt facility purposes. At December 31, 2019, the Company held $13.9 million of
FRB stock and $15.8 million of FHLB stock.
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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.
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. During the first quarter of 2020, the Company updated its loan classifications to include energy loans within the
commercial and industrial loan class and present municipal and non-profit loans as their own class within the commercial segment. In
addition, as the concept of impaired loans does not exist under CECL, disclosures that related solely to impaired loans have been
removed.
The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value
of loans is net of discounts, fees, costs and fair value marks of $16.2 million and $21.9 million at December 31, 2020 and 2019,
respectively. Included in commercial loans are loans originated as part of the SBA’s Paycheck Protection Program of which $176.1
million, net of fees and costs, are outstanding at December 31, 2020, and are fully guaranteed by the SBA.
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, 2020
Total loans
% of total
3,044,065
631,996
658,659
19,006
4,353,726
70.0%
14.5%
15.1%
0.4%
100.0%
December 31, 2019
Total loans
% of total
2,992,307
630,906
770,417
21,776
4,415,406
67.8%
14.3%
17.4%
0.5%
100.0%
$
$
$
$
Information about delinquent and non-accrual loans is shown in the following tables at December 31, 2020 and 2019:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans
30-89 days
past due and
accruing
Greater
than 90 days
past due and
accruing
December 31, 2020
Non-accrual
loans
Total past
due and
non-accrual
— $
—
—
—
—
—
—
—
—
—
160
—
160
2
162
$
6,312
—
5,450
422
12,184
—
6
1,523
135
1,664
5,820
709
6,529
10
20,387
$
$
6,482
—
5,450
568
12,500
—
6
1,523
135
1,664
6,507
804
7,311
42
21,517
$
$
170
—
—
146
316
—
—
—
—
—
527
95
622
30
968
$
$
93
Current
Total loans
$ 1,440,256
870,791
510,789
209,729
3,031,565
$ 1,446,738
870,791
516,239
210,297
3,044,065
91,125
24,665
67,233
447,309
630,332
91,125
24,671
68,756
447,444
631,996
577,764
73,584
651,348
18,964
$ 4,332,209
584,271
74,388
658,659
19,006
$ 4,353,726
Table of Contents
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans
Non-accrual loans
with a related
allowance for
credit loss
December 31, 2020
Non-accrual loans
with no related
allowance for
credit loss
Non-accrual
loans
$
$
6,080
—
2,698
88
8,866
—
6
—
135
141
4,158
709
4,867
10
13,884
$
$
232
—
2,752
334
3,318
—
—
1,523
—
1,523
1,662
—
1,662
—
6,503
$
$
6,312
—
5,450
422
12,184
—
6
1,523
135
1,664
5,820
709
6,529
10
20,387
30-89 days
past due and
accruing
Greater
than 90 days
past due and
accruing
December 31, 2019
Non-accrual
loans
Total past
due and
non-accrual
$
$
2,251
226
595
190
3,262
—
187
—
438
625
2,101
245
2,346
116
6,349
$
$
879
—
630
—
1,509
—
—
—
65
65
9
79
88
—
1,662
$
$
10,330
—
2,264
317
12,911
—
416
—
43
459
7,597
731
8,328
50
21,748
$
$
13,460
226
3,489
507
17,682
—
603
—
546
1,149
9,707
1,055
10,762
166
29,759
Current
Total loans
$ 1,398,071
837,300
486,633
252,621
2,974,625
$ 1,411,531
837,526
490,122
253,128
2,992,307
77,733
26,276
55,808
469,940
629,757
77,733
26,879
55,808
470,486
630,906
668,955
90,700
759,655
21,610
$ 4,385,647
678,662
91,755
770,417
21,776
$ 4,415,406
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. Non-accrual loans include non-accrual loans and TDRs on
non-accrual status. There was no interest income recognized from non-accrual loans during the years ended December 31, 2020 and
2019.
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”. For a description of the general characteristics of the risk
grades, refer to note 2 Summary of Significant Accounting Policies.
94
Table of Contents
The amortized cost basis for all loans as determined by the Company’s internal risk rating system and year of origination was as
follows at December 31, 2020:
Commercial:
Commercial and industrial:
Pass
Special mention
Substandard
Doubtful
Total commercial and industrial
Municipal and non-profit:
Pass
Special mention
Substandard
Doubtful
Total municipal and non-profit
Owner occupied commercial real
estate:
Pass
Special mention
Substandard
Doubtful
Total owner occupied commercial
real estate
Food and agribusiness:
Pass
Special mention
Substandard
Doubtful
Total food and agribusiness
Total commercial
Commercial real estate non-owner
occupied:
Construction:
Pass
Special mention
Substandard
Doubtful
Total construction
Acquisition/development:
Pass
Special mention
Substandard
Doubtful
Total acquisition/development
Multifamily:
Pass
Special mention
Substandard
Doubtful
Total multifamily
Non-owner occupied
Pass
Special mention
Substandard
Doubtful
Total non-owner occupied
Total commercial real estate non-
2020
2019
Origination year
2017
2018
2016
Prior
Revolving Revolving
loans
loans
amortized converted
cost basis
to term
December 31, 2020
17,662 $ 499,283 $
991 $
2,329
1,341
29
502,982
1,478
—
—
2,469
$ 372,041 $ 212,388 $ 189,753 $
1,445
1,238
—
215,071
7,381
925
34
198,093
—
23
—
372,064
93,822 $
4,845
11,885
456
111,008
15,145 $
5,810
56
—
21,011
131,961
—
—
—
131,961
100,791
1,581
—
—
91,911
—
—
—
91,911
107,558
2,236
1,988
511
125,247
—
—
—
125,247
90,398
2,714
6,211
—
156,275
—
—
—
156,275
53,131
544
251
—
124,269
—
—
—
124,269
32,648
3,254
93
—
729
4,840
809
24,040
238,453
—
—
—
238,453
87,758
19,341
3,802
28
102,372
112,293
99,323
53,926
35,995
110,929
28,139
—
—
—
28,139
634,536
9,198
—
—
—
9,198
428,473
20,242
—
—
—
20,242
442,905
7,198
—
302
—
7,500
328,709
9,556
—
—
—
9,556
190,831
28,330
222
977
—
29,529
402,951
106,007
—
—
—
106,007
613,065
15,841
392
—
—
16,233
3,762
—
—
—
3,762
29,738
—
—
—
29,738
51,445
70
—
—
51,515
49,658
—
—
—
49,658
1,997
—
—
—
1,997
13,670
—
—
—
13,670
92,225
5,458
—
—
97,683
17,349
—
—
—
17,349
1,947
—
—
—
1,947
137
—
—
—
137
25,362
5,841
779
—
31,982
4,072
—
—
—
4,072
8,373
34
—
—
8,407
212
—
—
—
212
86,975
22,737
—
—
109,712
—
—
—
—
—
4,559
—
—
—
4,559
18,050
—
—
—
18,050
26,613
—
3,937
—
30,550
—
—
—
—
—
3,694
253
41
—
3,988
4,990
436
1,523
—
6,949
118,144
3,662
370
—
122,176
Total
1,401,085
24,017
20,308
1,328
1,446,738
870,791
—
—
—
870,791
473,685
29,670
12,345
539
516,239
208,796
222
1,279
—
210,297
3,044,065
90,733
392
—
—
91,125
24,343
287
41
—
24,671
66,797
436
1,523
—
68,756
404,490
37,868
5,086
—
447,444
—
—
—
—
—
—
—
—
—
—
126
—
—
—
126
2,595
1,807
—
—
—
1,807
—
—
—
—
—
—
—
—
—
—
643
—
—
—
643
2,675
—
—
—
2,675
1,401
—
—
—
1,401
2,006
—
—
—
2,006
11
—
—
—
11
—
—
—
—
—
3,083
100
—
—
3,183
5,200
owner occupied
101,248
163,008
51,415
122,403
53,159
133,113
95
2,450
631,996
Table of Contents
Residential real estate:
Senior lien
Pass
Special mention
Substandard
Doubtful
Total senior lien
Junior lien
Pass
Special mention
Substandard
Doubtful
Total junior lien
Total residential real estate
Consumer
Pass
Special mention
Substandard
Doubtful
Total consumer
Total loans
2020
2019
Origination year
2017
2018
2016
Prior
Revolving Revolving
loans
loans
amortized converted
cost basis
to term
December 31, 2020
129,551
—
95
—
129,646
3,479
—
—
—
3,479
133,125
9,777
—
—
—
9,777
76,504
—
818
—
77,322
4,217
—
112
—
4,329
81,651
3,348
—
—
—
3,348
36,493
—
20
—
36,513
2,553
—
101
—
2,654
39,167
1,674
—
37
—
1,711
47,887
—
1,232
—
49,119
1,775
—
177
—
1,952
51,071
489
—
—
—
489
88,358
—
550
—
88,908
1,226
—
55
—
1,281
90,189
329
—
2
—
331
173,091
463
4,107
—
177,661
3,760
21
287
—
4,068
181,729
623
—
8
—
631
24,884
—
—
—
24,884
55,860
341
—
—
56,201
81,085
2,700
—
—
—
2,700
$ 878,686 $ 676,480 $ 535,198 $ 502,672 $ 334,510 $ 718,424 $ 702,050 $
Total
576,986
463
6,822
—
584,271
73,235
362
791
—
74,388
658,659
218
—
—
—
218
365
—
59
—
424
642
19
—
—
—
19
5,706 $
18,959
—
47
—
19,006
4,353,726
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows at December 31, 2019:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied:
Construction
Acquisition/development
Multifamily
Non-owner occupied
Total commercial real estate
Residential real estate:
Senior lien
Junior lien
Total residential real estate
Consumer
Total loans
Loans evaluated individually
Pass
1,366,457
837,526
439,315
249,930
2,893,228
77,733
26,229
55,325
454,045
613,332
668,452
90,540
758,992
21,725
4,287,277
$
$
$
$
December 31, 2019
Special
mention
Substandard
Doubtful
Total
28,226
—
39,986
1,408
69,620
—
—
—
15,307
15,307
441
365
806
1
85,734
$
$
15,132
—
10,821
1,758
27,711
—
650
483
1,134
2,267
9,769
850
10,619
50
40,647
$
$
1,716
—
—
32
1,748
—
—
—
—
—
—
—
—
—
1,748
$
$
1,411,531
837,526
490,122
253,128
2,992,307
77,733
26,879
55,808
470,486
630,906
678,662
91,755
770,417
21,776
4,415,406
We evaluate loans individually when they no longer share risk characteristics with pooled loans. These loans include 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 expected 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.
96
Table of Contents
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be
provided substantially through the operation or sale of the collateral. Management individually evaluates collateral-dependent loans
with an amortized cost basis of $250 thousand or more and includes collateral-dependent loans less than $250 thousand within the
general allowance population. The amortized cost basis of collateral-dependent loans over $250 thousand was as follows at December
31, 2020:
Commercial
Commercial and industrial
Owner-occupied commercial real estate
Food and agribusiness
Total Commercial
Commercial real estate non owner-occupied
Acquisition/development
Multifamily
Total commercial real estate
Residential real estate
Senior lien
Total residential real estate
Total loans
Impaired Loans
Real property
Business assets
Total amortized
cost basis
December 31, 2020
$
$
7,579
3,701
334
11,614
1,573
1,523
3,096
2,021
2,021
16,731
$
$
3,005
284
—
3,289
—
—
—
—
—
3,289
$
$
10,584
3,985
334
14,903
1,573
1,523
3,096
2,021
2,021
20,020
During 2019 and 2018, prior to the adoption of ASU 2016-13, loans were considered to be impaired when it was probable that the
Company would not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans
were comprised of originated and acquired loans on non-accrual status, loans in bankruptcy, and TDRs described below. If a specific
allowance was warranted based on the borrower’s overall financial condition, the specific allowance was 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 was $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 allocated to them of $1.8 million and $1.2 million at December 31, 2019 and 2018, respectively.
97
Table of Contents
Additional information regarding impaired loans at December 31, 2019 and 2018 is set forth in the table below:
December 31, 2019
December 31, 2018
Unpaid
principal
balance
Recorded
investment
Allowance
for losses
allocated
Unpaid
principal
balance
Recorded
investment
Allowance
for losses
allocated
With no related allowance recorded:
Commercial:
Commercial and industrial
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
Total commercial
Commercial real estate non-owner occupied:
$
16,001
$
—
10,548
$
—
3,265
1,468
20,734
2,385
1,220
14,153
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
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
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
allowance recorded
Total impaired loans
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
9,740
$
—
3,771
$
—
7,130
1,468
18,338
1,435
378
—
641
2,454
4,229
409
4,638
46
6,609
1,260
11,640
1,208
121
—
547
1,876
3,814
341
4,155
42
—
458
—
90
548
4,355
311
4,666
57
—
415
—
26
441
3,967
269
4,236
50
26,005
$
18,880
$
— $
25,476
$
17,713
$
13,768
$
—
6,435
$
—
711
757
15,236
505
751
7,691
1,725
$
—
3
35
1,763
—
—
—
—
—
—
232
232
5,808
1,074
6,882
171
171
5,034
987
6,021
—
—
—
—
—
1
1
25
6
31
—
7,252
$
—
4,627
$
—
1,362
883
9,497
—
—
—
313
313
6,032
1,408
7,440
1,169
845
6,641
—
—
—
254
254
5,178
1,293
6,471
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
996
—
90
46
1,132
—
—
—
2
2
27
8
35
—
$
$
22,350
48,355
$
$
13,883
32,763
$
$
1,795
1,795
$
$
17,250
42,726
$
$
13,366
31,079
$
$
1,169
1,169
98
Table of Contents
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
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
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
Municipal and non-profit
Owner occupied commercial real estate
Food and agribusiness
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 allowance recorded
Total impaired loans
For the years ended
December 31, 2019
December 31, 2018
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
$
$
$
$
$
13,062
—
2,849
1,316
17,227
—
575
—
28
603
4,081
287
4,368
11
22,209
6,653
554
796
—
8,003
—
—
—
207
207
5,241
1,034
6,275
49
14,534
36,743
$
$
$
$
$
248
—
27
—
275
—
—
—
—
—
1
2
3
—
278
$
$
— $
17
12
—
29
—
—
—
14
14
66
34
100
—
143
421
$
$
4,132
—
6,799
1,259
12,190
1,208
606
—
573
2,387
3,904
355
4,259
12
18,848
4,677
1,220
862
—
6,759
—
—
—
288
288
5,412
1,331
6,743
36
13,826
32,674
$
$
$
$
$
168
—
38
98
304
—
—
—
—
—
0
2
2
—
306
—
19
5
—
24
—
—
—
16
16
57
43
100
—
140
446
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 and 2018 was $0.4
million and $0.4 million, respectively.
Loan modifications and 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 to provide a concession by
the Company to the borrower from their original terms due to borrower financial difficulties in
99
Table of Contents
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.
The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19
pandemic without requiring the modifications to be classified as TDRs under ASC Topic 310 if the borrower has been adversely
impacted by COVID-19 and was current on their loan payments. During 2020, the Company modified 510 loans totaling $519.0
million due to the effects of the COVID-19 pandemic that were not classified as TDRs. Of those loans, $345.4 million have resumed
making principal or interest payments or paid in full as of December 31, 2020. Modified loans that remained on a payment deferral
plan at December 31, 2020 totaled $173.6 million, or 4.0% of the total loan portfolio, of which 26.2% were a subsequent modification.
Of those loans, principal payment deferrals totaled $167.1 million and full payment deferrals totaled $6.5 million. All COVID
modified loans were classified as performing as of December 31, 2020.
During 2020, the Company restructured 24 loans with an amortized cost basis of $10.8 million to facilitate repayment that are
considered TDRs. Included in the total TDR balance as of December 31, 2020 were loans totaling $4.2 million previously accounted
for under ASC 310-30. Loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of
term.
The tables below provide additional information related to accruing TDRs at December 31, 2020 and 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
$
$
Amortized
cost basis
9,387
2,400
2,121
37
13,945
December 31, 2020
Average year-to-date
amortized cost basis
9,544
$
2,351
2,185
37
14,117
$
Unpaid
principal balance
9,978
$
4,105
2,922
37
17,042
$
Unfunded commitments
to fund TDRs
$
$
150
—
12
—
162
Recorded
investment
5,615
141
1,129
—
6,885
December 31, 2019
Average year-to-date
recorded investment
5,788
$
172
1,178
—
7,138
$
Unpaid
principal balance
5,714
$
192
1,206
—
7,112
$
$
$
Unfunded commitments
to fund TDRs
—
—
12
—
12
The following table summarizes the Company’s carrying value of non-accrual TDRs as of December 31, 2020 and 2019:
Commercial
Commercial real estate non-owner occupied
Residential real estate
Consumer
Total non-accruing TDRs
December 31, 2020
December 31, 2019
$
$
3,397 $
1,644
3,156
—
8,197
$
1,891
410
2,553
—
4,854
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 three TDRs totaling $3.4 million that were modified within the past 12 months and had defaulted on their
restructured terms during the year ended December 31, 2020.
During 2019, the Company had two TDRs totaling $0.7 million that had been modified within the prior twelve months and defaulted
on their restructured terms. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on
principal or interest. The allowance for credit losses related to TDRs 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.
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Note 7 Allowance for Credit Losses
The tables below detail the Company’s allowance for credit losses as of the dates shown:
Beginning balance
Cumulative effect adjustment(1)
Charge-offs
Recoveries
Provision
Ending balance
Year ended December 31, 2020
Non-owner
occupied
commercial
real estate
4,850
1,666
(412)
$
$
—
11,344
17,448
Commercial
30,442
$
(1,299)
(2,023)
394
2,862
30,376
Residential
real estate
Consumer
Total
$
3,468
5,314
(67)
32
2,745
11,492
$
304
155
(726)
145
583
461
39,064
5,836
(3,228)
571
17,534
59,777
(1) Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.
Refer to note 2 – Recent Accounting Pronouncements of our consolidated financial statements for further details.
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Year ended December 31, 2019
$
Non-owner
occupied
commercial
real estate
4,406
(116)
12
548
4,850
$
$
Commercial
27,137
(7,422)
102
10,625
30,442
Residential
real estate
Consumer
Total
$
3,800
(124)
34
(242)
3,468
$
349
(937)
180
712
304
35,692
(8,599)
328
11,643
39,064
In evaluating the loan portfolio for an appropriate ACL level, excluding loans evaluated individually, 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 developing the underlying data used
within the discounted cash flow model including, but not limited to, prepayment and recovery rates as well as loss rates tied to macro-
economic conditions within management’s reasonable and supportable forecast. The ACL also includes subjective adjustments based
upon qualitative risk factors including asset quality, loss trends, lending management, portfolio growth and loan review/internal audit
results.
Net charge-offs on loans during 2020 were $2.7 million. Provision for loan losses of $17.6 million, including $0.1 million for
unfunded loan commitment reserves, was recorded during the year ended December 31, 2020 to provide coverage for the impact of
deteriorating economic conditions as a result of COVID-19.
Provision for loan losses totaled $11.6 million for the year ended December 31, 2019 to support originated loan growth.
The Company has elected to exclude AIR from the allowance for credit losses calculation. As of December 31, 2020 and December
31, 2019, AIR from loans totaled $16.7 million and $17.2 million, respectively.
Note 8 Leases
Right-of-use (“ROU”) lease assets totaled $25.4 million and $29.2 million as of December 31, 2020 and 2019, respectively, and were
included in other assets on the consolidated statements of financial condition. The related lease liabilities totaled $26.0 million and
$29.5 million as of December 31, 2020 and 2019, respectively, and were included in other liabilities on the consolidated statements of
financial condition.
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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 5.4 years and 5.1 years at December 31, 2020 and 2019, respectively. As of
December 31, 2020 and 2019, the weighted-average discount rate was 3.36% and 3.36%, respectively, 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 and $5.7 million for the years ended December 31, 2020 and 2019, respectively, 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.
Below is a summary of undiscounted future minimum lease payments as of December 31, 2020:
Years ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Imputed interest
Present value of operating lease liabilities
Note 9 Premises and Equipment
Premises and equipment consisted of the following at December 31, 2020 and 2019:
Land
Buildings and improvements
Equipment
Total premises and equipment, at cost
Less: accumulated depreciation and amortization
Premises and equipment, net
Amount
5,276
4,896
4,529
4,136
3,539
12,294
34,670
(8,678)
25,992
$
$
$
$
December 31, 2020 December 31, 2019
32,911
94,260
56,523
183,694
(71,543)
112,151
33,149
92,463
60,205
185,817
(78,835)
106,982
$
$
The Company recorded $8.1 million, $8.2 million and $8.6 million of depreciation expense during 2020, 2019 and 2018, respectively,
as a component of occupancy and equipment expense in the consolidated statements of operations. The Company disposed of $3.6
million, $0.0 million and $1.7 million of premises and equipment, net, during 2020, 2019 and 2018, respectively. During 2020, the
Company recognized $1.6 million of impairments included in non-interest expense in its consolidated statements of operations from
the consolidation of 12 banking centers classified as held-for-sale totaling $8.0 million. 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.
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Note 10 Other Real Estate Owned
A summary of the activity in OREO during 2020 and 2019 is as follows:
Beginning balance
Transfers from loan portfolio, at fair value
Impairments
Sales
Ending balance
For the years ended December 31,
2020
2019
$
$
7,300 $
1,533
(470)
(3,633)
4,730
$
10,596
2,705
(1,082)
(4,919)
7,300
During 2020, the Company sold OREO properties with net book balances of $3.6 million, compared to $4.9 million during 2019.
Sales of OREO properties resulted in net OREO gains of $38 thousand and $7.2 million which were included within other non-interest
expense in the consolidated statements of operations for the years ended December 31, 2020 and 2019, 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. 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, 2020 or December 31, 2019.
The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at December 31, 2020 and
December 31, 2019, are presented as follows:
Gross
carrying
amount
December 31, 2020
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
December 31, 2019
Accumulated
amortization
Net
carrying
amount
Core deposit intangible
$
48,834 $
(41,286) $
7,548 $
48,834 $
(40,103) $
8,731
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, $1.2 million and $2.2 million during 2020, 2019 and 2018, respectively.
The following table shows the estimated future amortization expense for the core deposit intangibles as of December 31, 2020:
Years ending December 31,
2021
2022
2023
2024
2025
103
$
Amount
1,183
1,127
1,048
1,048
1,048
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Mortgage servicing rights
MSRs represent rights to service loans originated by the Company and sold to government-sponsored enterprises including FHLMC,
FNMA, GNMA and FHLB and are included in other assets in the consolidated statements of financial condition. Mortgage loans
serviced for others were $1.4 billion at December 31, 2020 and $308.4 million at December 31, 2019.
Below are the changes in the MSRs for the years presented:
Beginning balance
Originations
Impairment
Amortization
Ending balance
Fair value of mortgage servicing rights
For the years ended December 31,
2020
2019
$
$
2,630 $
10,354
(751)
(1,853)
10,380
11,542
$
3,556
27
(129)
(824)
2,630
2,630
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
15.4% to 21.3% for the December 31, 2020 valuation. 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. Included in mortgage banking income in the consolidated
statements of operations were service fees of $1.7 million and $1.0 million for the years ended December 31, 2020 and 2019,
respectively.
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 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 following table shows the estimated future amortization expense for the MSRs as of December 31, 2020:
Years ending December 31,
2021
2022
2023
2024
2025
Note 12 Deposits
$
Amount
1,971
1,626
1,342
1,108
914
Total deposits were $5.7 billion and $4.7 billion at December 31, 2020 and 2019, respectively. Time deposits were $1.0 billion and
$1.1 billion at December 31, 2020 and 2019, respectively. The following table summarizes the Company’s time deposits by remaining
contractual maturity:
Years ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total time deposits
104
Amount
659,509
246,835
47,150
21,717
9,940
981
986,132
$
$
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The Company incurred interest expense on deposits as follows during the years indicated:
For the years ended December 31,
2019
2018
2020
Interest bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Total
$
$
1,921
5,342
1,342
15,024
23,629
$
$
1,514
9,046
2,717
16,526
29,803
$
$
887
5,622
2,249
12,283
21,041
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, 2020.
Note 13 Borrowings
The following table sets forth selected information regarding repurchase agreements during 2020, 2019 and 2018:
Maximum amount of outstanding agreements at any month end during the period
Average amount outstanding during the period
Weighted average interest rate for the period
$
As of and for the years ended December 31,
2019
68,600
60,445
1.11%
2020
54,489
30,355
0.45%
2018
142,292
87,691
0.34%
$
$
The Company enters into repurchase agreements to facilitate the needs of its clients. As of December 31, 2020, 2019 and 2018, the
Company sold securities under agreements to repurchase totaling $22.9 million, $56.9 million and $66.0 million, respectively. The
Company pledged mortgage-backed securities with a fair value of approximately $27.7 million, $65.6 million and $73.9 million, as of
December 31, 2020, 2019 and 2018, 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. As of December 31, 2020,
2019 and 2018, the Company had $2.1 million, $7.0 million and $5.9 million, respectively, of excess collateral pledged for repurchase
agreements.
The vast majority of the Company’s repurchase agreements are overnight transactions with clients that mature the day after the
transaction. At December 31, 2020, 2019 and 2018, 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
$0.9 billion at December 31, 2020. At December 31, 2020, the Bank had no outstanding borrowings from the FHLB. At December 31,
2019 and 2018, the Bank had $192.7 million and $234.3 million, respectively, in line of credit advances from the FHLB that matured
within a day. At December 31, 2019 and 2018, the Bank had $15.0 million and $67.3 million in term advances from the FHLB,
respectively, with fixed interest rates between 1.55% - 2.33% and maturity dates of 2020 - 2021.
The Bank may have investment securities and loans pledged as collateral for FHLB advances. There were no investment securities
pledged at December 31, 2020. At December 31, 2019 and 2018, investment securities pledged were $17.6 million and $16.0 million,
respectively. Loans pledged were $1.2 billion, $1.5 billion and $1.6 billion at December 31, 2020, 2019 and 2018, respectively.
Interest expense related to FHLB advances and other short-term borrowings totaled $1.3 million, $6.3 million and $2.6 million for the
years ended December 31, 2020, 2019 and 2018, 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
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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, 2020 and 2019, the Company and the Bank met all capital requirements including
the capital conservation buffer of 2.5%. The Bank had regulatory capital ratios in excess of the levels established for well-capitalized
institutions, as detailed in the tables below.
Tier 1 leverage ratio:
Consolidated
NBH Bank
Common equity tier 1 risk based capital:
Consolidated
NBH Bank
Tier 1 risk based capital ratio:
Consolidated
NBH Bank
Total risk based capital ratio:
Consolidated
NBH Bank
Tier 1 leverage ratio:
Consolidated
NBH Bank
Common equity tier 1 risk based capital:
Consolidated
NBH Bank
Tier 1 risk based capital ratio:
Consolidated
NBH Bank
Total risk based capital ratio:
Consolidated
NBH Bank
December 31, 2020
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
Amount
10.7% $
9.2%
696,311
600,622
N/A
5.0% $
N/A
325,447
4.0% $
4.0%
260,370
260,358
14.7% $
12.7%
696,311
600,622
N/A
6.5% $
N/A
307,631
7.0% $
7.0%
331,632
331,295
14.7% $
12.7%
696,311
600,622
N/A
8.0% $
N/A
378,623
8.5% $
8.5%
402,696
402,287
15.8% $
13.8%
749,899
654,209
N/A
10.0% $
N/A
473,279
10.5% $
10.5%
497,448
496,943
December 31, 2019
Required to be
well capitalized under
prompt corrective
action provisions
Required to be
considered
adequately
capitalized
Actual
Ratio
Amount
Ratio
Amount
Ratio
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
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,
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Table of Contents
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 Company’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.
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, 2020, 2019 and 2018.
Non-interest income
In-scope of Topic 606:
Service charges and other fees
Bank card fees
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,
2020
2019
2018
$
$
$
$
16,913
15,446
32,359
107,899
140,258
38
32,397
$
$
$
$
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
In accordance with 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 expense immediately 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.
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As of December 31, 2020, the aggregate number of Class A common stock available for issuance under the 2014 Plan is 4,314,726
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 on a graded basis over 1-4 years of continuous
service and have 10-year contractual terms.
Below are the weighted average assumptions used in the Black-Scholes option pricing model to determine fair value of the Company’s
stock options granted in 2020, 2019 and 2018:
Weighted average fair value
Weighted average risk-free interest rate (1)
Expected volatility (2)
Expected term (years) (3)
Dividend yield (4)
$
$
2020
3.37
0.44%
25.08%
6.04
3.44%
$
2019
6.31
2.35%
20.56%
6.05
2.00%
2018
7.43
2.69%
20.75%
6.10
1.13%
(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.
The Company issued stock options in accordance with the 2014 Plan during 2020. The following table summarizes stock option
activity for 2020:
Outstanding at December 31, 2019
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Options exercisable at December 31, 2020
Options vested and expected to vest
Options
657,114
230,261
(94,007)
(25,239)
768,129
412,940
736,774
108
Weighted
average
remaining
contractual Aggregate
intrinsic
value
term in
years
6.41
$
5,626
6.91
5.32
6.82
5,224
3,101
5,005
Weighted
average
exercise
price
26.69
$
23.25
19.95
30.59
$
26.35
25.64
26.36
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Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $1.0 million,
$0.7 million and $0.8 million for 2020, 2019 and 2018, respectively. At December 31, 2020, there was $0.7 million of total
unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized
over a weighted average period of 1.2 years.
The following table summarizes the Company’s outstanding stock options:
Number
outstanding
228,228
219,652
110,753
207,597
1,899
Options outstanding
Weighted average
remaining contractual
life (years)
Weighted average
exercise price
$
3.95
9.24
7.18
7.54
7.63
19.25
23.13
32.53
34.15
40.36
Options exercisable
$
Number
exercisable
228,228
936
71,223
111,289
1,264
Weighted average
exercise price
19.25
23.75
32.64
34.12
40.36
$
Range of exercise price
18.00 - 22.99
23.00 - 27.99
28.00 - 32.99
33.00 - 37.99
38.00 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 2020, 2019 and 2018, the Company granted 68,498, 60,781, and 77,125 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. Historically, 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.
In establishing the PSU components during 2020, the Compensation Committee determined the EPS target portion of the award would
not be an effective metric in light of economic uncertainty surrounding COVID-19. Consequently, the Compensation Committee
granted an award based upon a relative return on tangible assets (“ROTA”). Annually, the Company’s ROTA is compared to the
respective ROTA of companies comprising the KBW Regional Index. At the end of the measurement period, the Company’s ranking
will be averaged to determine the shares awarded. The fair value of the ROTA award was determined based on the closing stock price
of the Company’s common stock on the grant date.
The weighted-average grant date fair value per unit for the ROTA target portion and the TSR target portion granted during 2020 was
$28.43 and $24.58, respectively. 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. The initial weighted-average performance price for the TSR
target portion granted during 2020 was $35.95. During 2020 and 2019, the Company awarded an additional 17,852 and 22,246 units
due to final performance results related to performance stock units granted in 2017 and 2016, respectively.
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The following table summarizes restricted stock and performance stock unit activity during 2020 and 2019:
Unvested at December 31, 2018
Granted
Adjustment due to performance
Vested
Forfeited
Unvested at December 31, 2019
Granted
Adjustment due to performance
Vested
Forfeited
Unvested at December 31, 2020
Weighted
Restricted
stock shares
146,494
86,689
—
(85,266)
(25,719)
122,198
127,400
—
(69,444)
(13,524)
166,630
average grant-
date fair value
28.19
35.05
—
25.21
32.68
34.19
23.94
—
32.60
29.25
27.42
$
$
Performance
stock units
192,049 $
60,781
22,246
(95,308)
(20,894)
158,874
68,498
17,852
(53,540)
(6,847)
184,837 $
Weighted
average grant-
date fair value
26.40
30.85
17.36
18.02
31.48
31.19
26.74
33.22
33.22
29.52
29.21
As of December 31, 2020, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance
stock units totaled $2.1 million and $2.5 million, respectively, and is expected to be recognized over a weighted average period of
approximately 2.0 years and 1.7 years, respectively. Expense related to non-vested restricted stock awards totaled $2.5 million, $2.2
million and $2.1 million during 2020, 2019 and 2018, respectively. Expense related to non-vested performance stock units totaled $1.8
million, $2.0 million and $1.5 million during 2020, 2019 and 2018, respectively. Expense related to non-vested restricted stock awards
and units is a component of salaries and benefits in the Company’s consolidated statements of operations.
Employee stock purchase plan
The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of the Internal
Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll deductions up to a limit of
$25,000 per calendar year and 2,000 shares per offering period. The price an employee pays for shares is 90.0% of the fair market
value of Company common stock on the last day of the offering period. The offering periods are the six-month periods commencing
on March 1 and September 1 of each year and ending on August 31 and February 28 (or February 29 in the case of a leap year) of each
year. There are no vesting or other restrictions on the stock purchased by employees under the ESPP. Under the ESPP, the total
number of shares of common stock reserved for issuance totaled 400,000 shares, of which 302,876 was available for issuance at
December 31, 2020.
Under the ESPP, employees purchased 23,212 shares and 16,556 shares during 2020 and 2019, respectively.
Note 17 Common Stock
The Company had 30,634,291 and 31,176,627 shares of Class A common stock outstanding at December 31, 2020 and 2019,
respectively. Additionally, the Company had 166,630 and 122,198 shares outstanding at December 31, 2020 and 2019, respectively, of
restricted Class A common stock issued but not yet vested under the 2014 Omnibus Incentive 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 February 26, 2020, 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. During the first quarter of 2020, the Company repurchased
734,117 shares for $19.5 million. Of those repurchases, $12.6 million were part of the previous authorization from August 2016. That
authorization has been completed. The remaining authorization under the new program as of December 31, 2020 was $43.1 million.
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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 30,634,291 and 31,176,627 shares of Class A common stock outstanding as of December 31, 2020 and 2019,
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 2020, 2019 and 2018.
The following table illustrates the computation of basic and diluted earnings per share for 2020, 2019 and 2018:
Net income
Less: income allocated to participating securities
Income allocated to common shareholders
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of equity awards
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per share
Diluted earnings per share
For the years ended December 31,
2019
2018
2020
$
88,591
(130)
$
88,461
30,857,086
218,771
31,075,857
2.87
$
2.85
$
80,365
(94)
$
80,271
31,175,825
354,992
31,530,817
2.57
$
2.55
$
61,451
(70)
$
61,381
30,748,234
681,840
31,430,074
2.00
$
1.95
The Company had 768,129, 657,114 and 1,264,876 outstanding stock options to purchase common stock at weighted average exercise
prices of $26.35, $26.69 and $22.33 per share at December 31, 2020, 2019 and 2018, 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 351,467, 281,072 and 338,543 unvested restricted shares and performance stock units
issued as of December 31, 2020, 2019 and 2018, 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 $20.8 million, $15.8 million and $12.2 million for 2020, 2019 and 2018,
respectively. Included in income tax was $51 thousand of tax expense during 2020 and $2.2 million and $1.3 million of tax benefit
from stock compensation activity during 2019 and 2018, respectively.
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(a) Income taxes
Total income taxes for 2020, 2019 and 2018 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,
2018
2019
2020
$ 16,460
3,255
19,715
$
8,947
2,280
11,227
560
531
1,091
$ 20,806
4,115
487
4,602
$ 15,829
$
$
427
1,530
1,957
10,110
163
10,273
12,230
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:
Income tax at federal statutory rates (21%)
State income taxes, net of federal benefits
Tax-exempt loan interest income
Bank-owned life insurance income
Stock-based compensation
Other
Income tax expense
$
$
112
$
$
For the years ended December 31,
2018
2019
2020
15,473
20,201
22,974
1,337
2,186
2,991
(4,089)
(4,354)
(4,628)
136
(475)
(575)
(1,207)
(1,925)
43
580
196
1
12,230
15,829
20,806
$
$
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(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, 2020 and 2019 are presented below:
Deferred tax assets:
Excess tax basis of acquired loans over carrying value
Allowance for credit losses
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
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
Mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax asset
December 31, 2020 December 31, 2019
$
$
966
14,154
634
2,070
3,674
1,540
532
1,015
641
6,154
2,025
33,405
(2,563)
(3,033)
(1,599)
(6,015)
(229)
(2,458)
(44)
(15,941)
17,464
$
$
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
At December 31, 2020, the Company had federal and state net operating loss carryovers (NOLs) of $2.4 million and $3.5 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. While these NOLs are subject to certain restrictions on the amount that
can be utilized per year, 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, 2020 and 2019, 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, 2020 and 2019 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 is not currently subject to any open income tax
examinations; however, the Company’s tax returns for the years ended December 31, 2017 through 2020 remain subject to
examination by U.S. federal income tax authorities. The years open to examination by state and local government authorities vary by
jurisdiction.
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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, 2020 and 2019.
Information about the valuation methods used to measure fair value is provided in note 22.
Balance Sheet
location
Asset derivatives fair value
December 31, December 31,
2020
2019
Balance Sheet
Location
Liability derivatives fair value
December 31, December 31,
2020
2019
Derivatives designated as hedging
instruments:
Interest rate products
Other assets
Total derivatives designated as
hedging instruments
Derivatives not designated as hedging
instruments:
Interest rate products
Interest rate lock commitments
Forward contracts
Total derivatives not designated as
hedging instruments
Fair value hedges
Other assets
Other assets
Other assets
$
$
$
$
— $
1,171 Other liabilities
— $
1,171
$
18,149
7,001
—
9,004 Other liabilities
Other liabilities
1,499
Other liabilities
16
25,150
$
10,519
$
$
$
$
$
$
$
38,884
38,884
18,176
298
2,622
13,537
13,537
9,021
141
299
21,096
$
9,461
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, 2020, the Company had interest rate swaps with a notional amount of $387.1 million that were designated as fair value
hedges. These interest rate swaps were associated with $389.9 million of the Company’s fixed-rate loans included in loans receivable
on the statements of financial condition as of December 31, 2020, before a gain of $40.1 million from the fair value hedge adjustment
in the carrying 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. These interest rate swaps were associated with $405.9 million of the Company’s fixed-rate loans as of December 31,
2019, excluding a gain of $13.9 million from the fair value hedge adjustment in the carrying amount.
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.
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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, 2020, the Company had
matched interest rate swap transactions with an aggregate notional amount of $456.0 million related to this program. As of December
31, 2019, the Company had matched interest rate swap transactions with an aggregate notional amount of $478.9 million.
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 $258.8 million and forward contracts with a notional value
of $375.3 million at December 31, 2020. At December 31, 2019, 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.
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
2020 and 2019:
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
Location of gain (loss)
recognized in income on
hedged items
Interest and fees on loans
Amount of gain (loss) recognized in income on derivatives
For the years ended December 31,
2020
2019
4,405
4,405
$
$
10,397
10,397
Amount of gain (loss) recognized in income on hedged items
For the years ended December 31,
2020
2019
(6,376)
(6,376)
$
$
(9,603)
(9,603)
$
$
$
$
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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,
2020
2019
$
$
(7)
7,218
(2,339)
4,872
$
$
133
1,138
189
1,460
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, 2020, the termination value of derivatives in a net liability position related to these agreements was $59.0 million,
which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting
thresholds with certain of its derivative counterparties and, as of December 31, 2020, the Company had posted $63.4 million in
eligible collateral. If the Company had breached any of these provisions at December 31, 2020, 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. 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, 2020 and 2019 were as follows:
Commitments to fund loans
Unfunded commitments under lines of credit
Commercial and standby letters of credit
Total unfunded commitments
$
December 31, 2020 December 31, 2019
249,914
600,407
11,929
862,250
311,237
537,325
7,320
855,882
$
$
$
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.
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
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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. Charges against the reserve during the year ended December 31, 2020 and 2019
totaling $0.5 million and $0.3 million, respectively, were primarily driven by early payoffs. The Company recorded a repurchase
reserve of $2.7 million and $2.6 million at December 31, 2020 and 2019, respectively, which is included in other liabilities on the
consolidated statements of financial condition.
The following table summarizes mortgage repurchase reserve activity for the periods presented:
Beginning balance
Provision charged to (released from) operating expense, net
Charge-offs
Ending balance
For the years ended December 31,
2019
2020
$
$
2,589
662
(510)
2,741
$
$
3,286
(366)
(331)
2,589
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
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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.
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
2020 and 2019, 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, 2020 and 2019, 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 are classified as level 2.
Interest rate swap derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as
fair value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to
appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar amount of the
fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the potential loss over the life of
the trade. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which
incorporates both the current and potential future exposure) and then applying the respective counterparties’ credit spreads to the
exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large
financial institutions ("dealers"). International Swaps and Derivative Association Master Agreements (“ISDA”) and Credit Support
Annexes (“CSA”) are employed for all contracts with dealers. These contracts contain bilateral collateral arrangements. The fair value
inputs of these financial instruments are determined using discounted cash flow analysis through the use of third-party models whose
significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and
credit risk, and are classified as level 2.
Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative financial
assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate the fair value of its
interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock
commitments by interest rate and terms, applying an average 86.1% 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
118
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on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward
commitments against applicable investor pricing.
The tables below present the financial instruments measured at fair value on a recurring basis as of December 31, 2020 and 2019, on
the consolidated statements of financial condition utilizing the hierarchy structure described above:
Level 1
December 31, 2020
Level 2
Level 3
Total
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
$
— $ 196,334
$
— $ 196,334
Other residential MBS issued or guaranteed by U.S. Government
agencies or sponsored enterprises
Municipal securities
Corporate debt
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:
— 462,779
318
—
1,998
—
— 247,813
18,149
—
—
—
— $ 927,391
— $
—
— $
57,060
—
57,060
$
$
$
— 462,779
318
—
1,998
—
— 247,813
18,149
—
7,001
$ 934,392
7,001
7,001
— $
2,920
2,920
$
57,060
2,920
59,980
$
$
$
Level 1
Level 2
Level 3
Total
December 31, 2019
Residential mortgage pass-through securities issued or guaranteed by
U.S. Government agencies or sponsored enterprises
$
— $
95,256
$
— $
95,256
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
The table below details the changes in level 3 financial instruments during 2020:
Balance at December 31, 2019
Gain included in earnings, net
Fees and costs included in earnings, net
Balance at December 31, 2020
119
— 542,037
372
—
— 117,444
10,175
—
—
—
— $ 765,284
— $
—
— $
22,558
—
22,558
$
$
$
— 542,037
372
—
— 117,444
10,175
—
1,515
$ 766,799
1,515
1,515
— $
440
440
$
22,558
440
22,998
$
$
$
Mortgage banking
derivatives, net
1,075
4,879
(1,873)
4,081
$
$
Table of Contents
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.
Individually evaluated loans—The Company records individually evaluated loans based on the fair value of the collateral 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.
The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of 3% - 26%, with a
weighted average discount rate of 14.5%, 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, 2020, the Company recorded a specific
reserve of $1.9 million related to seven loans with a carrying balance of $7.5 million. At December 31, 2019, the Company recorded a
specific reserve of $1.8 million related to seven loans with a carrying balance of $5.9 million.
OREO—OREO is recorded at the fair value of the collateral less estimated selling costs using a range of 6% - 10% with a weighted
average discount rate of 9.7%. The estimated fair values of OREO are updated periodically and further write-downs may be taken to
reflect a new basis. The Company recognized $0.5 million and $1.1 million of OREO impairments in its consolidated statements of
operations during 2020 and 2019, 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—MSRs 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% with a weighted average discount rate of 9.5% at December 31, 2020 and a
prepayment speed assumption range from 15.4% to 21.3% with a weighted average rate of 15.8% at December 31, 2020 as inputs. At
December 31, 2019, discount rates ranged from 9.5% to 10.5% with a weighted average discount rate of 9.6% and prepayment speed
assumption range from 14.8% to 22.0% with a weighted average rate of 15.7%. The weighted average MSRs are subject to
impairment testing. The carrying values of these MSRs are reviewed quarterly for impairment based upon the calculation of fair value.
For purposes of measuring impairment, the MSRs are stratified into certain risk characteristics including note type and note term. If
the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance and
the adjustment is included in mortgage banking income on the consolidated statements of operations. The inputs used to determine the
fair values of MSRs are considered level 3 inputs in the fair value hierarchy.
Premises and equipment—During 2020, the Company announced plans to consolidate 12 banking centers, which were substantially
complete by December 31, 2020. Premises and equipment held-for-sale are written down to estimated fair value less costs to sell in the
period in which the held-for-sale criteria are met. Fair value is estimated in a process which considers current local commercial real
estate market conditions and the judgment of the sales agent and often 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 $1.6 million
of impairments in its consolidated statements of operations related to premises and equipment classified as held-for-sale totaling $8.0
million during the year ended December 31, 2020. During 2019, the Company recognized $0.9 million of impairments in its
consolidated statements of operations related to premises and equipment classified as held-for-sale totaling $3.4 million.
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.
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The tables below provide information regarding the assets recorded at fair value on a non-recurring basis at December 31, 2020 and
2019.
Individually evaluated loans
Other real estate owned
Premises and equipment
Mortgage servicing rights
Total
Individually evaluated loans
Other real estate owned
Premises and equipment
Mortgage servicing rights
Total
Total
December 31, 2020
Losses from fair value changes
3,228
25,480
$
470
4,730
1,631
8,024
751
10,380
6,080
48,614
$
Total
December 31, 2019
Losses from fair value changes
8,271
32,763
$
1,082
7,300
898
3,385
129
2,630
10,380
46,078
$
$
$
$
$
The Company did not record any liabilities measured at fair value on a non-recurring basis during 2020 and 2019.
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.
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The fair value of financial instruments at December 31, 2020 and 2019 are set forth below:
ASSETS
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
Corporate debt
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 in fair value
measurement
hierarchy
December 31, 2020
December 31, 2019
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
Level 1
$
605,565
$
605,565
$
110,190
$
110,190
Level 2
196,334
196,334
95,256
95,256
Level 2
Level 2
Level 3
Level 2
Level 3
462,779
318
57
1,998
469
462,779
318
57
1,998
469
542,037
372
115
—
469
542,037
372
115
—
469
Level 2
306,187
310,930
127,560
128,770
70,428
16,493
4,353,726
247,813
18,795
18,149
7,001
70,761
16,493
4,511,357
247,813
18,795
18,149
7,001
55,324
29,751
4,415,406
117,444
19,157
10,175
1,515
4,690,100
986,132
22,897
4,690,100
993,070
22,897
—
6,762
57,060
2,920
—
6,762
57,060
2,920
3,678,979
1,058,153
56,935
207,675
9,328
22,558
440
54,971
29,751
4,481,209
117,444
19,157
10,175
1,515
3,678,979
1,058,354
56,935
207,890
9,328
22,558
440
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
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Table of Contents
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, 2020 December 31, 2019
$
$
$
$
91,402
725,002
14,809
831,213
10,522
10,522
820,691
831,213
$
$
$
$
105,012
654,508
18,095
777,615
10,695
10,695
766,920
777,615
For the years ended December 31,
2019
2020
2018
Income
Interest income
Equity in undistributed earnings of subsidiaries
Distributions from subsidiaries
Total income
Expenses
Salaries and benefits
Other expenses
Total expenses
Income before income taxes
Income tax benefit
Net income
$
— $
— $
28,133
55,725
83,858
112
19,682
47,338
67,132
4,925
2,463
7,388
76,470
(3,895)
$ 80,365
4,455
4,467
8,922
58,210
(3,241)
$ 61,451
67,416
27,200
94,616
5,136
2,621
7,757
86,859
(1,732)
88,591
$
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Table of Contents
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Equity in undistributed earnings 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:
Issuance of stock under purchase and equity compensation plans
Proceeds from exercise of stock options
Payment of dividends
Repurchase of shares
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
124
For the years ended December 31,
2018
2019
2020
$
88,591
(67,416)
5,299
51
3,074
29,599
$
80,365
(28,133)
4,869
(2,160)
5,045
59,986
$
61,451
(19,682)
4,420
(1,286)
9,230
54,133
—
—
—
(36,189)
— (36,189)
(749)
1,832
(24,816)
(19,476)
(43,209)
(13,610)
115,012
$ 101,402
—
(6,229)
2,788
(23,530)
(26,971)
33,015
81,997
$ 115,012
(772)
7,576
(16,624)
—
(9,820)
8,124
73,873
81,997
$
quarter
$ 53,288
4,732
48,556
Fourth Third
quarter
$ 52,302
5,587
46,715
— 1,200
45,515
44,532
55,321
34,726
6,833
$ 27,893
0.91
$
0.90
48,556
33,357
48,425
33,488
6,319
$ 27,169
0.88
$
0.87
December 31, 2020
Second
quarter
$ 53,744
6,416
47,328
10,271
37,057
38,837
53,760
22,134
4,429
$ 17,705
0.57
$
0.57
First
quarter
$ 58,668
8,321
50,347
6,159
44,188
23,532
48,671
19,049
3,225
$ 15,824
0.51
$
0.50
Total
$ 218,002
25,056
192,946
17,630
175,316
140,258
206,177
109,397
20,806
88,591
2.87
2.85
$
$
Table of Contents
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 income
Earnings per share-basic
Earnings per share-diluted
Note 26 Acquisition Activities
Fourth Third
quarter
$ 61,372
9,587
51,785
5,690
46,095
24,759
43,793
27,061
5,419
$ 21,642
0.69
$
0.69
quarter
$ 59,616
9,228
50,388
1,180
49,208
20,282
46,107
23,383
3,864
$ 19,519
0.62
$
0.62
Fourth Third
quarter
$ 55,909
6,137
49,772
807
48,965
18,061
44,432
22,594
4,354
$ 18,240
0.59
$
0.58
quarter
$ 57,780
7,148
50,632
2,476
48,156
15,317
42,857
20,616
3,381
$ 17,235
0.56
$
0.55
December 31, 2019
Second
quarter
$ 62,193
9,702
52,491
3,239
49,252
20,660
46,451
23,461
3,179
$ 20,282
0.65
$
0.64
First
quarter
$ 59,420
8,254
51,166
1,534
49,632
17,051
44,394
22,289
3,367
$ 18,922
0.61
$
0.60
December 31, 2018
Second
quarter
$ 54,911
5,525
49,386
1,873
47,513
19,562
46,763
20,312
2,800
$ 17,512
0.57
$
0.56
First
quarter
$ 52,791
5,144
47,647
41
47,606
17,835
55,282
10,159
1,695
8,464
$
0.28
$
0.27
Total
$ 242,601
36,771
205,830
11,643
194,187
82,752
180,745
96,194
15,829
80,365
2.57
2.55
$
$
Total
$ 221,391
23,954
197,437
5,197
192,240
70,775
189,334
73,681
12,230
61,451
2.00
1.95
$
$
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 other assets 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 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.
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Table of Contents
The table below summarizes the net assets acquired (at fair value) and consideration transferred in connection with the Peoples
acquisition:
January 1, 2018
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 MSRs 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 MSRs 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.
Note 27 Subsequent Event
On February 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 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. To date, the Company has repurchased $6.9 million of its
previously authorized $50.0 million stock repurchase program announced in February 2020. The new program of $75.0 million
replaces this previously authorized program in its entirety.
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Table of Contents
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, 2020. 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, 2020.
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, 2020
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, 2020. 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, 2020, 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.
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Table of Contents
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements), and our
report dated February 24, 2021 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.
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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 24, 2021
129
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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 2021 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 2021 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 2021 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 2021 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 2021 Annual
Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
PART IV
(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
75
76
77
78
79
80
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
2.1*
3.1
3.2
4.1
4.2
10.1
10.2
10.3
Description
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 (incorporated herein by reference to Exhibit 4.2 to our Form 10-K,
filed on February 26, 2020)
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)˄
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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
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 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)˄
Transition Agreement, dated May 5, 2020, by and between National Bank Holdings Corporation
and Zsolt K. Besskó (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on
May 5, 2020) ˄
Employment Agreement, dated May 5, 2020, by and between National Bank Holdings Corporation
and Angela N. Petrucci (incorporated herein by reference to Exhibit 10.2 to our Form 10-Q, filed on
August 5, 2020) ˄
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)˄
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)
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 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)˄
National Bank Holdings Corporation 2014 Omnibus Incentive Plan (incorporated herein by
reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on
March 31, 2014)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock
Unit Award Agreement (For Management) (incorporated herein by reference to Exhibit 10.13 to our
Form 10-K, filed on March 1, 2019)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Restricted Stock Award
Agreement (For Management) (incorporated herein by reference to Exhibit 10.14 to our Form 10-K,
filed on March 1, 2019)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Nonqualified Stock
Option Agreement (For Management) (incorporated herein by reference to Exhibit 10.15 to our
Form 10-K, filed on March 1, 2019)˄
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Table of Contents
10.18
10.19
10.20
21.1
23.1
31.1
31.2
32
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)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock
Unit Award Agreement (TSR) (For Management) (incorporated herein by reference to Exhibit 10.3
to our Form 10-Q, filed on August 5, 2020)˄
Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock
Unit Award Agreement (ROTA) (For Management) (incorporated herein by reference to Exhibit
10.4 to our Form 10-Q, filed on August 5, 2020)˄
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.
133
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on February 24, 2021, on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
National Bank Holdings Corporation
By
/s/ G. Timothy Laney
G. Timothy Laney
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 24, 2021, by the
following persons on behalf of the registrant and in the capacities indicated.
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Table of Contents
/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
135
Exhibit 21.1
Subsidiary
Jurisdiction of Organization
Trade Names
NBH Bank
Colorado
NBH Realty I, LLC
NBH Realty II, LLC
Missouri
Missouri
Bank Midwest; Community Banks of
Colorado; Hillcrest Bank; NBH Capital
Finance; Bank Midwest Mortgage;
Community Banks Mortgage, a
Division of NBH Bank; and Hillcrest
Bank Mortgage
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
National Bank Holdings Corporation:
We consent to the incorporation by reference in the registration statement No. 333-238066, No. 333-184054, and No. 333-222792
on Form S-3 and No. 333-204071 and No. 333-195785 on Form S-8 of National Bank Holdings Corporation and subsidiaries (the
Company) of our reports dated February 24, 2021, with respect to the consolidated statements of financial condition of the
Company as of December 31, 2020 and 2019, 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, 2020, and the related
notes, and the effectiveness of internal control over financial reporting as of December 31, 2020, which reports appear in the
December 31, 2020 annual report on Form 10-K of National Bank Holdings Corporation.
As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for the recognition and
measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Kansas City, Missouri
February 24, 2021
Exhibit 31.1
Certifications of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, G. Timothy Laney, Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of National Bank Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: February 24, 2021
/s/ G. Timothy Laney
G. Timothy Laney
Chairman, President and Chief Executive Officer
Certifications of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Aldis Birkans, Chief Financial Officer, certify that:
Exhibit 31.2
1.
I have reviewed this annual report on Form 10-K of National Bank Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: February 24, 2021
/s/ Aldis Birkans
Aldis Birkans
Chief Financial Officer
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
In connection with the annual report of National Bank Holdings Corporation (the “Company”) on Form 10-K for the year ended
December 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned officers
certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) this Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Exhibit 32
Date: February 24, 2021
Date: February 24, 2021
/s/ G. Timothy Laney
G. Timothy Laney
Chairman, President and Chief Executive Officer
/s/ Aldis Birkans
Aldis Birkans
Chief Financial Officer