424B3
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Filed pursuant to Rule 424(b)(3)

Registration Number 333-184054

Prospectus Supplement No. 1

(To the Prospectus dated September 25, 2012)

43,508,820 Shares of

 

LOGO

Class A Common Stock

 

 

This Prospectus Supplement supplements the prospectus dated September 25, 2012 (the “Prospectus”), relating to the offering of up to 43,508,820 shares of Class A common stock (including, shares of Class A common stock issuable upon conversion of shares of Class B non-voting common stock) of National Bank Holdings Corporation by the selling stockholders identified in the Prospectus. This Prospectus Supplement should be read in conjunction with the Prospectus which is to be delivered with this Prospectus Supplement. If there is any inconsistency between the information in the Prospectus and this Prospectus Supplement, you should rely on the information in this Prospectus Supplement.

INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 16 OF THE PROSPECTUS.

This Prospectus Supplement is filed for the purpose of including in the Prospectus the information contained in the attached quarterly report on Form 10-Q for the quarter ended September 30, 2012, which was filed with the Securities and Exchange Commission on November 14, 2012.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this Prospectus Supplement (or the Prospectus, including any supplements or amendments thereto). Any representation to the contrary is a criminal offense.

 

 

The date of this Prospectus Supplement is November 19, 2012.


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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: 000-26335

 

 

NATIONAL BANK HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-0563799

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5570 DTC Parkway, Greenwood Village, Colorado, 80111

(Address of principal executive offices) (Zip Code)

Registrant’s telephone, including area code: (720) 529-3336

 

 

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  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer.” and “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 52,327,910 shares of the Registrant’s common stock, $0.01 par value per share, outstanding as of November 14, 2012.

 

 

 


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            Page  

Part I. Financial Information

  

Item 1.

    

Financial Statements

  
    

Unaudited Consolidated Statements of Financial Condition as of September 30, 2012 and December 31, 2011

     5   
    

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

     6   
    

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011

     7   
    

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011

     8   
    

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

     9   
    

Notes to Unaudited Consolidated Financial Statements

     10   

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

     108   

Item 4.

    

Controls and Procedures

     109   

Part II. Other Information

     109   

Item 1.

    

Legal Proceedings

     109   

Item 1A.

    

Risk Factors

     109   

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

     135   

Item 5

    

Other Information

  

Item 6.

    

Exhibits

     135   

Signature Page

     136   

Exhibit 31.1

    

Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002

  

Exhibit 31.2

    

Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002

  

Exhibit 32.1

    

Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350

  

Exhibit 32.2

    

Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350

  

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains forward-looking statements. 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,” “believes,” “can,” “would,” “should,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. Our actual results could differ materially from those expressed in or contemplated by such forward-looking statements as a result of a variety of factors, some of which are more fully described in Part II under the caption “Risk Factors.”

Any or all of our forward-looking statements in this quarterly report may turn out to be inaccurate. The inclusion of such forward-looking statements should not be regarded as a representation by us that we will achieve the results expressed in or contemplated by such forward-looking statements. We have based these forward-looking 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. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed in or contemplated by the forward looking statements, including, but not limited to:

 

   

ability to execute our business strategy;

 

   

changes in the regulatory environment, including changes in regulation that affect the fees that we charge;

 

   

economic, market, operational, liquidity, credit and interest rate risks associated with our business;

 

   

our ability to identify potential candidates for, obtain regulatory approval, and consummate, acquisitions of banking franchises on attractive terms, or at all;

 

   

our ability to integrate acquisitions and to achieve synergies, operating efficiencies and/or other expected benefits within expected time-frames, or at all, or within expected cost projections, and to preserve the goodwill of acquired banking franchises;

 

   

our ability to achieve organic loan and deposit growth and the composition of such growth;

 

   

business and economic conditions generally and in the financial services industry;

 

   

increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other things, lower risk-adjusted returns;

 

   

changes in the economy or supply-demand imbalances affecting local real estate values;

 

   

volatility and direction of market interest rates;

 

   

effects of any changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;

 

   

the ability in certain states to amend the state constitution to impose restrictions on financial services by a simple majority of the people who actually vote;

 

   

governmental legislation and regulation, including changes in accounting regulation or standards;

 

   

failure of politicians to reach consensus on a bipartisan basis;

 

   

acts of war or terrorism, natural disasters such as tornadoes, flooding, hail storms and damaging winds, earthquakes, hurricanes or fires, or the effects of pandemic flu;

 

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the timely development and acceptance of new products and services and perceived overall value of these products and services by users;

 

   

changes in the Company’s management personnel;

 

   

continued consolidation in the financial services industry;

 

   

ability to maintain or increase market share;

 

   

ability to implement and/or improve operational management and other internal risk controls and processes and our reporting system and procedures;

 

   

a weakening of the economy which could materially impact credit quality trends and the ability to generate quality loans;

 

   

the impact of current economic conditions and the Company’s performance, liquidity, financial condition and prospects and on its ability to obtain attractive third-party funding to meet its liquidity needs;

 

   

fluctuations in face value of investment securities due to market conditions;

 

   

changes in fiscal, monetary and related policies of the U.S. federal government, its agencies and government sponsored entities;

 

   

inability to receive dividends from our subsidiary bank and to service debt, pay dividends to our common stockholders and satisfy obligations as they become due;

 

   

costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews;

 

   

changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

 

   

changes in capital classification;

 

   

impact of reputational risk on such matters as business generation and retention; and

 

   

the Company’s success at managing the risks involved in the foregoing items.

All forward-looking statements are necessarily only estimates of future results. Accordingly, actual results may differ materially from those expressed in or contemplated by the particular forward-looking statement, and, therefore, you are cautioned not to place undue reliance on such statements. Any forward-looking statement is qualified in its entirety by reference to the matters discussed elsewhere in this quarterly report. Further, 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.

 

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PART I: FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(In thousands, except share and per share data)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and due from banks

   $ 65,452      $ 93,862   

Due from Federal Reserve Bank of Kansas City

     496,893        1,421,734   

Federal funds sold and interest bearing bank deposits

     102,354        112,541   
  

 

 

   

 

 

 

Cash and cash equivalents

     664,699        1,628,137   

Investment securities available-for-sale, (at fair value)

     1,739,632        1,862,699   

Investment securities held-to-maturity (fair value of $653,760 and $6,829 at September 30, 2012 and December 31, 2011, respectively)

     643,661        6,801   

Non-marketable securities

     33,046        29,117   

Loans receivable, net - covered

     711,029        952,715   

Loans receivable, net - non-covered

     1,226,770        1,321,336   
  

 

 

   

 

 

 

Total loans

     1,937,799        2,274,051   

Allowance for loan losses

     (17,496     (11,527
  

 

 

   

 

 

 

Loans, net

     1,920,303        2,262,524   

Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, net

     113,195        223,402   

Other real estate owned

     129,345        120,636   

Premises and equipment, net

     118,385        87,315   

Goodwill

     59,630        59,630   

Intangible assets, net

     28,901        32,923   

Other assets

     72,029        38,842   
  

 

 

   

 

 

 

Total assets

   $ 5,522,826      $ 6,352,026   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits:

    

Non-interest bearing demand deposits

   $ 648,808      $ 678,735   

Interest bearing demand deposits

     484,760        537,160   

Savings and money market

     1,202,938        1,062,562   

Time deposits

     1,945,218        2,784,596   
  

 

 

   

 

 

 

Total deposits

     4,281,724        5,063,053   

Securities sold under agreements to repurchase

     46,192        47,597   

Due to FDIC

     32,502        67,972   

Other liabilities

     66,573        84,675   
  

 

 

   

 

 

 

Total liabilities

     4,426,991        5,263,297   

Stockholders’ equity:

    

Common Stock, par value $0.01 per share: 400,000,000 shares authorized and 52,191,239 and 52,157,697 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     522        522   

Additional paid in capital

     1,005,627        994,705   

Retained earnings

     42,934        46,480   

Accumulated other comprehensive income, net of tax

     46,752        47,022   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,095,835        1,088,729   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,522,826      $ 6,352,026   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Interest and dividend income:

        

Interest and fees on loans

   $ 40,105      $ 33,928      $ 129,290      $ 89,473   

Interest and dividends on investment securities

     15,190        15,754        46,750        44,250   

Dividends on non-marketable securities

     377        276        1,142        780   

Interest on interest-bearing bank deposits

     370        609        1,595        1,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     56,042        50,567        178,777        136,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Interest on deposits

     6,519        9,764        24,022        30,657   

Interest on borrowings

     27        50        88        91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     6,546        9,814        24,110        30,748   

Net interest income before provision for loan losses

     49,496        40,753        154,667        105,472   

Provision for loan losses

     5,263        3,760        25,325        16,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     44,233        36,993        129,342        89,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

FDIC loss sharing income

     (1,329     (6,226     113        173   

Service charges

     4,466        4,717        13,170        12,180   

Bank card fees

     2,484        1,856        7,168        5,396   

Bargain purchase gain

     —          60,520        —          60,520   

Gain on sales of mortgages, net

     283        356        886        817   

Gain on sale of securities, net

     —          (813     674        (621

Gain on recoveries of previously charged-off acquired loans

     837        3,423        2,627        3,470   

Other non-interest income

     1,322        233        3,744        2,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     8,063        64,066        28,382        84,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     27,182        22,098        72,226        52,115   

Occupancy and equipment

     5,570        4,392        14,845        9,652   

Professional fees

     2,669        3,101        8,612        7,372   

Telecommunications and data processing

     4,475        3,754        11,694        8,675   

Marketing and business development

     1,760        1,229        4,290        2,972   

Other real estate owned expenses

     3,468        1,013        12,152        5,466   

Problem loan expenses

     2,267        341        6,704        2,366   

Intangible asset amortization

     1,353        1,122        4,020        3,079   

FDIC deposit insurance

     1,152        893        3,664        3,333   

ATM/debit card expenses

     1,102        664        3,100        2,057   

Initial public offering related expenses

     7,566        600        7,974        600   

Acquisition related costs

     —          3,819        870        4,293   

Other non-interest expense

     1,393        3,633        8,080        7,827   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     59,957        46,659        158,231        109,807   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (7,661     54,400        (507     63,378   

Income tax expense

     230        20,648        3,039        23,868   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (7,891   $ 33,752      $ (3,546   $ 39,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per share - basic

   $ (0.15   $ 0.65      $ (0.07   $ 0.76   

Income (loss) per share - diluted

   $ (0.15   $ 0.65      $ (0.07   $ 0.76   

Weighted average number of common shares outstanding:

        

Basic

     52,191,239        51,936,280        52,186,465        51,936,280   

Diluted

     52,191,239        52,242,834        52,186,465        52,239,061   

See accompanying notes to the unaudited consolidated interim financial statements.

 

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012     2011      2012     2011  

Net Income (loss)

   $ (7,891   $ 33,752       $ (3,546   $ 39,510   

Other comprehensive income (loss), net of tax:

         

Securities available-for-sale:

         

Net unrealized (losses) gains arising during the period, net of tax of $1,498 and $21,538 for the three months ended September 30, 2012 and 2011, respectively, and net of tax of $2,624 and $29,992 for the nine months ended September 30, 2012 and 2011, respectively

     2,357        34,920         4,074        46,413   

Reclassification adjustment for net securities (gains) losses included in net income, net of tax expense of $0 and $60 for the three months ended September 30, 2012 and 2011, respectively, and net of tax (benefit) expense of ($263) and $217 for the nine months ended September 30, 2012 and 2011, respectively

     —          528         (411     404   

Reclassification adjustment for net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity

     —          —           (23,711     —     
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,357        35,448         (20,048     46,817   

Net unrealized holding gains on securities transferred between available-for-sale to
held-to-maturity:

         

Net unrealized holding gains on securities transferred, net of tax of $15,159

     —          —           23,711        —     

Less: amortization of net unrealized holding gains to income, net of tax of $1,302 and $0 for the three months ended September 30, 2012 and 2011, respectively, and net of tax of $2,515 and $0 for the nine months ended September 30, 2012 and 2011, respectively

     (2,036     —           (3,933     —     
  

 

 

   

 

 

    

 

 

   

 

 

 
     (2,036     —           19,778        —     

Other comprehensive income (loss)

     321        35,448         (270     46,817   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

   $ (7,570   $ 69,200       $ (3,816   $ 86,327   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands)

 

     Common
stock
     Additional
paid-in
capital
     Retained
earnings
(loss)
    Accumulated
other
comprehensive
income, net
    Total  

Balance, December 31, 2010

   $ 520       $ 982,637       $ 4,517      $ 6,085      $ 993,759   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stock based compensation

     —           14,472         —          —          14,472   

Net income

     —           —           39,510        —          39,510   

Other comprehensive income

     —           —           —          46,817        46,817   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 520       $ 997,109       $ 44,027      $ 52,902      $ 1,094,558   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

    

            
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 522       $ 994,705       $ 46,480      $ 47,022      $ 1,088,729   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stock based compensation

     —           10,922         —          —          10,922   

Net loss

     —           —           (3,546     —          (3,546

Other comprehensive loss

     —           —           —          (270     (270
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ 522       $ 1,005,627       $ 42,934      $ 46,752      $ 1,095,835   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     For the nine months ended
September 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income (loss)

   $ (3,546   $ 39,510   

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Provision for loan losses

     25,325        16,446   

Depreciation and amortization

     8,946        4,643   

(Gain) loss on sale of securities, net

     (674     621   

Deferred income tax expense and benefit

     (10,575     18,108   

Discount accretion, net of premium amortization

     13,110        623   

Loan accretion

     (93,497     (63,618

Amortization of indemnification asset

     9,165        2,237   

Bargain purchase gain

     —          (60,520

Gain on the sale of other real estate owned, net

     (6,792     (1,030

Impairment on other real estate owned

     8,638        2,848   

Stock-based compensation

     10,922        14,472   

(Decrease) increase in due to FDIC, net

     (35,470     1,016   

(Increase) decrease in other assets

     (378     522   

Decrease in other liabilities

     (31,416     (9,165
  

 

 

   

 

 

 

Net cash used in operating activities

     (106,242     (33,287
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of FHLB of Des Moines stock

     (4,018     (3,467

Sale of FHLB stock

     89        1,000   

Sales of investment securities available-for-sale

     20,794        238,215   

Maturities of investment securities available-for-sale

     465,727        122,857   

Purchase and settlement of investment securities

     (1,005,827     (1,463,779

Net decrease in loans

     359,759        352,747   

Purchase of premises and equipment

     (35,994     (17,650

Proceeds from sales of other real estate owned

     57,186        31,427   

Decrease in FDIC indemnification asset

     67,822        86,822   

Net cash provided from acquisitions

     —          399,321   
  

 

 

   

 

 

 

Net cash used in investing activities

     (74,462     (252,507
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (781,329     (112,553

(Decrease) increase in repurchase agreements

     (1,405     14,432   

Repayment of FHLB advances

     —          (117,148
  

 

 

   

 

 

 

Net cash used in financing activities

     (782,734     (215,269
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (963,438     (501,063

Cash and cash equivalents at beginning of the period

     1,628,137        1,907,730   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 664,699      $ 1,406,667   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the year for interest

   $ 30,428      $ 34,099   

Cash paid during the year for taxes

   $ 29,228      $ 16,508   

Supplemental schedule of non-cash investing activities:

    

Loans transferred to other real estate owned at fair value

   $ 67,741      $ 39,736   

FDIC indemnificaiton asset claims transferred to other assets

   $ 33,220      $ 10,319   

Available-for-sale investment securities transferred to investment securities held-to-maturity

   $ 754,063      $ —     

See accompanying notes to the unaudited consolidated interim financial statements.

 

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Table of Contents

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2012

Note 1 Basis of Presentation

National Bank Holdings Corporation, formerly known as NBH Holdings Corp., (the “Company”) is a bank holding company that was incorporated in the State of Delaware in June 2009 with the intent to acquire and operate community banking franchises and other complementary businesses in targeted markets. The accompanying unaudited consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, NBH Bank, N.A. NBH Bank, N.A. is the resulting entity from the Company’s acquisitions to date. The results of operations of each acquisition is included from the respective dates of the acquisition (October 22, 2010 for Hillcrest Bank, N.A., December 10, 2010 for Bank Midwest, N.A., July 22, 2011 for Bank of Choice, and October 21, 2011 for Community Banks of Colorado, collectively referred to herein as the “Banks”), and as such, the operating results for the three or nine months ended September 30, 2011 do not reflect any operations for Community Banks of Colorado and only include a partial quarter of operations of Bank of Choice for the three months ended September 30, 2011.

The accompanying 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 unaudited consolidated interim 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. The unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ending December 31, 2011. Certain reclassifications of prior years’ amounts are made whenever necessary to conform to current period presentation. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The Company’s significant accounting policies followed in the preparation of the consolidated financial statements are disclosed in Note 2 of the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2011. 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 covered assets, the valuation of the FDIC indemnification asset and clawback liability, 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 deferred tax assets, the evaluation of investment securities for other-than-temporary impairment (“OTTI”), the fair values of financial instruments, the allowance for loan losses (“ALL”), and contingent liabilities. Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.

Pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company qualifies as an emerging growth company and can elect to opt out of the extended transition period for any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or the SEC. The Company has elected to opt out of such extended transition period, which election is irrevocable.

 

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Table of Contents

The Company is still evaluating the JOBS Act and may take advantage of some or all of the reduced regulatory and reporting requirements that will be available so long as the Company qualifies as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Note 2 Investment Securities

During the nine months ended September 30, 2012, the Company re-evaluated the securities classified as available-for-sale and identified securities that the Company intends to hold until maturity. As a result, during the first quarter of 2012, the Company transferred residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises with a collective fair value of $754.1 million from an available-for-sale classification to the held-to-maturity classification. The $754.1 million of securities transferred to held-to-maturity included $38.9 million of unrealized gains, net. As a result of the change in intent, the transferred securities were transferred to held-to-maturity at their fair value on the date of the transfer. The unrealized net gain continues to reside in “Accumulated other comprehensive income, net of tax” in the Company’s unaudited consolidated statement of financial condition and will be accreted into interest income over the remaining life of the securities. This accretion is simultaneously offset by the amortization of the discount that was recorded to the investment securities balance at the time of the transfer, which represents the fair value adjustment, resulting in no impact to earnings.

Available-for-sale

Available-for-sale investment securities are summarized as follows as of the dates indicated (in thousands):

 

     September 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury securities

   $ 300       $ —         $ —        $ 300   

Asset backed securities

     92,689         178         —          92,867   

Mortgage-backed securities (“MBS”):

          

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

     717,238         23,382         (1     740,619   

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

     885,165         20,505         (243     905,427   

Other securities

     419         —           —          419   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,695,811       $ 44,065       $ (244   $ 1,739,632   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury securities

   $ 3,300       $ —         $ —        $ 3,300   

U.S. Government sponsored agency obligations

     3,009         1         —          3,010   

Mortgage-backed securities (“MBS”):

          

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

     1,139,058         52,480         (1     1,191,537   

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

     620,122         23,503         —          643,625   

Other MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

     20,123         685         —          20,808   

Other securities

     419         —           —          419   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,786,031       $ 76,669       $ (1   $ 1,862,699   
  

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2012 and December 31, 2011, mortgage-backed securities represented 94.6% and 99.6%, respectively, of the Company’s available-for-sale investment portfolio and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”), and the government sponsored agency Government National Mortgage Association (“GNMA”).

The table below summarizes the unrealized losses as of the dates shown, along with the length of the impairment period (in thousands):

 

    September 30, 2012  
    Less than 12 months     12 months or more     Total  
    Fair Value     Unrealized
Losses
    Fair
Value
    Unrealized
Losses
    Fair Value     Unrealized
Losses
 

Mortgage-backed securities (“MBS”):

           

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

  $ 26      $ (1   $ —        $ —        $ 26      $ (1

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

    161,432        (243     —          —          161,432        (243
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 161,458      $ (244   $ —        $ —        $ 161,458      $ (244
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2011  
    Less than 12 months     12 months or more     Total  
    Fair Value     Unrealized
Losses
    Fair
Value
    Unrealized
Losses
    Fair Value     Unrealized
Losses
 

Mortgage-backed securities (“MBS”):

           

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

  $ 20      $ (1   $ —        $ —        $ 20      $ (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $          20      $     (1   $ —        $ —        $          20      $     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management evaluated all of the securities in an unrealized loss position and concluded that no other-than-temporary-impairment existed at September 30, 2012 or December 31, 2011. The Company had no intention to sell these securities before recovery of their amortized cost and believes it will not be required to sell the securities before the recovery of their amortized cost.

 

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Table of Contents

The Company pledges certain securities as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank, if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $76.5 million at September 30, 2012 and $198.6 million December 31, 2011. The decrease of pledged available-for-sale investment securities was primarily attributable to the transfer of a significant amount of pledged securities from available-for-sale to held-to-maturity. Investment securities may also be pledged as collateral should the Company utilize its line of credit at the FHLB of Des Moines; however, no investment securities were pledged for this purpose at September 30, 2012 or December 31, 2011.

The table below summarizes the contractual maturities of our available-for-sale investment portfolio as of September 30, 2012 (in thousands):

 

     Amortized
Cost
     Fair Value  

Due in one year or less

   $ 300       $ 300   

Due after one year through five years

     92,694         92,872   

Due after five years through ten years

     275,890         280,611   

Due after ten years

     1,326,508         1,365,430   

Other securities

     419         419   
  

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 1,695,811       $ 1,739,632   
  

 

 

    

 

 

 

Actual maturities of mortgage-backed securities may differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 3.4 years as of September 30, 2012 and December 31, 2011. This estimate is based on assumptions and actual results may differ.

The Company’s U.S. Treasury securities have contractual maturities of less than one year. Other securities of $0.4 million have no stated contractual maturity date.

Held-to-maturity

At September 30, 2012 and December 31, 2011 the Company held $643.7 million and $6.8 million of held-to-maturity investment securities, respectively. The increase was attributable to the transfer of securities with a fair value of $754.1 million from an available-for-sale classification to the held-to-maturity classification during the first quarter of 2012. Held-to-maturity investment securities are summarized as follows as of the dates indicated (in thousands):

 

     September 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities (“MBS”):

           

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

   $ 643,661       $ 10,099       $ —         $ 653,760   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 643,661       $ 10,099       $ —         $ 653,760   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Mortgage-backed securities (“MBS”):

           

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

   $ 6,801       $ 28       $ —         $ 6,829   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 6,801       $ 28       $ —         $ 6,829   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below summarizes the contractual maturities of our held-to-maturity investment portfolio at September 30, 2012 (in thousands):

 

     Amortized
Cost
     Fair Value  

Due in one year or less

   $ —         $ —     

Due after one year through five years

     —           —     

Due after five years through ten years

     —           —     

Due after ten years

     643,661         653,760   

Other securities

     —           —     
  

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 643,661       $ 653,760   
  

 

 

    

 

 

 

The carrying value of held-to-maturity investment securities pledged as collateral totaled $135.6 million at September 30, 2012. At December 31, 2011, none of the $6.8 million of held-to-maturity investment securities were pledged as collateral. Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of September 30, 2012 was 3.9 years and 6.4 years as of December 31, 2011. This estimate is based on assumptions and actual results may differ.

Note 3 Non-marketable Securities

Non-marketable securities include Federal Reserve Bank stock and FHLB stock. At September 30, 2012, the Company held $25.0 million of Federal Reserve Bank stock, $7.5 million of FHLB Des Moines stock, and $0.5 million of FHLB San Francisco stock, for regulatory or debt facility purposes. At December 31, 2011 the Company held $25.0 million of Federal Reserve Bank stock, $3.5 million of FHLB Des Moines stock, and $0.6 million of FHLB San Francisco stock.

This stock is restricted and is carried at cost, less any other than temporary impairment. There have been no identified events or changes in circumstances that may have an adverse effect on the investments carried at cost.

Note 4 Loans

The loan portfolio is comprised of loans that were acquired in connection with the Company’s acquisitions of Bank of Choice and Community Banks of Colorado in 2011, Hillcrest Bank and Bank Midwest in 2010, and new loans originated by the Company. The majority of the loans acquired in the Hillcrest Bank and Community Banks of Colorado transactions are covered by loss sharing agreements with the FDIC, and covered loans are presented separately from non-covered loans due to the FDIC loss sharing agreements associated with these loans.

 

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Table of Contents

Covered loans comprised 36.7% of the total loan portfolio at September 30, 2012, compared to 41.9% of the total loan portfolio at December 31, 2011. The table below shows the loan portfolio composition and the amounts of loans that are accounted for in accordance with ASC Topic 310-30 (in thousands):

 

     September 30, 2012  
     Covered Loans      Non-Covered Loans                
     ASC
310-30
     Non ASC
310-30
     Total
Covered
Loans
     ASC
310-30
     Non ASC
310-30
     Total Non-
Covered
Loans
     Total Loans      % of
Total
 

Commercial

   $ 83,469       $ 57,416       $ 140,885       $ 14,195       $ 111,147       $ 125,342       $ 266,227         13.8

Commercial real estate

     477,427         11,081         488,508         187,344         236,772         424,116         912,624         47.1

Agriculture

     44,738         14,939         59,677         11,206         90,373         101,579         161,256         8.3

Residential real estate

     19,584         2,371         21,955         106,710         412,322         519,032         540,987         27.9

Consumer

     4         —           4         26,359         30,342         56,701         56,705         2.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 625,222       $   85,807       $ 711,029       $ 345,814       $ 880,956       $ 1,226,770       $ 1,937,799         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Covered Loans      Non-Covered Loans                
     ASC
310-30
     Non ASC
310-30
     Total
Covered
Loans
     ASC
310-30
     Non ASC
310-30
     Total Non-
Covered
Loans
     Total Loans      % of
Total
 

Commercial

   $ 123,108       $ 79,044       $ 202,152       $ 31,482       $ 139,297       $ 170,779       $ 372,931         16.4

Commercial real estate

     626,089         15,939         642,028         243,297         267,153         510,450         1,152,478         50.6

Agriculture

     56,839         28,535         85,374         13,989         52,040         66,029         151,403         6.7

Residential real estate

     21,043         2,111         23,154         147,239         352,492         499,731         522,885         23.0

Consumer

     7         —           7         44,616         29,731         74,347         74,354         3.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 827,086       $ 125,629       $ 952,715       $ 480,623       $ 840,713       $ 1,321,336       $ 2,274,051         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Covered Loans

The following tables summarize the carrying value of all covered loans by segment as of September 30, 2012 and December 31, 2011, net of deferred discounts on loans excluded from ASC Topic 310-30, fees and costs of $4.3 million and $13.1 million, respectively (in thousands):

 

     September 30, 2012  
     ASC
310-30
     Non ASC
310-30
     Total
covered
loans
 

Commercial

        

Commercial and industrial

   $ 83,469       $ 53,693       $ 137,162   

Leases

     —           3,723         3,723   
  

 

 

    

 

 

    

 

 

 

Total commercial

     83,469         57,416         140,885   

Commercial real estate

        

Commercial construction

     76,999         14         77,013   

Commercial real estate

     161,647         6,025         167,672   

Land and development

     192,529         3,478         196,007   

Multifamily

     46,252         1,564         47,816   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     477,427         11,081         488,508   

Agriculture

     44,738         14,939         59,677   

Residential real estate

     19,584         2,371         21,955   

Consumer

     4         —           4   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 625,222       $   85,807       $ 711,029   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     ASC
310-30
     Non ASC
310-30
     Total
covered
loans
 

Commercial

        

Commercial and industrial

   $ 123,108       $ 73,183       $ 196,291   

Leases

     —           5,861         5,861   
  

 

 

    

 

 

    

 

 

 

Total commercial

     123,108         79,044         202,152   

Commercial real estate

        

Commercial construction

     112,331         20         112,351   

Commercial real estate

     219,176         4,141         223,317   

Land and development

     246,520         10,226         256,746   

Multifamily

     48,062         1,552         49,614   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     626,089         15,939         642,028   

Agriculture

     56,839         28,535         85,374   

Residential real estate

     21,043         2,111         23,154   

Consumer

     7         —           7   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 827,086       $ 125,629       $ 952,715   
  

 

 

    

 

 

    

 

 

 

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 accounted for under ASC Topic 310-30 were not classified as non-performing assets at the respective acquisition dates, at September 30, 2012 or at December 31, 2011 as the carrying value of the respective loans or pools of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, was recognized on all acquired loans accounted for under ASC Topic 310-30.

 

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Table of Contents

Pooled loans accounted for under ASC Topic 310-30 that are 90 days or more past due and still accreting are considered to be performing and are included in loans 90 days or more past due and still accruing. At September 30, 2012 and December 31, 2011, $5.4 million and $13.1 million, respectively, of covered loans accounted for outside the scope of ASC Topic 310-30 were on non-accrual. Loan delinquency for covered loans is shown in the following tables at September 30, 2012 and December 31, 2011, respectively, (in thousands):

 

    Covered Loans September 30, 2012  
    30-59
days past
due
    60-89
days
past
due
    Greater
than 90
days past
due
    Total past
due
    Current     Total
loans
    Loans > 90
days past
due and
still
accruing
    Non-
accrual
 

Loans excluded from ASC 310-30

               

Commercial

               

Wholesale

  $ —        $ —        $ 894      $ 894      $ 2,291      $ 3,185      $ —        $ 894   

Manufacturing

    —          —          10        10        245        255        —          10   

Transportation/warehousing

    —          —          —          —          279        279        —          —     

Finance and insurance

    —          —          —          —          3,449        3,449        —          —     

Oil & gas

    —          —          —          —          —          —          —          —     

Lease

    221        27        —          248        3,475        3,723        —          135   

All other commercial and industrial

    6,247        17        1,373        7,637        38,888        46,525        —          2,607   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    6,468        44        2,277        8,789        48,627        57,416        —          3,646   

Commercial real estate

               

1-4 family construction

    —          —          —          —          —          —          —          —     

1-4 family acquisition/development

    —          —          —          —          3,478        3,478        —          —     

Commercial construction

    —          —          —          —          14        14        —          —     

Commercial acquisition/development

    —          —          —          —          —          —          —          —     

Multifamily

    —          —          —          —          1,564        1,564        —          —     

Owner-occupied

    —          —          1,074        1,074        3,379        4,453        —          1,252   

Non owner-occupied

    —          —          —          —          1,572        1,572        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    —          —          1,074        1,074        10,007        11,081        —          1,252   

Agriculture

    —          7        12        19        14,920        14,939        —          61   

Residential real estate

               

Sr lien 1-4 family closed end

    —          —          —          —          2,046        2,046        —          420   

Jr lien 1-4 family closed end

    —          —          —          —          —          —          —          —     

Sr lien 1-4 family open end

    —          —          —          —          61        61        —          —     

Jr lien 1-4 family open end

    44        —          —          44        220        264        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    44        —          —          44        2,327        2,371        —          420   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans excluded from ASC Topic 310-30

    6,512        51        3,363        9,926        75,881        85,807        —          5,379   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

               

Commercial

    11,586        1,035        4,068        16,689        66,780        83,469        4,068        —     

Commercial real estate

    16,269        6,459        80,528        103,256        374,171        477,427        80,528        —     

Agriculture

    —          73        4,784        4,857        39,881        44,738        4,784        —     

Residential real estate

    1        —          3,226        3,227        16,357        19,584        3,226        —     

Consumer

    —          —          —          —          4        4        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accounted for under ASC 310-30 loans

    27,856        7,567        92,606        128,029        497,193        625,222        92,606        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans

  $ 34,368      $ 7,618      $ 95,969      $ 137,955      $ 573,074      $ 711,029      $ 92,606      $ 5,379   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents
    Covered Loans December 31, 2011  
    30-59
days past
due
    60-89
days past
due
    Greater
than 90
days past
due
    Total past
due
    Current     Total
loans
    Loans > 90
days past
due and
still
accruing
    Non-
accrual
 

Loans excluded from ASC 310-30

               

Commercial

               

Wholesale

  $ 319      $ —        $ 1,069      $ 1,388      $ 4,043      $ 5,431      $ —        $ 1,069   

Manufacturing

    50        —          —          50        270        320        —          —     

Transportation/warehousing

    —          —          —          —          500        500        —          —     

Finance and insurance

    —          —          167        167        2,730        2,897        —          167   

Oil & gas

    —          —          —          —          241        241        —          —     

Lease

    1,940        108        100        2,148        3,713        5,861        60        40   

All other commercial and industrial

    674        2,760        2,990        6,424        57,370        63,794        118        3,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    2,983        2,868        4,326        10,177        68,867        79,044        178        4,614   

Commercial real estate

               

1-4 family construction

    —          —          —          —          —          —          —          —     

1-4 family acquisition/development

    —          —          7,009        7,009        3,217        10,226        —          7,009   

Commercial construction

    —          —          —          —          20        20        —          —     

Commercial acquisition/development

    —          —          —          —          —          —          —          —     

Multifamily

    —          —          —          —          1,552        1,552        —          —     

Owner-occupied

    789        149        1,099        2,037        496        2,533        149        1,038   

Non owner-occupied

    —          —          —          —          1,608        1,608        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    789        149        8,108        9,046        6,893        15,939        149        8,047   

Agriculture

    133        —          —          133        28,402        28,535        —          —     

Residential real estate

               

Sr lien 1-4 family closed end

    —          —          —          —          1,762        1,762        —          460   

Jr lien 1-4 family closed end

    —          —          —          —          —          —          —          —     

Sr lien 1-4 family open end

    —          —          —          —          87        87        —          —     

Jr lien 1-4 family open end

    —          —          —          —          262        262        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    —          —          —          —          2,111        2,111        —          460   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans excluded from ASC Topic 310-30

    3,905        3,017        12,434        19,356        106,273        125,629        327        13,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

               

Commercial

    9,027        1,763        10,183        20,973        102,135        123,108        10,183        —     

Commercial real estate

    13,114        19,320        98,746        131,180        494,909        626,089        98,746        —     

Agriculture

    157        4,967        439        5,563        51,276        56,839        439        —     

Residential real estate

    —          —          287        287        20,756        21,043        287        —     

Consumer

    —          —          —          —          7        7        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accounted for under ASC 310-30 loans

    22,298        26,050        109,655        158,003        669,083        827,086        109,655        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans

  $ 26,203      $ 29,067      $ 122,089      $ 177,359      $ 775,356      $ 952,715      $ 109,982      $ 13,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Credit exposure for all covered loans as determined by the Company’s internal risk rating system was as follows as of September 30, 2012 and December 31, 2011, respectively (in thousands):

 

    Covered Loans September 30, 2012  
    Pass     Special
Mention
    Substandard     Doubtful     Total  

Loans excluded from ASC 310-30

         

Commercial

         

Wholesale

  $ 150      $ —        $ 3,035      $ —        $ 3,185   

Manufacturing

    176        69        10        —          255   

Transportation/warehousing

    147        132        —          —          279   

Finance and insurance

    456        —          2,993        —          3,449   

Oil & gas

    —          —          —          —          —     

Lease

    3,588        —          135        —          3,723   

All other commercial and industrial

    12,034        9,110        23,927        1,454        46,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    16,551        9,311        30,100        1,454        57,416   

Commercial real estate

         

1-4 family construction

    —          —          —          —          —     

1-4 family acquisition/development

    —          —          3,478        —          3,478   

Commercial construction

    14        —          —          —          14   

Commercial acquisition/development

    —          —          —          —          —     

Multifamily

    1,564        —          —          —          1,564   

Owner-occupied

    2,455        709        1,289        —          4,453   

Non owner-occupied

    421        199        952        —          1,572   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    4,454        908        5,719        —          11,081   

Agriculture

    13,940        384        615        —          14,939   

Residential real estate

            —     

Sr lien 1-4 family closed end

    510        —          1,115        421        2,046   

Jr lien 1-4 family closed end

    —          —          —          —          —     

Sr lien 1-4 family open end

    61        —          —          —          61   

Jr lien 1-4 family open end

    264        —          —          —          264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    835        —          1,115        421        2,371   

Consumer

         

Secured

    —          —          —          —          —     

Unsecured

    —          —          —          —          —     

Credit card

    —          —          —          —          —     

Overdrafts

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    —          —          —          —          —     
            —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans excluded from ASC 310-30

    35,780        10,603        37,549        1,875        85,807   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

         

Commercial

    28,595        1,748        46,256        6,870        83,469   

Commercial real estate

    107,494        79,562        278,366        12,005        477,427   

Agriculture

    33,825        1,588        9,325        —          44,738   

Residential real estate

    10,191        —          9,393        —          19,584   

Consumer

    4        —          —          —          4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans accounted for under ASC 310-30

    180,109        82,898        343,340        18,875        625,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans

  $ 215,889      $ 93,501      $ 380,889      $ 20,750      $ 711,029   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents
    Covered Loans December 31, 2011  
    Pass     Special
Mention
    Substandard     Doubtful     Total  

Loans excluded from ASC 310-30

         

Commercial

         

Wholesale

  $ 286      $ —        $ 5,145      $ —        $ 5,431   

Manufacturing

    270        50        —          —          320   

Transportation/warehousing

    323        177        —          —          500   

Finance and insurance

    869        —          2,028        —          2,897   

Oil & gas

    112        —          129        —          241   

Lease

    5,821        —          40        —          5,861   

All other commercial and industrial

    18,571        13,160        29,213        2,850        63,794   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    26,252        13,387        36,555        2,850        79,044   

Commercial real estate

         

1-4 family construction

    —          —          —          —          —     

1-4 family acquisition/development

    262        —          4,497        5,467        10,226   

Commercial construction

    20        —          —          —          20   

Commercial acquisition/development

    —          —          —          —          —     

Multifamily

    1,552        —          —          —          1,552   

Owner-occupied

    740        755        1,038        —          2,533   

Non owner-occupied

    728        76        804        —          1,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    3,302        831        6,339        5,467        15,939   

Agriculture

    25,393        977        2,165        —          28,535   

Residential real estate

         

Sr lien 1-4 family closed end

    162        —          1,600        —          1,762   

Jr lien 1-4 family closed end

    —          —          —          —          —     

Sr lien 1-4 family open end

    87        —          —          —          87   

Jr lien 1-4 family open end

    252        10        —          —          262   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    501        10        1,600        —          2,111   

Consumer

         

Secured

    —          —          —          —          —     

Unsecured

    —          —          —          —          —     

Credit card

    —          —          —          —          —     

Overdrafts

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    —          —          —          —          —     
            —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans excluded from ASC 310-30

    55,448        15,205        46,659        8,317        125,629   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

         

Commercial

    37,886        11,491        62,859        10,872        123,108   

Commercial real estate

    133,513        145,387        276,052        71,137        626,089   

Agriculture

    43,891        3,090        9,858        —          56,839   

Residential real estate

    12,116        63        8,864        —          21,043   

Consumer

    7        —          —          —          7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans accounted for under ASC 310-30

    227,413        160,031        357,633        82,009        827,086   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans

  $ 282,861      $ 175,236      $ 404,292      $ 90,326      $ 952,715   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Non-covered loans

The following tables summarize the carrying value of all non-covered loans by segment net of deferred discounts on loans excluded from ASC Topic 310-30, fees and costs of $18.8 and $28.4 million, as of September 30, 2012 and December 31, 2011, respectively (in thousands):

 

     September 30, 2012  
     ASC
310-30
     Non ASC
310-30
     Total non -
covered
loans
 

Commercial

        

Commercial and industrial

   $ 14,195       $ 109,189       $ 123,384   

Leases

     —           1,958         1,958   
  

 

 

    

 

 

    

 

 

 

Total commercial

     14,195         111,147         125,342   

Commercial real estate

        

Commercial construction

     42,790         1,952         44,742   

Commercial real estate

     144,506         211,687         356,193   

Land and development

     48         8,854         8,902   

Multifamily

     —           14,279         14,279   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     187,344         236,772         424,116   

Agriculture

     11,206         90,373         101,579   

Residential real estate

     106,710         412,322         519,032   

Consumer

     26,359         30,342         56,701   
  

 

 

    

 

 

    

 

 

 

Total non-covered loans

   $ 345,814       $ 880,956       $ 1,226,770   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     ASC
310-30
     Non ASC
310-30
     Total non -
covered
loans
 

Commercial

        

Commercial and industrial

   $ 31,482       $ 136,765       $ 168,247   

Leases

     —           2,532         2,532   
  

 

 

    

 

 

    

 

 

 

Total commercial

     31,482         139,297         170,779   

Commercial real estate

        

Commercial construction

     62,749         —           62,749   

Commercial real estate

     180,548         216,464         397,012   

Land and development

     —           31,568         31,568   

Multifamily

     —           19,121         19,121   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     243,297         267,153         510,450   

Agriculture

     13,989         52,040         66,029   

Residential real estate

     147,239         352,492         499,731   

Consumer

     44,616         29,731         74,347   
  

 

 

    

 

 

    

 

 

 

Total non-covered loans

   $ 480,623       $ 840,713       $ 1,321,336   
  

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

The following tables reflect the carrying value and loan delinquency of non-covered loans at September 30, 2012 and December 31, 2011 (in thousands). Pooled loans accounted for under ASC Topic 310-30 that are 90 days or more past due and still accreting are included in loans 90 days or more past due and still accruing interest and are considered to be performing.

 

    Non-Covered Loans September 30, 2012  
    30-59
days

past  due
    60-89
days
past due
    Greater
than 90
days

past due
    Total
past due
    Current     Total loans     Loans > 90
days past
due and
still
accruing
    Non-
accrual
 

Loans excluded from ASC 310-30

               

Commercial

               

Wholesale

  $ —        $ —        $ —        $ —        $ 15,503      $ 15,503      $ —        $ 613   

Manufacturing

    —          —          33        33        14,643        14,676        —          33   

Transportation/warehousing

    —          —          —          —          13,948        13,948        —          —     

Finance and insurance

    5        155        —          160        17,274        17,434        —          —     

Oil & gas

    —          —          —          —          9,835        9,835        —          —     

Lease

    —          401        —          401        1,557        1,958        —          —     

All other commercial and industrial

    21        —          195        216        37,577        37,793        —          347   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    26        556        228        810        110,337        111,147        —          993   

Commercial real estate

               

1-4 family construction

    —          —          —          —          692        692        —          —     

1-4 family acquisition/development

    48        1,525        172        1,745        3,436        5,181        —          234   

Commercial construction

    —          —          —          —          1,952        1,952        —          —     

Commercial acquisition/development

    —          —          —          —          2,981        2,981        —          —     

Multifamily

    —          —          191        191        14,088        14,279        —          191   

Owner-occupied

    3,083        —          122        3,205        49,547        52,752        —          1,000   

Non owner-occupied

    —          —          7,241        7,241        151,694        158,935        —          10,205   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    3,131        1,525        7,726        12,382        224,390        236,772        —          11,630   

Agriculture

    11        —          —          11        90,362        90,373        —          116   

Residential real estate

               

Sr lien 1-4 family closed end

    1,042        441        870        2,353        301,241        303,594        —          2,711   

Jr lien 1-4 family closed end

    37        27        106        170        6,612        6,782        —          378   

Sr lien 1-4 family open end

    708        —          421        1,129        56,431        57,560        32        527   

Jr lien 1-4 family open end

    312        137        92        541        43,845        44,386        —          214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    2,099        605        1,489        4,193        408,129        412,322        32        3,830   

Consumer

               

Secured

    138        —          28        166        22,423        22,589        —          28   

Unsecured

    4        12        —          16        2,180        2,196        —          —     

Credit card

    68        9        18        95        3,731        3,826        18        —     

Overdrafts

    —          —          —          —          1,731        1,731        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    210        21        46        277        30,065        30,342        18        28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans excluded from ASC 310-30

    5,477        2,707        9,489        17,673        863,283        880,956        50        16,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

               

Commercial

    158        2,393        1,607        4,158        10,037        14,195        1,607        —     

Commercial real estate

    1,176        1,217        34,210        36,603        150,741        187,344        34,210        —     

Agriculture

    —          50        198        248        10,958        11,206        198        —     

Residential real estate

    4,799        843        14,707        20,349        86,361        106,710        14,707        —     

Consumer

    1,573        141        625        2,339        24,020        26,359        625        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans accounted for under ASC 310-30

    7,706        4,644        51,347        63,697        282,117        345,814        51,347        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans

  $ 13,183      $ 7,351      $ 60,836      $ 81,370      $ 1,145,400      $ 1,226,770      $ 51,397      $ 16,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents
    Non-Covered Loans December 31, 2011  
    30-59
days
past due
    60-89
days
past due
    Greater
than 90
days

past due
    Total
past due
    Current     Total loans     Loans > 90
days past
due and
still
accruing
    Non-
accrual
 

Loans excluded from ASC 310-30

               

Commercial

               

Wholesale

  $ 681      $ —        $ —        $ 681      $ 24,660      $ 25,341      $ —          —     

Manufacturing

    —          33        —          33        7,162        7,195        —          46   

Transportation/warehousing

    —          —          —          —          11,501        11,501        —          —     

Finance and insurance

    238        —          —          238        15,888        16,126        —          512   

Oil & gas

    —          —          —          —          20,510        20,510        —          —     

Lease

    —          —          —          —          2,532        2,532        —          —     

All other commercial and industrial

    3,552        434        10        3,996        52,096        56,092        —          202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    4,471        467        10        4,948        134,349        139,297        —          760   

Commercial real estate

               

1-4 family construction

    —          —          —          —          2,757        2,757        —          —     

1-4 family acquisition/development

    —          —          37        37        13,302        13,339        —          92   

Commercial construction

    —          —          —          —          —          —          —          —     

Commercial acquisition/development

    —          2,246        4,862        7,108        8,364        15,472        —          4,862   

Multifamily

    —          195        —          195        18,926        19,121        —          195   

Owner-occupied

    2,948        —          —          2,948        42,940        45,888        —          758   

Non owner-occupied

    2,418        1,234        —          3,652        166,924        170,576        —          16,053   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    5,366        3,675        4,899        13,940        253,213        267,153        —          21,960   

Agriculture

    234        31        29        294        51,746        52,040        —          29   

Residential real estate

               

Sr lien 1-4 family closed end

    791        79        668        1,538        238,035        239,573        —          1,571   

Jr lien 1-4 family closed end

    1,364        —          5        1,369        3,650        5,019        —          5   

Sr lien 1-4 family open end

    377        258        339        974        59,640        60,614        290        50   

Jr lien 1-4 family open end

    193        63        200        456        46,830        47,286        —          273   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    2,725        400        1,212        4,337        348,155        352,492        290        1,899   

Consumer

               

Secured

    389        4        —          393        17,935        18,328        —          —     

Unsecured

    12        1        —          13        2,701        2,714        —          1   

Credit card

    36        21        35        92        6,967        7,059        35        —     

Overdrafts

    —          —          —          —          1,630        1,630        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    437        26        35        498        29,233        29,731        35        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans excluded from ASC 310-30

    13,233        4,599        6,185        24,017        816,696        840,713        325        24,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

               

Commercial

    1,176        60        1,334        2,570        28,912        31,482        1,334        —     

Commercial real estate

    4,486        630        38,269        43,385        199,912        243,297        38,269        —     

Agriculture

    419        —          772        1,191        12,798        13,989        772        —     

Residential real estate

    4,109        3,727        23,863        31,699        115,540        147,239        23,862        —     

Consumer

    432        249        478        1,159        43,457        44,616        478        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered accounted for under ASC 310-30 loans

    10,622        4,666        64,716        80,004        400,619        480,623        64,715        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans

  $ 23,855      $ 9,265      $ 70,901      $ 104,021      $ 1,217,315      $ 1,321,336      $ 65,040      $ 24,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Credit exposure for all non-covered loans as determined by the Company’s internal risk rating system was as follows as of September 30, 2012 and December 31, 2011, respectively (in thousands):

 

     Non-Covered Loans September 30, 2012  
     Pass      Special
Mention
     Substandard      Doubtful     Total  

Loans excluded from ASC 310-30

             

Commercial

             

Wholesale

   $ 14,729       $ 26       $ 748       $ —        $ 15,503   

Manufacturing

     12,238         2,405         33         —          14,676   

Transportation/warehousing

     13,948         —           —           —          13,948   

Finance and insurance

     17,381         —           53         —          17,434   

Oil & gas

     9,820         15         —           —          9,835   

Lease

     520         200         1,238         —          1,958   

All other commercial and industrial

     27,112         690         9,992         (1     37,793   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     95,748         3,336         12,064         (1     111,147   

Commercial real estate

             

1-4 family construction

     692         —           —           —          692   

1-4 family acquisition/development

     4,947         —           234         —          5,181   

Commercial construction

     1,952         —           —           —          1,952   

Commercial acquisition/development

     2,410         —           571         —          2,981   

Multifamily

     9,242         3,867         1,170         —          14,279   

Owner-occupied

     43,161         927         8,664         —          52,752   

Non owner-occupied

     99,277         43,771         15,370         517        158,935   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial real estate

     161,681         48,565         26,009         517        236,772   

Agriculture

     87,335         1,640         1,398         —          90,373   

Residential real estate

                —     

Sr lien 1-4 family closed end

     297,999         970         4,625         —          303,594   

Jr lien 1-4 family closed end

     5,694         323         762         3        6,782   

Sr lien 1-4 family open end

     53,658         1,563         2,341         (2     57,560   

Jr lien 1-4 family open end

     42,499         505         1,383         (1     44,386   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total residential real estate

     399,850         3,361         9,111         —          412,322   

Consumer

             

Secured

     22,554         —           35         —          22,589   

Unsecured

     2,196         —           —           —          2,196   

Credit card

     3,826         —           —           —          3,826   

Overdrafts

     1,731         —           —           —          1,731   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     30,307         —           35         —          30,342   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-covered loans excluded from ASC 310-30

     774,921         56,902         48,617         516        880,956   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans accounted for under ASC 310-30

             

Commercial

     5,414         1,434         7,347         —          14,195   

Commercial real estate

     67,461         14,920         101,732         3,231        187,344   

Agriculture

     2,861         2,526         5,819         —          11,206   

Residential real estate

     56,263         6,519         43,869         59        106,710   

Consumer

     23,461         1,986         912         —          26,359   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-covered loans accounted for under ASC 310-30

     155,460         27,385         159,679         3,290        345,814   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-covered loans

   $ 930,381       $ 84,287       $ 208,296       $ 3,806      $ 1,226,770   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents
    Non-Covered Loans December 31, 2011  
    Pass     Special
Mention
    Substandard     Doubtful     Total  

Loans excluded from ASC 310-30

         

Commercial

         

Wholesale

  $ 24,038      $ —        $ 622      $ 681      $ 25,341   

Manufacturing

    7,116        —          79        —          7,195   

Transportation/warehousing

    11,234        —          267        —          11,501   

Finance and insurance

    13,853        4        2,269        —          16,126   

Oil & gas

    20,510        —          —          —          20,510   

Lease

    1,519        —          1,013        —          2,532   

All other commercial and industrial

    36,330        7,360        12,402        —          56,092   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    114,600        7,364        16,652        681        139,297   

Commercial real estate

         

1-4 family construction

    2,757        —          —          —          2,757   

1-4 family acquisition/development

    7,952        389        4,998        —          13,339   

Commercial construction

    —          —          —          —          —     

Commercial acquisition/development

    2,447        7,555        5,470        —          15,472   

Multifamily

    16,884        1,046        1,191        —          19,121   

Owner-occupied

    34,611        3,438        7,839        —          45,888   

Non owner-occupied

    105,744        36,891        27,941        —          170,576   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    170,395        49,319        47,439        —          267,153   

Agriculture

    48,116        2,421        1,503        —          52,040   

Residential real estate

            —     

Sr lien 1-4 family closed end

    234,983        1,477        3,113        —          239,573   

Jr lien 1-4 family closed end

    4,840        127        52        —          5,019   

Sr lien 1-4 family open end

    57,853        2,153        608        —          60,614   

Jr lien 1-4 family open end

    45,000        637        1,649        —          47,286   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential real estate

    342,676        4,394        5,422        —          352,492   

Consumer

         

Secured

    18,146        172        10        —          18,328   

Unsecured

    2,713        —          1        —          2,714   

Credit card

    7,059        —          —          —          7,059   

Overdrafts

    1,630        —          —          —          1,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    29,548        172        11        —          29,731   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans excluded from ASC 310-30

    705,335        63,670        71,027        681        840,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans accounted for under ASC 310-30

         

Commercial

    19,464        5,491        6,455        72        31,482   

Commercial real estate

    83,447        53,950        103,779        2,121        243,297   

Agriculture

    4,315        7,311        2,363        —          13,989   

Residential real estate

    78,795        14,986        53,458        —          147,239   

Consumer

    41,705        1,773        1,138        —          44,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans accounted for under ASC 310-30

    227,726        83,511        167,193        2,193        480,623   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans

  $ 933,061      $ 147,181      $ 238,220      $ 2,874      $ 1,321,336   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans

Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Included in impaired loans are loans on non-accrual status and troubled debt restructurings (“TDR’s”) described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral dependent loans. Inclusive of TDR’s, the Company’s unpaid principal balance of impaired loans was $56.0 million and $74.7 million at September 30, 2012 and December 31, 2011, respectively.

 

25


Table of Contents

At September 30, 2012, the Company’s unpaid principal balance and recorded investment of impaired loans was $56.0 million and $37.6 million, respectively. Of these impaired loans, 35 were within the commercial real estate segment, with an unpaid principal balance of $25.7 million and a recorded investment of $18.1 million. Twenty-five of these commercial real estate loans, with a recorded investment of $15.9 million and an unpaid principal balance of $17.3 million were not covered by the FDIC loss sharing agreement, compared to ten loans with a recorded investment of $2.2 million and an unpaid principal balance of $8.4 million that were covered by the FDIC loss sharing agreement. The commercial loan segment had a total of 52 loans, 35 of which were not covered by the FDIC loss sharing agreement with an unpaid principal balance and a recorded investment of $10.4 million and $7.9 million, respectively. The 17 commercial loans that were covered by the FDIC loss sharing agreement had an unpaid principal balance and recorded investment of $11.2 million and $3.7 million, respectively. The residential real estate loan segment held 93 impaired loans, with an unpaid principal balance of $8.3 million and a recorded investment of $7.5 million. Of these 93 loans, two were covered by the FDIC loss sharing agreement with an unpaid principal balance and recorded investment of $1.6 million and $1.5 million, respectively, leaving 91 loans not covered by the FDIC loss sharing agreement with an unpaid principal balance of $6.8 million and a recorded investment of $6.0 million. These loans had a collective related allowance for loan losses allocated to them of $2.0 million at September 30, 2012. The table below shows additional information regarding impaired loans at September 30, 2012 (in thousands):

 

     Impaired Loans September 30, 2012  
     Unpaid
principal
balance
     Recorded
investment
     Allowance
for loan
losses
allocated
     Average
recorded
investment
     Interest
income
recognized
 

With no related allowance recorded:

              

Commercial

              

Wholesale

   $ 3,672       $ 1,508       $ —         $ 1,733       $ —     

Manufacturing

     43         43         —           43         —     

Transportation/warehousing

     —           —           —           —           —     

Finance and insurance

     299         —           —           —           —     

All other commercial and industrial

     15,530         7,970         —           11,262         179   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     19,544         9,521         —           13,038         179   

Commercial real estate

              

1-4 family construction

     —           —           —           —           —     

1-4 family acquisition/development

     6,303         228         —           231         3   

Commercial construction

     —           —           —           —           —     

Commercial acquisition/development

     601         571         —           599         24   

Multifamily

     198         191         —           191         —     

Owner-occupied

     5,814         5,450         —           5,455         118   

Non-owner occupied

     7,050         6,504         —           5,823         64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     19,966         12,944         —           12,299         209   

Agriculture

     185         178         —           181         1   

Residential real estate

              

Sr. lien 1-4 family closed end

     5,529         5,291         —           5,395         86   

Jr. lien 1-4 family closed end

     505         457         —           459         1   

Sr. lien 1-4 family open end

     1,087         878         —           846         8   

Jr. lien 1-4 family open end

     491         214         —           216         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential real estate

     7,612         6,840         —           6,916         98   

Consumer

              

Secured

     193         193         —           194         1   

Unsecured

     13         —           —           1         —     

Credit card

     —           —           —           —           —     

Overdrafts

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     206         193         —           195         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance recorded

   $ 47,513       $ 29,676       $ —         $ 32,629       $ 488   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents
     Unpaid
principal
balance
     Recorded
investment
     Allowance
for loan
losses
allocated
     Average
recorded
investment
     Interest
income
recognized
 

With a related allowance recorded:

              

Commercial

              

Wholesale

     135         135         6         174         8   

Manufacturing

     —           —           —           —           —     

Transportation/warehousing

     —           —           —           —           —     

Finance and insurance

     —           —           —           —           —     

All other commercial and industrial

     1,931         1,930         1,085         2,011         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,066         2,065         1,091         2,185         8   

Commercial real estate

              

1-4 family construction

     —           —           —           —           —     

1-4 family acquisition/development

     —           —           —           —           —     

Commercial construction

     —           —           —           —           —     

Commercial acquisition/development

     —           —           —           —           —     

Multifamily

     —           —           —           —           —     

Owner-occupied

     —           —           —           —           —     

Non-owner occupied

     5,688         5,123         517         5,284         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     5,688         5,123         517         5,284         —     

Agriculture

     —           —           —           —           —     

Residential real estate

              

Sr. lien 1-4 family closed end

     445         421         421         440         —     

Jr. lien 1-4 family closed end

     271         271         3         271         —     

Sr. lien 1-4 family open end

     —           —           —           —           —     

Jr. lien 1-4 family open end

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential real estate

     716         692         424         711         —     

Consumer

              

Secured

     —           —           —           —           —     

Unsecured

     —           —           —           —           —     

Credit card

     —           —           —           —           —     

Overdrafts

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with a related allowance recorded

     8,470         7,880         2,032         8,180         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 55,983       $ 37,556       $ 2,032       $ 40,809       $ 496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

At December 31, 2011, the Company’s unpaid principal balance and recorded investment of impaired loans was $74.7 million and $50.1 million, respectively. Of these impaired loans, 26 were within the commercial real estate segment, with an unpaid principal balance of $58.2 million and a recorded investment of $41.1 million. Of the 26 impaired commercial real estate loans, the FDIC loss sharing agreements covered five of those loans with a recorded investment of $8.2 million and an unpaid principal balance of $23.3 million and 21 commercial real estate loans, with a recorded investment of $32.9 million and an unpaid principal balance of $34.9 million, were not covered by FDIC loss sharing agreements. The commercial loan segment had a total of 20 loans; ten of these were not covered by the FDIC loss sharing agreements and carried an unpaid principal balance and recorded investment of $0.8 million and $0.8 million, respectively. The 10 commercial loans that were covered by the FDIC loss sharing agreements had an unpaid principal balance and recorded investment of $11.9 million and $4.6 million, respectively. The residential real estate loan segment held 43 impaired loans, with an unpaid principal balance of $3.9 million and a recorded investment of $3.6 million. Of these 43 loans, three were covered by the FDIC loss sharing agreement with an unpaid principal balance and recorded investment of $1.7 million and $1.7 million, respectively, leaving 40 loans not covered by the FDIC loss sharing agreement with an unpaid principal balance of $2.2 million and a recorded investment of $1.9 million. These loans had a collective related allowance for loan losses allocated to them of $0.8 million at December 31, 2011. The table below shows additional information regarding impaired loans at December 31, 2011 (in thousands):

 

     Impaired Loans December 31, 2011  
     Unpaid
principal
balance
     Recorded
investment
     Allowance
for loan
losses
allocated
     Average
recorded
investment
     Interest
income
recognized
 

With no related allowance recorded:

              

Commercial

              

Wholesale

   $ 3,205       $ 1,069       $ —         $ 2,137       $ —     

Manufacturing

     48         46         —           46         —     

Transportation/warehousing

     —           —           —           —           —     

Finance and insurance

     1,412         679         —           1,044         —     

All other commercial and industrial

     8,008         3,580         —           5,793         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     12,673         5,374         —           9,020         —     

Commercial real estate

              

1-4 family construction

     —           —           —           —           —     

1-4 family acquisition/development

     27,205         12,007         —           19,484         24   

Commercial construction

     —           —           —           —           —     

Commercial acquisition/development

     5,717         5,470         —           5,579         3   

Multifamily

     203         195         —           199         —     

Owner-occupied

     2,856         2,678         —           2,746         6   

Non-owner occupied

     9,963         9,335         —           9,397         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     45,944         29,685         —           37,405         50   

Agriculture

     30         29         —           30         —     

Residential real estate

              

Sr. lien 1-4 family closed end

     2,756         2,712         —           2,730         5   

Jr. lien 1-4 family closed end

     5         5         —           5         —     

Sr. lien 1-4 family open end

     89         50         —           70         —     

Jr. lien 1-4 family open end

     468         273         —           371         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential real estate

     3,318         3,040         —           3,176         5   

Consumer

              

Secured

     —           —           —           —           —     

Unsecured

     1         1         —           1         —     

Credit card

     —           —           —           —           —     

Overdrafts

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     1         1         —           1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance recorded

     61,966         38,129         —           49,632         55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents
     Unpaid
principal
balance
     Recorded
investment
     Allowance
for loan
losses
allocated
     Average
recorded
investment
     Interest
income
recognized
 

With a related allowance recorded:

              

Commercial

              

Wholesale

   $ —         $ —         $ —         $ —         $ —     

Manufacturing

     —           —           —           —           —     

Transportation/warehousing

     —           —           —           —           —     

Finance and insurance

     —           —           —           —           —     

All other commercial and industrial

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           —           —           —           —     

Commercial real estate

              

1-4 family construction

     —           —           —           —           —     

1-4 family acquisition/development

     —           —           —           —           —     

Commercial construction

     —           —           —           —           —     

Commercial acquisition/development

     —           —           —           —           —     

Multifamily

     —           —           —           —           —     

Owner-occupied

     —           —           —           —           —     

Non-owner occupied

     12,304         11,508         608         11,508         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     12,304         11,508         608         11,508         —     

Agriculture

     —           —           —           —           —     

Residential real estate

              

Sr. lien 1-4 family closed end

     —           —           —           —           —     

Jr. lien 1-4 family closed end

     —           —           —           —           —     

Sr. lien 1-4 family open end

     460         460         174         460         —     

Jr. lien 1-4 family open end

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential real estate

     460         460         174         460         —     

Consumer

              

Secured

     —           —           —           —           —     

Unsecured

     —           —           —           —           —     

Credit card

     —           —           —           —           —     

Overdrafts

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with a related allowance recorded

     12,764         11,968         782         11,968         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 74,730       $ 50,097       $ 782       $ 61,600       $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructurings

It is the Company’s policy to review each prospective credit in order to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include restructuring a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been reaffirmed by the borrower, regardless of past due status, the loan is considered to be a troubled debt restructuring (“TDR”). At September 30, 2012 and December 31, 2011, the Company had $15.6 million and $12.3 million, respectively, of accruing TDR’s that had been restructured from the original terms in order to facilitate repayment. Of these, $3.6 million and $1.4 million, respectively, were covered by FDIC loss sharing agreements. Accruing TDR’s in the commercial loan segment were primarily comprised of nineteen loans with a recorded investment of $6.9 million that were not covered by loss sharing agreements at September 30, 2012. Commercial real estate TDR’s totaled $5.2 million, of which seven were non-covered with a recorded investment of $4.2 million and two were covered with a recorded investment of $1.0 million. The remaining accruing TDR’s were primarily made up of 23 loans from the single family residential segment, with a recorded investment of $2.9 million. Of these loans, 22 were non-covered and had a recorded investment of $1.8 million and one was covered, with a recorded investment of $1.1 million.

 

29


Table of Contents

Non-accruing TDR’s at September 30, 2012 and December 31, 2011 totaled $9.3 million and $16.3 million, respectively. Of these, $1.5 million were covered as of September 30, 2012 and none were covered as of December 31, 2011. At September 30, 2012 the non-accruing commercial real estate segment was primarily comprised of four non-covered loans with a recorded investment of $6.8 million. The commercial loan segment held non-accruing TDR’s, which included three covered loans with a recorded investment of $0.9 million and three non-covered loans with a recorded investment of $0.6 million. The remaining non-accruing TDR balance was from the single family residential segment, which included four non-covered loans and one covered loan, with a recorded investment of $0.5 million and $0.4 million, respectively.

During the three and nine months ended September 30, 2012, the Company restructured 30 loans with a recorded investment of $7.3 million and 65 loans with a recorded investment of $14.7 million, respectively, to facilitate repayment. Loan modifications to loans accounted for under ASC Topic 310-30 are not considered troubled debt restructurings. The table below provides additional information related to accruing TDR’s at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012  
     Recorded
investment
     Average
year-to-
date
recorded
investment
     Unpaid
principal
balance
     Unfunded
commitments
to fund
TDR’s
 

Commercial

   $ 6,946       $ 8,981       $ 7,277       $ 5,476   

Commercial real estate

     5,188         5,305         5,356         —     

Agriculture

     —           —           —           —     

Residential real estate

     3,281         3,266         3,286         35   

Consumer

     165         166         165         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,580       $ 17,718       $ 16,084       $ 5,511   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Recorded
investment
     Average
year-to-
date
recorded
investment
     Unpaid
principal
balance
     Unfunded
commitments
to fund
TDR’s
 

Commercial

   $ —         $ —         $ —         $ 60   

Commercial real estate

     11,184         11,184         11,678         24   

Agriculture

     —           —           —           —     

Residential real estate

     1,141         1,141         1,141         60   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,325       $ 12,325       $ 12,819       $ 144   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

The following table summarizes the Company’s carrying value of non-accrual TDR’s as of September 30, 2012 and December 31, 2011 (in thousands):

 

     Non - Accruing TDR’s  
     September 30, 2012      December 31, 2011  
     Covered      Non-covered      Covered      Non-covered  

Commercial

   $ 933       $ 643       $ —         $ 119   

Commercial real estate

     112         6,765         —           16,108   

Agriculture

     —           —           —           —     

Residential real estate

     421         437         —           61   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,466       $ 7,845       $ —         $ 16,288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrual of interest is resumed on loans that were on non-accrual at the time of restructuring, only after the loan has performed sufficiently. The Company had two TDR’s that had been modified within the past 12 months that defaulted on its restructured terms during the nine months ended September 30, 2012. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest. The defaulted TDRs were comprised of a non-owner occupied commercial real estate loan with a balance of $0.6 million and a C&I loan with a balance of $0.9 at September 30, 2012 and the maximum amount defaulted during the period was $1.5 million.

Loans accounted for under ASC Topic 310-30

Loan pools accounted for under ASC Topic 310-30 are periodically remeasured to determine expected future cash flows. In determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller homogeneous loans are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans are fixed or variable rate loans. Prepayments may be assumed on large loans if circumstances specific to that loan warrant a prepayment assumption. No prepayments were presumed for small homogeneous commercial loans; however, prepayment assumptions are made that consider similar prepayment factors listed above for smaller homogeneous loans. The re-measurement of loans accounted for under ASC Topic 310-30 resulted in the following changes in the carrying amount of accretable yield during the nine months ended September 30, 2012 (in thousands):

 

Accretable yield balance at December 31, 2011

   $ 186,494   

Reclassification from non-accretable difference

     46,974   

Reclassification to non-accretable difference

     (8,348

Accretion

     (76,252
  

 

 

 

Accretable yield balance at September 30, 2012

   $ 148,868   
  

 

 

 

Below is the composition of the net book value for loans accounted for under ASC Topic 310-30 at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30,
2012
    December 31,
2011
 

Contractual cash flows

   $ 1,617,451      $ 2,030,374   

Non-accretable difference

     (497,547     (536,171

Accretable yield

     (148,868     (186,494
  

 

 

   

 

 

 

Loans accounted for under ASC Topic 310-30

   $ 971,036      $ 1,307,709   
  

 

 

   

 

 

 

 

31


Table of Contents

Note 5 Allowance for Loan Losses

The tables below detail the Company’s allowance for loan losses (“ALL”) and recorded investment in loans as of and for the three and nine months ended September 30, 2012 (in thousands):

 

    Three months ended September 30, 2012  
    Commercial     Commercial
real estate
    Agriculture     Residential
real estate
    Consumer     Total  

Beginning balance

  $ 3,318      $ 7,797      $ 660      $ 4,872      $ 647      $ 17,294   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non 310-30 beginning balance

    1,725        3,578        284        3,813        635        10,035   

Charge-offs

    (297     (35     —          (351     (566     (1,249

Recoveries

    279        (195     4        (47     (41     —     

Provision

    842        (15     (22     274        521        1,600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non 310-30 ending balance

    2,549        3,333        266        3,689        549        10,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

310-30 beginning balance

    1,593        4,219        376        1,059        12        7,259   

Charge-offs

    (1     (3,500     (144     (169     —          (3,814

Recoveries

    —          2        —          —          —          2   

Provision

    (1,592     6,012        —          (747     (10     3,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

310-30 ending balance

    —          6,733        232        143        2        7,110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $     2,549      $   10,066      $        498      $     3,832      $       551      $      17,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Nine months ended September 30, 2012  
    Commercial     Commercial
real estate
    Agriculture     Residential
real estate
    Consumer     Total  

Beginning balance

  $ 2,959      $ 3,389      $ 282      $ 4,121      $ 776      $ 11,527   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non 310-30 beginning balance

    1,597        3,389        154        3,423        776        9,339   

Charge-offs

    (3,056     (2,448     (8     (815     (1,161     (7,488

Recoveries

    279        24        4        49        252        608   

Provision

    3,729        2,368        116        1,032        682        7,927   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non 310-30 ending balance

    2,549        3,333        266        3,689        549        10,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

310-30 beginning balance

    1,362        —          128        698        —          2,188   

Charge-offs

    (216     (11,643     (144     (729     (19     (12,751

Recoveries

    —          275        —          —          —          275   

Provision

    (1,146     18,101        248        174        21        17,398   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

310-30 ending balance

    —          6,733        232        143        2        7,110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,549      $ 10,066      $ 498      $ 3,832      $ 551      $ 17,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance balance attributable to:

           

Non 310-30 loans individually evaluated for impairment

  $ 1,091      $ 517      $ —        $ 424      $ —        $ 2,032   

Non 310-30 loans collectively evaluated for impairment

    1,458        2,816        266        3,265        549        8,354   

310-30 loans acquired w/ deteriorated credit

    —          6,733        232        143        2        7,110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 2,549      $ 10,066      $ 498      $ 3,832      $ 551      $ 17,496   

Loans:

           

Non 310-30 individually evaluated for impairment

  $ 10,958      $ 16,676      $ —        $ 3,386      $ —        $ 31,020   

Non 310-30 collectively evaluated for impairment

    157,605        231,177        105,312        411,307        30,342        935,743   

310-30 loans acquired w/ deteriorated credit

    97,664        664,771        55,944        126,294        26,363        971,036   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 266,227      $ 912,624      $ 161,256      $ 540,987      $ 56,705      $ 1,937,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ended September 30, 2012, the Company re-estimated the expected cash flows of the loan pools accounted for under ASC Topic 310-30 utilizing the same cash flow methodology used at the time of acquisition. The re-measurement resulted in impairment of $17.4 million, which was primarily driven by impairments of $7.8 million in the land and development pools, $4.9 million of which was in the acquired Community Banks of Colorado portfolio and $2.9 million of which was in the acquired Hillcrest Bank portfolio, and impairments of $7.4 million in the commercial real estate portfolio, which included impairments of $6.7 million in the acquired Hillcrest Bank portfolio, a $0.4 million impairment in the acquired Bank of Choice portfolio, and $0.3

 

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million impairment in the acquired Community Banks of Colorado portfolio. The commercial construction pool experienced an impairment of $2.6 million resulting from a $2.1 million impairment in the acquired Bank of Choice portfolio and a $0.5 million impairment in the acquired Community Banks of Colorado portfolio. Other notable impairments included a $0.2 million impairment in the agriculture pools and a $0.2 million impairment in the residential real estate pools. The commercial and industrial pool experienced a reversal of impairment of $1.1 million which was primarily the result of gross cash flow improvements.

In evaluating the loan portfolio for an appropriate ALL level, non-impaired loans were grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of applying loss ratios and determining applicable subjective adjustments to the ALL. The application of subjective adjustments was based upon qualitative risk factors, including economic trends and conditions, industry conditions, asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results. During the nine months ended September 30, 2012, the Company recorded $7.9 million of provision for loan losses for loans not accounted for under ASC Topic 310-30 primarily to provide for changes in credit risk inherent in the portfolio and in new loan originations.

The Company charged off $6.9 million, net of recoveries, of non-ASC Topic 310-30 loans during the nine months ended September 30, 2012, $2.4 million of which was the result of a large commercial and industrial loan that is not considered indicative of future charge-offs in the commercial and industrial loan category. The Company also charged off $2.4 million of commercial real estate loans, primarily the result of three commercial real estate loans outside of our core market areas totaling $2.1 million. Consumer charge-offs, net of recoveries, totaled $0.9 million which is primarily the result of overdrafts on consumer accounts.

Note 6 FDIC Indemnification Asset

Under the terms of the purchase and assumption agreement with the FDIC with regard to the Hillcrest Bank and Community Banks of Colorado acquisitions, the Company is reimbursed for a portion of the losses incurred on covered assets. As covered assets are resolved, whether it be through repayment, short sale of the underlying collateral, the foreclosure on and sale of collateral, or the sale or charge-off of loans or OREO, any differences between the carrying value of the covered assets versus the payments received during the resolution process, that are reimbursable by the FDIC, are recognized in the consolidated statements of operations as FDIC loss sharing income. Any gains or losses realized from the resolution of covered assets reduce or increase, respectively, the amount recoverable from the FDIC.

Below is a summary of the activity related to the FDIC indemnification asset during the nine months ended September 30, 2012 and 2011 (in thousands):

 

     For the nine months ended  
     September 30,
2012
    September 30,
2011
 

Balance at beginning of period

   $ 223,402      $ 161,395   

Accretion

     (9,165     (2,237

Reduction for claims filed

     (101,042     (85,777
  

 

 

   

 

 

 

Balance at end of period

   $ 113,195      $ 73,381   
  

 

 

   

 

 

 

During the nine months ended September 30, 2012, the Company recognized $9.2 million of negative accretion on the FDIC indemnification asset, and reduced the carrying value of the FDIC indemnification asset by $101.0 million as a result of claims filed with the FDIC as discussed below. The negative accretion resulted from an overall increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. The increase in overall expected cash flows from these underlying assets is

 

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Table of Contents

reflected in increased accretion rates on covered loans and is being recognized over the expected remaining lives of the underlying covered loans as an adjustment to yield. During the nine months ended September 30, 2012, the Company submitted $109.1 million of loss share claims to the FDIC for the reimbursable portion of losses related to the Hillcrest Bank and Community Banks of Colorado covered assets incurred during the fourth quarter of 2011 through the second quarter of 2012. Included in the $109.1 million were $8.1 million of claims related to additional losses incurred during the period that were not previously considered in the carrying amount of the indemnification asset. The loss claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements. During the nine months ended September 30, 2012, the FDIC paid $75.9 million, $33.1 million of which was related to losses incurred during the fourth quarter of 2011 and $42.8 million of which was related to losses incurred during the six months ended June 30, 2012 and submitted to the FDIC during the three months ended September 30, 2012. The remaining claimed amounts are anticipated to be received during the fourth quarter of 2012 and are included in other assets.

Note 7 Premises and Equipment

Premises and equipment consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30,
2012
    December 31,
2011
 

Land

   $ 29,699      $ 25,186   

Buildings and improvements

     70,560        48,933   

Equipment

     25,689        15,960   
  

 

 

   

 

 

 

Total

     125,948        90,079   
  

 

 

   

 

 

 

Less: accumulated depreciation and amortization

     (7,563     (2,764
  

 

 

   

 

 

 

Premises and equipment, net

   $ 118,385      $ 87,315   
  

 

 

   

 

 

 

Premises and equipment increased $31.1 million from December 31, 2011 to September 30, 2012, primarily because the Company purchased 26 banking center premises from the FDIC in connection with the Community Banks of Colorado acquisition. The Company incurred $1.9 million and $0.9 million of depreciation expense during the three months ended September 30, 2012 and 2011 and $4.9 million and $1.6 million of depreciation expense during the nine months ended September 30, 2012 and 2011, respectively, which is included in occupancy and equipment expense.

 

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Table of Contents

Note 8 Other Real Estate Owned

A summary of the activity in the OREO balances during the nine months ended September 30, 2012 and 2011 is as follows (in thousands):

 

     For the nine months ended
September 30,
 
     2012     2011  

Balance at December 31

   $ 120,636      $ 54,078   

Purchases through acquisition, at fair value

     —          34,335   

Transfers from loan portfolio, at fair value

     67,741        39,736   

Impairments

     (8,638     (2,848

Sales, net of gains and losses

     (50,394     (30,397
  

 

 

   

 

 

 

Balance at September 30

   $ 129,345      $ 94,904   
  

 

 

   

 

 

 

The OREO balance of $129.3 million at September 30, 2012 includes the interests of several outside participating banks totaling $17.1 million, for which an offsetting liability is recorded in other liabilities and excludes $12.2 million of the Company’s minority interests in OREO which are held by outside banks where the Company was not the lead bank and does not have a controlling interest, for which the Company maintains a receivable in other assets. Of the $129.3 million of OREO at September 30, 2012, $64.5 million, or 49.9%, was covered by loss sharing agreements with the FDIC. Any losses on these assets are substantially offset by a corresponding change in the FDIC indemnification asset. During the nine months ended September 30, 2012, the Company sold $57.2 million of OREO and realized net gains on these sales of $6.8 million, and during the nine months ended September 30, 2011, the Company sold $31.4 million of OREO and realized net gains of $1.0 million.

Note 9 Deposits

As of September 30, 2012 and December 31, 2011, deposits totaled $4.3 billion and $5.1 billion, respectively. Time deposits decreased from $2.8 billion at December 31, 2011 to $1.9 billion at September 30, 2012. The following table summarizes the Company’s time deposits, based upon contractual maturity, at September 30, 2012 and December 31, 2011, by remaining maturity (in thousands):

 

     September 30, 2012     December 31, 2011  
     Balance      Weighted
Average
Rate
    Balance      Weighted
Average
Rate
 

Three months or less

   $ 522,725         0.89   $ 746,835         1.30

Over 3 months through 6 months

     355,530         0.79     554,740         1.15

Over 6 months through 12 months

     477,321         0.75     1,014,949         1.23

Over 12 months through 24 months

     399,187         0.96     309,848         1.58

Over 24 months through 36 months

     105,769         1.69     52,879         2.01

Over 36 months through 48 months

     50,630         2.10     54,678         2.65

Over 48 months through 60 months

     27,120         1.58     43,550         1.89

Thereafter

     6,936         2.28     7,117         2.77
  

 

 

      

 

 

    

Total time deposits

   $ 1,945,218         0.94   $ 2,784,596         1.33
  

 

 

      

 

 

    

In connection with the Company’s FDIC-assisted transactions, the FDIC provided Hillcrest Bank, Bank of Choice, and Community Banks of Colorado depositors with the right to redeem their time deposits at any time during the life of the time deposit, without penalty, unless the depositor accepts new terms. At September 30, 2012 and December 31, 2011, the Company had approximately $232.0 million and $1.1 billion, respectively, of time deposits that were subject to penalty-free withdrawals.

 

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The Company incurred interest expense on deposits as follows during the periods indicated (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  

Interest bearing demand deposits

   $ 271       $ 387       $ 1,007       $ 609   

Money market accounts

     1,005         1,048         3,076         3,476   

Savings accounts

     65         66         226         277   

Time deposits

     5,178         8,263         19,713         26,295   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,519       $ 9,764       $ 24,022       $ 30,657   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 10 Regulatory Capital

NBH Bank, N.A. is subject to the regulatory capital adequacy requirements of the Federal Reserve Board, the FDIC, and the OCC, 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 the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital requirements that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Typically, mature banks are required to maintain a Tier I risk-based capital ratio of 4.00%, a total risk-based capital ratio of 8.00% and a Tier 1 leverage ratio of 4.00% in order to meet minimum, adequately capitalized regulatory requirements. To be considered well-capitalized (under prompt corrective action provisions), banks must maintain minimum capital ratios of 6.00% for Tier I risk-based capital, 10.00% for total risk-based capital and 5.00% for the Tier 1 leverage ratio. However, in connection with the approval of the de novo charter for NBH Bank, N.A., the Company has agreed with its regulators to maintain capital levels of at least 10% Tier 1 leverage ratio, 11% Tier 1 risk-based capital ratio and 12% total risk-based capital ratio through the fourth quarter of 2013.

At September 30, 2012 and December 31, 2011, as applicable, NBH Bank, N.A. and the consolidated holding company exceeded all capital ratio requirements under prompt corrective action or other regulatory requirements, as is detailed in the table below (dollars in thousands):

 

     September 30, 2012  
     Actual      Required to be
considered well
capitalized (1)
     Required to be
considered
adequately
capitalized
 
     Ratio     Amount      Ratio     Amount      Ratio     Amount  

Tier 1 leverage ratio

              

Consolidated

     17.7   $ 980,654         N/A        N/A         4   $ 221,566   

NBH Bank, N.A. (2)

     15.9     865,172         10     542,508         4     217,003   

Tier 1 risk-based capital ratio (3)

              

Consolidated

     51.6   $ 980,654         6   $ 114,220         4   $ 76,147   

NBH Bank, N.A. (2)

     46.0     865,172         11     206,697         4     75,162   

Total risk-based capital ratio (3)

              

Consolidated

     52.4   $ 998,461         10   $ 190,367         8   $ 152,293   

NBH Bank, N.A. (2)

     47.0     882,979         12     225,487         8     150,325   

 

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Table of Contents
     December 31, 2011  
     Actual      Required to be
considered well
capitalized (1)
     Required to be
considered
adequately
capitalized
 
     Ratio     Amount      Ratio     Amount      Ratio     Amount  

Tier 1 leverage ratio

              

Consolidated

     15.1   $ 949,154         N/A        N/A         4   $ 251,514   

NBH Bank, N.A. (2)

     13.4     828,321         10   $ 616,919         4     246,768   

Tier 1 risk-based capital ratio (3)

              

Consolidated

     49.4   $ 949,154         6   $ 114,077         4   $ 76,051   

NBH Bank, N.A. (2)

     44.2     828,321         11     206,258         4     75,003   

Total risk-based capital ratio (3)

              

Consolidated

     50.5   $ 960,681         10   $ 190,129         8   $ 152,103   

NBH Bank, N.A. (2)

     44.8     839,848         12     225,009         8     150,006   

 

(1) These ratio requirements are reflective of the agreements the Company has made with its various regulators in connection with the approval of the de novo charter for NBH Bank, N.A., as described above.
(2) In November 2011, Hillcrest Bank, N.A. was merged into NBH Bank, N.A. The capital ratios shown are reflective of the merger.
(3) Due to the conditional guarantee represented by the loss sharing agreements, the FDIC indemnification asset and covered assets are risk-weighted at 20% for purposes of risk-based capital computations.

Note 11 FDIC Loss Sharing Income

In connection with the loss sharing agreements that the Company has with the FDIC in regard to the Hillcrest Bank and Community Banks of Colorado transactions, the Company recognizes the changes in the FDIC indemnification asset and the clawback liability, in addition to the actual reimbursement of costs of resolution of covered assets from the FDIC, in FDIC loss sharing income in the consolidated statements of operations. The table below provides additional details of the Company’s FDIC loss sharing income during the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2012     2011     2012     2011  

FDIC indemnification asset accretion

   $ (2,832   $ (5,976   $ (9,165   $ (2,237

Clawback liability amortization

     (355     (180     (1,066     (507

Clawback liability remeasurement

     (820     —          247        (1,152

Reimbursement to FDIC for gain on sale

     (1,842     (535     (1,408     (652

Reimbursement to FDIC for recoveries

     (2     (1,181     (3     (1,204

FDIC reimbursement of costs of resolution of covered assets

     4,522        1,646        11,508        5,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (1,329   $ (6,226   $ 113      $ 173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 12 Stock-Based Compensation and Employee Benefits

The Company provides stock-based compensation in accordance with the NBH Holdings Corp. 2009 Equity Incentive Plan (the “Plan”). The Plan provides the compensation committee of the board of directors of the Company the authority to grant, from time to time, awards of options, stock appreciation rights, restricted stock, restricted stock units, stock awards, or stock bonuses to eligible persons. The aggregate number of shares of stock which may be granted under the Plan was 5,750,000 and the maximum number of restricted shares and restricted share units that may be granted was 1,725,000 at September 30, 2012.

 

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Table of Contents

To date, the Company has issued stock options and restricted stock under the Plan. 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. The Company used information provided by third parties, including independent valuation specialists, as required by the Plan, to assist in the determination of estimates regarding fair values associated with the Company’s stock-based compensation issued prior to the Company’s initial public offering and listing on a national exchange, including contemporaneous valuations of grant date fair values. The Company is responsible for the assumptions used therein and the resulting values.

The Company issued stock options and restricted stock during the nine months ended September 30, 2012. The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing model. The time vesting component of the restricted stock was valued at the same price as the common shares since they are assumed to be held beyond the vesting period. The market vesting component of the restricted stock was valued using a Monte Carlo Simulation with 100,000 simulation paths to assess the expected percentage of vested shares. A Geometric Brownian Motion was used for simulating the equity prices for a period of 10 years and if the restricted stock were not vested during the 10-year period it was assumed they were forfeited.

Below are the weighted average assumptions used in the Black-Scholes option pricing model and the Monte Carlo Simulation to determine fair value of the Company’s stock options and the market-vesting portion of the Company’s restricted stock granted during the nine months ended September 30, 2012:

 

     Black-Scholes     Monte Carlo  

Risk-free interest rate

     1.06     1.10

Expected volatility

     38.00     38.00

Expected term (years)

     6        10   

Dividend yield

     0.00     0.00

At the time of issuance, the Company’s shares were not yet publicly traded and had limited private trading; therefore, expected volatility was estimated based on the median historical volatility, for a period commensurate with the expected term of the options, of 13 comparable companies with publicly traded shares. 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. The expected term was estimated to be the average of the contractual vesting term and time to expiration and the dividend yield was assumed to be zero.

The following table summarizes the material vesting terms of the stock options granted in 2012:

 

     Number of Options
Granted in 2012
 

Options are time-vested with 1/3 vesting on each of the first, second and third anniversary of the date of grant, and further subject to the Company’s shares becoming publicly listed

     240,000   

Total options granted in 2012

     240,000   

 

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Table of Contents

The following table summarizes option activity for the year ended December 31, 2011 and for the three months ended March 31, 2012, June 30, 2012 and September 30, 2012:

 

     Options     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term in
Years
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2010

     2,357,332      $ 20.00          $ —     

Granted during the three months ended March 31, 2011

     203,500        20.00         

Granted during the three months ended June 30, 2011

     63,500        20.00         

Granted during the three months ended September 30, 2011

     26,500        20.00         

Granted during the three months ended December 31, 2011

     993,000        20.00         

Forfeited

     (402,500     20.00         

Surrendered

     —          20.00         

Exercised

     —          20.00         
  

 

 

   

 

 

       

Outstanding at December 31, 2011

     3,241,332      $ 20.00         9.7       $ —     

Granted during the three months ended March 31, 2012

     215,000        20.00         

Granted during the three months ended June 30, 2012

     25,000        20.00         

Granted during the three months ended September 30, 2012

     —          20.00         

Forfeited

     (38,000     20.00         
  

 

 

   

 

 

       

Outstanding at September 30, 2012

     3,443,332      $ 20.00         7.1       $ —     

Options fully vested and exercisable at September 30, 2012

     1,070,416      $ 20.00         7.2      

Options expected to vest

     2,302,520      $ 20.00         7.0      

Options granted during the nine months ended September 30, 2012 had weighted average grant date fair values of $8.77.

Stock option expense is included in salaries and employee benefits in the accompanying consolidated statements of operations and totaled $3.9 million and $3.0 million, respectively, for the three months ended September 30, 2012 and 2011, and $5.9 million and $7.4 million for the nine months ended September 30, 2012 and 2011, respectively. The options to acquire 240,000 shares of common stock granted during the nine months ended September 30, 2012 and the options to acquire 993,000 shares of common stock granted during the fourth quarter of 2011 are subject to an additional vesting requirement of the Company’s shares being publicly listed on a national exchange. In accordance with ASC Topic 718, the Company deferred recognition of the compensation expense on the grants that have vesting requirements tied to the Company’s shares becoming listed on a national exchange subsequent to that vesting requirement being fulfilled, with an expense recognition catch-up for the portion of the expense that was deferred until that vesting criteria was met. As a result, no expense was recorded on these particular grants during the six months ended June 30, 2012 or during 2011. Upon listing on a national exchange in September 2012, the Company immediately recognized an expense catch-up for the portion of the expense that had been deferred until that vesting criterion was met. The deferred portion of expense related to stock option awards that have a public listing vesting requirement that was recognized during the three months ended September 30, 2012 was $2.8 million. At September 30, 2012, there was $3.7 million of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted average period of 0.8 years.

Restricted stock may also be issued under the Plan as described above. Compensation expense for the portion of the restricted stock that contains a market vesting condition is recognized over the derived service period based on the fair value of the awards on the grant date. Compensation expense for the portion of the restricted stock that contains performance and service vesting conditions is recognized over the requisite service period based on fair value of the awards on the grant date. The Company did not recognize any expense related to the restricted stock awards that have vesting requirements tied to the Company’s shares becoming listed on a national exchange, but has recognized this expense subsequent to that vesting requirement being fulfilled, as described above.

 

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The following table summarizes restricted stock activity for the nine months ended September 30, 2012:

 

     Restricted
Stock
    Weighted
Average
Grant
Date Fair
Value
 

Unvested at December 31, 2011

     1,108,334      $ 15.58   

Vested

     (33,542     20.00   

Granted

     100,000        19.94   

Forfeited

     (5,000     14.19   

Surrendered

     —          —     
  

 

 

   

 

 

 

Unvested at September 30, 2012

     1,169,792      $ 15.83   
  

 

 

   

 

 

 

As of September 30, 2012, there was $3.3 million of total unrecognized compensation cost related to non-vested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted average period of 0.8 years. Expense related to restricted stock totaled $2.7 million and $2.9 million during the three months ended September 30, 2012 and 2011, respectively, and $5.0 million and $7.1 million during the nine months ended September 30, 2012 and 2011, respectively, and is included in salaries and employee benefits in the Company’s unaudited consolidated statements of operations. The deferred portion of expense related to restricted stock awards that have a public listing vesting requirement that was recognized during the three months ended September 30, 2012 was $2.1 million.

Note 13 Warrants

At September 30, 2012 and December 31, 2011, the Company had 830,750 outstanding warrants to purchase Company stock. The warrants were granted to certain lead stockholders of the Company, all with an exercise price of $20.00 per share. The term of the warrants is for ten years from the date of grant and the expiration dates of the warrants range from October 20, 2019 to September 30, 2020. The fair value of the warrants was estimated to be $5.8 million and $6.9 million at September 30, 2012 and December 31, 2011, respectively. The fair value of the warrants was estimated using a Black-Scholes option pricing model utilizing the following assumptions at the indicated dates:

 

     September 30, 2012   December 31, 2011

Risk-free interest rate

   1.13%   1.56%

Expected volatility

   38.00%   34.93%

Expected term (years)

   7-8   8-9

Dividend yield

   1.03%   0.00%

The Company’s shares became publicly traded on September 20, 2012 and prior to that, had limited private trading; therefore, expected volatility was estimated based on the median historical volatility, for a period commensurate with the expected term of the warrants, of 18 comparable companies with publicly traded shares. The risk-free rate for the expected term of the warrants was based on the U.S. Treasury yield curve at the date of grant and based on the expected term. The expected term was estimated based on the contractual term of the warrants. The dividend yield was assumed to be 1.027%.

 

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The Company recorded a benefit of $1.2 million and $0.0 during the three months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012 and 2011, the Company recorded a benefit of $1.0 million and an expense of $0.8 million, respectively, in the unaudited consolidated statements of operations resulting from the change in fair value on the revaluation of the warrant liability.

Note 14 Common Stock

The Company had 46,232,050 shares of Class A common stock and 5,959,189 shares of Class B common stock outstanding as of September 30, 2012 and 44,612,344 shares of Class A common stock and 7,545,353 shares of Class B common stock outstanding as of December 31, 2011. Additionally, as of September 30, 2012 and December 31, 2011, respectively, the Company had 1,169,792 and 1,108,334 shares of restricted Class A common stock issued but not yet vested under the NBH Holdings Corp. 2009 Equity Incentive Plan. Class A common stock possesses all of the voting power for all matters requiring action by holders of common stock, with certain limited exceptions. The Company’s certificate of incorporation provides that, except with respect to voting rights and conversion rights, the Class A common stock and Class B non-voting common stock are treated equally and identically.

Note 15 Income (Loss) Per Share

The Company had 52,191,239 and 51,936,280 shares issued and outstanding (inclusive of Class A & B) as of September 30, 2012 and 2011, respectively, inclusive of 250,000 shares of founders’ shares that were issued in 2009 at par value. Stock options, certain restricted shares and warrants 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 the three and nine months ended September 30, 2012 and 2011. The Company also has Value Appreciation Rights (“VAR’s”) issued to the FDIC in conjunction with the acquisition of Bank of Choice and Community Banks of Colorado that are potentially dilutive should the FDIC choose to settle this right in the Company’s stock. The exercisability of the VAR’s is contingent upon the Company having a triggering event 30 trading days following the public listing of its stock or a sale event, and as a result, the VAR’s are not included in the calculations of diluted earnings per share.

The following table illustrates the computation of basic and diluted income per share for the three and nine months ended September 30, 2012 and 2011 (in thousands except earnings (loss) per share):

 

     For the three months ended
September 30,
     For the nine months ended
September 30,
 
     2012     2011      2012     2011  

Basic earnings (loss) per share:

         

Income (loss) available to common stockholders (numerator)

   ($ 7,891   $ 33,752       ($ 3,546   $ 39,510   

Weighted average common shares outstanding (denominator)

     52,191        51,936         52,186        51,936   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings (loss) per share

   $ (0.15   $ 0.65       $ (0.07   $ 0.76   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings (loss) per share:

         

Income (loss) available to common stockholders (numerator)

   ($ 7,891   $ 33,752       ($ 3,546   $ 39,510   

Weighted average common shares outstanding

     52,191        51,936         52,186        51,936   

Plus: effect of dilutive securities

         

Restricted stock (with no performance restrictions)

     —          307         —          303   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares applicable to diluted earnings per share (denominator)

     52,191        52,243         52,186        52,239   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ (0.15   $ 0.65       $ (0.07   $ 0.76   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company had 3,443,332 and 2,620,832 outstanding stock options to purchase common stock at $20.00 per share at September 30, 2012 and 2011, respectively, which were not included in the computations of diluted income per share because the options’ exercise price was greater than the average market price of the common shares during those periods. Additionally, the Company had 830,750 outstanding warrants to purchase the Company’s common

 

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stock as of September 30, 2012 and 2011. The warrants have an exercise price of $20.00, which was out-of-the-money for purposes of dilution calculations. The Company had 1,174,792 and 1,299,168 restricted shares outstanding as of September 30, 2012 and 2011, respectively, which have performance, market and time-vesting criteria, and as such, any dilution is derived only for the timeframe in which the vesting criteria had been met and where the inclusion of those restricted shares is dilutive.

Note 16 Commitments and Contingencies

Financial instrument commitments and contingencies

In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. The same credit policies are applied to these commitments as the loans on the consolidated statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of financial condition. At September 30, 2012 and December 31, 2011, the Company had loan commitments totaling $352.8 million and $341.1 million, respectively, and standby letters of credit that totaled $11.3 million and $20.0 million, respectively. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these commitments represents the Company’s potential credit loss exposure. Amounts funded at Hillcrest Bank and Community Banks of Colorado under non-cancelable commitments in effect at the date of acquisition are covered under the respective loss sharing agreements if certain conditions are met.

Total unfunded commitments at September 30, 2012 and December 31, 2011 were as follows (in thousands):

 

     September 30, 2012      December 31, 2011  
     Covered      Non
Covered
     Total      Covered      Non
Covered
     Total  

Commitments to fund loans

                 

Residential

   $ —         $ 75,679       $ 75,679       $ 1,517       $ 30,194       $ 31,711   

Commercial and commercial real estate

     1,966         45,120         47,086         2,437         38,937         41,374   

Construction and land development

     426         5,370         5,796         3,565         776         4,341   

Consumer

     —           1,503         1,503         —           39,690         39,690   

Credit card lines of credit

     —           17,135         17,135         —           20,738         20,738   

Unfunded commitments under lines of credit

     25,922         179,672         205,594         68,223         135,001         203,224   

Commercial and standby letters of credit

     4,114         7,228         11,342         3,051         16,986         20,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,428       $ 331,707       $ 364,135       $ 78,793       $ 282,322       $ 361,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commitments to fund loans — Commitments to fund loans are legally binding agreements to lend to clients in accordance with predetermined contractual provisions providing there have been no violations of any conditions specified in the contract. These commitments are generally at variable interest rates and are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments are not necessarily representative of future credit exposure or cash requirements, as commitments often expire without being drawn upon.

Credit card lines of credit — The Company extends lines of credit to clients through the use of credit cards issued by the banks. These lines of credit represent the maximum amounts allowed to be funded, many of which will not exhaust the established limits, and as such, these amounts are not necessarily representations of future cash requirements or credit exposure.

Unfunded commitments under lines of credit — In the ordinary course of business, the Company extends revolving credit to its clients through the use of bank-issued credit cards. These arrangements may require the payment of a fee.

 

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Commercial and standby letters of credit — As a provider of financial services, the Company routinely issues commercial and standby letters of credit, which may be financial standby letters of credit or performance standby letters of credit. These are various forms of “back-up” commitments to guarantee the performance of a client to a third party. While these arrangements represent a potential cash outlay for the Company, the majority of these letters of credit will expire without being drawn upon. Letters of credit are subject to the same underwriting and credit approval process as traditional loans, and as such, many of them have various forms of collateral securing the commitment, which may include real estate, personal property, receivables or marketable securities.

Contingencies

In the ordinary course of business, the Company and its banks 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 17 Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels are defined as follows:

 

   

Level 1 — Includes assets or liabilities in which the inputs to the valuation methodologies are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Includes assets or liabilities in which the inputs to the valuation methodologies are based on similar assets or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs other than quoted prices that are observable, such as interest rates, yield curves, volatilities, prepayment speeds, and other inputs obtained from observable market input.

 

   

Level 3 — Includes assets or liabilities in which the inputs to the valuation methodology are based on at least one significant assumption that is not observable in the marketplace. These valuations may rely on management’s judgment and may include internally-developed model-based valuation techniques.

Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the observability of these quotations.

 

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Table of Contents

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. The Company classified its U.S. Treasury securities as level 1 in the fair value hierarchy as of September 30, 2012 and December 31, 2011. When quoted market prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the securities are then classified as level 2. At September 30, 2012 and December 31, 2011, the Company’s level 2 securities included asset backed securities, mortgage-backed securities comprised of residential mortgage pass-through securities, other residential mortgage-backed securities, and at December 31, 2011 also included other mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. All other investment securities are classified as level 3. There were no transfers between levels 1 or 2 during the nine months ended September 30, 2012 or 2011.

Value appreciation rights issued to the FDIC — The Company measures the fair value of the VAR on a recurring basis and is based on the spread between the strike price of the VAR and the average multiple of price to tangible book value indicated by national and regional bank indices, multiplied by the maximum number of applicable units.

Warrant liability — The Company measures the fair value of the warrant liability on a recurring basis using a Black-Scholes option pricing model. The Company’s shares became publicly traded on September 20, 2012 and prior to that, had limited private trading; therefore, expected volatility was estimated based on the median historical volatility, for a period commensurate with the expected term of the warrants, of 18 comparable companies with publicly traded shares, and is deemed a significant unobservable input to the valuation model.

Clawback liability — The Company measures the net present value of expected future cash payments to be made by the Company to the FDIC that must be made within 45 days of the conclusion of the loss sharing agreements on a recurring basis. The expected cash flows are calculated in accordance with the loss sharing agreements and are based primarily on the expected losses on the covered assets, which involve significant inputs that are not market observable.

 

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The tables below present the financial instruments measured at fair value on a recurring basis as of September 30, 2012 (unaudited) and December 31, 2011 on the consolidated statements of financial condition utilizing the hierarchy structure described above (in thousands):

 

     September 30, 2012  
     Level 1      Level 2      Level 3      Total  

Assets:

           

Investment Securities available-for-sale:

           

U.S. Treasury securities

   $ 300       $ —         $ —         $ 300   

Asset backed securities

     —           92,867         —           92,867   

Mortgage-backed securities (“MBS”):

           

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

     —           740,619         —           740,619   

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

     —           905,427         —           905,427   

Other securities

     —           —           419         419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $   300       $ 1,738,913       $ 419       $ 1,739,632   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Value appreciation rights issued to FDIC

   $ —         $ —         $ 285       $ 285   

Warrant liability

     —           —           5,829         5,829   

Clawback liability

     —           —           30,813         30,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ 36,927       $ 36,927   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Level 1      Level 2      Level 3      Total  

Assets:

           

Investment Securities available-for-sale:

           

U.S. Treasury securities

   $ 3,300       $ —         $ —         $ 3,300   

U.S. Government sponsored agency obligations

     3,010         —           —           3,010   

Mortgage-backed securities (“MBS”):

           

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

     —           1,191,537         —           1,191,537   

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

     —           643,625         —           643,625   

Other MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

     —           20,808         —           20,808   

Other securities

     —           —           419         419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 6,310       $ 1,855,970       $ 419       $ 1,862,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Value appreciation rights issued to FDIC

   $ —         $ —         $ 1,767       $ 1,767   

Warrant liability

     —           —           6,845         6,845   

Clawback liability

     —           —           29,994         29,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ 38,606       $ 38,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below details the changes in Level 3 financial instruments during the nine months ended September 30, 2012 (in thousands):

 

     Value
appreciation
rights issued
to FDIC
    Warrant
liability
    Clawback
liability
 

Balance at December 31, 2011

   $ 1,767      $ 6,845      $ 29,994   

Change in value

     (1,482     (1,016     —     

Accretion

     —          —          1,066   

Clawback revaluation

     —          —          (247
  

 

 

   

 

 

   

 

 

 

Net change in Level 3

     (1,482     (1,016     819   
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 285      $ 5,829      $ 30,813   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Fair Value of Instruments Measured on a Non-recurring Basis

The Company records collateral dependent loans that are considered to be impaired at their estimated fair value. A loan is considered impaired when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. Collateral dependent impaired loans are measured based on the fair value of the collateral. The Company relies on third-party appraisals and internal assessments in determining the estimated fair values of these loans. The inputs used to determine the fair values of loans are considered level 3 inputs in the fair value hierarchy. During the nine months ended September 30, 2012, the Company measured 14 loans not accounted for under ASC Topic 310-30 at fair value on a non-recurring basis. These loans carried specific reserves totaling $2.0 million. During the nine months ended September 30, 2012 the Company added specific reserves of $1.1 million for 4 loans within the commercial segment with carrying balances of $2.1 million and $0.3 million for 3 loans within the residential real estate segment with carrying balances of $0.7 million. In addition, specific reserves totaling $91 thousand were eliminated in the commercial real estate segment primarily due to two loans charged off totaling $0.6 million offset by a specific reserve totaling $0.5 million added for one loan.

OREO is recorded at the lower of the loan balance or the fair value of the collateral less estimated selling costs. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized $8.6 million of OREO impairments during the nine months ended September 30, 2012, of which $7.5 million, or 86.3%, were on OREO that was covered by loss sharing agreements with the FDIC. The fair values of OREO are derived from third party price opinions or appraisals that generally use an income approach or a market value approach. If reasonable comparable appraisals are not available, then the Company may use internally developed models to determine fair values. The inputs used to determine the fair values of OREO are considered level 3 inputs in the fair value hierarchy

The table below provides information regarding the assets recorded at fair value on a non-recurring basis during the nine months ended September 30, 2012 (in thousands):

 

     Nine months ended September 30, 2012  
     Level 1      Level 2      Level 3      Total      Losses
From Fair
Value
Changes
 

Other real estate owned

   $ —         $ —         $ 129,345       $ 129,345       $ (8,638

Impaired loans

   $ —         $ —         $ 37,556       $ 37,556       $ (14,169

The Company did not record any liabilities for which the fair value was made on a non-recurring basis during the nine months ended September 30, 2012.

 

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The following table provides information about the valuation techniques and unobservable inputs used in the valuation of financial instruments falling within level 3 of the fair value hierarchy as of September 30, 2012 (in thousands):

 

     Fair Value at
September 30,
2012
    

Valuation Technique

  

Unobservable Input

   Quantitative
measures

Other securities

   $ 419       Cash investment in private equity fund    Cash investment   

Impaired loans

     37,556       Appraised value    Appraised values   
         Discount rate    0-25%

Clawback liability

     30,813       Contractually defined    Intrinsic loss estimates    $323.3 million -
$405 million
      Discounted Cash Flows    Expected credit losses   
         Asset purchase premium    $98 million -
$182.7 million
         Discount rate    4%
         Discount period   

Value appreciation rights issued to FDIC

     285       Contractual    Tangible book value per share   

Warrant liability

     5,829       Black-Scholes    Volatility    37% - 41%

Note 18 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.

 

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In connection with the Hillcrest Bank, Bank Midwest, Bank of Choice and Community Banks of Colorado acquisitions, the Company recorded all of the acquired assets and assumed liabilities at fair value at the respective dates of acquisition. The fair value of financial instruments at September 30, 2012 and December 31, 2011, including methods and assumptions utilized for determining fair value of financial instruments, are set forth below (in thousands):

 

          September 30, 2012      December 31, 2011  
     Level in Fair
Value
Measurement
Hierarchy
   Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

ASSETS:

              

Cash and cash equivalents

   Level 1    $ 664,699       $ 664,699       $ 1,628,137       $ 1,628,137   

U.S. Treasury securities available-for-sale

   Level 1      300         300         3,300         3,300   

U.S. Government sponsored agency obligations available-for-sale

   Level 1      —           —           3,010         3,010   

Asset backed securities available-for-sale

   Level 2      92,867         92,867         —           —     

Mortgage-backed securities - residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale

   Level 2      740,619         740,619         1,191,537         1,191,537   

Mortgage-backed securities - other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale

   Level 2      905,427         905,427         643,625         643,625   

Mortgage-backed securities - other mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale

   Level 2      —           —           20,808         20,808   

Other securities

   Level 3      419         419         419         419   

Mortgage-backed securities - residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity

   Level 2      643,661         653,760         6,801         6,829   

Capital stock of FHLB

   Level 2      8,026         8,026         4,097         4,097   

Capital stock of FRB

   Level 2      25,020         25,020         25,020         25,020   

Loans receivable

   Level 3      1,920,303         1,933,431         2,262,525         2,272,886   

Accrued interest receivable

   Level 2      14,216         14,216         16,022         16,022   

LIABILITIES:

              

Deposit transaction accounts

   Level 2      2,336,506         2,336,506         2,278,457         2,278,457   

Time deposits

   Level 2      1,945,218         1,937,469         2,784,596         2,790,314   

Securities sold under agreements to repurchase

   Level 2      46,192         46,192         47,597         47,597   

Due to FDIC

   Level 3      32,502         32,502         67,972         67,972   

Warrant liability

   Level 3      5,829         5,829         6,845         6,845   

Accrued interest payable

   Level 2      4,699         4,699         11,017         11,017   

Cash and cash equivalents

Cash and cash equivalents have a short-term nature and the estimated fair value is equal to the carrying value.

Investment securities

The estimated fair value of investment securities is based on quoted market prices or bid quotations received from securities dealers. Other investment securities, including securities that are held for regulatory purposes are carried at cost, less any other than temporary impairment.

Loans and covered loans

The estimated fair value of the loan portfolio is estimated using a discounted cash flow analysis using a discount rate based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The allowance for loan losses is considered a reasonable estimate of any required adjustment to fair value to reflect the impact of credit risk.

 

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Accrued interest receivable

Accrued interest receivable has a short-term nature and the estimated fair value is equal to the carrying value.

Deposits

The estimated fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits, taking into account the option for early withdrawal. The discount rate is estimated using the rates offered by the Company, at the respective measurement date, for deposits of similar remaining maturities.

Securities sold under agreements to repurchase

The vast majority of the Company’s repurchase agreements are overnight transactions that mature the day after the transaction, and as a result of this short-term nature, the estimated fair value is equal to the carrying value.

Due to FDIC

The amount due to FDIC is specified in the purchase agreements and, as it relates to the clawback liability, is discounted to reflect the uncertainty in the timing and payment of the amount due by the Company. The amounts due to the FDIC in connection with the value appreciation rights is fully described in note 4 of the Company’s December 31, 2011 audited consolidated financial statements.

Warrant liability

The warrant liability is estimated using a Black-Scholes model, the assumptions of which are detailed in note 17.

Accrued interest payable

Accrued interest payable has a short-term nature and the estimated fair value is equal to the carrying value.

 

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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes for the three and nine months ended September 30, 2012 and 2011, with our audited consolidated financial statements and related notes as of and for the years ended December 31, 2011 and 2010, and for the period from June 16, 2009 (date of inception) through December 31, 2009, as well as the statements of assets acquired and liabilities assumed for each of our acquisitions and with the other financial and statistical data previously filed in our prospectus included in Form S-1 filed with the Securities and Exchange Commission on September 19, 2012 (file number 333-177971). 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 sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in the registration statement on Form S-1, referenced above, and should be read herewith.

Readers are cautioned that meaningful comparability of current period financial information to prior periods is limited. Prior to the completion of the Hillcrest Bank acquisition on October 22, 2010, we had no banking operations and our activities were limited to corporate organization matters and due diligence. Following our Hillcrest Bank acquisition, we completed three additional acquisitions: Bank Midwest on December 10, 2010, Bank of Choice on July 22, 2011 and Community Banks of Colorado on October 21, 2011. As a result, our operating results are limited to the periods since these acquisitions, and the comparability of periods is compromised due to the timing of these acquisitions. Additionally, the comparability of data related to our acquisitions prior to the respective dates of acquisition is limited because, in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, the assets acquired and liabilities assumed were recorded at fair value at their respective dates of acquisition and do not have a significant resemblance to the assets and liabilities of the predecessor banking franchises. The comparability of pre-acquisition data is compromised not only by the fair value accounting applied, but also by the FDIC loss sharing agreements in place that cover a portion of losses incurred on certain assets acquired in the Hillcrest Bank and the Community Banks of Colorado acquisitions. In the Bank Midwest acquisition, only specific, performing loans were chosen for acquisition. Additionally, we acquired the assets of Bank of Choice at a substantial discount from the FDIC. We received a considerable amount of cash during the settlement of these acquisitions, we paid off certain borrowings, and we contributed significant capital to each banking franchise we acquired. All of these actions materially changed the balance sheet composition, liquidity, and capital structure of the acquired banking franchises.

In May 2012, we changed the name of Bank Midwest, N.A. to NBH Bank, N.A. (“NBH Bank” or the “Bank”) and all references to NBH Bank, N.A. should be considered synonymous with references to Bank Midwest, N.A. prior to the name change.

 

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Overview

National Bank Holdings Corporation is a bank holding company that was incorporated in the State of Delaware in June 2009. In October 2009, we raised net proceeds of approximately $974 million through a private offering of our common stock. We completed the initial public offering of our Class A common stock in September 2012. We are executing a strategy to create long-term stockholder value through the acquisition and operation of community banking franchises and other complementary businesses in our targeted markets. We believe these markets exhibit attractive demographic attributes, are home to a substantial number of financial institutions, including troubled financial institutions, and present favorable competitive dynamics, thereby offering long-term opportunities for growth. Our emphasis is on creating meaningful market share with strong revenues complemented by operational efficiencies that we believe will produce attractive risk-adjusted returns.

We believe we have a disciplined approach to acquisitions, both in terms of the selection of targets and the structuring of transactions, which has been exhibited by our four acquisitions to date. As of September 30, 2012, we had approximately $5.5 billion in assets, $4.3 billion in deposits and $1.1 billion in equity. We currently operate a network of 101 full-service banking centers, with the majority of those banking centers located in the greater Kansas City region and Colorado. We believe that our established presence positions us well for growth opportunities in our current and complementary markets.

Our strategic plan is to become a leading regional bank holding company through selective acquisitions of financial institutions, including troubled financial institutions that have stable core franchises and significant local market share, as well as other complementary businesses, while structuring the transactions to limit risk. We plan to achieve this through the acquisition of banking franchises from the FDIC and through conservatively structured unassisted transactions. We seek acquisitions that offer opportunities for clear financial benefits through add-on transactions, long-term organic growth opportunities and expense reductions. Additionally, our acquisition strategy is to identify markets that are relatively unconsolidated, establish a meaningful presence within those markets, and take advantage of operational efficiencies and enhanced market position. Our focus is on building strong banking relationships with small- and mid-sized businesses and consumers, while maintaining a low risk profile designed to generate reliable income streams and attractive risk-adjusted returns. Through our acquisitions, we have established a solid core banking franchise with operations in the greater Kansas City region and in Colorado, with a sizable presence for deposit gathering and client relationship building necessary for growth.

Operating Highlights and Key Challenges

Prior to completion of the Hillcrest Bank acquisition on October 22, 2010, we had no banking operations and our activities were limited to corporate organization matters and acquisition due diligence. Our first full year with banking operations was 2011 and includes the results of operations of Hillcrest Bank and NBH Bank for the entire year, Bank of Choice from July 22, 2011 and Community Banks of Colorado from October 21, 2011. The nine months ended September 30, 2012 marked our first three full quarters with the operations of all four of our acquisitions. These operations resulted in the following highlights as of and for the nine months ended September 30, 2012:

Attractive risk profile.

 

   

As of September 30, 2012, 80.8%, or $1.6 billion, of our total loans (by dollar amount) were acquired loans and all of those loans were recorded at their estimated fair value at the time of acquisition.

 

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As of September 30, 2012, 36.7%, or $711.0 million, of our total loans (by dollar amount) were covered by loss sharing agreements with the FDIC.

 

   

As of September 30, 2012, 49.9%, or $64.5 million, of our total other real estate owned (by dollar amount) was covered by loss sharing agreements with the FDIC.

Strong capital position.

 

   

As of September 30, 2012, our tier 1 leverage ratio was 17.7% and our tier 1 risk-based capital ratio was 51.6%.

 

   

As of September 30, 2012, we had approximately $375 million of capital available to deploy while maintaining a 10% tier 1 leverage ratio, and we had approximately $475 million of available capital to deploy at an 8% tier 1 leverage ratio.

 

   

Tangible book value per share increased from $17.60 at December 31, 2010 to $19.10 at December 31, 2011 and to $19.30 at September 30, 2012.

 

   

The after-tax accretable yield on ASC 310-30 loans plus the after-tax yield on the FDIC Indemnification asset, net, in excess of 4.5%, an approximate yield on new loan originations, and discounted at 5%, adds $0.56 per share to our tangible book value per share as of September 30, 2012.

Foundation for loan growth.

 

   

As of September 30, 2012, we have over $1.0 billion of loans outstanding that are associated with a “strategic” client relationship.

 

   

Loans associated with our strategic client relationships had strong credit quality with less than 0.2% 90 days or more past due as of September 30, 2012.

 

   

For the nine months ended September 30, 2012, organic loan originations totaled $295 million, representing an increase of over three times from $85 million in the first nine months of 2011.

 

   

100% of the decrease in loans during the nine months ended September 30, 2012 was from the non-strategic portfolio.

Client deposit funded balance sheet.

 

   

As of September 30, 2012, total deposits made up 96.7% of our total liabilities.

 

   

Transaction deposit accounts increased from 45.0% of total deposits at December 31, 2011 to 54.6% as of September 30, 2012.

 

   

As of September 30, 2012, we did not have any brokered deposits.

 

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Attractive risk-adjusted returns and revenue streams.

 

   

For the nine months ended September 30, 2012, our adjusted pre-tax pre-provision net revenue was 3.08% of total risk weighted assets (for reconciliation, see “—About Non-GAAP Financial Measures”).

 

   

Our average annual yield on our loan portfolio was 8.37% during the nine months ended September 30, 2012.

 

   

Cost of deposits declined 25 basis points during the nine months ended September 30, 2012 and has decreased 35 basis points from the third quarter of 2011 to the third quarter of 2012 due to the continued emphasis on our consumer banking strategy and lower cost transaction accounts.

 

   

Non-interest expense to average assets was 3.58% for the nine months ended September 30, 2012.

Integrated operating platform.

 

   

We have successfully integrated all of our acquired banks onto a common operating platform across our franchise.

During 2011 and early 2012, we completed the deployment of much of the cash received in our acquisitions into our investment securities portfolio. We also actively worked to resolve the troubled loans and OREO that we acquired through our acquisition of three failed banks. Accordingly, our continued steady resolution of troubled assets, coupled with loan payoffs, may offset loan originations in the near-term. As a result, we expect that our investment securities portfolio will continue to be one of the largest components of our balance sheet.

We have worked to actively grow our banking franchise and implement consistent lending policies and a technology infrastructure designed to support our acquisition strategy, provide for future growth and achieve operational efficiencies. This included the implementation of a scalable data processing and operating platform and hiring key personnel to execute our relationship banking strategy. In May and July 2012, we completed the integration of Community Banks of Colorado and Bank of Choice, respectively, onto our operating platform and we now have all of our operations on a common operating platform. We expect that the integration of these operations will provide additional efficiencies and enable us to support growth.

Key Challenges

There are a number of significant challenges confronting us and our industry. Economic conditions remain guarded and increasing bank regulation is adding costs and uncertainty to all U.S. banks. We face a variety of challenges in implementing our business strategy, including being a new entity, hiring talented people, the challenges of acquiring distressed franchises and rebuilding them, deploying our remaining capital on quality targets, low interest rates and low demand from high quality borrowers.

 

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Broad economic conditions, including those in our core markets, remain strained and both commercial and residential real estate values remain under pressure, which may lead to continued deterioration in credit quality and further elevated levels of non-performing assets, ultimately having a negative impact on the quality of our loan portfolio. Excluding the new loan balances contributed by our two 2011 acquisitions, loan balances declined during the first nine months of 2012 and during 2011 due to the repayment and resolution of existing loans that have been outpacing organic loan growth resulting from curtailed real estate activities and constrained economic activity. Additionally, the historically low interest rate environment limits the yields we are able to obtain on interest earning assets, including both new assets acquired as we grow and assets that replace existing, higher yielding assets as they are paid down or mature. For example, our acquired loans generally have produced higher yields than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield. As a result, we expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans.

Increased regulation, such as the passage of the Dodd-Frank Act or potential higher required capital ratios, could reduce our competitiveness as compared to other banks or lead to industry-wide decreases in profitability. While certain external factors are out of our control and may provide obstacles during the implementation of our business strategy, we believe we are prepared to deal with these challenges. We intend to remain flexible, yet methodical, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.

Performance Overview

As a financial institution, we routinely evaluate and review our consolidated statements of financial condition and results of operations. We evaluate the levels, trends and mix of the statements of financial condition and statements of operations line items and compare those levels to our budgeted expectations, our peers, industry averages and trends. Due to our short operating history, comparisons to our prior historical performance are limited, but are used to the extent practical.

Within our statements of financial condition, we specifically evaluate and manage the following:

Loan balances—We monitor our loan portfolio to evaluate loan originations, payoffs, and profitability. We forecast loan originations and payoffs within the overall loan portfolio, and we work to resolve problem loans in an expeditious manner. We track the runoff of our covered assets as well as the loan relationships that we have identified as “non-strategic” and put particular emphasis on the buildup of “strategic” relationships.

Asset quality—We monitor the asset quality of our loans and OREO through a variety of metrics, and we work to resolve problem assets in an efficient manner. Specifically, we monitor the resolution of problem loans through payoffs, pay downs and foreclosure activity. We marked all of our acquired assets to fair value at the date of their respective acquisitions, taking into account our estimation of credit quality. Additionally, the majority of the loans and all of the OREO acquired in the Hillcrest Bank acquisition are covered by loss sharing agreements with the FDIC, and, as of the date of acquisition, approximately 61.8% of loans and 83.5% of OREO acquired in the Community Banks of Colorado acquisition were covered by a loss sharing agreement. As of September 30, 2012, 36.7% of our total loans and 49.9% of our OREO was covered by loss sharing agreements with the FDIC.

 

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Many of the loans that we acquired in the Hillcrest Bank, Bank of Choice and Community Banks of Colorado acquisitions had deteriorated credit quality at the respective dates of acquisition. These loans are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of September 30, 2012 and December 31, 2011, 50.1% and 57.5% of our loans were accounted for under this guidance. Loans accounted for under ASC Topic 310-30 may be considered performing upon and subsequent to acquisition, regardless of whether the client is contractually delinquent, if the timing and expected cash flows on such loans can be reasonably estimated and if collection of the new carrying value of such loans is expected.

Our evaluation of traditional credit quality metrics and the allowance for loan losses (“ALL”) levels takes into account that any credit quality deterioration that existed at the date of acquisition was considered in the original valuation of those assets on our balance sheet, and may not be comparable to industry averages or to other financial institutions. Additionally, many of these assets are covered by the loss sharing agreements. All of these factors limit the comparability of our credit quality and ALL levels to peers or other financial institutions.

Deposit balances—We monitor our deposit levels by type, market and rate. Our loans are funded primarily through our deposit base, and we seek to optimize our deposit mix in order to provide reliable, low-cost funding sources.

Liquidity—We monitor liquidity based on policy limits and through projections of sources and uses of cash. In order to test the adequacy of our liquidity, we routinely perform various liquidity stress test scenarios that incorporate wholesale funding maturities, if any, certain deposit run-off rates and committed line of credit draws. We manage our liquidity primarily through our balance sheet mix, including our cash and our investment security portfolio, and the interest rates that we offer on our loan and deposit products, coupled with contingency funding plans as necessary.

Capital—We monitor our capital levels, including evaluating the effects of potential acquisitions, to ensure continued compliance with regulatory requirements and with the OCC Operating Agreement and FDIC Order that we entered into with our regulators in connection with our Bank Midwest acquisition. We review our tier 1 leverage capital ratios, our tier 1 risk-based capital ratios and our total risk-based capital ratios on a quarterly basis.

Within our consolidated results of operations, we specifically evaluate the following:

Net interest income—Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. We generate interest income through interest and dividends on investment securities, interest-bearing bank deposits and loans. Our acquired loans have generally produced higher yields than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield. As a result, we expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolio is not replaced with comparable high-yielding loans. We incur interest expense on our interest-bearing deposits and

 

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repurchase agreements and would also incur interest expense on any future borrowings, including any debt assumed in acquisitions. We strive to maximize our interest income by acquiring and originating high-yielding loans and investing excess cash in investment securities. Furthermore, we seek to minimize our interest expense through low-cost funding sources, thereby maximizing our net interest income.

Provision for loan losses—The provision for loan losses includes the amount of expense that is required to maintain the ALL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date. Additionally, we incur a provision for loan losses on loans accounted for under ASC Topic 310-30 as a result of a decrease in the net present value of the expected future cash flows during the periodic re-measurement of the cash flows associated with these pools of loans. The determination of the amount of the provision for loan losses and the related ALL is complex and involves a high degree of judgment and subjectivity to maintain a level of ALL that is considered by management to be appropriate under GAAP.

Non-interest income—Non-interest income consists primarily of service charges, bank card fees, gains on sales of investment securities, and other non-interest income. Also included in non-interest income is FDIC loss sharing income (expense), which consists of accretion of our FDIC indemnification asset and reimbursement of costs related to the resolution of covered assets, and amortization of our clawback liability. For additional information on our clawback liability, see “—Application of Critical Accounting Policies—Acquisition Accounting Application and the Valuation of Assets Acquired and Liabilities Assumed” and Note 2 in our audited consolidated financial statements. Due to fluctuations in the accretion rates on the FDIC indemnification asset and the amortization of clawback liability and due to varying levels of expenses related to the resolution of covered assets, the FDIC loss sharing income (expense) is not consistent on a period-to-period basis and, absent additional acquisitions with FDIC loss sharing agreements, is expected to decline over time as covered assets are resolved.

Non-interest expense—The primary components of our non-interest expense are salaries and employee benefits, occupancy and equipment, professional fees and data processing and telecommunications, and during the three months ended September 30, 2012, also included initial public offering expenses. Any expenses related to the resolution of covered assets are also included in non-interest expense. These expenses are dependent on individual resolution circumstances and, as a result, are not consistent from period to period. We seek to manage our non-interest expense in order to maximize efficiencies.

Net income—We utilize traditional industry return ratios such as return on average assets, return on average equity and return on risk-weighted assets to measure and assess our returns in relation to our balance sheet profile.

 

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In evaluating the financial statement line items described above, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for periods indicated:

 

Key Ratios (1)

   For the three
months ended
September 30,
2012
    For the three
months ended
June 30,
2012
    For the three
months ended
September 30,
2011
    For the nine
months ended
September 30,
2012
    For the nine
months ended
September 30,
2011
 

Return on average assets

     -0.56     0.18     2.49     -0.08     1.08

Return on average tangible assets

     -0.51     0.25     2.58     -0.03     1.15

Adjusted return on average assets (2) (3)

     0.28     0.28     0.30     0.26     0.42

Adjusted return on average tangible assets (2) (3)

     0.34     0.34     0.37     0.32     0.48

Return on average equity

     -2.86     0.99     12.28     -0.43     5.12

Return on average tangible common equity

     -2.79     1.42     13.52     -0.15     5.81

Adjusted return on average equity (2) (3)

     1.45     1.48     1.49     1.40     1.98

Adjusted return on average tangible equity (2) (3)

     1.91     1.96     1.88     1.86     2.40

Return on risk weighted assets

     -1.65     0.55     8.35     -0.25     3.29

Pre-tax, pre-provision net revenue to risk weighted assets (2)

     -0.50     3.37     14.39     1.74     6.65

Adjusted pre-tax, pre-provision net revenue to risk weighted assets (2) (3)

     2.48     3.81     2.17     3.08     3.28

Interest earning assets to interest bearing liabilities (end of period) (4)

     133.44     130.30     132.45     133.44     132.45

Loans to deposits ratio (end of period)

     45.26     43.80     38.71     45.26     38.71

Non-interest bearing deposits to total deposits (end of period)

     15.15     14.00     11.16     15.15     11.16

Yield on earning assets (4)

     4.44     4.61     4.15     4.56     4.16

Cost of interest bearing liabilities (4)

     0.68     0.78     1.04     0.79     1.21

Interest rate spread (5)

     3.76     3.83     3.11     3.77     2.95

Net interest margin (6)

     3.92     4.00     3.35     3.95     3.22

Non-interest expense to average assets

     4.22     3.09     3.45     3.58     3.00

Adjusted non-interest expense to average assets (2) (3)

     3.22     2.94     2.69     3.13     2.46

Efficiency ratio (7)

     101.82     70.96     43.44     84.25     56.28

Adjusted efficiency ratio (2) (3)

     77.09     67.45     78.18     73.72     67.34

Asset Quality Data (8) (9) (10)

          

Non-performing loans to total loans

     1.94     2.51     2.49     1.94     2.49

Covered non-performing loans to total non-performing loans

     19.98     15.59     35.89     19.98     35.89

Non-performing assets to total assets

     3.05     3.26     2.53     3.05     2.53

Covered non-performing assets to total non-performing assets

     43.12     45.41     52.88     43.12     52.88

Allowance for loan losses to total loans

     0.90     0.87     0.48     0.90     0.48

Allowance for loan losses to total non-covered loans

     1.43     1.42     0.73     1.43     0.73

Allowance for loan losses to non-performing loans

     46.52     34.69     19.40     46.52     19.40

Net charge-offs to average loans

     1.03     1.45     0.24     1.25     0.77

Consolidated Capital Ratios

          

Total stockholders’ equity to total assets

     19.84     18.95     20.44     19.84     20.44

Tangible common equity to tangible assets (2) (11)

     18.54     17.67     19.21     18.54     19.21

Tier 1 leverage

     17.70     17.02     18.30     17.70     18.30

Tier 1 risk-based capital

     51.51     49.32     59.82     51.51     59.82

Total risk-based capital

     17.70     50.21     60.31     52.45     60.31

 

(1) Ratio is annualized.
(2) Ratio represents non-GAAP financial measure.
(3) “Adjusted” calculations exclude bargain purchase gains, initial public offering related expenses, stock based compensation expense (related to the initial public offering and those not related to the initial public offering), acquisition costs, and loss (gain) on sale of investment securities. Tax adjustments are calculated at a rate equal to the effective tax rate for each period, with the exception of the three and nine months ended September 30, 2012. These periods were calculated at a tax rate of 38.24%, which is adjusted for the effects of the non-deductibility of the expenses related to our initial public offering.
(4) Interest earning assets include assets that earn interest/accretion or dividends, except for the FDIC indemnification asset that earns accretion but is not part of interest earning assets. Any market value adjustments on investment securities are excluded from interest-earning assets. Interest bearing liabilities include liabilities that much be paid interest.
(5) Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average costs of interest bearing
(6) Net interest margin represents net interest income, including accretion income, as a percentage of average interest-earning assets.
(7) The efficiency ratio represents non-interest expense, less intangible asset amortization, as a percentage of net interest income plus non-interest income.
(8) Non-performing loans consists of non-accruing loans, loans 90 days or more past due and still accruing interest and restructured loans, but exclude any loans accounted for under ASC 310-30 in which the pool is still performing. These ratios may therefore not be comparable to similar ratios of our peers.
(9) Non-performing assets include non-performing loans, OREO and other repossessed assets.
(10) Total loans are net of unearned discounts and fees.
(11) Tangible common equity to tangible assets is a non-GAAP financial measure. For purposes of computing tangible common equity to tangible common assets, tangible common equity is calculated as common stockholders’ equity less goodwill and other intangible assets, net, and tangible assets is calculated as total assets less goodwill and other intangible assets, net. We believe that the most directly comparable GAAP financial measure is total stockholders’ equity to total assets. See the reconciliation under “About Non-GAAP Financial Measures.”

About Non-GAAP Financial Measures

Certain of the financial measures and ratios we present, including “tangible common equity,” “tangible book value,” “tangible book value per share,” and “ pre-tax, pre-provision net revenue to risk weighted assets” are supplemental measures that are not required by, or are not presented in accordance with, accounting principles generally accepted in the United States, or “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and

 

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operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results. 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.

We believe that these measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however we acknowledge that our non-GAAP financial measures have a number of limitations relative to GAAP financial measures. First, certain non-GAAP financial measures exclude provisions for loan losses and income taxes, and both of these expenses significantly impact our financial statements. Additionally, the items that we exclude in our adjustments are not necessarily consistent with the items that our peers may exclude from their results of operations and key financial measures and therefore may limit the comparability of similarly named financial measures and ratios. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including the following 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.

Below is a reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures:

 

     September 30, 2012     June 30, 2012     September 30, 2011     December 31, 2011  

Total stockholders’ equity

   $ 1,095,835      $ 1,096,741      $ 1,094,558      $ 1,088,729   

Less: goodwill

     (59,630     (59,630     (52,442     (59,630

Less: intangibles

     (28,901     (30,255     (29,385     (32,923
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

   $ 1,007,304      $ 1,006,856      $ 1,012,731      $ 996,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,522,826      $ 5,789,075      $ 5,354,853      $ 6,352,026   

Less: goodwill

     (59,630     (59,630     (52,442     (59,630

Less: intangibles

     (28,901     (30,255     (29,385     (32,923
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 5,434,295      $ 5,699,190      $ 5,273,026      $ 6,259,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity to total assets

     19.84     18.95     20.44     17.14

Less: impact of goodwill

     -0.88     -0.85     -0.79     -0.79

Less: impact of intangibles

     -0.42     -0.43     -0.44     -0.44
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity to tangible assets

     18.54     17.67     19.21     15.91
  

 

 

   

 

 

   

 

 

   

 

 

 

 

58


Table of Contents
    For the three
months ended
September 30,
2012
    For the three
months ended
June 30,

2012
    For the three
months ended
September 30,
2011
    For the nine
months ended
September 30,
2012
    For the nine
months ended
September 30,
2011
 

Net income (loss)

  $ (7,891   $ 2,702      $ 33,752      $ (3,546   $ 39,510   

Less: bargain purchase gain, after tax

    —          —          (36,589     —          (36,589

Add: impact of initial public offering related expenses

    7,566        87        600        7,974        600   

Add: impact of non initial public offering related stock-based compensation, after tax

    1,068        1,261        3,536        3,699        8,749   

Add: impact of initial public offering related stock-based compensation, after tax

    3,267        —          —          3,267        —     

Add: impact of acquisition costs, after tax

    —          9        2,309        537        2,595   

Less:Gain (loss) on sale of investment securities, after tax

    —          —          492        (416     375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net revenue, after tax

  $ 4,010      $ 4,059      $ 4,100      $ 11,515      $ 15,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (7,891   $ 2,702      $ 33,752      $ (3,546   $ 39,510   

Add: impact of income taxes

    230        1,733        20,648        3,039        23,868   

Add: impact of provision

    5,263        12,226        3,760        25,325        16,446   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax, pre-provision net income

    (2,398     16,661        58,160        24,818        79,824   

Less: bargain purchase gain

    —          —          (60,520     —          (60,520

Add: impact of initial public offering related expenses

    7,566        87        600        7,974        600   

Add: impact of non initial public offering related stock-based compensation

    1,730        2,076        5,848        5,988        14,471   

Add: impact of initial public offering related stock-based compensation

    4,934        —          —          4,934        —     

Add: impact of acquisition costs

    —          15        3,819        870        4,293   

Less: gain (loss) on sale of investment securities

    —          —          813        (674     621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted pre-tax, pre-provision net revenue

  $ 11,832      $ 18,839      $ 8,720      $ 43,910      $ 39,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense

    59,957        45,301        46,659        158,231        109,807   

Less: impact of initial public offering related expenses

    (7,566     (87     (600     (7,974     (600

Less: impact of non initial public offering related stock-based compensation

    (1,730     (2,076     (5,848     (5,988     (14,471

Less: impact of initial public offering related stock-based compensation

    (4,934     —          —          (4,934     —     

Less: impact of acquisition costs

    —          (15     (3,819     (870     (4,293
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted non-interest expense

  $ 45,727      $ 43,123      $ 36,392      $ 138,465      $ 90,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

59


Table of Contents
    For the three
months ended
September 30,
2012
    For the three
months ended
June 30,

2012
    For the three
months ended
September 30,
2011
    For the nine
months ended
September 30,
2012
    For the nine
months ended
September 30,
2011
 

Return on average assets

    -0.56     0.18     2.49     -0.08     1.08

Less: bargain purchase gain, after tax

    0.00     0.00     -2.70     0.00     -1.00

Add: impact of initial public offering related expenses, after tax

    0.53     0.01     0.04     0.18     0.02

Add: impact of non initial public offering related stock-based compensation, after tax

    0.08     0.09     0.26     0.08     0.24

Add: impact of initial public offering related stock-based compensation, after tax

    0.23     0.00     0.00     0.07     0.00

Add: impact of acquisition costs, after tax

    0.00     0.00     0.17     0.01     0.07

Less: gain (loss) on sale of investment securities, after tax

    0.00     0.00     0.04     -0.01     0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted return on average assets

    0.28     0.28     0.30     0.26     0.42

Return on average tangible assets

    -0.51     0.25     2.58     -0.03     1.15

Less: bargain purchase gain, after tax

    0.00     0.00     -2.74     0.00     -1.02

Add: impact of initial public offering related expenses, after tax

    0.54     0.01     0.04     0.18     0.02

Add: impact of non initial public offering related stock-based compensation, after tax

    0.08     0.09     0.27     0.08     0.24

Add: impact of initial public offering related stock-based compensation, after tax

    0.23     0.00     0.00     0.07     0.00

Add: impact of acquisition costs, after tax

    0.00     0.00     0.17     0.01     0.07

Less: gain (loss) on sale of investment securities, after tax

    0.00     0.00     0.04     -0.01     0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted return on average tangible assets

    0.34     0.34     0.37     0.32     0.48

Return on average equity

    -2.86     0.99     12.28     -0.43     5.12

Less: bargain purchase gain, after tax

    0.00     0.00     -13.32     0.00     -4.74

Add: impact of initial public offering related expenses, after tax

    2.74     0.03     0.22     0.97     0.08

Add: impact of non initial public offering related stock-based compensation, after tax

    0.39     0.46     1.29     0.45     1.13

Add: impact of initial public offering related stock-based compensation, after tax

    1.18     0.00     0.00     0.40     0.00

Add: impact of acquisition costs, after tax

    0.00     0.00     0.84     0.07     0.34

Less: gain (loss) on sale of investment securities, after tax

    0.00     0.00     0.18     -0.05     0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted return on average equity

    1.45     1.48     1.49     1.40     1.98

Return on average tangible equity

    -2.79     1.42     13.52     -0.15     5.81

Less: bargain purchase gain, after tax

    0.00     0.00     -14.37     0.00     -5.14

Add: impact of initial public offering related expenses, after tax

    2.98     0.04     0.24     1.06     0.08

Add: impact of non initial public offering related stock-based compensation, after tax

    0.42     0.51     1.39     0.49     1.23

Add: impact of initial public offering related stock-based compensation, after tax

    1.29     0.00     0.00     0.43     0.00

Add: impact of acquisition costs, after tax

    0.00     0.00     0.91     0.07     0.36

Less: gain (loss) on sale of investment securities, after tax

    0.00     0.00     0.19     -0.06     0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted return on average tangible equity

    1.91     1.96     1.88     1.86     2.40

Net income to risk weighted assets

    -1.65     0.55     8.35     -0.25     3.29

Add: impact of income taxes

    0.05     0.35     5.11     0.21     1.99

Add: impact of provision

    1.10     2.47     0.93     1.78     1.37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax, pre-provision net revenue to risk weighted assets

    -0.50     3.37     14.39     1.74     6.65

Less: bargain purchase gain

    0.00     0.00     -14.96     0.00     -5.04

Add: impact of initial public offering related expenses

    1.58     0.02     0.15     0.56     0.05

Add: impact of non initial public offering related stock-based compensation

    0.36     0.42     1.45     0.42     1.21

Add: impact of initial public offering related stock-based compensation

    1.03     0.00     0.00     0.35     0.00

Add: impact of acquisition costs

    0.00     0.00     0.94     0.06     0.36

Less: gain (loss) on sale of investment securities

    0.00     0.00     0.20     -0.05     0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted pre-tax, pre-provision net revenue to risk weighted assets

    2.48     3.81     2.17     3.08     3.28

Non-interest expense to average assets

    4.22     3.09     3.45     3.58     3.00

Add: impact of initial public offering related expenses

    -0.53     -0.01     -0.04     -0.18     -0.02

Add: impact of non initial public offering related stock-based compensation

    -0.12     -0.14     -0.44     -0.14     -0.40

Add: impact of initial public offering related stock-based compensation

    -0.35     0.00     0.00     -0.11     0.00

Less: impact of acquisition costs

    0.00     0.00     -0.28     -0.02     -0.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted non-interest expense to average assets

    3.22     2.94     2.69     3.13     2.46

Efficiency ratio

    101.82     70.96     43.44     84.25     56.28

Less: bargain purchase gain

    0.00     0.00     57.83     0.00     26.16

Add: impact of initial public offering related expenses

    -13.14     -0.14     -1.33     -4.37     -0.46

Add: impact of non initial public offering related stock-based compensation

    -3.00     -3.35     -12.96     -3.28     -11.15

Add: impact of initial public offering related stock-based compensation

    -8.57     0.00     0.00     -2.71     0.00

Add: impact of acquisition costs

    0.00     -0.02     -8.47     -0.48     -3.31

Less: gain (loss) on sale of investment securities

    0.00     0.00     -0.33     0.31     -0.18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted efficiency ratio

    77.09     67.45     78.18     73.72     67.34

 

60


Table of Contents

Application of Critical Accounting Policies

We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the fair value determination of assets acquired and liabilities assumed in business combinations and the application of acquisition accounting, the accounting for acquired loans and the related FDIC indemnification asset, the determination of the ALL, and the valuation of stock-based compensation. These critical accounting policies and estimates are summarized in our registration statement on Form S-1, and are further analyzed with other significant accounting policies in Note 2 to the “Summary of Significant Accounting Policies” in the notes to the audited consolidated financial statements for the year ended December 31, 2011.

Implications of and Elections Under the JOBS Act

National Bank Holdings Corporation qualifies as an emerging growth company under the Jumpstart Our Business Act (“JOBS Act.”) Pursuant to the JOBS Act, an emerging growth company can elect to opt out of the extended transition period for any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or the SEC. We have elected to opt out of such extended transition period, which election is irrevocable.

Although we are still evaluating the JOBS Act, we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Financial Condition

Total assets at September 30, 2012 were $5.5 billion compared to $6.4 billion at December 31, 2011, a decrease of $0.9 billion. The decrease in total assets was largely driven by a decrease in non-strategic loan balances of $337.1 million, which was a reflection of our workout progress on troubled loans (many of which were covered) that we acquired with our various acquisitions. We also originated $295 million of loans during the nine months ended September 30, 2012, which offset normal client payments and sustained the loan balances in our strategic portfolio. We coupled the overall loan balance decrease with a $781.3 million decrease in total deposits, as we rolled off high-priced time deposits that we assumed in our FDIC-assisted acquisitions and continued our focus on migrating toward a client-based deposit mix with higher concentrations of lower cost demand, savings and money market (“transaction”) deposits. We also utilized available cash and purchased $1.0 billion of investment securities during the nine months ended September 30, 2012. Our FDIC indemnification asset decreased $110.2 million during the nine months ended September 30, 2012 as a result of continued progress on our acquired problem loan resolutions and an increase in actual and expected cash flows on our covered assets. These increases in cash flows also contributed to a net reclassification of $38.6 million of non-accretable difference to accretable yield during the period, which will be accreted to income over the remaining life of those loans.

 

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Table of Contents

Investment Securities

Available-for-sale

Total investment securities available-for-sale were $1.7 billion at September 30, 2012, compared to $1.9 billion at December 31, 2011, a decrease of $0.2 billion, or 6.61%. During the first quarter of 2012, we re-evaluated the securities in our available-for-sale investment portfolio and identified securities that we now intend to hold until maturity. The securities that were transferred included residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises with a collective amortized cost of approximately $715.2 million and net unrealized gains of approximately $39 million on the date of transfer. These securities were classified as available-for-sale at December 31, 2011. During the nine months ended September 30, 2012, we also purchased $1.0 billion of available-for-sale securities, which was partially offset by $466.6 million of maturities and paydowns. The purchases included mortgage backed securities and asset backed securities. Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated (in thousands):

 

    September 30, 2012     December 31, 2011  
    Amortized
Cost
    Fair
Value
    Percent of
Portfolio
    Weighted
Average
Yield Earned
Year-to-Date
    Amortized
Cost
    Fair
Value
    Percent of
Portfolio
    Weighted
Average
Yield Earned
Year-to-Date
 

U.S. Treasury securities

  $ 300      $ 300        0.02     0.13   $ 3,300      $ 3,300        0.18     0.27

U.S. Government sponsored agency and government sponsored enterprises obligations

    —          —          —          —          3,009        3,010        0.16     0.63

Asset backed securities

    92,689        92,867        5.34     0.61     —          —          —          —     

Mortgage-backed securities (“MBS”):

               

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

    717,238        740,619        42.57     2.10     1,139,058        1,191,537        63.97     3.21

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

    885,165        905,427        52.05     2.35     620,122        643,625        34.55     2.97

Other MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

    —          —          —          —          20,123        20,808        1.12     2.73

Other securities

    419        419        0.02     0.00     419        419        0.02     0.00
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total investment securities available-for-sale

  $ 1,695,811      $ 1,739,632        100.00     2.14   $ 1,786,031      $ 1,862,699        100.00     3.11
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

As of September 30, 2012, approximately 94.6% of the available-for-sale investment portfolio is backed by mortgages. The residential mortgage pass through securities portfolio is comprised of both fixed rate and adjustable rate Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Government National Mortgage Association (“GNMA”) securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.

 

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Table of Contents

At September 30, 2012, adjustable rate securities comprised 12.3% of the available-for-sale MBS portfolio and the remainder of the portfolio was comprised of fixed rate securities with 10 to 30 year maturities, with a weighted average coupon of 3.0% per annum.

During the nine months ended September 30, 2012, we sold approximately $20.8 million of available-for-sale investment securities, all of which occurred during the first quarter. The sale was comprised of one fixed-rate collateralized mortgage obligation backed by commercial property. We realized a gross gain of $674 thousand on the sale of the security, which is included in gain on sale of securities, net in the accompanying consolidated statements of operations.

During the three and nine months ended September 30, 2011, we sold approximately $122.2 million and $238.2 million, respectively, of available-for-sale investment securities. We realized losses on the sale of these securities of $0.8 million and $0.6 million during the three and nine months ended September 30, 2011, respectively, which is included in gain (loss) on sale of securities in the accompanying consolidated statements of operations.

The available-for-sale investment portfolio included $43.8 million and $76.7 million of net unrealized gains, inclusive of $243 thousand and $1 thousand of unrealized losses, at September 30, 2012 and December 31, 2011, respectively. We do not believe that any of the securities with unrealized losses were other-than-temporarily-impaired. The table below summarizes the contractual maturities of our available-for-sale investment portfolio as of September 30, 2012 (in thousands):

 

    Due in one year or less     Due after one year
through five years
    Due after five years
through ten years
    Due after ten years     Other securities     Total  
    Carrying
Value
    Weighted
Average
Yield
    Carrying
Value
    Weighted
Average
Yield
    Carrying
Value
    Weighted
Average
Yield
    Carrying
Value
    Weighted
Average
Yield
    Carrying
Value
    Weighted
Average
Yield
    Carrying
Value
    Weighted
Average
Yield
 

U.S. Treasury securities

  $ 300        0.13   $ —          0.00   $ —          0.00   $ —          0.00   $ —          0.00   $ 300        0.13

U.S. Government sponsored agency obligations

    —          0.00     —          0.00     —          0.00     —          0.00     —          0.00     —          0.00

Asset backed securities

    —          0.00     92,867        0.61     —          0.00     —          0.00     —          0.00     92,867        0.61

Mortgage-backed securities (“MBS”):

                       

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

    —          0.00     5        1.98     266,582        1.78     474,032        2.19     —          0.00     740,619        2.10

Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

    —          0.00     —          0.00     14,029        2.81     891,398        2.34     —          0.00     905,427        2.35

Other MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

    —          0.00     —          0.00     —          0.00     —          0.00     —          0.00     —          0.00

Other securities

                    419          419     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 300        0.13   $ 92,872        0.61   $ 280,611        1.83   $ 1,365,430        2.29   $ 419        $ 1,739,632        2.14
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

The estimated weighted average life of the available-for-sale MBS portfolio as of September 30, 2012 and December 31, 2011 was 3.4 years and 3.4 years, respectively. This estimate is based on various assumptions, including repayment characteristics, and actual results may differ. The U.S. Treasury securities have contractual maturities of less than one year. As of September 30, 2012, the duration of the total available-for-sale investment portfolio was 3.1 years and the asset backed securities portfolio within the available-for-sale investment portfolio had a duration of 0.7 years.

 

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Table of Contents

Held-to-maturity

At September 30, 2012, we held $643.7 million of held-to-maturity investment securities. As previously discussed, during the first quarter of 2012, we re-evaluated the securities in our available-for-sale investment portfolio and identified securities that we now intend to hold until maturity. We transferred residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises with a collective amortized cost of approximately $715.2 million and unrealized gains of approximately $39 million on the date of transfer. These securities were classified as available-for-sale at December 31, 2011. During the nine months ended September 30, 2012, we also purchased $2.2 million of held-to-maturity securities.

At December 31, 2011 the Company held $6.8 million of held-to-maturity investment securities, of which $3.2 million were purchased by the Company under the classification of available-for-sale and transferred to the held-to-maturity classification and $3.6 million were purchased under the classification of held-to-maturity. Held-to-maturity investment securities are summarized as follows as of the dates indicated (in thousands):

 

                                                                   
     September 30, 2012  
     Amortized
Cost
     Fair
Value
     Percent of
Portfolio
    Weighted
Average Yield
 

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

   $ 643,661       $ 653,760         100.00     3.60
  

 

 

    

 

 

    

 

 

   

Total investment securities held-to-maturity

   $ 643,661       $ 653,760         100.00     3.60
  

 

 

    

 

 

    

 

 

   

 

                                                                   
     December 31, 2011  
     Amortized
Cost
     Fair
Value
     Percent of
Portfolio
    Weighted
Average Yield
 

Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises

   $ 6,801       $ 6,829         100.00     2.44
  

 

 

    

 

 

    

 

 

   

Total investment securities held-to-maturity

   $ 6,801       $ 6,829         100.00     2.44
  

 

 

    

 

 

    

 

 

   

The residential mortgage pass through held-to-maturity investment portfolio is comprised only of fixed rate FNMA and GNMA securities.

 

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At September 30, 2012, the fair value of the held-to-maturity investment portfolio was $653.8 million with $10.1 million of unrealized gains. The table below summarizes the contractual maturities of our held-to-maturity investment portfolio as of September 30, 2012 (in thousands):

 

     Amortized Cost      Weighted
Average
Yield
 

Due in one year or less

   $ —           —     

Due after one year through five year

     —           —     

Due after five years through ten years

     —           —     

Due after ten years

     643,661         3.60

Other Securities

     —           —     
  

 

 

    

 

 

 

Total

   $ 643,661         3.60
  

 

 

    

 

 

 

The estimated weighted average life of the held-to-maturity investment portfolio as of September 30, 2012 was 3.9 years. As of September 30, 2012, the duration of the total held-to-maturity investment portfolio was 3.7 years and the duration of the entire investment securities portfolio was 3.2 years.

Non-marketable securities

Non-marketable securities include Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock. At September 30, 2012 and December 31, 2011, we held $25.0 million of Federal Reserve Bank stock and at September 30, 2012 and December 31, 2011 we also held $8.0 million and $4.1 million of FHLB stock, respectively. We hold these securities in accordance with debt and regulatory requirements. These are restricted securities which lack a market and are therefore carried at cost.

Loans- Overview

Our loan portfolio at September 30, 2012 was comprised of loans that were acquired in connection with the acquisitions of Hillcrest Bank and Bank Midwest in the fourth quarter of 2010, our acquisition of Bank of Choice during the third quarter of 2011, and our acquisition of Community Banks of Colorado during the fourth quarter of 2011, in addition to new loans that we have originated. The majority of the loans acquired in the Hillcrest Bank and Community Banks of Colorado transaction are covered by loss sharing agreements with the FDIC, and we present covered loans separately from non-covered loans due to the FDIC loss sharing agreements associated with these loans.

As discussed in Note 2 to our audited consolidated financial statements, in accordance with applicable accounting guidance, all acquired loans are recorded at fair value at the date of acquisition, and an allowance for loan losses is not carried over with the loans but, rather, the fair value of the loans encompasses both credit quality and market considerations. Loans that exhibit signs of credit deterioration at the date of acquisition are accounted for in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Management accounted for all loans acquired in the Hillcrest Bank, Bank of Choice, and Community Banks of Colorado acquisitions loans under ASC Topic 310-30, with the exception of loans with revolving privileges which were outside the scope of ASC Topic 310-30. In our Bank Midwest transaction, we did not acquire all of the loans of the former Bank Midwest but, rather, selected certain loans based upon specific criteria of performance, adequacy of collateral, and loan type that were performing at the time of acquisition. As a result, none of the loans acquired in the Bank Midwest transaction are accounted for under ASC Topic 310-30.

 

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Consistent with differences in the risk elements and accounting, the loan portfolio is presented in two categories: (i) loans covered by FDIC loss sharing agreements, or “covered loans,” and (ii) loans that are not covered by FDIC loss sharing agreements, or “non-covered loans.” The portfolio is further stratified based on (i) ASC 310-30 loans and (ii) Non ASC 310-30 loans. Additionally, to evaluate the progress of working out the troubled loans acquired in our FDIC-assisted acquisitions coupled with the progress of organic loan growth, we stratify the loan portfolio into (i) non-strategic loans and (ii) strategic loans.

Covered loans comprised 36.7% of the total loan portfolio at September 30, 2012, compared to 41.9% at December 31, 2011. The table below shows the loan portfolio composition and the breakdown of the portfolio between covered ASC 310-30 loans, covered Non ASC 310-30 loans, non-covered ASC 310-30 loans and Non-covered Non ASC 310-30 loans at September 30, 2012 and December 31, 2011 (dollars in thousands):

 

     September 30, 2012  
     Covered loans      Non-covered loans                
     ASC 310-
30
     Non
ASC  310-30
     Total
covered
loans
     ASC 310-
30
     Non
ASC  310-30
     Total
non-covered
loans
     Total loans      % of
Total
 

Commercial

   $ 83,469       $ 57,416       $ 140,885       $ 14,195       $ 111,147       $ 125,342       $ 266,227         13.8

Commercial real estate

     477,427         11,081         488,508         187,344         236,772         424,116         912,624         47.1

Agriculture

     44,738         14,939         59,677         11,206         90,373         101,579         161,256         8.3

Residential real estate

     19,584         2,371         21,955         106,710         412,322         519,032         540,987         27.9

Consumer

     4         —           4         26,359         30,342         56,701         56,705         2.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 625,222       $ 85,807       $ 711,029       $ 345,814       $ 880,956       $ 1,226,770       $ 1,937,799         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Covered loans      Non-covered loans                
     ASC 310-
30
     Non
ASC  310-30
     Total
covered
loans
     ASC 310-
30
     Non
ASC  310-30
     Total
non-covered
loans
     Total loans      % of
Total
 

Commercial

   $ 123,108       $ 79,044       $ 202,152       $ 31,482       $ 139,297       $ 170,779       $ 372,931         16.4

Commercial real estate

     626,089         15,939         642,028         243,297         267,153         510,450         1,152,478         50.6

Agriculture

     56,839         28,535         85,374         13,989         52,040         66,029         151,403         6.7

Residential real estate

     21,043         2,111         23,154         147,239         352,492         499,731         522,885         23.0

Consumer

     7         —           7         44,616         29,731         74,347         74,354         3.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 827,086       $ 125,629       $ 952,715       $ 480,623       $ 840,713       $ 1,321,336       $ 2,274,051         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Inherent in the nature of acquiring troubled banks, only certain of our acquired clients conform to our long-term business model of in-market, relationship-oriented banking. During the nine months ended September 30, 2012, we developed a management tool whereby we have designated loans as “strategic” that include loans inside our operating markets and meet our credit risk profile. Criteria utilized in the designation of a loan as “strategic” include (a) geography, (b) total relationship with borrower and (c) credit metrics commensurate with our current underwriting standards. At September 30, 2012, strategic loans totaled $1.1 billion and had very good credit quality as represented by a 90 days or more past due ratio of 0.2%. We believe this secondary presentation of our loan portfolio provides a meaningful basis to understand the underlying drivers of changes in our loan portfolio balances.

 

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Strategic loans comprised 56.1% of the total loan portfolio at September 30, 2012, compared to 47.7% at December 31, 2011. The table below shows the loan portfolio composition categorized between strategic and non-strategic at the respective dates (dollars in thousands):

 

     September 30, 2012      December 31, 2011  
     Strategic      Non-Strategic      Total      Strategic      Non-Strategic      Total  

Commercial

   $ 143,255       $ 122,972       $ 266,227       $ 191,512       $ 181,419       $ 372,931   

Commercial real estate

     287,583         625,041         912,624         291,051         861,427         1,152,478   

Agriculture

     145,295         15,961         161,256         131,823         19,580         151,403   

Residential real estate

     463,034         77,953         540,987         415,730         107,155         522,885   

Consumer

     47,114         9,591         56,705         55,334         19,020         74,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,086,281       $ 851,518       $ 1,937,799       $ 1,085,450       $ 1,188,601       $ 2,274,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Strategic loans remained relatively flat at September 30, 2012 compared to December 31, 2011 as originations of $295 million offset routine paydowns of existing loans. Strategic residential real estate loans increased $47.3 million driven by strong originations primarily due to low interest rates and high refinance activity. The increase in strategic residential real estate loans was offset with a $48.3 million decrease in commercial loans.

Commercial loans consist of loans made to finance business operations and secured by inventory or other business-related collateral such as accounts receivable or equipment. Commercial real estate loans include loans on 1-4 family construction properties, commercial properties such as office buildings, shopping centers, or free standing commercial properties, multi-family properties and raw land development loans. Agriculture loans include loans on farm equipment and farmland loans. Residential real estate loans include 1-4 family closed and open end loans, in both senior and junior collateral positions (both owner occupied and non-owner occupied). Consumer loans include both secured and unsecured loans to retail clients and overdrafts.

Our loan origination strategy involves lending primarily to clients within our markets; however, our acquired loans are to clients in various geographies. The table below shows the geographic breakout of our loan portfolio at September 30, 2012, based on the domicile of the borrower or, in the case of collateral-dependent loans, the geographic location of the collateral (in thousands):

 

     Loan balance      Percent of
loan portfolio
 

Colorado

   $ 733,892         37.9

Missouri

     558,583         28.8

Texas

     195,209         10.1

Kansas

     119,129         6.1

Florida

     72,431         3.7

California

     67,693         3.5

Other

     190,862         9.9
  

 

 

    

 

 

 

Total

   $ 1,937,799         100.0
  

 

 

    

 

 

 

The decline in total loans from $2.3 billion at December 31, 2011 to $1.9 billion at September 30, 2012 was primarily driven by decreases in our non-strategic loan portfolios as the problem credits acquired in our FDIC-assisted transactions migrated to resolution, as well as the repayment of many loans that do not conform to our business model of in-market, relationship-oriented loans with credit metrics commensurate with our current underwriting standards. We have an enterprise-level, dedicated special

 

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asset resolution team that is working to resolve problem loans in an expeditious manner and through the third quarter of 2012, our resolution of the troubled assets acquired with our acquisitions of three failed banks outpaced our originations. Acquired loans were marked to fair value at the time of acquisition and, as a result, we have been able to resolve these assets without significant losses.

New loan origination is a direct result of our ability to recruit and retain top banking talent. New loan originations continued to increase as our Midwest markets stabilized during the period. We expect that our Colorado markets will continue to contribute to loan growth as bankers are further deployed and our presence in those markets increases. The widespread economic uncertainty has limited organic loan growth and we anticipate this will continue to be a challenge in the near future. The following table represents new loan originations for the last seven quarters (in thousands):

 

     Commercial      Commercial
real estate
     Agriculture      Residential      Consumer      Total  

First quarter 2011

   $ 1,128       $ 5,194       $ 3,101       $ 14,170       $ 1,223       $ 24,816   

Second quarter 2011

     1,390         2,081         2,476         16,707         2,207         24,861   

Third quarter 2011

     14,226         818         651         16,908         2,772         35,375   

Fourth quarter 2011

     9,955         4,062         1,575         35,745         3,083         54,420   

First quarter 2012

     20,102         18,546         7,570         33,016         3,155         82,389   

Second quarter 2012

     10,799         6,816         22,444         40,123         4,057         84,239   

Third quarter 2012

     25,640         11,135         24,328         60,320         6,505         127,928   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 83,240       $ 48,652       $ 62,145       $ 216,989       $ 23,002       $ 434,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans

The Company has loss sharing agreements with the FDIC for the assets related to the Hillcrest Bank acquisition and the Community Banks of Colorado acquisition, whereby the FDIC will reimburse us for a portion of the losses incurred as a result of the resolution and disposition of the covered assets of these banks.

The Hillcrest Bank loss sharing agreements with the FDIC cover substantially all of the loans acquired in the Hillcrest Bank transaction, including single family residential mortgage loans, commercial real estate, commercial and industrial loans, unfunded commitments, and OREO. For purposes of the Hillcrest Bank loss sharing agreements, the anticipated losses on the covered assets are grouped into two categories, commercial assets and single family assets, and each category has its own specific loss sharing agreement. The term for loss sharing on single family residential real estate loans is ten years, and the Company will share in losses and recoveries with the FDIC for the entire term. The term for the loss sharing agreement on commercial loans is eight years. Under the commercial loss sharing agreement, the Company will share in losses and recoveries with the FDIC for the first five years. After the first five years, the FDIC will not share in losses but only in recoveries for the remaining term of the agreement. The loss sharing agreements cover losses on loans (and any acquired or resultant OREO) in the respective categories and have provisions through which we are required to be reimbursed for up to 90 days of accrued interest and direct expenses related to the resolution of these assets. Within the categories, there are three tranches of losses, each with a specified loss-coverage percentage. The categories, and the respective loss thresholds and coverage amounts are as follows (in thousands):

 

Commercial     Single family  
Tranche   Loss
Threshold
  Loss-
Coverage
Percentage
    Tranche   Loss
Threshold
  Loss-
Coverage
Percentage
 
1   Up to $295,592     60   1   Up to $4,618     60
2   $295,593-405,293     0   2   $4,618-8,191     30
3   >$405,293     80   3   >$8,191     80

 

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With the purchase and assumption agreement of Community Banks of Colorado with the FDIC, we entered into a loss sharing agreement with the FDIC whereby the FDIC will reimburse us for a portion of the losses incurred as a result of the resolution and disposition of certain covered assets of Community Banks of Colorado. Covered assets include certain single family residential mortgage loans, commercial real estate loans, commercial and industrial loans, agriculture loans, consumer loans, unfunded commitments, and OREO. As of the date of acquisition, covered loans of Community Banks of Colorado totaled approximately 61.8% of the total outstanding loan principal balances of Community Banks of Colorado. For purposes of the Community Banks of Colorado loss sharing agreement, the anticipated losses on the covered assets are grouped into one category, commercial assets, and are subject to one loss share agreement lasting eight years. Under the agreement, the Company will share in losses and recoveries with the FDIC for the first five years and thereafter, the FDIC will not share in losses but only in recoveries for the remaining term of the agreement. The loss sharing agreement covers losses on covered loans (and any acquired or resultant OREO) and has provisions under which we will be reimbursed for up to 90 days of accrued interest and direct expenses related to the resolution of these assets. There are three tranches of losses, each with a specified loss-coverage percentage. The respective loss thresholds and coverage amounts are as follows (in thousands):

 

Tranche

   Loss Threshold    Loss-
Coverage
Percentage
 
1    Up to $204,194      80
2    $204,195-308,020      30
3    >$308,020      80

Under the Hillcrest Bank and Community Banks of Colorado loss sharing agreements, the reimbursable losses from the FDIC are based on the book value of the related covered assets as determined by the FDIC at the date of acquisition, and the FDIC’s book value does not necessarily correlate with our book value of the same assets. This difference is primarily because we recorded the loans at fair value at the date of acquisition in accordance with applicable accounting guidance.

As of September 30, 2012 and December 31, 2011, respectively, we had incurred $195.1 million and $159.5 million of losses on our Hillcrest Bank covered assets since the beginning of the loss sharing agreement as measured by the FDIC’s book value, substantially all of which was related to the commercial assets. Additionally, as of September 30, 2012 and December 31, 2011, respectively, we had incurred approximately $134.1 million and $43.1 million of losses related to our Community Banks of Colorado loss sharing agreement. The fair value adjustments assigned to the related covered loans at the time of acquisition encompassed anticipated losses such as these, and as a result, our financial statement losses are mitigated and do not correspond to the losses reported for loss sharing purposes. Subsequent to

 

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September 30, 2012, we submitted a request for $6.1 million of loss sharing reimbursements from the FDIC for $10.2 million of losses related to Hillcrest Bank and an additional request for $20.0 million of reimbursement related to $25.0 million in losses for Community Banks of Colorado, all incurred (as measured by the FDIC’s book value) during the three months ended September 30, 2012.

The status of covered assets and any incurred losses require extensive recordkeeping and documentation and are submitted to the FDIC on a monthly and quarterly basis. The loss claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in our loss sharing agreements.

Our loss sharing agreements cover losses for finite terms—ten years for the assets covered by the single family loss sharing agreement and five years for all assets covered by the commercial loss sharing agreements. We have focused on resolving the covered loans in an expeditious manner in an effort to utilize the benefits offered by the loss sharing agreements, and often times, loans pay down prior to the scheduled maturity date.

The table below shows the contractual maturities of our covered loans for the dates indicated (in thousands):

 

     September 30, 2012  
     Due within
1 Year
     Due after 1  but
within 5 Years
     Due after
5 Years
     Total  
           

Commercial

   $ 82,029       $ 43,383       $ 15,473       $ 140,885   

Commercial real estate

     324,606         142,909         20,993         488,508   

Agriculture

     19,181         10,309         30,187         59,677   

Residential real estate

     4,728         16,679         548         21,955   

Consumer

     4         —           —           4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 430,548       $ 213,280       $ 67,201       $ 711,029   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

December 31, 2011

 
     Due within
1 Year
     Due after 1 but
within 5 Years
     Due after
5 Years
     Total  
           

Commercial

   $ 123,692       $ 56,964       $ 21,496       $ 202,152   

Commercial real estate

     409,213         199,003         33,812         642,028   

Agriculture

     37,361         12,134         35,879         85,374   

Residential real estate

     10,081         12,602         471         23,154   

Consumer

     —           7         —           7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 580,347       $ 280,710       $ 91,658       $ 952,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The interest rate sensitivity of covered loans with maturities over one year is as follows at the dates indicated (in thousands):

 

     September 30, 2012  
     Fixed      Variable      Total  

Commercial

   $ 15,110       $ 43,746       $ 58,856   

Commercial real estate

     37,426         126,476         163,902   

Agriculture

     3,500         36,996         40,496   

Residential real estate

     8,091         9,136         17,227   

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 64,127       $ 216,354       $ 280,481   
  

 

 

    

 

 

    

 

 

 
    

 

December 31, 2011

 
     Fixed      Variable      Total  

Commercial

   $ 24,370       $ 54,090       $ 78,460   

Commercial real estate

     74,621         158,194         232,815   

Agriculture

     4,587         43,426         48,013   

Residential real estate

     3,878         9,195         13,073   

Consumer

     7         —           7   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 107,463       $ 264,905       $ 372,368   
  

 

 

    

 

 

    

 

 

 

For more information on how interest is accounted for on covered loans, please refer below under “Accretable Yield” and to the notes to our consolidated financial statements. Note 4 to the consolidated financial statements and Note 7 to our audited consolidated financial statements provide additional information on our covered loans, including a breakout of past due status, credit quality indicators, and non-accrual status.

Non-covered loans

The tables below show the contractual maturities of our non-covered loans at the dates indicated (in thousands):

 

     September 30, 2012  
     Due within
1 year
     Due after 1
but within
5 years
     Due after
5 years
     Total  
           
           

Commercial

   $ 44,334       $ 73,588       $ 7,420       $ 125,342   

Commercial real estate

     145,620         167,558         110,938         424,116   

Agriculture

     20,630         54,318         26,631         101,579   

Residential real estate

     64,560         71,696         382,776         519,032   

Consumer

     27,861         19,444         9,396         56,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 303,005       $ 386,604       $ 537,161       $ 1,226,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2011  
     Due within
1 year
     Due after 1
but within
5 years
     Due after
5 years
     Total  
           
           

Commercial

   $ 62,725       $ 85,367       $ 22,687       $ 170,779   

Commercial real estate

     185,526         186,672         138,252         510,450   

Agriculture

     19,684         23,067         23,278         66,029   

Residential real estate

     84,383         103,881         311,467         499,731   

Consumer

     33,234         32,407         8,706         74,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 385,552       $ 431,394       $ 504,390       $ 1,321,336   
  

 

 

    

 

 

    

 

 

    

 

 

 

The interest rate sensitivity of non-covered loans with maturities over one year is as follows at the dates indicated (in thousands):

 

     September 30, 2012  
     Fixed Rate      Variable Rate      Total  

Commercial

   $ 26,974       $ 54,034       $ 81,008   

Commercial real estate

     121,273         157,223         278,496   

Agriculture

     40,583         40,366         80,949   

Residential real estate

     227,556         226,916         454,472   

Consumer

     16,648         12,192         28,840   
  

 

 

    

 

 

    

 

 

 

Total

   $ 433,034       $ 490,731       $ 923,765   
  

 

 

    

 

 

    

 

 

 
    

 

December 31, 2011

 
     Fixed Rate      Variable Rate      Total  

Commercial

   $ 32,988       $ 75,066       $ 108,054   

Commercial real estate

     110,416         214,508         324,924   

Agriculture

     20,713         25,632         46,345   

Residential real estate

     181,107         234,241         415,348   

Consumer

     23,671         17,442         41,113   
  

 

 

    

 

 

    

 

 

 

Total

   $ 368,895       $ 566,889       $ 935,784   
  

 

 

    

 

 

    

 

 

 

Note 4 to the consolidated financial statements and Note 7 to our audited consolidated financial statements provides additional information on our non-covered loans, including a detailed breakout of loan categories, past due status, credit quality indicators, and non-accrual status.

Accretable Yield

The fair value adjustments assigned to loans that are accounted for under ASC Topic 310-30 are comprised of both accretable yield and a non-accretable difference that are based on expected cash flows from the loans. Accretable yield is the excess of a pool’s cash flows expected to be collected over the recorded balance of the related pool of loans. The non-accretable difference represents the expected shortfall in future cash flows from the contractual amount due in respect of each pool of such loans. Similar to the entire fair value adjustment for loans outside the scope of ASC Topic 310-30, the accretable yield is accreted into income over the estimated remaining life of the loans in the applicable pool.

 

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Below is the composition of the net book value for loans accounted for under ASC Topic 310-30 at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012     December 31, 2011  

Contractual cash flows

   $ 1,617,451      $ 2,030,374   

Nonaccretable difference

     (497,547     (536,171

Accretable yield

     (148,868     (186,494
  

 

 

   

 

 

 

Total loans accounted for under ASC Topic 310-30

   $ 971,036      $ 1,307,709   
  

 

 

   

 

 

 

Loan pools accounted for under ASC Topic 310-30 are periodically remeasured to determine expected future cash flows. In determining the expected cash flows, prepayment assumptions on smaller homogeneous loans are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans were fixed or variable rate loans. Prepayments may be assumed on large loans if circumstances specific to that loan warrant a prepayment assumption. No prepayments are presumed for small homogeneous commercial loans; however, prepayment assumptions are made that consider similar prepayment factors listed above for smaller homogeneous loans. Decreases to the expected future cash flows in the applicable pool generally result in an immediate provision for loan losses charged to the consolidated statements of operations. Conversely, increases in the expected future cash flows in the applicable pool result in a transfer from the non-accretable difference to the accretable yield, and have a positive impact on accretion income prospectively. This re-measurement process resulted in the following changes to the accretable yield during the nine months ended September 30, 2012 (in thousands):

 

Balance at December 31, 2011

   $ 186,494   

Reclassification from non-accretable difference

     46,974   

Reclassification to non-accretable difference

     (8,348

Accretion income

     (76,252
  

 

 

 

Balance at September 30, 2012

   $ 148,868   
  

 

 

 

During the nine months ended September 30, 2012, we re-measured the expected cash flows of all 30 of the loan pools accounted for under ASC Topic 310-30 utilizing the same cash flow methodology used at the time of acquisition. Increases in expected cash flows are reflected as an increase in the accretion rates as well as an increased amount of accretable yield that will be recognized over the expected remaining lives of the underlying loan pools. During the nine months ended September 30, 2012, we reclassified $38.6 million, net, from non-accretable difference to accretable yield. The re-measurements also resulted in a $17.4 million impairment during the nine months ended September 30, 2012, primarily driven by our commercial and industrial, commercial real estate and land pools. One commercial real estate pool contributed $6.7 million, or 38.4% of the total impairment and one land pool contributed $4.9 million, or 28.3%, of the total impairment for the nine months ended September 30, 2012. These impairments are reflected in provision for loan loss in the consolidated statement of operations.

 

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In addition to the accretable yield on loans accounted for under ASC Topic 310-30, the fair value adjustments on loans outside the scope of 310-30 are also accreted to interest income over the life of the loans. At September 30, 2012, our total remaining accretable yield and fair value mark was as follows (in thousands):

 

Remaining accretable yield on loans accounted for under ASC Topic 310-30

   $ 148,868   

Remaining accretable fair value mark on loans not accounted for under ASC Topic 310-30

     23,144   
  

 

 

 

Total remaining accretable yield and fair value mark at September 30, 2012

   $ 172,012   
  

 

 

 

Asset Quality

All of the assets acquired in our acquisitions were marked to fair value at the date of acquisition, and the adjustments on loans included a credit quality component. We utilize traditional credit quality metrics to evaluate the overall credit quality of our loan portfolio; however our credit quality ratios are limited in their comparability to industry averages or to other financial institutions because:

 

  1. Any asset quality deterioration that existed at the date of acquisition was considered in the original fair value adjustments; and

 

  2. 43.1% of our non-performing assets (by dollar amount) at September 30, 2012 are covered by loss sharing agreements with the FDIC.

Asset quality, particularly on our originated loans, is fundamental to our success. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.

Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution to the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $250,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of 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 covered and non-covered 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

 

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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 that are not accounted for under ASC Topic 310-30 are deemed impaired and put on non-accrual status.

In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. 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 terms of the loan are considered to have been conceded. Such restructured loans are considered “troubled debt restructurings” in accordance with ASC Topic 310-40 Troubled Debt Restructurings by Creditors. Under this guidance, modifications to loans that fall within the scope of ASC Topic 310-30 are not considered troubled debt restructurings, regardless of otherwise meeting the definition of a troubled debt restructuring. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the lower of the related loan balance or the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ALL and any subsequent declines in carrying value charged to impairments on OREO.

Non-performing Assets

Non-performing assets consist of covered and non-covered non-accrual loans, accruing loans 90 days or more past due, troubled debt restructurings, OREO (49.9% of which was covered by FDIC loss sharing agreements at September 30, 2012) and other repossessed assets. However, loans accounted for under ASC Topic 310-30, as described below, are excluded from our non-performing assets. Our non-performing assets include $7.5 million and $14.8 million of covered loans not accounted for under ASC Topic 310-30 and $64.5 million and $77.1 million of covered OREO at September 30, 2012 and December 31, 2011, respectively. In addition to being covered by loss sharing agreements, these assets were marked to fair value at the time of acquisition, mitigating much of our loss potential on these non-performing assets. As a result, the levels of our non-performing assets are not fully comparable to those of our peers or to industry benchmarks.

As of September 30, 2012 and December 31, 2011, 64.4% and 63.3%, respectively, of loans accounted for under ASC Topic 310-30 were covered by the FDIC loss sharing agreements. Loans accounted for under ASC Topic 310-30 were recorded at fair value based on cash flow projections that considered any deteriorated credit quality and expected losses. These loans are accounted for on a pool basis and any non-payment of contractual principal or interest is considered in our periodic re-estimation of the expected future cash flows. To the extent that we decrease our cash flow projections, we record an

 

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immediate impairment expense through the provision for loan losses. We recognize any increases to our cash flow projections on a prospective basis through an increase to the pool’s yield over its remaining life once any previously recorded impairment expense has been recouped. As a result of this accounting treatment, these pools may be considered to be performing, even though some or all of the individual loans within the pools may be contractually past due. Loans accounted for under ASC Topic 310-30 were classified as performing assets at September 30, 2012 and December 31, 2011, as the carrying value of the respective loan or pool of loans cash flows were considered estimatable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans in the pool and the pool’s expected future cash flows, is being recognized on all acquired loans accounted for under ASC Topic 310-30.

The following table sets forth the non-performing assets as of the dates presented (in thousands):

 

     September 30, 2012     December 31, 2011  
     Non-Covered     Covered     Total     Non-Covered     Covered     Total  

Non-accrual loans:

            

Commercial loans

   $ 993      $ 3,646      $ 4,639      $ 760      $ 4,614      $ 5,374   

Commercial real estate loans

     11,630        1,252        12,882        21,960        8,047        30,007   

Agriculture

     116        61        177        29        —          29   

Residential real estate loans

     3,830        420        4,250        1,899        460        2,359   

Consumer loans

     28        —          28        1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     16,597        5,379        21,976        24,649        13,121        37,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans past due 90 days or more and still accruing interest:

            

Commercial loans

     —          —          —          —          178        178   

Commercial real estate loans

     —          —          —          —          149        149   

Agriculture

     —          —          —          —          —          —     

Residential real estate loans

     32        —          32        290        —          290   

Consumer loans

     18        —          18        35        —          35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accruing loans 90 days past due

     50        —          50        325        327        652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing restructured loans (1)

     13,445        2,135        15,580        10,958        1,367        12,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     30,092        7,514        37,606        35,932        14,815        50,747   

OREO

     64,822        64,523        129,345        43,530        77,106        120,636   

Other repossessed assets

     801        530        1,331        873        680        1,553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 95,715      $ 72,567      $ 168,282      $ 80,335      $ 92,601      $ 172,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses

       $ 17,496          $ 11,527   

Total non-performing loans to total non-covered, total covered, and total loans, respectively

     1.55     0.39     1.94     1.58     0.65     2.23

Total non-performing assets to total assets

         3.05         2.72

Allowance for loan losses to non-performing loans

         46.52         22.71

 

(1) Includes restructured loans less than 90 days past due and still accruing.

Total non-performing assets decreased $4.7 million at September 30, 2012 compared to December 31, 2011. The decrease was primarily a result of a $15.8 million decrease in non-accrual loans, most notably through a $17.1 decrease in commercial real estate loans on non-accrual status, offset, in part, by a $8.7 million increase in OREO.

At September 30, 2012, the largest category of non-performing loans was commercial real estate loans with balances of $12.9 million, consisting of $11.6 million of non-covered loans and $1.3 million of covered loans. The non-performing non-covered commercial real estate loans include 16 loans on non-accrual

 

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status totaling $11.6 million, primarily due to vacancies of commercial properties. We also had five covered commercial real estate loans on non-accrual status totaling $1.3 million. Non-performing commercial loans consisted primarily of eleven covered loans totaling $3.6 million and 11 non-covered loans totaling $1.0 million. Additionally, our residential real estate category had 61 non-covered loans totaling $3.8 million and one non-covered loan totaling $0.4 million.

Our OREO of $129.3 million at September 30, 2012 includes $17.1 million of participant interests in OREO in connection with our repossession of collateral on loans for which we were the lead bank and we have a controlling interest. We have recorded a corresponding payable to those participant banks in other liabilities. Additionally, the $129.3 million of OREO at September 30, 2012 excludes $12.2 million of minority interest in participated OREO in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a controlling interest. These properties have been repossessed by the lead banks and we have recorded our receivable due from the lead banks in other assets as minority interest in participated OREO.

During the nine months ended September 30, 2012, $67.7 million of OREO was foreclosed on or otherwise repossessed and $50.4 million of OREO was sold, including $3.0 million of non-covered gains and $3.8 million of covered gains that are subject to reimbursement to the FDIC at the applicable loss share coverage percentage. OREO write-downs of $8.6 million were recorded during the nine months ended September 30, 2012, of which $7.5 million, or 86.3%, were covered by FDIC loss sharing agreements. OREO balances increased $8.7 million during the nine months ended September 30, 2012 to $129.3 million, 49.9% of which was covered by FDIC loss sharing agreements, compared to OREO balances of $120.6 million at December 31, 2011, $77.1 million, or 63.9%, of which was covered by the FDIC loss sharing agreement.

The following table presents the carrying value of our accruing and non-accrual loans compared to the unpaid principal balance (“UPB”) as of September 30, 2012 (in thousands):

 

     Accruing     Nonaccrual     Total  
     Unpaid
principal
balance
     Carrying
value
     Carrying
value/
UPB
    Unpaid
principal
balance
     Carrying
value
     Carrying
value/
UPB
    Unpaid
principal
balance
     Carrying
value
     Carrying
value/
UPB
 

Covered loans:

                        

Commercial

   $ 179,108       $ 137,239         76.6   $ 12,984       $ 3,646         28.1   $ 192,092       $ 140,885         73.3

Commercial real estate

     647,007         487,256         75.3     42,502         1,252         2.9     689,509         488,508         70.8

Agriculture

     64,980         59,616         91.7     62         61         98.4     65,042         59,677         91.8

Residential real estate

     25,102         21,535         85.8     445         420         94.6     25,547         21,955         85.9

Consumer

     5         4         80.0     —           —           0.0     5         4         80.0
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total covered loans

     916,202         705,650         77.0     55,993         5,379         9.6     972,195         711,029         73.1

Non-covered loans:

                        

Commercial

     131,091         124,349         94.9     4,281         993         23.2     135,372         125,342         92.6

Commercial real estate

     468,955         412,486         88.0     16,875         11,630         68.9     485,830         424,116         87.3

Agriculture

     103,207         101,463         98.3     292         116         39.7     103,499         101,579         98.1

Residential real estate

     543,327         515,202         94.8     5,031         3,830         76.1     548,358         519,032         94.7

Consumer

     67,917         56,673         83.4     52         28         53.8     67,969         56,701         83.4
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total non-covered loans

     1,314,497         1,210,173         92.1     26,531         16,597         62.6     1,341,028         1,226,770         91.5
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total loans

   $ 2,230,699       $ 1,915,823         85.9   $ 82,524       $ 21,976         26.6   $ 2,313,223       $ 1,937,799         83.8
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

 

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Past Due Loans

Past due status is monitored as an indicator of credit deterioration. Covered and non-covered loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due and not accounted for under ASC Topic 310-30 are put on non-accrual status unless the loan is well secured and in the process of collection. Pooled loans accounted for under ASC Topic 310-30 that are 90 days or more past due and still accreting are included in loans 90 days or more past due and still accruing interest and are considered to be performing as is further described above under “Non-Performing Assets.” The table below shows the past due status of covered and non-covered loans, based on contractual terms of the loans as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012     December 31, 2011  
     Non-covered     Covered     Total     Non-covered     Covered     Total  

Loans 30-89 days past due and still accruing interest

   $ 19,804      $ 41,986      $ 61,790      $ 31,279      $ 55,182      $ 86,461   

Loans 90 days past due and still accruing interest (accounted for under ASC 310-30)

     51,347        92,606        143,953        64,714        109,654        174,368   

Loans 90 days or more past due and still accruing interest (excluded from ASC 310-30)

     50        —          50        325        327        652   

Non-accrual loans

     16,597        5,379        21,976        24,649        13,121        37,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total past due and non-accrual loans

   $ 87,798      $ 139,971      $ 227,769      $ 120,967      $ 178,284      $ 299,251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total past due and non-accrual loans to total non-covered, total covered, and total loans, respectively

     7.2     19.7     11.8     9.2     18.7     13.2

Total non-accrual loans to total non-covered, total covered, and total loans, respectively

     1.4     0.8     1.1     1.9     1.4     1.7

% of total past due and non-accrual loans that carry fair value adjustments

     77.4     91.7     86.2     84.0     98.9     92.9

% of total past due and non-accrual loans that are covered by FDIC loss sharing agreement

         61.5         59.6

Total loans 30 days or more past due and still accruing interest and non-accrual loans represented 11.8% of total loans as of September 30, 2012 compared to 13.2% at December 31, 2011. Loans 30-89 days past due and still accruing interest decreased $24.7 million at September 30, 2012 compared to December 31, 2011. Loans 90 days or more past due and still accruing interest decreased $31.0 million at September 30, 2012 compared to December 31, 2011. The decreases in past due loans is reflective of improved credit quality and the successful workout strategies employed by our special assets division during the period. Additionally, of the $144.0 million of loans 90 days or more past due and still accruing interest, all but $50 thousand are accounted for under ASC Topic 310-30 and continued to accrete interest and 64.3% of the aforementioned $144.0 million of loans 90 days or more past due and still accruing interest are covered by FDIC loss sharing agreements.

Non-accrual loans decreased $15.8 million during the period primarily due to resolution of certain assets and foreclosures during the period. The covered and non-covered non-accrual loans are primarily secured by real estate both in and outside of our market areas.

 

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Allowance for Loan Losses

The ALL represents the amount that we believe is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. Determination of the ALL is based on an evaluation of the collectability of loans, the realizable value of underlying collateral and, to the extent applicable, prior loss experience. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity and results of operations.

In accordance with the applicable guidance for business combinations, acquired loans were recorded at their acquisition date fair values, which were based on expected future cash flows and included an estimate for future loan losses, therefore no loan loss reserves were recorded as of the acquisition date. Any estimated losses on acquired loans that arise after the acquisition date are reflected in a charge to the provision for loan losses. Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss-sharing agreements with the FDIC. Accordingly, any provision for loan losses relating to covered loans is partially offset by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income.

Loans accounted for under the accounting guidance provided in ASC Topic 310-30 have been grouped into pools based on the predominant risk characteristics of purpose and/or type of loan. The timing and receipt of expected principal, interest and any other cash flows of these loans are periodically re-estimated and the expected future cash flows of the collective pools are compared to the carrying value of the pools. To the extent that the expected future cash flows of each pool is less than the book value of the pool, an allowance for loan losses will be established through a charge to the provision for loan losses and, for loans covered by loss sharing agreements with the FDIC, a related adjustment to the FDIC indemnification asset for the portion of the loss that is covered by the loss sharing agreements. If the re-estimated expected future cash flows are greater than the book value of the pools, then the improvement in the expected future cash flows will be accreted into interest income over the remaining expected life of the loan pool.

We periodically re-estimate the expected future cash flows of loans accounted for under ASC Topic 310-30. During the nine months ended September 30, 2012, these re-estimations resulted in an increase in expected cash flows in certain loan pools, which, absent previous valuation allowances within the same pool, is reflected in increased accretion as well as an increased amount of accretable yield and is recognized over the expected remaining lives of the underlying loans as an adjustment to yield. A loan pool within the commercial loan segment had previous valuation allowances of $1.1 million, which was reversed as a result of an increase in expected cash flows. In some pools, the re-measurement of expected future cash flows resulted in decreases in expected cash flows and is reflected as provision for loan loss on loans accounted for under ASC Topic 310-30 of $18.5 million for the nine months ended September 30, 2012, resulting in net impairment of $17.4 million for the nine months ended September 30, 2012, $11.2 million of which was covered.

For all loans not accounted for under ASC Topic 310-30, the determination of the ALL follows an established process to determine the appropriate level of ALL that is designed to account for credit

 

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deterioration as it occurs. This process provides an ALL consisting of a specific allowance component based on certain individually evaluated loans and a general allowance component based on estimates of reserves needed for all other loans, segmented based on similar risk characteristics.

Impaired loans less than $250,000 are included in the general allowance population. Impaired loans over $250,000 are subject to individual evaluation on a regular basis to determine the need, if any, to allocate a specific reserve to the impaired loan. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:

 

   

the borrower’s resources, ability, and willingness to repay in accordance with the terms of the loan agreement;

 

   

the likelihood of receiving financial support from any guarantors;

 

   

the adequacy and present value of future cash flows, less disposal costs, of any collateral;

 

   

the impact current economic conditions may have on the borrower’s financial condition and liquidity or the value of the collateral.

At September 30, 2012, there were six impaired loans that carried specific reserves totaling $2.0 million. One commercial loan comprised $1.0 million of the total specific reserves and was an acquired unsecured revolving line of credit scoped out of ASC Topic 310-30. The remaining five loans were allocated across various segments and classes.

In evaluating the loan portfolio for an appropriate ALL level, unimpaired loans are grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio is further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of applying loss ratios and determining applicable subjective adjustments to the ALL. The application of subjective adjustments is based upon qualitative risk factors, including:

 

   

economic trends and conditions;

 

   

industry conditions;

 

   

asset quality;

 

   

loss trends;

 

   

lending management;

 

   

portfolio growth; and

 

   

loan review/internal audit results.

We have identified five primary loan segments that are further stratified into 22 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific factors affecting each loan class.

 

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Following are the loan classes within each of the five primary loan segments:

 

Commercial

  

Commercial real estate

  

Agriculture

  

Residential real estate

  

Consumer

Wholesale   

1-4 family construction

  

Total agriculture

  

Sr. lien 1-4 family closed end

  

Secured

Manufacturing    1-4 family—acquisition and      

Jr. lien 1-4 family closed end

  

Unsecured

Transportation/   

    development

     

Sr. lien 1-4 family open end

  

Credit card

warehousing   

Commercial construction

     

Jr. lien 1-4 family open end

  

Overdraft

Finance and insurance   

Commercial—acquisition and

development

        
Oil and gas   

Multi-family

        

All other commercial

    and industrial

  

Owner-occupied

Non-owner occupied

        

Actual historical loss data is limited due to the relatively recent inception date of the Company and the recent acquisitions of the Bank of Choice and the Community Banks of Colorado further limits loss history on those acquired loans. The methodology used in establishing the historical loss ratios for acquired residential real estate, consumer and agriculture loans was the three-year historical net charge-off percentage realized by Bank Midwest prior to our acquisition. We believe use of the historical net charge-off data for the aforementioned residential real estate, consumer and agriculture loans is an appropriate baseline due to the fact that we acquired approximately 84% of these loan types on a combined basis. The percentage acquired by each loan type was as follows: residential real estate (82%), consumer (90%), and agriculture (98%). Bank of Choice was acquired on July 22, 2011, and Community Banks of Colorado was acquired on October 21, 2011, and all of the loans acquired in those transactions were recorded at fair value at the respective dates of acquisition. Additionally, the majority of the loans acquired with those acquisitions are accounted for under ASC Topic 310-30.

Historical loss ratios of loan classes are calculated based on the proportion of actual charge-offs experienced to the total population of loans in the class. The historical baseline is then adjusted based on our analysis of the current conditions as they relate to the subjective adjustment factors described above. Portions of the ALL may be allocated for specific loans or specific loan classes; however, the entire ALL is available for any loan that, in our judgment, should be charged-off.

In addition to the $17.4 million of provision for loan losses expense for our loans accounted for under ASC Topic 310-30, during the nine months ended September 30, 2012, we recorded $7.9 million of provision for loan losses for loans not accounted for under ASC Topic 310-30 as we provided for loan charge-offs and credit risks inherent in the September 30, 2012 non ASC Topic 310-30 balances.

We charged off $20.2 million of loans during the nine-months ended September 30, 2012 primarily related to commercial and commercial real estate loans. Approximately $12.8 million of these charge-offs were related to loans accounted for under ASC Topic 310-30 and were provided for during the previous re-measurements. Of the $7.5 million non 310-30 charge-offs, $2.4 million was related to one commercial and industrial loan which was a result of fraudulent collateral accepted by the acquired institution and is not indicative of expected future charge-offs.

After considering the abovementioned factors, we believe that the ALL of $17.5 million and $11.5 million was adequate to cover probable losses inherent in the loan portfolio at September 30, 2012 and

 

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December 31, 2011, respectively. However, it is likely that future adjustments to the ALL will be necessary and any changes to the assumptions, circumstances or estimates used in determining the ALL could adversely affect the Company’s results of operations, liquidity or financial condition.

The following schedule presents, by class stratification, the changes in the ALL from June 30, 2012 to September 30, 2012 (in thousands):

 

     310-30     Non 310-30     Total  

Allowance for loan losses at June 30, 2012

   $ 7,259      $ 10,035      $ 17,294   

Charge-offs:

      

Commercial

     (1     (297     (298

Commercial real estate

     (3,500     (35     (3,535

Agriculture

     (144     —          (144

Residential real estate

     (169     (351     (520

Consumer

     —          (566     (566
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (3,814     (1,249     (5,063

Recoveries

     2        0        2   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (3,812     (1,249     (5,061

Provision for loan loss

     3,663        1,600        5,263   
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses at September 30, 2012

   $ 7,110      $ 10,386      $ 17,496   
  

 

 

   

 

 

   

 

 

 

 

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The following schedule presents, by class stratification, the changes in the ALL from December 31, 2011 to September 30, 2012 (in thousands):

 

     310-30     Non 310-30     Total  

Allowance for loan losses at December 31, 2011

   $ 2,188      $ 9,339      $ 11,527   

Charge-offs:

      

Commercial

     (216     (3,056     (3,272

Commercial real estate

     (11,643     (2,448     (14,091

Agriculture

     (144     (8     (152

Residential real estate

     (729     (815     (1,544

Consumer

     (19     (1,161     (1,180
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (12,751     (7,488     (20,239
  

 

 

   

 

 

   

 

 

 

Recoveries

     275        608        883   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (12,476     (6,880     (19,356

Provision for loan loss

     17,398        7,927        25,325   
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses at September 30, 2012

   $ 7,110      $ 10,386      $ 17,496   
  

 

 

   

 

 

   

 

 

 

Ratio of allowance for loan losses to total loans outstanding at period end

     0.73     1.07     0.90

Ratio of allowance for loan losses to non-covered loans outstanding at period end

         1.43

Ratio of allowance for non 310-30 loan losses to total non-performing loans at period end

       27.62     46.52

Ratio of allowance for non 310-30 loan losses to non-performing, non-covered loans at period end

       34.51     58.14

Ratio of net charge-offs during the period (annualized) to average total loans during the period

         1.25

Total loans

   $ 971,036      $ 966,763      $ 1,937,799   

Non-covered loans

   $ 345,814      $ 880,956      $ 1,226,770   

Total non-performing loans

     $ 37,606      $ 37,606   

Non-performing, non-covered loans

     $ 30,092      $ 30,092   

Average total loans outstanding during the period

       $ 2,062,227   

The following table presents the allocation of the ALL and the percentage of the total amount of loans in each loan category listed as of the dates presented:

 

     September 30, 2012  
     Total loans      % of total
loans
    Related
ALL
     % of ALL  

Commercial

   $ 266,227         14   $ 2,549         15

Commercial real estate

     912,624         47     10,066         57

Agriculture

     161,256         8     498         3

Residential real estate

     540,987         28     3,832         22

Consumer

     56,705         3     551         3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,937,799         100   $ 17,496         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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     December 31, 2011  
     Total loans      % of total
loans
    Related
ALL
     % of ALL  

Commercial

   $ 372,931         16   $ 2,959         26

Commercial real estate

     1,152,478         51     3,389         29

Agriculture

     151,403         7     282         2

Residential real estate

     522,885         23     4,121         36

Consumer

     74,354         3     776         7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,274,051         100   $ 11,527         100
  

 

 

    

 

 

   

 

 

    

 

 

 

FDIC Indemnification Asset and Clawback Liability

The FDIC indemnification asset represents the net present value of the expected reimbursements from the FDIC for probable losses on covered loans and OREO that were acquired in the Hillcrest Bank and Community Banks of Colorado transactions. As covered assets are resolved, whether it be through repayment, short sale of the underlying collateral, the foreclosure on, and sale of collateral, or the sale or charge-off of loans or OREO, the portion of any loss incurred that is reimbursable by the FDIC is recognized as FDIC loss sharing income in non-interest income. Any gains or losses realized from the resolution of covered assets reduce or increase, respectively, the amount of the FDIC indemnification asset.

We recorded FDIC indemnification assets at fair value in connection with our Hillcrest Bank and Community Banks of Colorado acquisitions. The initial fair values were established by discounting the expected future cash flows with a market discount rate for like maturity and risk instruments. The discount is accreted to income in connection with the expected timing of the related cash flows, and may increase or decrease from period to period due to changes in amounts and timing of expected cash flows from covered loans and OREO.

During the nine months ended September 30, 2012, we recognized $9.2 million of negative accretion related to the FDIC indemnification asset and we further reduced the carrying value of the FDIC indemnification asset by $101.0 million as a result of claims filed with the FDIC as discussed below. The negative accretion resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. The increase in expected cash flows from these underlying assets is reflected in increased accretion rates on covered loans as well as an increased amount of accretable yield on our covered loans accounted for under ASC Topic 310-30 and is being recognized over the expected lives of the underlying covered loans as an adjustment to yield. During the nine months ended September 30, 2012, we submitted $109.1 million of loss share claims to the FDIC for the reimbursable portion of losses related to the Hillcrest Bank and Community Banks of Colorado covered assets incurred during the fourth quarter of 2011 and the second quarter of 2012. Included in the $109.1 million were $8.1 million of claims related to additional losses incurred during the period that were not previously considered in the carrying amount of the indemnification asset. The loss claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements. During the nine months ended September 30, 2012, the FDIC paid $75.9 million, $33.1 million of which was related to losses incurred during the fourth quarter of 2011 and $42.8 million of which was related to losses incurred during the six months ended June 30, 2012 and submitted to the FDIC during the three months ended September 30, 2012. The remaining claimed amounts are anticipated to be received during the fourth quarter of 2012 and are included in other assets.

 

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During the nine months ended September 30, 2011, we received $83.5 million from the FDIC for reimbursement of losses that occurred from the date of acquisition of Hillcrest Bank through June 30, 2011, in accordance with our loss sharing agreements. Included in the $83.5 million received from the FDIC were reimbursements of expenses incurred for the resolution of covered assets netted with recoveries received on covered assets that were not included in the expected cash flows of the indemnification assets. During the nine months ended September 30, 2011, we also recognized negative accretion of $2.2 related to the FDIC indemnification asset.

Within 45 days of the end of each of the loss sharing agreements with the FDIC, we may be required to reimburse the FDIC in the event that the Company’s losses on covered assets do not reach the second tranche in each related loss sharing agreement, based on the initial discount received less cumulative servicing amounts for the covered assets acquired. At September 30, 2012 and December 31, 2011, this clawback liability was carried at $30.8 million and $30.0 million, respectively, and is included in Due to FDIC in our consolidated statements of financial condition.

Other real estate owned

OREO is comprised of properties acquired through the foreclosure or repossession process, or any other resolution activity that results in partial or total satisfaction of problem loans. We have a dedicated, enterprise-level problem asset resolution team that is actively working to resolve problem loans and to obtain and subsequently sell the underlying collateral. The OREO balance of $129.3 million at September 30, 2012 includes the interests of several outside participating banks totaling $17.1 million, for which an offsetting liability is recorded in other liabilities and excludes $12.2 million of the Company’s minority interests in OREO which are held by outside banks where we were not the lead bank and do not have a controlling interest, for which a receivable is included in other assets. Of the $129.3 million of OREO at September 30, 2012, $64.5 million, or 49.9%, was covered by the loss sharing agreements with the FDIC. Any losses on these assets are substantially offset by a corresponding change in the FDIC indemnification asset. During the nine months ended September 30, 2012, the Company sold $50.4 million of OREO, inclusive of realized net gains on these sales of $6.8 million, and during the nine months ended September 30, 2011 the Company sold $30.4 million of OREO, inclusive of realized net losses of $1.0 million. Changes in OREO for the nine months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     For the nine months ended
September 30,
 
     2012     2011  

Balance at December 31

   $ 120,636      $ 54,078   

Transfers from loan portfolio

     67,741        74,071   

Impairments

     (8,638     (2,847

Sales, net of gains and losses

     (50,394     (30,397
  

 

 

   

 

 

 

Balance at September 30

   $ 129,345      $ 94,905   
  

 

 

   

 

 

 

 

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At December 31, 2011, $77.1 million, or 63.9%, of OREO was covered by the loss sharing arrangement with the FDIC. Any gains or losses on these assets are substantially offset by a corresponding change in the FDIC indemnification asset.

Other Assets

Significant components of other assets were as follows as of the periods indicated (in thousands):

 

     September 30,
2012
     December 31,
2011
 

FDIC indemnification-claimed

   $ 33,220       $ —     

Minority interest in participated other real estate owned

     12,192         —     

Accrued interest on interest bearing bank deposits and investment securities

     6,395         5,651   

Accrued interest on loans

     7,821         10,371   

Other receivable from FDIC

     566         11,191   

Other

     11,835         11,629   
  

 

 

    

 

 

 

Total other assets

   $ 72,029       $ 38,842   
  

 

 

    

 

 

 

The FDIC indemnification-claimed, which is comprised of adjustments to covered assets, reimbursable expenses incurred during the resolution of covered assets, and other miscellaneous adjustments from the FDIC, increased $33.2 million during the nine months ended September 30, 2012 in connection with the loss share claims submitted to the FDIC that remained unpaid as of September 30, 2012.

During the nine months ended September 30, 2012, we recorded $12.2 million of minority interest in participated OREO in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a controlling interest. These properties have been repossessed by the lead banks and we have recorded our receivable due from the lead banks in other assets as minority interest in participated OREO.

During the nine months ended September 30, 2012, the other receivable due from FDIC decreased $10.6 million as settlement items related to the Community Banks of Colorado acquisition in the fourth quarter of 2011 were settled with FDIC.

Other Liabilities

Significant components of other liabilities were as follows as of the dates indicated (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Participant interest in other real estate owned

   $ 17,107       $ —     

Accrued and deferred income taxes payable

     19,611         45,081   

Accrued interest payable

     4,699         11,017   

Accrued expenses

     17,471         15,916   

Warrant liability

     5,829         6,845   

Other liabilities

     1,856         5,816   
  

 

 

    

 

 

 

Total other liabilities

   $ 66,573       $ 84,675   
  

 

 

    

 

 

 

 

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During the nine months ended September 30, 2012, we recorded $17.1 million of participant interests in other real estate owned which represents participant banks’ interests in properties that we have repossessed. These participant interests are also reflected in our other real estate owned balances.

Accrued and deferred income taxes payable decreased $25.5 million during the nine months ended September 30, 2012 primarily as a result of tax payments paid during that period.

During the nine months ended September 30, 2012, we continued to lower the interest rates on our deposits, coupled with the shift from higher-cost time deposits to lower cost transaction accounts. The lower cost mix of deposits resulted in a decrease in accrued interest payable of $6.3 million from December 31, 2011 to September 30, 2012.

We have outstanding warrants to purchase 830,750 shares of our common stock, which are classified as a liability and included in other liabilities in our consolidated statements of financial condition. The warrants were granted to certain lead stockholders and all warrants have an exercise price of $20.00 per share. The term of the warrants is for ten years and the expiration dates of the warrants range from October 20, 2019 to September 30, 2020. We revalue the warrants at the end of each reporting period using a Black-Scholes model and any change in fair value is reported in the statements of operations as “loss (gain) from change in fair value of warrant liability” in non-interest expense in the period in which the change occurred. The warrant liability decreased $1.0 million during the nine months ended September 30, 2012. The value of the warrant liability, and the expense that results from an increase to this liability, has a direct correlation to our stock price. Accordingly, any increase in our stock price, would result in an increase in the warrant liability and the associated expense. More information on the accounting and measurement of the warrant liability can be found in notes 2 and 19 in our audited consolidated financial statements.

Funding Sources

Deposits from banking clients serve as a primary funding source for our banking operations. Our banking centers function as the primary deposit gathering stations, where we seek to price deposits competitively in accordance with other depository institutions in the area and according to our needs.

In connection with our acquisitions of Bank of Choice in July 2011 and Community Banks of Colorado in October 2011 we transferred approximately $100 million and $174 million, respectively, of holding company cash in the form of capital contributions to NBH Bank to provide sufficient capital for the consummation of those acquisitions. Under our agreements with the OCC and the FDIC, NBH Bank is not permitted to pay any dividends to the holding company prior to December 2013. As such, the funding sources for our holding company are currently limited to the cash on hand at the holding company, which was approximately $103.9 million at September 30, 2012 and $113.6 million at December 31, 2011.

Deposits

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. We assumed the majority of our deposit accounts with our acquisitions of Bank Midwest and Hillcrest Bank during the fourth quarter of 2010, our acquisition of Bank of Choice in July 2011, and acquisition of the Community Banks of Colorado in October 2011. The deposits were recorded

 

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at their estimated fair value and we marked the time deposits assumed in the Bank Midwest transaction up by $0.9 million, which is being amortized as an adjustment to yield over the expected life of the related time deposits. A fair value adjustment was not deemed necessary on the time deposits assumed in the Bank of Choice, Hillcrest Bank, or the Community Banks of Colorado transactions because we had the option to re-price these time deposits at the time of the acquisition.

The following table presents information regarding our deposit composition at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012     December 31, 2011  

Non-interest bearing demand deposits

   $ 648,808         15   $ 678,735         13

Interest bearing demand deposits

     484,760         11     537,160         11

Savings accounts

     176,076         4     169,378         3

Money market accounts

     1,026,862         25     893,184         18
  

 

 

      

 

 

    

Total transaction accounts

     2,336,506         55     2,278,457         45

Time deposits < $ 100,000

     1,216,708         28     1,680,531         33

Time deposits > $ 100,000

     728,510         17     1,104,065         22
  

 

 

      

 

 

    

Total time deposits

     1,945,218         45     2,784,596         55
  

 

 

      

 

 

    

Total deposits

   $ 4,281,724         100   $ 5,063,053         100
  

 

 

      

 

 

    

During the nine months ended September 30, 2012, our total deposits decreased $781.3 million, as high-priced time deposits assumed in our Hillcrest Bank and Community Banks of Colorado acquisitions matured and were not renewed. Our transaction deposits have been steadily increasing as a result of our strategic shift away from time deposits and to lower cost demand deposits, savings and money market accounts, which is consistent with our client relationship banking strategy. As of September 30, 2012, acquired time deposits, the majority of which we believe were priced above market, represented approximately 15% of outstanding time deposits. Approximately 28% of the remaining acquired time deposits are scheduled to mature by December 31, 2012.

Approximately 62.5% and 60.4% of the time deposits at September 30, 2012 and December 31, 2011, respectively, were for denominations of less than $100,000. The remaining maturities of these time deposits are summarized as follows (in thousands):

 

     September 30, 2012     December 31, 2011  
     Balance      Weighted
Average
Rate
    Balance      Weighted
Average
Rate
 

Three months or less

   $ 319,839         0.82   $ 446,447         1.22

Over 3 months through 6 months

     234,581         0.73     345,592         1.09

Over 6 months through 12 months

     319,860         0.69     627,241         1.11

Over 12 months through 24 months

     257,191         0.91     180,967         1.54

Over 24 months through 36 months

     49,720         1.68     34,097         2.00

Over 36 months through 48 months

     19,982         2.02     23,458         2.61

Over 48 months through 60 months

     10,753         1.57     17,914         1.93

Thereafter

     4,782         2.43     4,815         2.72
  

 

 

      

 

 

    

Total time deposits < $100,000

   $ 1,216,708         0.85   $ 1,680,531         1.24
  

 

 

      

 

 

    

 

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Approximately 37.5% and 39.6% of the time deposits at September 30, 2012 and December 31, 2011, respectively, were for denominations of $100,000 or more. The remaining maturities of these time deposits are summarized as follows (in thousands):

 

     September 30, 2012     December 31, 2011  
     Balance      Weighted
Average
Rate
    Balance      Weighted
Average
Rate
 

Three months or less

   $ 202,886         1.02   $ 300,388         1.41

Over 3 months through 6 months

     120,949         0.91     209,148         1.25

Over 6 months through 12 months

     157,461         0.87     387,708         1.41

Over 12 months through 24 months

     141,996         1.04     128,881         1.64

Over 24 months through 36 months

     56,049         1.70     18,782         2.03

Over 36 months through 48 months

     30,648         2.15     31,220         2.67

Over 48 months through 60 months

     16,367         1.58     25,636         1.87

Thereafter

     2,154         1.94     2,302         2.90
  

 

 

      

 

 

    

Total time deposits > $100,000

   $ 728,510         1.09   $ 1,104,065         1.47
  

 

 

      

 

 

    

At September 30, 2012, we had $1.4 billion of time deposits that were scheduled to mature within 12 months, $0.5 billion of which are in denominations of $100,000 or more, and $0.9 billion of which are in denominations less than $100,000. The table below highlights the weighted average rate of total time deposits by scheduled maturity date (dollars in thousands):

 

     September 30, 2012     December 31, 2011  
     Balance      Weighted
Average
Rate
    Balance      Weighted
Average
Rate
 

Three months or less

   $ 522,725         0.89   $ 746,835         1.30

Over 3 months through 6 months

     355,530         0.79     554,740         1.15

Over 6 months through 12 months

     477,321         0.75     1,014,949         1.23

Over 12 months through 24 months

     399,187         0.96     309,848         1.58

Over 24 months through 36 months

     105,769         1.69     52,879         2.01

Over 36 months through 48 months

     50,630         2.10     54,678         2.65

Over 48 months through 60 months

     27,120         1.58     43,550         1.89

Thereafter

     6,936         2.28     7,117         2.77
  

 

 

      

 

 

    

Total time deposits

   $ 1,945,218         0.94   $ 2,784,596         1.33
  

 

 

      

 

 

    

 

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In connection with our FDIC-assisted bank acquisitions, the FDIC provided Bank of Choice, Hillcrest Bank, and Community Banks of Colorado depositors with the right to redeem their time deposits at any time during the life of the time deposit, without penalty, unless the depositor accepts new terms. At September 30, 2012 and December 31, 2011, the Company had approximately $232.0 million and $1.1 billion, respectively, of time deposits that were subject to the penalty-free withdrawals, the remaining scheduled maturity dates of which are shown below (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Three months or less

   $ 66,652       $ 341,875   

Over 3 months through 6 months

     29,555         215,327   

Over 6 months through 12 months

     49,976         366,574   

Over 12 months through 24 months

     21,408         126,585   

Over 24 months through 36 months

     31,856         16,864   

Over 36 months through 48 months

     30,723         39,055   

Over 48 months through 60 months

     1,863         23,513   

Thereafter

     —           404   
  

 

 

    

 

 

 

Total

   $ 232,033       $ 1,130,197   
  

 

 

    

 

 

 

Regulatory Capital

Our subsidiary bank and the holding company are subject to the regulatory capital adequacy requirements of the Federal Reserve Board, the FDIC and the OCC, 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. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital requirements that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Through these judgments, assets are risk weighted according to the perceived risk they pose to capital on a scale of 0% to 100%, with 100% risk-weighted assets signifying higher risk assets that warrant higher levels of capital. While many non-covered assets (particularly loans and OREO) typically fall in to 50% or 100% risk-weighted classifications, our covered assets are all considered to be 20% risk-weighted for risk-based capital calculations.

Typically, banks are required to maintain a tier 1 risk-based capital ratio of 4%, a total risk-based capital ratio of 8% and a tier 1 leverage ratio of 4% in order to meet minimum, adequately capitalized regulatory requirements. To be considered well-capitalized (under prompt corrective action provisions), banks must maintain minimum capital ratios of 6% for tier 1 risk-based capital, 10% for total risk-based capital and 5% for the tier 1 leverage ratio. In connection with the approval of the de-novo charters for Hillcrest Bank and NBH Bank, we agreed with our regulators to maintain capital levels of at least 10% tier 1 leverage ratio, 11% tier 1 risk based capital ratio and 12% total risk-based capital ratio at our subsidiary bank(s) through December, 2013. Following the merger of Hillcrest Bank into NBH Bank in November 2011, only NBH Bank remains subject to these capital ratios. In conjunction with the consummation of the Hillcrest Bank and Bank Midwest transactions, the Company contributed $170 million of capital into Hillcrest Bank and $390 million of capital into Bank Midwest to provide each of our subsidiary banks with sufficient capital to meet and exceed the above-mentioned agreed-upon capital ratios. In July 2011, we contributed $100 million to NBH Bank to provide additional capital to fund the acquisition of Bank of Choice from the FDIC. In October 2011, we contributed capital of $174 million to NBH Bank to fund the Community Banks of Colorado acquisition from the FDIC.

 

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At September 30, 2012 and at December 31, 2011, our subsidiary bank(s) and the consolidated holding company exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as is detailed in the table below (dollars in thousands):

 

     September 30, 2012  
     Actual      Required to be
considered well
capitalized (1)
     Required to be
considered
adequately
capitalized
 
     Ratio     Amount      Ratio     Amount      Ratio     Amount  

Tier 1 leverage ratio

              

Consolidated

     17.7   $ 980,654         N/A        N/A         4   $ 221,566   

NBH Bank, N.A. (2)

     15.9     865,172         10     532,508         4     217,003   

Tier 1 risk-based capital ratio (3)

              

Consolidated

     51.6   $ 980,654         6   $ 114,220         4   $ 76,147   

NBH Bank, N.A. (2)

     46.0     865,172         11     206,697         4     75,162   

Total risk-based capital ratio (3)

              

Consolidated

     52.4   $ 998,461         10   $ 190,367         8   $ 152,293   

NBH Bank, N.A. (2)

     47.0     882,979         12     225,487         8     150,325   

 

     December 31, 2011  
     Actual      Required to be
considered well
capitalized (1)
     Required to be
considered
adequately
capitalized
 
     Ratio     Amount      Ratio     Amount      Ratio     Amount  

Tier 1 leverage ratio

              

Consolidated

     15.1   $ 949,154         N/A        N/A         4   $ 251,514   

NBH Bank, N.A. (2)

     13.4     828,321         10     616,919         4     246,768   

Tier 1 risk-based capital ratio (3)

              

Consolidated

     49.9   $ 949,154         6   $ 114,077         4   $ 76,051   

NBH Bank, N.A. (2)

     44.2     828,321         11     206,258         4     75,003   

Total risk-based capital ratio (3)

              

Consolidated

     50.5   $ 960,681         10   $ 190,129         8   $ 152,103   

NBH Bank, N.A. (2)

     44.8     839,848         12     225,009         8     150,006   

 

(1) These ratio requirements are reflective of the agreements the Company has made with its various regulators in connection with the approval of the de novo charter for NBH Bank, N.A., as described above.
(2) In November 2011, Hillcrest Bank, N.A. was merged into NBH Bank, N.A. The capital ratios shown are reflective of the merger.
(3) Due to the conditional guarantee represented by the loss sharing agreements, the FDIC indemnification asset and covered assets are risk-weighted at 20% for purposes of risk-based capital computations.

 

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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 and FDIC loss sharing income. Our primary operating expenses, aside from interest expense, consist of salaries and employee benefits, professional fees, occupancy costs, and data processing expense.

Overview of Results of Operations

The nine months ended September 30, 2012 represents our first three full quarters with the operations of all of our acquisitions. We earned $1.6 million during the first quarter of 2012, $2.7 million during the second quarter of 2012 and during the third quarter of 2012 we incurred a net loss of $7.9 million, which was largely attributable to expenses incurred in connection with our initial public offering in September 2012. These results reflect the increased revenues and expenses associated with our acquisitions of Bank of Choice and Community Banks of Colorado in the second half of 2011, in addition to the further build-out of our business development and operational functions that support our banking activities and the continued integration of our acquisitions. We completed the integration of Community Banks of Colorado in May 2012 and the integration of Bank of Choice in July 2012. During the three and nine months ended September 30, 2012 we continued to benefit from the strong yields on our loan portfolio while our dedicated workout group actively worked to resolve our acquired troubled loans. The activity in this resolution process is evidenced by the elevated levels of OREO related expenses and problem loan expenses. During the nine months ended September 30, 2012, in addition to net transfers of $38.6 million of non-accretable difference to accretable yield to be recognized in future periods, we recorded $25.3 million of provision for loan losses, $17.4 million of which was related to loans accounted for under ASC Topic 310-30 and $7.9 million of which was related to loans not accounted for under ASC Topic 310-30. The FDIC coverage of these impairments is reflected in the estimated cash flows underlying the FDIC indemnification asset.

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 deposit mix and the cost of deposits; (ii) our loan mix and the yield on loans; (iii) the investment portfolio and the related yields; and (iv) net interest income simulations for various forecast periods.

The following tables present the components of net interest income for the periods indicated. Prior to our acquisition of Hillcrest Bank on October 22, 2010, we did not have any banking operations and subsequent to the Hillcrest Bank acquisition, we have completed three other acquisitions: Bank Midwest on December 10, 2010, Bank of Choice on July 22, 2011 and Community Banks of Colorado on October 21, 2011. As a result, the comparability of the periods presented in the tables below related to 2011 is limited. The tables include: (i) the average daily balances of interest-earning assets and interest bearing liabilities; (ii) the average daily balances of non-interest earning assets and non-interest bearing and liabilities; (iii) the total amount of interest income earned on interest-earning assets; (iv) the total amount of interest expense incurred on interest-bearing liabilities; (v) the resultant average yields and

 

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rates; (vi) net interest spread; and (vii) net interest margin, which represents the difference between interest income and interest expense, expressed as a percentage of interest-earning assets. The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest-earning assets and are excluded from this presentation for timeframes prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale. Non-accrual and restructured loan balances are included in the average loan balances; however, the forgone interest on non-accrual and restructured loans is not included in the dollar amounts of interest earned. All amounts presented are on a pre-tax basis.

 

     Three months ended September 30, 2012     Three months ended June 30, 2012  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 
     (Dollars in thousands)     (Dollars in thousands)  

Interest earning assets:

              

310-30 loans

   $ 990,661      $ 24,008         9.64   $ 1,108,322      $ 25,694         9.32

Non 310-30 loans (1)(2)

     968,652        16,097         6.61     927,688        16,900         7.33

Investment securities available-for-sale

     1,747,254        9,302         2.12     1,759,623        10,124         2.31

Investment securities held-to-maturity

     683,700        5,888         3.43     738,196        6,330         3.45

Other securities

     33,067        377         4.54     31,943        384         4.84

Interest-bearing deposits

     595,383        370         0.25     650,759        413         0.26
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest earning assets

   $ 5,018,717      $ 56,042         4.44   $ 5,216,531      $ 59,845         4.61
  

 

 

   

 

 

      

 

 

   

 

 

    

Cash and due from banks

     66,467             70,805        

Other assets

     585,735             623,648        

Allowance for loan losses

     (15,817          (11,375     
  

 

 

        

 

 

      

Total assets

   $ 5,655,102           $ 5,899,609        
  

 

 

        

 

 

      

Interest bearing liabilities:

              

Savings deposits and interest bearing checking

   $ 1,696,972      $ 1,341         0.31   $ 1,705,916      $ 1,364         0.32

Time deposits

     2,063,622        5,178         1.00     2,298,782        6,536         1.14

Securities sold under agreements to repurchase

     53,073        27         0.20     62,124        32         0.21
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing liabilities

   $ 3,813,667      $ 6,546         0.68   $ 4,066,822      $ 7,932         0.78
  

 

 

   

 

 

      

 

 

   

 

 

    

Demand deposits

     636,277             622,936        

Other liabilities

     107,415             115,032        
  

 

 

        

 

 

      

Total liabilities

     4,557,359             4,804,790        
  

 

 

        

 

 

      

Stockholders’ equity

     1,097,743             1,094,819        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 5,655,102           $ 5,899,609        
  

 

 

        

 

 

      

Net interest income

     $ 49,496           $ 51,913      
    

 

 

        

 

 

    

Interest rate spread

          3.76          3.83

Net interest earning assets

   $ 1,205,050           $ 1,149,709        
  

 

 

        

 

 

      

Net interest margin

          3.92          4.00

Ratio of average earning assets to average interest bearing liabilities

     131.60          128.27     

 

(1) Originated loans are net of deferred loan fees, less costs.
(2) Loan fees, less costs on originated loans, are included in interest income.

During the three months ended September 30, 2012, the net interest margin narrowed by 0.08% and our interest rate spread narrowed by 0.07% compared to the three months ended June 30, 2012. The decrease in net interest margin was primarily driven by a 3.8% reduction in interest earning assets as we successfully exited non-strategic loans and slightly reduced the investment portfolio. In addition, the third quarter net interest margin equaled 3.92% representing a narrowing of 8 basis points from the prior quarter as the continued low interest rate environment provided lower reinvestment yields for the

 

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investment portfolio coupled with lower prepayments on acquired non 310-30 loans, thereby decreasing the accelerated recognition of acquisition discounts. The net interest margin also benefited from a 0.10% decrease in our cost of interest earning liabilities as we continue to execute our strategy of transitioning to lower cost transaction accounts and away from many of the high-priced time deposits that our acquired troubled banks relied upon. Progress on our deposit mix was evidenced by a $235.2 million decrease in time deposits as we rolled off high-priced time deposits, many of which were acquired with our Hillcrest Bank and Community Banks of Colorado acquisitions. We continued to earn strong yields on our loan portfolio, as evidenced by a total loan portfolio yield of 8.14% during the three months ended September 30, 2012; however the total loan portfolio yield decreased 0.27% during the quarter. The strong loan yields, particularly on our portfolio of loans accounted for under ASC Topic 310-30, are attributable to the accretion of accretable yield on those loans and increases in the yield on this portfolio are a result of the effects of life-to-date transfers of non-accretable difference to accretable yield that are being recognized over the remaining life of these loans. As a result, we expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolio is not replaced with comparable high-yielding loans. Note 2 to our audited consolidated financial statements provides more information on the accounting treatment of acquired loans. The yield on the investment securities portfolio decreased 0.16% during the three months ended September 30, 2012, as higher yielding securities paydown and are replaced with lower yielding securities.

 

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The table below presents the components of net interest income for the three months ended September 30, 2012 and 2011:

 

     Three months ended September 30, 2012     Three months ended September 30, 2011  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 
     (Dollars in thousands)     (Dollars in thousands)  

Interest earning assets:

              

310-30 loans

   $ 990,661      $ 24,008         9.64   $ 724,874      $ 16,215         8.87

Non 310-30 loans (1)(2)

     968,652        16,097         6.61     938,602        17,713         7.49

Investment securities available-for-sale

     1,747,254        9,302         2.12     1,977,461        15,754         3.16

Investment securities held-to-maturity

     683,700        5,888         3.43     —          —           0.00

Other securities

     33,067        377         4.54     18,760        276         5.84

Interest-bearing deposits

     595,383        370         0.25     1,175,252        609         0.21
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest earning assets

   $ 5,018,717      $ 56,042         4.44   $ 4,834,949      $ 50,567         4.15
  

 

 

   

 

 

      

 

 

   

 

 

    

Cash and due from banks

     66,467             56,676        

Other assets

     585,735             488,437        

Allowance for loan losses

     (15,817          (9,567     
  

 

 

        

 

 

      

Total assets

   $ 5,655,102           $ 5,370,495        
  

 

 

        

 

 

      

Interest bearing liabilities:

              

Savings deposits and interest bearing checking

   $ 1,696,972      $ 1,341         0.31   $ 1,305,282      $ 1,501         0.46

Time deposits

     2,063,622        5,178         1.00     2,402,074        8,263         1.36

Securities sold under agreements to repurchase

     53,073        27         0.20     42,664        50         0.46
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing liabilities

   $ 3,813,667      $ 6,546         0.68   $ 3,750,020      $ 9,814         1.04
  

 

 

   

 

 

      

 

 

   

 

 

    

Demand deposits

     636,277             423,646        

Other liabilities

     107,415             106,800        
  

 

 

        

 

 

      

Total liabilities

     4,557,359             4,280,466        
  

 

 

        

 

 

      

Stockholders’ equity

     1,097,743             1,090,029        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 5,655,102           $ 5,370,495        
  

 

 

        

 

 

      

Net interest income

     $ 49,496           $ 40,753      
    

 

 

        

 

 

    

Interest rate spread

          3.76          3.11

Net interest earning assets

   $ 1,205,050           $ 1,084,929        
  

 

 

        

 

 

      

Net interest margin

          3.92          3.35

Ratio of average earning assets to average interest bearing liabilities

     131.60          128.93     

 

(1) Originated loans are net of deferred loan fees, less costs.
(2) Loan fees, less costs on originated loans, are included in interest income.

 

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The table below presents the components of net interest income for the nine months ended September 30, 2012 and 2011:

 

     Nine months ended September 30, 2012     Nine months ended September 30, 2011  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 
     (Dollars in thousands)     (Dollars in thousands)  

Interest earning assets:

              

310-30 loans

   $ 1,113,860      $ 76,251         9.14   $ 590,322      $ 39,693         8.99

Non 310-30 loans (1)(2)

     948,367        53,039         7.47     930,690        49,780         7.15

Investment securities available-for-sale

     1,822,474        34,321         2.52     1,841,959        44,250         3.21

Investment securities held-to-maturity

     482,466        12,429         3.44     —          —           0.00

Other securities

     31,380        1,142         4.86     18,367        780         5.68

Interest-bearing deposits

     835,543        1,595         0.26     995,812        1,717         0.23
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest earning assets

   $ 5,234,090      $ 178,777         4.56   $ 4,377,150      $ 136,220         4.16
  

 

 

   

 

 

      

 

 

   

 

 

    

Cash and due from banks

     70,108             47,483        

Other assets

     618,800             472,633        

Allowance for loan losses

     (11,192          (3,718     
  

 

 

        

 

 

      

Total assets

   $ 5,911,806           $ 4,893,548        
  

 

 

        

 

 

      

Interest bearing liabilities:

              

Savings deposits and interest bearing checking

   $ 1,690,942      $ 4,309         0.34   $ 1,080,297      $ 4,363         0.54

Time deposits

     2,313,238        19,713         1.14     2,277,627        26,294         1.54

Securities sold under agreements to repurchase

     54,860        88         0.21     31,577        91         0.39
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing liabilities

   $ 4,059,040      $ 24,110         0.79   $ 3,389,501      $ 30,748         1.21
  

 

 

   

 

 

      

 

 

   

 

 

    

Demand deposits

     634,881             354,212        

Other liabilities

     122,751             117,415        
  

 

 

        

 

 

      

Total liabilities

     4,816,672             3,861,128        
  

 

 

        

 

 

      

Stockholders’ equity

     1,095,134             1,032,420        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 5,911,806           $ 4,893,548        
  

 

 

        

 

 

      

Net interest income

     $ 154,667           $ 105,472      
    

 

 

        

 

 

    

Interest rate spread

          3.77          2.95

Net interest earning assets

   $ 1,175,050           $ 987,649        
  

 

 

        

 

 

      

Net interest margin

          3.95          3.22

Ratio of average earning assets to average interest bearing liabilities

     128.95          129.14     

 

(1) Originated loans are net of deferred loan fees, less costs.
(2) Loan fees, less costs on originated loans, are included in interest income.

Net interest income totaled $154.7 million and $105.5 million for the nine months ended September 30, 2012 and 2011, respectively, with the increase primarily attributable to the increase in average interest-earning assets that resulted from the Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011. Average investment securities, measured from the date of settlement, comprised $2.3 billion, or 44.0%, of total average interest-earning assets during the nine months ended September 30, 2012. Average loans made up $2.1 billion, or 39.4%, of total average interest-earning assets during the nine months ended September 30, 2012.

 

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The following table summarizes the changes in net interest income by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates.

 

     Three Months Ended September 30, 2012
Compared To
    Nine Months Ended September 30, 2012
Compared To
 
     Three Months Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Increase (decrease) due to     Increase (decrease) due to  
     Volume     Rate     Net     Volume     Rate (3)     Net  
     (In thousands)     (In thousands)  

Interest income:

            

310-30 loans

   $ 5,945      $ 1,848      $ 7,793      $ 35,202      $ 1,356      $ 36,558   

Non 310-30 loans (1)(2)

     567        (2,183     (1,616     946        2,313        3,259   

Investment securities available-for-sale

     (1,834     (4,618     (6,452     (468     (9,461     (9,929

Investment securities held-to-maturity

     5,888        —          5,888        12,429        —          12,429   

Other securities

     210        (109     101        553        (191     362   

Interest bearing deposits

     (300     61        (239     (277     155        (122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ 10,476      $ (5,001   $ 5,475      $ 48,385      $ (5,828   $ 42,557   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Savings deposits and interest bearing checking

   $ 450      $ (610   $ (160   $ 2,466      $ (2,520   $ (54

Time deposits

     (1,164     (1,921     (3,085     411        (6,992     (6,581

Securities sold under agreements to repurchase

     12        (35     (23     67        (70     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (702     (2,566     (3,268     2,944        (9,582     (6,638
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in net interest income

   $ 11,178      $ (2,435   $ 8,743      $ 45,441      $ 3,754      $ 49,195   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Originated loans are net of deferred loan fees, less costs.
(2) Loan fees, less costs on originated loans, are included in interest income over the life of the loan.
(3) Also includes changes due to number of days.

The vast majority of our loans were acquired and were subject to acquisition accounting guidance whereby the assets and liabilities, including loans, were recorded at fair value at the date of acquisition. The accretable yield on our loans accounted for under ASC Topic 310-30 and the fair value adjustments on our acquired loans excluded from ASC Topic 310-30 are being accreted to income over the life of the loans as an adjustment to yield and, as a result, a significant portion of our interest income on loans is attributable to this accretion. Our acquired loans generally produce higher yields than our originated loans due to the recognition of accretion of interest rate adjustments and accretable yield. As a result, we expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolio is not replaced with comparable high-yielding loans. Note 2 to our audited consolidated financial statements provides more information on the accounting treatment of acquired loans.

Our rates on deposits have been higher than the average in the markets in which we operate, primarily because our acquired banks had their deposit rates higher than market at the time we acquired them. Since our first quarter of banking operations, we have been steadily lowering deposit rates as we shift towards a more client relationship based banking strategy and focus on lower cost transaction accounts.

 

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Below is a breakdown of deposits and the average rates paid during the periods indicated (in thousands):

 

    For the three months ended  
    September 30,
2012
    June 30, 2012     March 31, 2012     December 31, 2011     September 30,
2011
    June 30, 2011  
    Average
Balance
    Average
Rate
Paid
    Average
Balance
    Average
Rate
Paid
    Average
Balance
    Average
Rate
Paid
    Average
Balance
    Average
Rate
Paid
    Average
Balance
    Average
Rate
Paid
    Average
Balance
    Average
Rate
Paid
 

Non-interest bearing demand

  $ 636,277        0.00   $ 622,936        0.00   $ 645,972        0.00   $ 625,884        0.00   $ 423,646        0.00   $ 321,766        0.00

Interest bearing demand

    500,240        0.22     523,202        0.24     532,574        0.32     506,257        0.38     459,573        0.33     230,157        0.16

Money market accounts

    1,014,793        0.39     995,668        0.40     955,983        0.46     924,432        0.46     722,203        0.58     664,168        0.70

Savings accounts

    181,939        0.14     187,046        0.16     181,332        0.19     161,604        0.19     123,324        0.21     108,520        0.33

Time deposits

    2,063,622        1.00     2,298,782        1.14     2,580,053        1.25     2,931,920        1.26     2,402,074        1.36     2,180,026        1.56
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total average deposits

  $ 4,396,871        0.59   $ 4,627,634        0.69   $ 4,895,914        0.79   $ 5,150,097        0.84   $ 4,130,820        0.94   $ 3,504,637        1.12
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Provision for Loan Losses

The provision for loan losses represents the amount of expense that is necessary to bring the ALL to a level that we deem appropriate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The determination of the ALL, and the resultant provision for loan losses, are subjective and involve estimates and assumptions.

Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss-sharing agreements with the FDIC. Accordingly, any provisions made that relate to covered loans are partially offset by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income. Below is a summary of the provision for loan losses for the periods indicated (in thousands):

 

     For the three months
ended September 30
     For the nine months
ended September 30
 
     2012      2011      2012      2011  

Provision for impairment on loans accounted for under ASC Topic 310-30

   $ 3,663       $ —         $ 17,398       $ 3,238   

Provision for loan losses

     1,600         3,760         7,927         13,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total provision for loan losses

   $ 5,263       $ 3,760       $ 25,325       $ 16,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

The provisions for loan losses charged to non 310-30 loans were related to a combination of providing an ALL for new loans, changes in the market conditions and qualitative factors used in analyzing the ALL and specific impairments on non-covered loans. Through the re-measurement process, we recorded $17.4 million of provision for loans accounted for under ASC Topic 310-30 to reflect decreased expected future cash flows, which was primarily driven by our commercial and industrial, commercial real estate and land pools. One commercial real estate pool contributed $6.7 million, or 38.4% of the total impairment and one land pool contributed $4.9 million, or 28.3%, of the total impairment for the nine months ended September 30, 2012. The decreases in expected future cash flows are reflected immediately in our financial statements. Increases in expected future cash flows are reflected through an increase in accretable yield that is accreted to income in future periods, and during the nine months ended September 30, 2012, we transferred $38.6 million, net, from non-accretable difference to accretable yield to reflect an increase in expected future cash flows on loans accounted for under ASC Topic 310-30.

 

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Non-Interest Income

For the three and nine months ended September 30, 2012 and 2011, service charges comprised the largest component of our non-interest income. Service charges represent various fees charged to clients for banking services, including fees such as non-sufficient funds charges, overdraft fees, and service charges on deposit accounts. Service charges increased $1.0 million during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, however, service charges declined $0.3 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011, partially as a result of a change in the order of overdraft processing from highest items presented first, to ordered as presented. Additionally, we increased our overdraft charges to be more competitive in our markets. FDIC loss sharing income represents the income or loss recognized in connection with our loss sharing agreements with the FDIC, and is discussed in greater detail below. During the third quarter of 2011, we recognized a $60.5 million bargain purchase gain on the acquisition of Bank of Choice. The table below details the components of non-interest income during the three and nine months ended September 30, 2012 and 2011, respectively (in thousands):

 

     Three months ended
September 30
    Nine months ended
September 30
 
     2012     2011     2012      2011  

FDIC loss sharing income (expense)

   $ (1,329   $ (6,226   $ 113       $ 173   

Service charges

     4,466        4,717        13,170         12,180   

Bank card fees

     2,484        1,856        7,168         5,396   

Bargain purchase gain

     —          60,520        —           60,520   

Gain on sale of mortgages, net

     283        356        886         817   

Gain on sale of securities, net

     —          (813     674         (621

Gain on recoveries of previously charged-off acquired loans

     837        3,423        2,627         3,470   

Other non-interest income

     1,322        233        3,744         2,224   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-interest income

   $ 8,063      $ 64,066      $ 28,382       $ 84,159   
  

 

 

   

 

 

   

 

 

    

 

 

 

Bank card fees are comprised primarily of interchange fees on the debit cards that we have issued to our clients. These transactional charges totaled $2.5 million and $1.9 million during the three months ended September 30, 2012 and 2011, and $7.2 million and $5.4 million during the nine months ended September 30, 2012 and 2011. Bank of Choice and Community Banks of Colorado had substantially fewer debit cards issued and, as a result, the addition of those banks’ bank card fees did not mirror that of NBH Bank during similar time periods. Other bank card fees include merchant services fees and credit card fees.

Gain on recoveries of previously charged-off acquired loans represents recoveries on loans that were previously charged-off by the predecessor bank prior to takeover by the FDIC. A portion of these recoveries are shared with the FDIC and the sharing of these recoveries is reflected as reimbursement to FDIC for recoveries on non-covered loans.

FDIC Loss Sharing Income (Expense)

FDIC loss sharing income (expense) represents the income or loss recognized in connection with the changes in the FDIC indemnification asset and the clawback liability, in addition to the actual

 

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reimbursement of costs/recoveries of resolution of covered assets from the FDIC. The primary drivers of the FDIC loss sharing income (expense) are the FDIC reimbursements of the costs of resolving covered assets and the accretion related to the indemnification asset.

Activity in the FDIC loss sharing income (expense) during the three and nine months ended September 30, 2012 and 2011 was as follows (in thousands):

 

     Three months ended
September 30
    Nine months ended
September 30
 
     2012     2011     2012     2011  

FDIC indemnification asset accretion

   $ (2,832   $ (5,976   $ (9,165   $ (2,237

Clawback liability amortization

     (355     (180     (1,066     (507

Clawback liability remeasurement

     (820     —          247        (1,152

Reimbursement to FDIC for gain on sale of and income from covered OREO

     (1,842     (535     (1,408     (652

Reimbursement to FDIC for recoveries on non-covered loans

     (2     (1,181     (3     (1,204

FDIC reimbursement of costs of resolution of covered assets

     4,522        1,646        11,508        5,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (1,329   $ (6,226   $ 113      $ 173   
  

 

 

   

 

 

   

 

 

   

 

 

 

We recorded the FDIC indemnification asset at its estimated fair value of $159.7 million at the date of the Hillcrest Bank acquisition and an additional $151.0 million at the date of the Community Banks of Colorado acquisition. The initial fair values were established by discounting the expected future cash flows with a market discount rate for like maturity and risk instruments. The discount is accreted to income in connection with the expected timing of the related cash flows, and may increase or decrease from period to period due to changes in amounts and timing of expected cash flows from covered loans and OREO.

During the three and nine months ended September 30, 2012, we recognized $2.8 million and $9.2 million of negative accretion related to the FDIC indemnification asset. The negative accretion in 2012 resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. The increase in expected cash flows from these underlying assets is reflected in increased accretion rates on covered loans and is being recognized over the remaining expected lives of the underlying covered loans as an adjustment to yield. Pools with a decrease in expected cash flows resulted in a $17.4 million provision for loan loss on loans accounted for under ASC Topic 310-30 during the nine months ended September 30, 2012.

During the three and nine months ended September 30, 2011, we recognized negative accretion on the FDIC indemnification asset of $6.0 million and $2.2 million, respectively. Prior to the three months ended September 30, 2011, we were recognizing accretion income on the FDIC indemnification asset pending the first receipt of loss-share reimbursements.

In September 2011, we received our first payment of $83.5 million from the FDIC for reimbursement of losses that occurred from the date of acquisition of Hillcrest Bank through June 30, 2011, and in December 2011, we received $5.6 million for reimbursements of losses that occurred during the third quarter of 2011, all in accordance with our loss sharing agreements. As part of the FDIC loss sharing

 

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agreement, we share equally in recoveries of loans that had been previously charged-off by the acquired institution (Hillcrest Bank and Community Banks of Colorado in this case) with the FDIC. This recovery-sharing arrangement resulted in $1.2 million of expense during the three and nine months ended September 30, 2011 that represents our reimbursement to the FDIC for their portion of these recoveries and is represented in the above table as “Reimbursement to FDIC for recoveries on non-covered loans.”

Non-Interest Expense

Our operating strategy is to capture the efficiencies available by consolidating the operations of our acquisitions and several of our key operating objectives affect our non-interest expense. First, immediately following each of our four acquisitions, we began efforts to consolidate as many functions as possible and we completed the conversion to our new data processing platform in phases. The first phase was completed during the second quarter of 2011, and the second phase was completed during the fourth quarter of 2011 in connection with the merger of Hillcrest Bank into NBH Bank under a single charter. Our Community Banks of Colorado and Bank of Choice acquisitions were converted in May 2012 and July 2012, respectively. We incurred significant professional fees related to the preparation and conversion of these acquisitions. Second, we believe the merger of Hillcrest Bank into NBH Bank, as well as the conversion and integration of Bank of Choice and Community Banks of Colorado, will provide opportunities to further streamline operations and increase efficiencies. Third, our business strategy includes growth strategies that may require added expenses to be incurred as we grow our operations through acquisitions and organic growth.

We incurred certain expenses in connection with our initial public offering that significantly impacted our earnings. We did not sell new shares in our initial public offering, and as a result, none of those expenses were offset against any proceeds, but were expensed. Such expenses included underwriting discounts and related fees, listing fees on the New York Stock Exchange and related registration and filing fees, printing fees, legal and accounting expenses. These expenses totaled approximately $8.0 million during the nine months ended September 30, 2012. Additionally, we incurred stock based compensation on awards that had a public listing vesting requirement. As discussed below, in September 2012, we incurred $4.9 million of stock-based compensation that had previously been deferred.

 

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The table below details non-interest expense for the periods presented (in thousands):

 

     Three months ended
September 30
     Nine months ended
September 30
 
     2012     2011      2012     2011  

Salaries and employee benefits

   $ 27,182      $ 22,098       $ 72,226      $ 52,115   

Occupancy and equipment

     5,570        4,392         14,845        9,652   

Professional fees

     2,669        3,101         8,612        7,372   

Telecommunications and data processing

     4,475        3,754         11,694        8,675   

Marketing and business development

     1,760        1,229         4,290        2,972   

Other real estate owned expenses

     3,468        1,013         12,152        5,466   

Problem loan expenses

     2,267        341         6,704        2,366   

Intangible asset amortization

     1,353        1,122         4,020        3,079   

FDIC deposit insurance

     1,152        893         3,664        3,333   

ATM/debit card expenses

     1,102        664         3,100        2,057   

Initial public offering related expenses

     7,566        600         7,974        600   

Acquisition related costs

     —          3,819         870        4,293   

Loss (gain) from change in fair value of warrant liability

     (1,154     —           (1,017     791   

Other non-interest expense

     2,547        3,633         9,097        7,036   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 59,957      $ 46,659       $ 158,231      $ 109,807   
  

 

 

   

 

 

    

 

 

   

 

 

 

The largest component of non-interest operating expense is salaries and employee benefits. Exclusive of stock-based compensation expense noted below, salaries and employee benefits totaled $20.4 million and $16.3 million for the three months ended September 30, 2012 and 2011, and $61.3 million and $37.6 million for the nine months ended September 30, 2012 and 2011. Increases reflect staff added as part of the Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011 along with addition of several key corporate and sales staff during 2012.

Salaries and employee benefits included $6.7 million and $5.8 million of stock-based compensation expense during the three months ended September 30, 2012 and 2011, respectively, and $10.9 million and $14.5 million during the nine months ended September 30, 2012 and 2011, respectively. The expense associated with stock-based compensation is being recognized by tranche over the requisite service period and at September 30, 2012, there was $3.7 million of total unrecognized compensation expense related to non-vested stock options and $3.3 million of total unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted average period of 0.8 years and 0.8 years, respectively.

Aside from the $4.9 million of catch-up expense related to our initial public offering, stock-based compensation continues to trend downward as a result of the vesting schedules of awards granted early in the Company’s formation, as is discussed in more detail below. However, in accordance with ASC 718, and as further discussed below, prior to our initial public offering, we were not recognizing the expense related to any awards that have a vesting requirement of the Company’s shares becoming publicly listed on a national exchange. Upon listing on a national exchange, we immediately recognized a catch-up expense of $4.9 million for the portion of the expense that had been deferred until that vesting criterion is met. The valuation methodologies employed in determining the expense associated with stock-based compensation vary widely, as do the award types and the subjective assumptions used in those valuation methodologies. As a result, these differences in practice can have a material impact on the financial performance of us or our peers, and can limit meaningful comparisons between our performance over different periods and the performance results of our peers.

 

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Occupancy and equipment expense totaled $5.6 million and $4.4 million for the three months ended September 30, 2012 and 2011, and $14.8 million and $9.7 million for the nine months ended September 30, 2012 and 2011. The increases were driven by the impact of our Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011 and were primarily the result of increased depreciation expense on the premises and equipment associated with the those acquisitions.

Professional fees totaled $2.7 million and $3.1 million for the three months ended September 30, 2012 and 2011, and $8.6 million and $7.4 million for the nine months ended September 30, 2012 and 2011. The fluctuations were driven by the impact of our Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011 and the timing of our conversions as we have converted all four acquisitions onto a common operating platform.

Telecommunications and data processing expense totaled $4.5 million and $3.8 million for the three months ended September 30, 2012 and 2011, an increase of $0.7 million, and $11.7 million and $8.7 million for the nine months ended September 30, 2012 and 2011, an increase of $3.0 million. The increases were primarily due to the impact of our Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011 coupled with conversion fees related to the Bank of Choice conversion that was completed early in the third quarter of 2012. Telecommunications and data processing expenses contain both fixed costs and volume-based components driven by the number of client accounts. While there is a cost associated with each additional account, additional efficiencies are available due to a lower incremental cost per account at higher levels of account volume.

Significant components of our non-interest expense are our problem loan expenses and OREO related expenses. We incur these expenses in connection with the resolution process of our acquired troubled loan portfolios. During the nine months ended September 30, 2012, we incurred $12.2 million of OREO related expenses and $6.7 million of problem loan expenses. Of the $18.9 million in collective OREO and problem loan expenses incurred during the nine months ended September 30, 2012, $16.2 million was covered by loss sharing agreements with the FDIC. The losses on covered assets that are reimbursable from the FDIC are based on the book value of the related covered assets as determined by the FDIC at the date of acquisition, and the FDIC’s book value does not necessarily correlate with our book value of the same assets. This difference is primarily because we recorded the OREO at fair value at the date of acquisition in accordance with applicable accounting guidance. Any losses recorded after the acquisition date are recorded at the full-loss value in other non-interest expense, and any related reimbursement from the FDIC is recorded in non-interest income as FDIC loss sharing income.

Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes. Under this guidance, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, 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 and liabilities may be required.

 

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Valuation allowances are based on the “more likely than not” criteria of ASC 740. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Interest and penalties on uncertain tax positions are recognized as a component of income tax expense. If our assessment of whether a tax position meets or no longer meets the more likely than not threshold were to change, adjustments to income tax benefits may be required.

Income tax expense totaled $0.2 million for the three months ended September 30, 2012, as compared with $20.6 million for the three months ended September 30, 2011. These amounts equate to effective tax expense rates of 3.0% and 38.0% for the respective periods. Income tax expense for the nine months ended September 30, 2012 and 2011 totaled $3.0 million and $23.9 million, respectively, equating to effective tax expense rates of 599.4% and 37.7%.

The increase in the effective tax rate for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, is primarily attributable to $8.0 million of expenses associated with the initial public offering of our stock which are non-deductible for income tax purposes. This amount represents a significant portion of the loss before income taxes for the nine months ended September 30, 2012 and no income tax benefit is recorded on these expenses.

While our marginal tax rate (the rate we pay on each incremental dollar of earnings) is approximately 39%, our effective tax rate (income tax expense divided by income before income taxes) for a given period is driven largely by income and expense items that are non-taxable or non-deductible for the calculation of income tax expense. Due to non-deductible expenses accounting for a significant portion of our loss before income taxes for the nine months ended September 30, 2012, our effective tax expense rate of 599.4% is inflated and therefore not comparable to prior periods. We expect our effective tax rate to be more consistent with our marginal tax rate in future periods.

Additional information regarding income taxes can be found in note 22 of our audited consolidated financial statements.

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 investment. Liquidity is represented by our cash and cash equivalents and unencumbered investment securities, and are detailed in the table below as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012      December 31, 2011  

Cash and due from banks

   $ 65,452       $ 93,862   

Due from Federal Reserve Bank of Kansas City

     496,893         1,421,734   

Federal funds sold and interest bearing bank deposits

     102,354         112,541   

Pledgeable investment securities, at fair value

     2,179,277         1,670,924   
  

 

 

    

 

 

 

Total

   $ 2,843,976       $ 3,299,061   
  

 

 

    

 

 

 

Total liquidity decreased $455.1 million from December 31, 2011 to September 30, 2012. The decrease was largely driven by our roll off of high-priced time deposits.

 

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Our acquisitions have significantly increased our liquidity position. Net of settlement amounts paid to the respective sellers, we acquired $1.5 billion of cash and cash equivalents and $290.6 million of investment securities available-for-sale in our completion of the Hillcrest Bank and Bank Midwest acquisitions. Our acquisitions of the Bank of Choice and Community Banks of Colorado provided $402.0 million and approximately $250.2 million of additional cash, respectively, as the FDIC contributed cash as a part of the purchase discount in each of these transactions.

Aside from the deployment of our capital and cash received from acquisitions, our primary sources of funds are deposits from clients, prepayments and maturities of loans and investment securities, the sale of investment securities, reimbursement of covered asset losses from the FDIC and the funds provided from operations. Additionally, we anticipate having access to 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 would provide adequate funding and liquidity for at least a 12 month period.

Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses and debt payments, particularly subsequent to acquisitions. For additional information regarding our operating, investing, and financing cash flows, see our consolidated statements of cash flows in the accompanying unaudited 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 sales and purchases of investment securities. At September 30, 2012, unencumbered investment securities represented our largest source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. The fair value of our collective investment securities portfolio totaled $2.4 billion at September 30, 2012. Included in the $2.4 billion were pre-tax net unrealized gains of $53.9 million. The gross unrealized gains are detailed in note 2 of our consolidated financial statements for the three and nine months ended September 30, 2012. As of September 30, 2012, our investment securities portfolio consisted primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises, and prime auto asset-backed securities. 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.

Through September 30, 2012, the majority of our capital expenditures have been through our acquisitions and the related subsequent banking center purchases. Aside from these, our capital outlays were $35.9 million for the first nine months ended September 30, 2012 and $21.8 million during 2011. The majority of capital outlays were related to the development and implementation of our new operating platform and the build out of the new facilities in downtown Kansas City, Missouri that were completed during the summer of 2011 and now house a significant portion of our operations and the purchase of banking center assets from the FDIC subsequent to our acquisitions.

At present, financing activities are limited to changes in repurchase agreements, time deposits, the clawback liability and the repayment of any FHLB advances assumed in acquisitions. Maturing time

 

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deposits, and holders of $232.0 million of time deposits assumed in the Hillcrest Bank, Bank of Choice, and Community Banks of Colorado acquisitions that have not accepted new terms, represent a potential use of funds, as the depositors have the option to move the funds without penalty. As of September 30, 2012, $1.4 billion of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions, and our consumer banking strategy with lower cost transaction accounts, we expect to replace a significant portion of those maturing time deposits.

In July 2011, we joined the FHLB of Des Moines and since have purchased $7.5 million of FHLB stock as is required by the membership agreement. Through this relationship, we anticipate that we could obtain additional liquidity by pledging unencumbered qualifying loans through borrowings from the FHLB.

As the Company matures, we expect that our liquidity at the holding company will subsequently decrease as we continue to deploy available capital and until such time that our subsidiary bank is permitted to pay, and does pay dividends up to the holding company, which is discussed more below. Additionally, our liquidity may fluctuate due to changes in unencumbered investment securities in response to changes in loan and deposit balances.

NBH Bank is prohibited from paying dividends to the holding company until December 2013. As a result, the holding company’s current sources of funds are limited to cash and cash equivalents on hand, which totaled $103.9 million at September 30, 2012. The holding company may seek to borrow funds and raise capital in the future, the success and terms of which will be subject to market conditions and other factors.

On October 31, 2012, our board of directors approved a $25 million share repurchase and declared a quarterly dividend of $0.05 per share, payable on December 14, 2012, to holders of record on November 30, 2012. See “Risk Factors—Risks Relating to Our Class A Common Stock—Our ability to pay dividends is subject to regulatory limitations and our bank subsidiary’s ability to pay dividends to us, which is also subject to regulatory limitations” in the prospectus dated September 19, 2012 included in our registration statement filed on Form S-1 with the Securities and Exchange Commission (file number 333-177971).

Through September 30, 2012, stockholders’ equity has been most significantly impacted by the repurchase of 6,382,024 shares in 2010 in connection with achieving compliance following the January 6, 2010 and April 23, 2010 interpretive guidance issued on the FDIC Policy Statement, changes in unrealized gains on securities, net of tax, and the retention of earnings. Exclusive of the $127.6 million reduction in stockholders’ equity related to the stock repurchase in 2010, stockholders’ equity has increased $122.2 million since our initial capital raise in 2009.

As was discussed under “—Regulatory Capital,” we have agreed to maintain capital levels of at least 10% tier 1 leverage ratio, 11% tier 1 risk-based capital ratio and 12% total risk-based capital ratio at NBH Bank, N.A. until December 2013, and at September 30, 2012 and at December 31, 2011, NBH Bank exceeded all capital requirements to which it was subject.

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 risks that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan

 

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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. At September 30, 2012 and December 31, 2011, the Company had loan commitments totaling $352.8 million and $341.1 million, respectively, and standby letters of credit that totaled $11.3 million and $20.0 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. We do not anticipate any material losses arising from commitments or contingent liabilities and we do not believe that there are any material commitments to extend credit that represent risks of an unusual nature.

Asset/Liability Management and Interest Rate Risk

The principal objective of the Company’s asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the board of directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company’s assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

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, securities and deposits, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows.

Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

 

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Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at September 30, 2012. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 50 basis point decrease in interest rates on net interest income based on the interest rate risk model at September 30, 2012:

 

Hypothetical Shift in Interest Rates (in bps)    % Change in Projected
Net Interest Income
 

200

     9.07

100

     5.47

-50

     -1.89

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.

The federal funds rate is the basis for overnight funding and the market expectations for changes in the federal funds rate influence the yield curve. The federal funds rate is currently at 0.25% and has been since December 2008. Should interest rates decline further, net interest margin and net interest income would be compressed given the current mix of rate sensitive assets and liabilities.

With the current low interest rate environment many borrowers are seeking longer term fixed rate loans, however, as part of the asset/liability management strategy, we have emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. Additionally, the scheduled maturity and planned exit strategy of our existing loan portfolio, particularly our covered loans, is generally short-term. The strategy with respect to liabilities has been to emphasize transaction accounts, particularly non-interest or low interest-bearing non-maturing deposit accounts which are less sensitive to changes in interest rates. In response to this strategy, non-maturing deposit accounts have been steadily increasing and totaled 55% of total deposits at September 30, 2012 compared to 45% at December 31, 2011. We currently have no brokered time deposits and intend to focus on our strategy of increasing non-interest or low interest-bearing non-maturing deposit accounts and accordingly, we have no current plans to use brokered deposits in the near future.

Item 3. 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 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

During the most recently completed fiscal quarter, there was no change 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 has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 1A. RISK FACTORS

National Bank Holdings Corporation and its subsidiaries could be adversely impacted by various risks and uncertainties. As a financial institution, we have significant exposure to market risk, including interest rate risk, liquidity risk and credit risk. As our business is highly regulated, we also have significant exposure to legislative and regulatory risk. An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this quarterly report, including our unaudited consolidated financial statements and the related notes thereto, as well as the information contained in the prospectus dated September 19, 2012 included in our registration statement filed on Form S-1 with the Securities and Exchange Commission (file number 333-177971), before making an investment decision. The occurrence or realization of any of the following risks could materially and adversely affect our business, prospects, financial condition, liquidity, results of operations, cash flows and capital levels. In any such case, the market price of our common stock could decline substantially, and you could lose all or part of your investment.

Risks Relating to Our Banking Operations:

We have recently completed four acquisitions and have a limited operating history from which investors can evaluate our future prospects and financial and operating performance.

We were organized in June 2009 and acquired selected assets and assumed selected liabilities of Hillcrest Bank, Bank Midwest, Bank of Choice and Community Banks of Colorado in October 2010, December 2010, July 2011 and October 2011, respectively. Because our banking operations began in 2010, we have a limited operating history upon which investors can evaluate our operational performance or compare our recent performance to historical performance. Although we acquired selected assets and assumed selected liabilities of four depository institutions which had operated for longer periods of time than we have, their business models and experiences are not reflective of our plans. Accordingly, our limited time operating our acquired franchises may make it difficult for investors to evaluate our future prospects and financial and operating performance. Moreover, because a large portion of our loans and OREO are covered by loss sharing agreements with the FDIC and all of the loans and OREO we acquired were marked to fair value at the time of our acquisition, we believe that the historical financial results of the acquisitions are less instructive to an evaluation of our future prospects and financial and operating performance. Certain other factors may also make it difficult for investors to evaluate our future prospects and financial and operating performance, including, among others:

 

   

our current asset mix, loan quality and allowance for loan losses are not representative of our anticipated future asset mix, loan quality and allowance for loan losses, which may change materially as we undertake organic loan origination and banking activities and pursue future acquisitions;

 

   

a large portion of our loans and OREO were covered by loss sharing agreements with the FDIC, which reimburse a variable percentage of losses experienced on these assets; thus, we may face higher losses once the FDIC loss sharing arrangement expires and losses may exceed the discounts we received;

 

   

the income we report from certain acquired assets due to loan discount, accretable yield and the accretion of the FDIC indemnification asset will be higher than the returns available in the current market and, if we are unable to make new performing loans and acquire other performing assets in sufficient volume, we may be unable to generate the earnings necessary to implement our growth strategy;

 

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our significant cash reserves and liquid investment securities portfolio, which result in large part from the proceeds of our 2009 private offering of common stock and cash received in connection with our acquisitions of Hillcrest Bank, Bank Midwest, Bank of Choice and Community Banks of Colorado, are unlikely to be representative of our future cash position;

 

   

our historical cost structure and capital expenditure requirements are not reflective of our anticipated cost structure and capital spending as we integrate our acquisitions and operate our organic banking platform; and

 

   

our regulatory capital ratios, minimums of which are required by agreements we have reached with our regulators and which result in part from the proceeds of our private offering of common stock, are not necessarily representative of our future regulatory capital ratios.

Our acquisition history may not be indicative of our ability to execute our external growth strategy, and our inability to execute such strategy would materially and adversely affect us.

Our acquisition history should be viewed in the context of the recent opportunities available to us as a result of the confluence of our access to capital at a time when market dislocations of historical proportions resulted in attractive asset acquisition opportunities. As conditions change, we may prove to be unable to execute our external growth strategy, which would materially and adversely affect us.

Continued or worsening 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, which remain guarded. If the U.S. economy is unable to steadily emerge from the recent recession that began in 2007 or we experience worsening economic conditions, we could be materially and adversely affected. Weak economic conditions may be characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors would be detrimental to our business. Our business is significantly affected by monetary and related policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us.

The geographic concentration of our two core markets in Colorado and the greater Kansas City region makes our business highly susceptible to downturns in the local economies and depressed banking markets, which could materially and adversely affect us.

Unlike larger financial institutions that are more geographically diversified, we are a regional banking franchise concentrated in Colorado and the greater Kansas City region. A deterioration in local economic conditions in the loan market or in the residential or commercial real estate market could have a material adverse effect on the quality of our portfolio, the demand for our products and services, the ability of

 

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borrowers to timely repay loans and the value of the collateral securing loans. In addition, if the population, employment or income growth in one of our core markets is negative or slower than projected, income levels, deposits and real estate development could be adversely impacted and we could be materially and adversely affected. If any of these developments were to result in losses that materially and adversely affected NBH Bank’s capital, we and NBH Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital.

Our two core markets are susceptible to adverse weather and natural disasters and these events could negatively impact the economies of our markets, our operations or our clients, any of which could have a material adverse effect on us.

Our two core markets are Colorado and the greater Kansas City region. These markets are susceptible to severe weather, including tornadoes, droughts, wildfires, flooding, hail storms and damaging winds. The occurrence of adverse weather and natural or manmade disasters could destroy, or cause a decline in the value of, mortgaged properties, crops or other assets that serve as our collateral and increase the risk of delinquencies, defaults, foreclosures and losses on our loans, damage our banking facilities and offices, negatively impact regional economic conditions, result in a decline in local loan demand and loan originations and negatively impact the implementation of our growth strategy. Natural or manmade disasters or severe weather events and the damage that may be caused by them, be it to our operations, our collateral, our clients or the economies in our current or future markets, could materially and adversely affect us.

Any changes in how we determine the impact of loss share accounting on our financial information could have a material adverse effect on us.

A material portion of our financial results is based on loss share accounting, which is subject to assumptions and judgments made by us and our regulators. Loss share accounting is a complex accounting methodology. If these assumptions are incorrect or we change or modify our assumptions, it could have a material adverse effect on us or our previously reported results. As such, any financial information generated through the use of loss share accounting is subject to modification or change.

Our financial information reflects the application of the acquisition method of accounting. Any change in the assumptions used in such methodology could have a material adverse effect on us.

As a result of our recent acquisitions, our financial information is heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets acquired and liabilities assumed to determine their fair values at the time of acquisition. Additionally, we periodically remeasure the expected cash flows on certain loans that were acquired with deteriorated credit quality, and this remeasurement can cause fluctuations in the accretion rates of these loans. Our interest income, interest expense and net interest margin reflect the impact of accretion and amortization of the fair value adjustments made to the carrying amounts of interest-earning assets and interest-bearing liabilities, and our non-interest income for periods subsequent to the acquisitions includes the effects of discount accretion and accretion of the FDIC indemnification asset. In addition, the balances of many of our acquired assets were significantly reduced by the adjustments to fair value recorded in conjunction with the relevant acquisition. 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.

 

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Our business is highly susceptible to credit risk.

As a lender, we are exposed to the risk that our clients will be unable to repay their loans according to their terms and that the collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The risks inherent in making any loan include risks with respect to the ability of borrowers to repay their loans and, if applicable, the period of time over which the loan is repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. Similarly, we have credit risk embedded in our securities portfolio. Our credit standards, procedures and policies may not prevent us from incurring substantial credit losses, particularly in light of market developments in recent years.

We have restructured and in the future may restructure originated or acquired loans if we believe the borrowers are likely to fully repay their restructured obligations. We may also be subject to legal or regulatory requirements for restructured loans. For our originated loans, if interest rates or other terms are modified subsequent to extension of credit or if terms of an existing loan are renewed because a borrower is experiencing financial difficulty and a concession is granted, we may be required to classify such action as a troubled debt restructuring (which we refer to as “TDR”). With respect to restructured loans, we may grant concessions to borrowers experiencing financial difficulties in order to facilitate repayment of the loan by (1) reduction of the stated interest rate for the remaining life of the loan to lower than the current market rate for new loans with similar risk or (2) extension of the maturity date. In situations where a TDR is unsuccessful and the borrower is unable to satisfy the terms of the restructured loan, the loan would be placed on nonaccrual status and written down to the underlying collateral value less estimated selling costs.

Our loan portfolio has been, and will continue to be, affected by the ongoing correction in residential and commercial real estate values and reduced levels of residential and commercial real estate sales.

Soft residential and commercial real estate markets, higher delinquency and default rates, heightened vacancy rates and volatile and constrained secondary credit markets have affected the real estate industry generally and in the areas in which our business is currently most heavily concentrated. We may be materially and adversely affected by declines in real estate values.

We make credit and reserve decisions based on the current conditions of borrowers or projects combined with our expectations for the future. The majority of our loans have real estate as a primary or secondary component of collateral. The real estate collateral provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the loan is outstanding. A continued weakening of the real estate conditions in any of our markets could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of any collateral securing their loans, which in turn could have a material adverse effect on us. If we are required to liquidate the collateral securing a loan to satisfy a borrower’s obligations during a period of reduced

 

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real estate values, we could be materially and adversely affected. The declines in home prices in the markets we serve, along with the reduced availability of mortgage credit, also may result in increases in delinquencies and losses in our portfolio of loans related to residential real estate construction and development as the ability to refinance those loans decreases. Further declines in home prices coupled with a deepened economic recession and continued rises in unemployment levels could drive losses beyond that which is provided for in our allowance for loan losses. In that event, we could also be materially and adversely affected.

Additionally, recent weakness in the secondary market for residential lending could have a material adverse impact on us. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could adversely affect the value of collateral securing mortgage loans, mortgage loan originations and gains on sale of mortgage loans. Continued 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.

Our commercial real estate loans other than owner occupied commercial real estate loans may be dependent on factors outside the control of our borrowers.

Our loan portfolio includes commercial real estate loans other than owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, these loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on these loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their services.

We believe that the implementation of our strategy will depend in large part on the skills of our executive management team and our ability to motivate and retain these and other key personnel. Accordingly, the loss of service of one or more of our executive officers or key personnel could reduce our ability to successfully implement our growth strategy and materially and adversely affect us. Leadership changes will occur from time to time, and if significant resignations occur, we may not be able to recruit additional qualified personnel. We believe our executive management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, President Midwest Division and

 

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Chief of Integration, Technology and Operations have entered into employment arrangements with us, it is possible that they may not complete the term of their employment arrangements or may choose not to renew them upon expiration. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the clients and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key senior personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on us.

Our allowance for loan losses and fair value adjustments may prove to be insufficient to absorb probable losses inherent in our loan portfolio.

Lending money is a substantial part of our business, and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

 

   

the financial condition and cash flows of the borrower and/or the project being financed;

 

   

the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

 

   

the discount on the loan at the time of its acquisition;

 

   

the duration of the loan;

 

   

the credit history of a particular borrower; and

 

   

changes in economic and industry conditions.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses inherent in our loan portfolio. The amount of this allowance is determined by our management through periodic reviews.

The application of the acquisition method of accounting to our completed acquisitions has impacted our allowance for loan losses. Under the acquisition method of accounting, all acquired loans were recorded in our consolidated financial statements at their fair value at the time of acquisition and the related allowance for loan loss was eliminated because credit quality, among other factors, was considered in the determination of fair value. To the extent that our estimates of fair value are too high, we will incur losses (some of which may be covered by our loss sharing arrangements with the FDIC) associated with the acquired loans.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding our loans, identification of additional problem loans by us and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. If current trends in the real estate markets continue, we expect that we will continue to experience increased delinquencies and credit losses, particularly with respect to construction, land development and land

 

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loans. In addition, our regulators periodically review our allowance for loan losses and may require an increase in the allowance for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital and may have a material adverse effect on us.

Our loss sharing agreements impose restrictions on the operation of our business and extensive record-keeping requirements, and failure to comply with the terms of our loss sharing agreements with the FDIC may result in significant losses.

On October 22, 2010, we acquired selected assets and assumed selected liabilities of Hillcrest Bank in an FDIC-assisted transaction. Subsequently, on October 21, 2011, we completed the FDIC-assisted acquisition of selected assets and assumption of selected liabilities of Community Banks of Colorado. A significant portion of our revenue is derived from assets acquired in those transactions. Certain of the loans, commitments and foreclosed assets acquired in those transactions are covered by the loss sharing agreements, which provide that a significant portion of the losses related to those covered assets will be borne by the FDIC. We may, however, experience difficulties in complying with the requirements of the loss sharing agreements, including the extensive record-keeping and documentation relating to the status and reimbursement of covered assets. The required terms of the agreements are extensive and failure to comply with any of the terms could result in a specific asset or group of assets losing their loss sharing coverage. Additionally, complying with the extensive requirements to avail ourselves of the loss sharing coverage could take management time and attention away from other aspects of running our business.

Our loss sharing agreements also impose limitations on the manner in which we manage loans covered by loss sharing. For example, under the loss sharing agreements, we may not, without FDIC consent, sell a covered loan even if in the ordinary course of our business we determine that taking such action would be advantageous for the Company. These restrictions could impair our ability to manage problem loans, extend the amount of time that such loans remain on our balance sheet and increase the amount of our losses.

We hold and acquire a significant amount of OREO from time to time, which may lead to increased operating expenses and vulnerability to additional declines in real property values.

When necessary, we foreclose on and take title to the real estate (some of which is covered by our FDIC loss sharing arrangement) serving as collateral for our loans as part of our business. Real estate that we own but do use in the ordinary course of our operations is referred to as “other real estate owned,” or “OREO” property. Increased OREO balances have led to greater expenses as we incur costs to manage and dispose of the properties. Despite some of the OREO being covered by loss sharing agreements with the FDIC, we expect that our earnings will continue to be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with OREO assets. We evaluate OREO properties periodically and write down the carrying value of the properties if the results of our evaluation require it. The expenses associated with OREO and any further OREO write-downs could have a material adverse effect on us.

 

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We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

The expanding body of federal, state and local regulation and/or the licensing of loan servicing, collections or other aspects of our business may increase the cost of compliance and the risks of noncompliance.

We service our own loans, and loan servicing is subject to extensive regulation by federal, state and local governmental authorities as well as to various laws and judicial and administrative decisions imposing requirements and restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan servicing activities including delaying or temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more restrictive requirements, we may incur additional significant costs to comply with such requirements which may further adversely affect us. In addition, our failure to comply with these laws and regulations could possibly lead to: civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties and litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes could materially and adversely affect us.

The fair value of our investment securities can fluctuate due to market conditions outside of our control.

We have historically taken a conservative investment strategy with our securities portfolio, with concentrations of securities that are primarily backed by government sponsored enterprises. In the future, we may seek to increase yields through more aggressive strategies, which may include a greater percentage of corporate securities and structured credit products. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets. These factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on us. The process for determining whether impairment of a security is other-than-temporary usually requires complex,

 

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subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

We face significant competition from other financial institutions and financial services providers, which may materially and adversely affect us.

Consumer and commercial banking is highly competitive. Our markets contain a large number of community and regional banks as well as a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers, in providing various types of loans and other financial services. Some of these competitors have a long history of successful operations in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Some of our competitors also have greater resources and access to capital and possess an advantage by being capable of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed internet platform. Competitors may also exhibit a greater tolerance for risk and behave more aggressively with respect to pricing in order to increase their market share.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Technological advances have lowered barriers to entry and made it possible for banks to compete in our market without a retail footprint by offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Our ability to compete successfully depends on a number of factors, including, among others:

 

   

the ability to develop, maintain and build upon long-term client relationships based on quality service, effective and efficient products and services, high ethical standards and safe and sound assets;

 

   

the scope, relevance and pricing of products and services offered to meet client needs and demands;

 

   

the rate at which we introduce new products and services relative to our competitors;

 

   

the ability to attract and retain highly qualified employees to operate our business;

 

   

the ability to expand our market position;

 

   

client satisfaction with our level of service;

 

   

the ability to operate our business effectively and efficiently; and

 

   

industry and general economic trends.

 

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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. As a result of a decline in depositor confidence, an increase in interest rates paid by competitors, general interest rate levels, FDIC insurance costs, higher returns being available to clients on alternative investments and general economic conditions, a substantial number of our clients could withdraw their bank deposits with us from time to time, resulting in our deposit levels decreasing substantially, and our cash on hand may not be able to cover such withdrawals and our other business needs, including amounts necessary to operate and grow our business. This would require us to seek third party funding or other sources of liquidity, such as asset sales. Our access to third party funding sources, including our ability to raise funds through the issuance of additional shares of our common stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, may be impacted by our financial strength, performance and prospects and may also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets. 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.

We may not be able to retain or develop a strong core deposit base or other low-cost funding sources.

We expect to 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. Our future growth will largely depend on our ability to retain and grow a strong, low-cost deposit base. A significant portion of our deposit base is time deposits, the large majority of which we acquired. It may prove harder to maintain and grow our deposit base than would otherwise be the case, especially since many of them currently pay interest at above-market rates.

We are working to transition certain of our clients to lower cost traditional banking services as higher cost funding sources, such as high interest time deposits, mature. Many banks in the United States are struggling to maintain depositors in light of the recent financial crisis, and there may be competitive pressures to pay higher interest rates on deposits, which could increase funding costs and compress net interest margins. Clients may not transition to lower yielding savings and investment products or continue their business with us, which could materially and adversely affect us. In addition, with recent concerns about bank failures, clients have become concerned about the extent to which their deposits are insured by the FDIC, particularly clients that may maintain deposits in excess of insured limits. Clients may withdraw deposits in an effort to ensure that the amount that they have on deposit with us is fully insured and may place them in other institutions or make investments that are perceived as being more secure. Further, even if we are able to grow and maintain our deposit base, the account and deposit balances can decrease when clients perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If clients move money out of bank deposits, we could lose a relatively low cost source of funds, increasing our funding costs, reducing our net interest income cash flow and net income and result in lower loan originations, any of which could materially and adversely affect us.

 

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Recent market disruptions caused increased liquidity risks which could recur in the future.

The recent disruption and illiquidity in the credit markets created challenges for banking institutions that made potential funding sources more difficult to access, less reliable and more expensive. In addition, liquidity in the inter-bank market, as well as the markets for commercial paper and other short-term instruments, contracted significantly. Current market conditions continue to present challenges in the management of banks and banks’ clients’ liquidity, which may exceed those challenges experienced in the recent past and could materially and adversely affect us.

Extended foreclosure processes and new homeowner protection laws and regulations might restrict or delay our ability to foreclose and collect payments for loans under the loss sharing agreements.

For the loans covered by the loss sharing agreements, we cannot collect loss share payments until we liquidate the properties securing those loans. These loss share payments could be delayed by an extended foreclosure process, including delays resulting from a court backlog, local or national foreclosure moratoriums or other delays, and these delays could have a material adverse effect on us. New homeowner protection laws and regulations may also delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans. Any such limitations are likely to cause delayed or reduced collections from borrowers. Any restriction on our ability to foreclose on a loan, any requirement that we forgo a portion of the amount otherwise due on a loan or any requirement that we advance principal, interest, tax and insurance payments or that we modify any original loan terms could materially and adversely affect us.

Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held by us.

Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of clients and counterparties and the level and volatility of trading markets. Such factors can impact clients and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.

Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income. When interest-bearing liabilities

 

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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 Board of Governors of the Federal Reserve System (the “Federal Reserve”). Adverse changes in the Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions could materially and adversely affect us.

We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have a material adverse effect on us.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of client business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.

In addition, we provide our clients with the ability to bank remotely, including online over the internet and over the telephone. The secure transmission of confidential information over the internet and other remote channels is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our clients involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in our systems and could materially and adversely affect us.

 

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As a public company, we will be required to meet periodic reporting requirements under the rules and regulations of the U.S. Securities and Exchange Commission. Complying with federal securities laws as a public company is expensive, and we will incur significant time and expense enhancing, documenting, testing, and certifying our internal control over financial reporting. Any deficiencies in our financial reporting or internal controls could materially and adversely affect us, including resulting in material misstatements in our financial statements, and could materially and adversely affect the market price of our Class A common stock.

Prior to becoming a public company, we have not been required to comply with the requirements of the U.S. Securities and Exchange Commission (the “SEC”) to have our consolidated financial statements completed, reviewed or audited and filed within a specified time. As a publicly traded company following completion of this offering, we will be required to file periodic reports containing our consolidated financial statements with the SEC within a specified time following the completion of quarterly and annual periods. We will also be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 concerning internal control over financial reporting. We may experience difficulty in meeting the SEC’s reporting requirements. Any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and cause investors and potential investors to lose confidence in us and reduce the market price of our Class A common stock.

As a public company, we will incur significant legal, accounting, insurance and other expenses. Compliance with these and other rules of the SEC and the rules of the New York Stock Exchange will increase our legal and financial compliance costs and make some activities more time consuming and costly. Beginning with our Annual Report on Form 10-K for our 2013 fiscal year, SEC rules will require that our Chief Executive Officer and Chief Financial Officer periodically certify the existence and effectiveness of our internal control over financial reporting. Beginning with the fiscal year ending December 31, 2018, or such earlier time as we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (which we refer to as the “JOBS Act”), our independent registered public accounting firm will be required to attest to our assessment of our internal control over financial reporting. This process will require significant documentation of policies, procedures and systems, review of that documentation by our internal auditing and accounting staff and our outside independent registered public accounting firm, and testing of our internal control over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter.

During the course of our testing, we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our internal control over financial reporting. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a consequence, we would have to disclose in periodic reports we file with the SEC any material weakness in our internal control over financial reporting. The existence of a material weakness would preclude management from concluding that our internal control over financial reporting is effective and would preclude our independent auditors from attesting to our assessment of the

 

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effectiveness of our internal control over financial reporting is effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect the market price of our Class A common stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal control over financial reporting, it may materially and adversely affect us.

A material weakness in our internal control over financial reporting was identified for the year ended December 31, 2011. Material weaknesses in our financial reporting or internal controls could materially and adversely affect us, including resulting in material misstatements in our financial statements, and could materially and adversely affect the market price of our common stock.

In connection with executing management’s process for identifying, documenting and testing existing internal controls used to validate inputs to our financial reporting process (i.e., management’s assessment of internal control over financial reporting), we identified a material weakness in such internal control during the audit of our consolidated financial statements for the year ended December 31, 2011. Due to the recent formation of the Company and the acquisition of four troubled financial institutions, we did not complete the recruitment of certain professionals to fully implement, enforce, document or assess the effectiveness of our internal control on a timely basis or to remediate identified internal control deficiencies prior to December 31, 2011. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in the audit of our consolidated financial statements for the year ended December 31, 2011. We provided our independent auditors with detailed transaction-level documentation to enable them to sufficiently expand substantive testing procedures in order to obtain reasonable assurance that the consolidated financial statements were free of material misstatements and as a result, the noted material weakness in internal control did not affect our independent auditor’s report on the consolidated financial statements dated March 27, 2012, which expressed an unqualified opinion on our consolidated financial statements. We have implemented and are continuing to implement measures designed to improve our internal control over financial reporting. In connection with our growth, we have expanded, and continue to expand, personnel to augment our internal control environment, including having hired over the last few quarters, among others, a new Chief Financial Officer, Controller, an Assistant Controller, a Treasurer, a Director of External Reporting, a General Counsel/Chief of Compliance and an additional senior credit officer. Additionally, we plan to separate the role of Chief Accounting Officer from that of the Chief Financial Officer. The measures we have taken to date and may take in the future may not be sufficient to avoid potential future material weaknesses and the consequences referenced above, though we believe that the actions we are taking are sufficient to address the identified weakness in internal control over financial reporting.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the

 

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requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that material weaknesses or other deficiencies in our internal control over financial reporting go undetected. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies immediately after this offering, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million). Investors and securities analysts may find it more difficult to evaluate our common stock because we will rely on one or more of these exemptions, and, as a result, investor confidence and the market price of our common stock may be materially and adversely affected.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies. We have elected to opt out of such extended transition period, which election is irrevocable.

We rely on our systems and employees, and any errors or fraud could materially and adversely affect us.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third parties to process a large number of increasingly complex transactions. We could be materially and adversely affected if one of our employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third parties with which we do business also could be sources of operational risk to us, including breakdowns or failures of such parties’ own systems or employees. Any of these occurrences could result in our diminished ability to operate our business, potential liability to clients, reputational damage and regulatory intervention, which could materially and adversely affect us.

Risks Relating to our Growth Strategy:

We may not be able to effectively manage our growth.

Our future operating results depend to a large extent on our ability to successfully manage our rapid growth. Our rapid growth has placed, and it may continue to place, significant demands on our operations

 

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and management. Whether through additional acquisitions or organic growth, our current plan to expand our business is dependent upon our ability to:

 

   

continue to implement and improve our operational, credit, financial, 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 businesses; and

 

   

attract and retain management talent.

We may not successfully implement improvements to, or integrate, our management information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the infrastructure that comes with new banking centers and banks. Thus, our growth strategy may divert management from our existing franchises and may require us to incur additional expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage and grow our banking 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 community banking franchises. Generally, any acquisition of target financial institutions, banking centers or other banking assets by us will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on applications, federal banking regulators consider, among other factors:

 

   

the effect of the acquisition on competition;

 

   

the financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the bank(s) involved;

 

   

the quantity and complexity of previously consummated acquisitions;

 

   

the managerial resources of the applicant and the bank(s) involved;

 

   

the convenience and needs of the community, including the record of performance under the Community Reinvestment Act (which we refer to as the “CRA”);

 

   

the effectiveness of the applicant in combating money laundering activities; and

 

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the extent to which the acquisition would result in greater or more concentrated risks to the stability of the United States banking or financial system.

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.

The success of future transactions will depend on our ability to successfully identify and consummate acquisitions of banking franchises that meet our investment objectives. Because of the intense competition for acquisition opportunities and the limited number of potential targets, we may not be able to successfully consummate acquisitions on attractive terms, or at all, that are necessary to grow our business.

The success of future transactions will depend on our ability to successfully identify and consummate transactions with target banking franchises that meet our investment objectives. There are significant risks associated with our ability to identify and successfully consummate these 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. 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. 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 increase loans through organic loan growth, we may be unable to successfully implement our growth strategy, which could materially and adversely affect us.

We intend to grow our business through strategic acquisitions of banking franchises coupled with organic loan growth. Previous availability of attractive acquisition targets may not be indicative of future acquisition opportunities, and we may be unable to identify any acquisition targets that meet our investment objectives. Additionally, loan growth, excluding the effects of our acquisitions, has so far been limited and such loan balances have declined as loan repayments from our clients have generally outpaced loan originations due not only to our limited time to cultivate relationships with our clients, but also due to the generally weakened economy and lower levels of quality borrowing demand. As a result, a significant portion of our income thus far has been derived from the accretion recognized on acquired assets rather than from cash interest income. As our acquired loan portfolio, which produces higher yields than our originated loans due to loan discount, accretable yield and the accretion of the FDIC

 

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indemnification asset, 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.

Because we intend to make acquisitions that involve distressed assets, we may not be able to realize the value we predict from these assets or make sufficient provision for future losses in the value of, or accurately estimate the future writedowns to be taken in respect of, these assets.

Delinquencies and losses in the loan portfolios and other assets we acquire may exceed our initial forecasts developed during our due diligence investigation prior to their acquisition and, thus, produce lower risk-adjusted returns than we believed our purchase price supported. Furthermore, our due diligence investigation may not reveal all material issues. The diligence process in FDIC-assisted transactions is also expedited due to the short acquisition timeline that is typical for these transactions. 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. Current economic conditions have created an uncertain environment with respect to asset valuations and there is no certainty that we will be able to sell assets or institutions after we acquire them if we determine it would be in our best interests to do so. In addition, currently there is limited or no liquidity for certain asset classes we hold, including commercial real estate and construction and development loans.

The success of future transactions will depend on our ability to successfully combine the target financial institution’s banking franchises with our existing banking business and, if we experience difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected.

The success of future transactions will depend, in part, on our ability to successfully combine the target financial institution’s banking franchises with our existing banking business. As with any acquisition involving financial institutions, there may be business disruptions that result in the loss of clients or cause clients to remove their accounts and move their business to competing financial institutions. It is possible that the integration process could result in additional expenses, the disruption of ongoing business and inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, depositors and employees and to achieve the anticipated benefits of the acquisition. Integration efforts, including integration of a target financial institution’s systems into our systems, may divert our management’s attention and resources, and we may be unable to develop, or experience prolonged delays in the development of, the systems necessary to operate our acquisitions, such as a financial reporting platform or a human resources reporting platform call center. If we experience difficulties with the integration process, the anticipated benefits of the particular acquisition may not be realized fully, or at all, or may take longer to realize than expected. Additionally, we may be unable to recognize synergies, operating efficiencies and/or expected benefits within expected timeframes and cost projections, or at all. We may also not be able to preserve the goodwill of an acquired financial institution.

 

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Projected operating results for banking franchises to be acquired by us may be inaccurate and may vary significantly from actual results.

We will generally establish the pricing of transactions and the capital structure of banking franchises to be acquired by us on the basis of financial projections for such banking franchises. In general, projected operating results will be based on the judgment of our management team. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed and the projected results may vary significantly from actual results. General economic, political and market conditions can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with our acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect us. Any of the foregoing matters could materially and adversely affect us.

Our officers and directors may have conflicts of interest in determining whether to present business opportunities to us or another entity for which they have fiduciary or contractual obligations.

Our officers and directors may become subject to fiduciary obligations in connection with their service on the boards of directors of other corporations. To the extent that our officers and directors become aware of acquisition opportunities that may be suitable for entities other than us to which they have fiduciary or contractual obligations, or they are presented with such opportunities in their capacities as fiduciaries to such entities, they may honor such obligations to such other entities. In addition, our officers and directors will not have any obligation to present us with any acquisition opportunity that does not fall within the parameters of our business. You should assume that to the extent any of our officers or directors becomes aware of an opportunity that may be suitable both for us and another entity to which such person has a fiduciary or contractual obligation to present such opportunity as set forth above, he or she may first give the opportunity to such other entity or entities and may give such opportunity to us only to the extent such other entity or entities reject or are unable to pursue such opportunity. In addition, you should assume that to the extent any of our officers or directors becomes aware of an acquisition opportunity that does not fall within the above parameters but that may otherwise be suitable for us, he or she may not present such opportunity to us. In general, officers and directors of a corporation incorporated under Delaware law are required to present business opportunities to a corporation if the corporation could financially undertake the opportunity, the opportunity is within the corporation’s line of business and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation.

Risks Relating to the Regulation of Our Industry:

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material adverse effect on our business.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on our business are:

 

   

changes to regulatory capital requirements;

 

   

exclusion of hybrid securities issued on or after May 19, 2010 from tier 1 capital;

 

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creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products);

 

   

potential limitations on federal preemption;

 

   

changes to deposit insurance assessments;

 

   

regulation of debit interchange fees we earn;

 

   

changes in retail banking regulations, including potential limitations on certain fees we may charge; and

 

   

changes in regulation of consumer mortgage loan origination and risk retention.

In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements could also materially and adversely affect us. Any changes in the laws or regulations or their interpretations could be materially adverse to investors in our common stock

We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could materially and adversely affect us.

We are subject to extensive regulation, supervision, and legislation that govern almost all aspects of our operations. Intended to protect clients, depositors and the Deposit Insurance Fund (the “DIF”) these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividends or distributions that we can pay, restrict the ability of institutions to guarantee our debt, and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could materially and adversely affect us. Further, any new laws, rules and regulations could make compliance more difficult or expensive and also materially and adversely affect us.

 

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We are subject to substantial regulatory limitations that limit the way in which we may operate our business.

Our bank subsidiary, NBH Bank, N.A. (“NBH Bank” or the “Bank”), is subject to specific requirements pursuant to the OCC Operating Agreement entered into in connection with our acquisition of certain assets of Bank Midwest, N.A. The OCC Operating Agreement requires, among other things, that the Bank maintain various financial and capital ratios and provide notice to, and obtain consent from, the OCC with respect to any additional failed bank acquisitions from the FDIC or the appointment of any new director or senior executive officer of the Bank. Additionally, the OCC Operating Agreement prohibits the Bank from paying a dividend to the Company until December 2013 and, once the prohibition period has elapsed, imposes other restrictions on the Bank’s ability to pay dividends, including requiring prior approval from the OCC before any distribution is made. Also, the OCC Operating Agreement requires that the Bank maintain total capital at least equal to 12% of risk-weighted assets, tier 1 capital at least equal to 11% of risk-weighted assets and tier 1 capital at least equal to 10% of adjusted total assets.

The Bank (and, with respect to certain provisions, the Company) is also subject to the FDIC Order issued in connection with the FDIC’s approval of our application for deposit insurance for the Bank. The FDIC Order requires, among other things, that, until December 2013, must obtain the FDIC’s approval before implementing certain compensation plans, submit updated business plans and reports of material deviations from those plans to the FDIC and comply with the applicable requirements of the FDIC Policy Statement. Additionally, the FDIC Order requires that the Bank maintain capital levels of at least a 10% tier 1 leverage ratio and a 10% tier 1 risk-based capital ratio until December 2013.

A failure by us or the Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order, or the objection by the OCC or the FDIC to any materials or information submitted pursuant to the OCC Operating Agreement or the FDIC Order, could prevent us from executing our business strategy and materially and adversely affect us.

The FDIC’s restoration plan and the related increased assessment rate could materially and adversely affect us.

The FDIC insures deposits at FDIC-insured depository institutions, such as our subsidiary bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Market developments have significantly depleted the DIF of the FDIC and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit insurance premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may

 

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be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially and adversely affect us, including by reducing our profitability or limiting our ability to pursue certain business opportunities.

Federal 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 banking agencies periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, a federal 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 the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, we could be materially and adversely affected.

We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

The Federal Reserve may require us to commit capital resources to support our subsidiary bank.

As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under this requirement, we could be required to provide financial assistance to our subsidiary bank should our subsidiary bank experience financial distress.

 

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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.

The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital rules for U.S. banks is uncertain.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III increases the requirements for minimum common equity, minimum tier 1 capital, and minimum total capital, to be phased in over time until fully phased in by January 1, 2019.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to count trust preferred securities toward their tier 1 capital. In June 2012, the Federal Reserve, OCC and FDIC released proposed rules which would implement the Basel III and Dodd-Frank Act capital requirements. While the proposed capital requirements would result in generally higher regulatory capital standards, it is uncertain as to exactly how the new standards will ultimately be applied to us and our subsidiary bank and their impact on us or NBH Bank.

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 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (the “OFAC”). If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already

 

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acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions (such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans), which could materially and adversely affect us. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

Risks Relating to Our Class A Common Stock:

Our ability to pay dividends is subject to regulatory limitations and our bank subsidiary’s ability to pay dividends to us, which is also subject to regulatory limitations.

Our ability to declare and pay dividends depends both on the ability of our bank subsidiary to pay dividends to us and on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. Because we are a separate legal entity from our bank subsidiary and we do not have significant operations of our own, any dividends paid by us to our common stockholders 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. Our bank subsidiary is currently prohibited by our OCC Operating Agreement from paying dividends to us until December 2013. Therefore, other than the net proceeds that we received or will receive from the 2009 private offering and from any future financing at the holding company level, we do not have, and do not expect to have in the near future, liquidity at the holding company level to pay dividends to our common stockholders. Finally, holders of our common stock are only entitled to receive such dividends as our board of directors may, in its unilateral discretion, declare out of funds legally available for such purpose based on a variety of considerations, including, without limitation, our historical and projected financial condition, liquidity and results of operations, capital levels, tax considerations, statutory and regulatory prohibitions and other limitations, general economic conditions and other factors deemed relevant by our board of directors. Accordingly, we may not pay the amount of dividends referenced in our current intention above, or any dividends at all, to our common stockholders in the future.

 

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Provisions in our certificate of incorporation and the applicability of Section 203 of the Delaware General Corporation Law may inhibit a takeover of us, which could discourage transactions that would otherwise be in the best interests of our stockholders and could entrench management.

Our certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include limits on the aggregate ownership of our outstanding shares of Class A common stock and the unilateral ability of the board of directors to designate the terms of and issue new series of preferred stock. In addition, we have not opted out of the limitations on business combinations with interested stockholders contained in Section 203 of the Delaware General Corporation Law. As a result, it may be more difficult to remove management and may discourage transactions that would otherwise be in the best interests of our stockholders, including those involving payment of a premium over the prevailing market price of our common stock.

Certain provisions of our loss sharing agreements may have anti-takeover effects and could limit our ability and the ability of our stockholders to engage in certain transactions.

The loss sharing agreements we entered into with the FDIC in connection with the Hillcrest Bank and Community Banks of Colorado acquisitions require that we receive prior FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to us or our stockholders engaging in certain transactions, including those that would otherwise be in our or their best interests. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue the loss sharing arrangement with us.

Among other things, prior FDIC consent is required for (1) a merger or consolidation of us with or into another company if our stockholders will own less than 66.66% of the combined company, or of our bank subsidiary with or into another company, if we will own less than 66.66% of the combined company, (2) the sale of all or substantially all of the assets of our bank subsidiary and (3) a sale of shares by a stockholder, or a group of related stockholders, that will effect a change in control of our bank subsidiary, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act of 1978, as amended (the “Change in Bank Control Act”) (generally, the acquisition of between 10% and 25% of our voting securities where the presumption of control is not rebutted, or the acquisition by any person, acting directly or indirectly or through or in concert with one or more persons, of more than 25% of our voting securities). If we or any stockholder desired to enter into any such transaction, the FDIC may not grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss share arrangement with us, we could be materially and adversely affected.

Our certificate of incorporation contains provisions renouncing our interest and expectancy in certain corporate opportunities.

We have renounced, in our certificate of incorporation, any interest or expectancy in any acquisition opportunities that our officers or directors become aware of and which may be suitable for other entities

 

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to which our officers or directors have a fiduciary or contractual obligation or which were presented to them in their capacity as fiduciaries of such other entities. This would apply even if the acquisition opportunity is in the same or similar line of business in which we operate. These potential conflicts of interest could have a material adverse effect on us.

We and certain of our stockholders are required to comply with the applicable provisions of the FDIC Policy Statement, including a prohibition on sales or transfers of our securities by each such stockholder until three years after the Company’s acquisition of certain failed institutions (except in the case of certain mutual fund holders) without prior FDIC approval.

As the agency responsible for resolving the failure of banks, the FDIC has discretion to determine whether a party is qualified to bid on a failed institution. The FDIC adopted the FDIC Policy Statement in August 2009 and issued related guidance in January and April 2010. The FDIC Policy Statement imposes restrictions and requirements on certain institutions—including us and our bank subsidiary—and their investors. Unless we, together with a group of investors holding an aggregate of at least 30% of our common stock, along with all investors holding more than 5% of our total voting power, are then in compliance with the FDIC Policy Statement, the FDIC may not permit us to bid on failed institutions.

The FDIC Policy Statement imposes the following restrictions and requirements, among others. First, our bank subsidiary is required to maintain capital levels of at least a 10% tier 1 leverage ratio and a 10% tier 1 risk-based capital ratio until December 2013. This amount of capital exceeds that required under otherwise applicable regulatory requirements. Second, investors that collectively own 80% or more of two or more depository institutions are required to pledge to the FDIC their proportionate interests in each institution to indemnify the FDIC against any losses it incurs in connection with the failure of one of the institutions. Third, our bank subsidiary is prohibited from extending credit to its investors and to affiliates of its investors. Fourth, investors may not employ ownership structures that use entities domiciled in bank secrecy jurisdictions (which the FDIC has interpreted to apply to a wide range of non-U.S. jurisdictions). Fifth, investors are prohibited from selling or otherwise transferring shares of our common stock that they own for a three-year period following the time of certain acquisitions of failed institutions by us without FDIC approval. The transfer restrictions in the FDIC Policy Statement do not apply to open-ended investment companies that are registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), issue redeemable securities and allow investors to redeem on demand. Sixth, investors may not employ complex and functionally opaque ownership structures to own a beneficial interest in our bank subsidiary. Seventh, investors that own 10% or more of the equity of a failed institution are not eligible to bid for that institution in a FDIC auction. Eighth, investors may be required to provide information to the FDIC regarding the investors and all entities in their ownership chains, such as information with respect to the size of the capital fund or funds, their diversification, their return profiles, their marketing documents, their management teams, and their business models. Ninth, the FDIC Policy Statement does not replace or substitute for otherwise applicable regulations or statutes.

The FDIC Policy Statement applies to any of our stockholders who hold more than 5% of our total voting power.

 

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

Item 6. EXHIBITS

 

2.1    Purchase and Assumption Agreement, dated as of July 6, 2010, among the Federal Deposit Insurance Corporation, Receiver of Hillcrest Bank, Overland Park, Kansas, the Federal Deposit Insurance Corporation and Hillcrest Bank, National Association (Single Family Shared-Loss Agreement and Commercial Shared-Loss Agreement included as Exhibits 4.15A and 4.15B thereto, respectively) (incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)†
2.2    Amended and Restated Purchase Agreement by and among Dickinson Financial Corporation, Bank Midwest, N.A. and NBH Holdings Corp. (on behalf of itself and its to-be-formed national banking association subsidiary), dated as of August 31, 2010 (incorporated herein by reference to Exhibit 2.2 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)†
2.3    Purchase and Assumption Agreement, dated as of July 22, 2011, among the Federal Deposit Insurance Corporation, Receiver of Bank of Choice, Greeley Colorado, the Federal Deposit Insurance Corporation and Bank Midwest, National Association (incorporated herein by reference to Exhibit 2.3 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)†
2.4    Purchase and Assumption Agreement, dated as of October 21, 2011, among the Federal Deposit Insurance Corporation, Receiver of Community Banks of Colorado, the Federal Deposit Insurance Corporation and Bank Midwest, National Association (incorporated herein by reference to Exhibit 2.4 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)†
3.1    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 August 22, 2012)
3.2    Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)
4.1    Specimen common stock certificate (incorporated herein by reference to Exhibit 4.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)
4.2    Registration Rights Agreement, dated as of October 20, 2009, by and between NBH Holdings Corp. and FBR Capital Markets, Inc. (incorporated herein by reference to Exhibit 4.2 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
4.3    Amendment No. 1, dated as of July 20, 2011, to the Registration Rights Agreement, dated as of October 20, 2009 by and between NBH Holdings Corp. and FBR Capital Markets, Inc. (incorporated herein by reference to Exhibit 4.3 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
10.1    Employment Agreement, dated May 22, 2010, 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)
10.2    NBH Holdings Corp. 2009 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
10.3    Value Appreciation Instrument Agreement, dated as of October 22, 2010 by and between NBH Holdings Corp. and the Federal Deposit Insurance Corporation (incorporated herein by reference to Exhibit 10.3 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
10.4    Value Appreciation Instrument Agreement, dated as of July 22, 2011 by and between NBH Holdings Corp. and the Federal Deposit Insurance Corporation (incorporated herein by reference to Exhibit 10.4 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
10.5    Value Appreciation Instrument Agreement, dated as of October 21, 2011 by and among NBH Holdings Corp., Bank Midwest, National Association and the Federal Deposit Insurance Corporation (incorporated herein by reference to Exhibit 10.5 to our Form S-1 Registration Statement (Registration No. 333-177971), filed on November 14, 2011)
10.6    Form of Indemnification Agreement 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)
10.7    Employment Agreement, dated October 24, 2011, by and between Richard U. Newfield and NBH Holdings Corp. (incorporated herein by reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
10.8    Employment Agreement, dated October 15, 2011, by and between Thomas M. Metzger and NBH Holdings Corp. (incorporated herein by reference to Exhibit 10.8 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
10.9    Letter Agreement dated February 13, 2012, by and between Brian F. Lilly and National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.9 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
10.10    Employment Agreement dated August 18, 2012, by and between Kathryn M. Hinderhofer and National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.10 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
10.11    Senior Executive Bonus Plan (incorporated herein by reference to Exhibit 10.11 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)
10.12    Letter Agreement dated November 7, 2011, by and between James B. Fitzgerald and National Bank Holdings Corporation (incorporated herein by reference to Exhibit 10.12 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)
10.13    Amendment to NBH Holdings Corp. 2009 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.13 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
10.14    Form of NBH Holdings Corp. 2009 Equity Incentive Plan Restricted Stock Award Agreement (For Non-Employee Directors) (incorporated herein by reference to Exhibit 10.14 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
10.15    Form of NBH Holdings Corp. 2009 Equity Incentive Plan Nonqualified Stock Option Agreement (For Management) (incorporated herein by reference to Exhibit 10.15 to our Form S-1 Registration Statement (Registration Statement No. 333-177971), filed on September 10, 2012)
31.1    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32    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    Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operation, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail*

 

* This information is deemed furnished, not filed.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NATIONAL BANK HOLDINGS CORPORATION
   

/s/ Brian F. Lilly

    Brian F. Lilly
    Chief Financial Officer
    (Authorized Officer and Principal Financial Officer)
Date: November 14, 2012    

 

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