UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31 2019, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35654
NATIONAL BANK HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 27-0563799 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7800 East Orchard Road, Suite 300, Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone, including area code:
(303) 892-8715
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, Par Value $0.01 | NBHC | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
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Large accelerated filer | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | | ☐ |
| | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securitiesare registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019,2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $1,094,000,000$1,128,000,000 based on the closing sale price as reported on the New York Stock Exchange.
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.
As of February 24, 2020,2023, NBHC had outstanding 31,177,47637,608,519 shares of Class A voting common stock with $0.01 par value per share, excluding 120,623164,870 shares of restricted Class A common stock issued but not yet vested.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 20202023 Annual Meeting of Shareholders to be filed within 120 days of December 31, 20192022 will be incorporated by reference into Part III of this Form 10-K.
INDEX
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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| Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
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| Certain Relationships and Related Transactions, and Director Independence |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, liquidity, results of operations, business strategy and growth prospects.
Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
● our ability to execute our business strategy, including our digital strategy, as well as changes in our business
strategy or development plans;
● business and economic conditions generally and in the financial services industry;
● effects of aany potential government shutdown, if any;shutdowns;
● economic, market, operational, liquidity, credit and interest rate risks associated with our business;business, including increased competition for deposits due to prevailing interest rates;
● effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
● changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions;
● effects of inflation, including its associated impact on labor costs, as well as, interest rate, securities market and monetary supply fluctuations;
● changes in the economy or supply-demand imbalances affecting local real estate values;
● changes in consumer spending, borrowings and savings habits;
● with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the related loans if the loans fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the geographic concentration of our servicing portfolio;
● our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions, consolidations or other expansion opportunities on attractive terms, or at all;
● our ability to integrate acquisitions, such as Community Bancorporation and Bancshares of Jackson Hole Incorporated (the “2022 Mergers”), or consolidations and to achieve synergies, operating efficiencies and/or other expected benefits within expected time-frames, or at all, or within expected cost projections, and to preserve the goodwill of acquired financial institutions;
● business disruption following the 2022 Mergers;
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● our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from time to time without significant change in our client service or risk to our control environment;
● our dependence on information technology and telecommunications systems of third partythird-party service providers and the risk of system failures, interruptions or breaches of security, including those that could result in disclosure or misuse of confidential or proprietary client or other information;
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● our ability to achieve organic loan and deposit growth and the competition for, and composition of, such growth;
● changes in sources and uses of funds, including loans, deposits and borrowings;
● increased competition in the financial services industry, including nationally, regionally or locally, resulting in, among other things, lower returns;
● continued consolidation in the financial services industry;
● our ability to maintain or increase market share and control expenses;
● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;
● the trading price of shares of the Company's stock;
● the effects of tax legislation, including the potential of future increaseschanges to prevailing tax rates, or challenges to our
tax position;positions;
● our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws on our deferred tax assets;
● costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries; and changes in regulations that apply to us as a Colorado state-chartered bank and a Wyoming state-chartered bank;
● technological changes;
● the timely development and acceptance of new products and services, including in the digital technology space and our digital solution 2UniFiSM, and perceived overall value of these products and services by our clients;
● changes in our management personnel and our continued ability to attract, hire and retain qualified personnel;
● ability to implement and/or improve operational management and other internal risk controls and processes and our reporting system and procedures;
● regulatory limitations on dividends from our bank subsidiary;subsidiaries;
● changes in estimates of future loancredit reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
● widespread natural and other disasters, dislocations, political instability, pandemics, acts of war or terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically;
● a cyber-security incident, data breach or a failure of a key information technology system;
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● impact of reputational risk on such matters as business generation and retention;
● other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission; and
● our success at managing the risks involved in the foregoing items.
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Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.
PART I: FINANCIAL INFORMATION
Item 1. BUSINESS.
Summary
National Bank Holdings Corporation ("NBHC" or the "Company") is a bankfinancial holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Denver,Greenwood Village, Colorado, and its primary operations are conducted through its wholly owned subsidiary,subsidiaries, NBH Bank (the "Bank"), a Colorado state-chartered bank and a memberBank of Jackson Hole Trust (“the Federal Reserve System.Banks”). The Company provides a variety of banking products and services to both commercial and consumer clients through a network of 101over 95 banking centers, as of December 31, 2019,2022, located primarily in Colorado and the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, as well as through online and mobile banking products and services. As of December 31, 2019,2022, we had $5.9$9.6 billion in assets, $4.4$7.2 billion in loans, $4.7$7.9 billion in deposits, $1.1 billion in shareholders’ equity and $0.8 billion in shareholders’ equity.of trust and wealth management assets under management.
NBH Bank is a Colorado state-chartered bank and a member of the Federal Reserve Bank (“FRB”) of Kansas City. Through NBH Bank, weWe operate under the following brand names:names as divisions of NBH Bank: in Colorado, Community Banks of Colorado in Colorado; Bank Midwestand Community Banks Mortgage; in Kansas and Missouri;Missouri, Bank Midwest and Bank Midwest Mortgage; in Wyoming, Bank of Jackson Hole and Bank of Jackson Hole Mortgage; and in Texas, Utah, New Mexico and Idaho, Hillcrest Bank and Hillcrest Bank in New Mexico, Texas and Utah. We believe that conducting our banking operations under a single state charter streamlines our operations and enables us to more effectively and efficiently execute our growth strategy.Mortgage.
Bank of Jackson Hole Trust (“BOJHT”) is a Wyoming state-chartered bank and a member of the Federal Reserve Bank of Kansas City. Our trust and wealth business currently operates under the Wyoming charter as Bank of Jackson Hole Trust and Bank of Jackson Hole Trust and Wealth Partners.
The Company continues to develop our digital solution 2UniFiSM, a national platform for providing banking services to small and medium-sized businesses, digital payment tools and financial services information management. We believe these services will address borrowings, depository and cash management needs for our clients by providing digital access to financial services, real-time information and digital payment solutions. We continue to focus on growing our core business while also innovating and building partnerships that will help us deliver a comprehensive digital financial ecosystem.
Our Acquisitions
We began banking operations in October 2010 and, as of December 31, 2019,2022, we have completed sixeight bank acquisitions. We have transformed these banks into one collective banking operation with a strong capital position, organic growth, prudent underwriting, a granular and well-diversified loan portfolio and meaningful market share with continued opportunity for expansion.
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Rock Canyon Bank Acquisition
On September 1, 2022, the Company completed its acquisition of Community Bancorporation, the bank holding company of Utah-based Rock Canyon Bank (“RCB”). Immediately following the completion of the acquisition, RCB merged into NBH Bank. Pursuant to the merger agreement executed in April 2022, the Company paid $16.1 million of cash consideration and issued 3,096,745 shares of the Company’s Class A common stock in exchange for all of the outstanding common stock of Community Bancorporation. The transaction was valued at $140.4 million in the aggregate, based on the Company’s closing price of $40.13 on August 31, 2022.
Bank of Jackson Hole Acquisition
On October 1, 2022, the Company completed its acquisition of Bancshares of Jackson Hole, the bank holding company of Wyoming-based Bank of Jackson Hole (“BOJH”). Pursuant to the merger agreement executed in March 2022, the Company paid $51.0 million of cash consideration and issued 4,391,964 shares of the Company’s Class A common stock in exchange for all of the outstanding common stock of Bancshares of Jackson Hole. The transaction was valued at $213.4 million in the aggregate, based on the Company’s closing price of $36.99 on September 30, 2022. Immediately following the closing of the acquisition, BOJH sold substantially of all its assets and liabilities to NBH Bank, with the exception of assets and liabilities related to its trust business. Effective October 1, 2022, BOJH was renamed as Bank of Jackson Hole Trust. The Bank of Jackson Hole Trust also operates under the brand Jackson Hole Trust.
All of our acquisitions were accounted for under the acquisition method of accounting, and accordingly, all assets acquired and liabilities assumed were recorded at their respective acquisition date fair values and the fair value discounts/premiums on loans are being accreted over the lives of the loans.
The following table summarizes certain highlights of our six historic acquisitions, including deposits and assets at fair value as of each acquisition date:
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| | Peoples | | Pine River | | of Colorado | | Bank of Choice | | Bank Midwest | | Hillcrest Bank | |||||
Date acquired | | January 1, 2018 | | | August 1, 2015 | | | October 21, 2011 |
| | July 22, 2011 |
| | December 10, 2010 |
| | October 22, 2010 |
Banking centers(1) | | 19 | | | 4 | | | 40 |
| | 16 |
| | 39 |
| | 9 |
Deposits (millions) | | $ 730 | | | $ 130 | | | $ 1,195 | | | $ 760 | | | $ 2,386 | | | $ 1,234 |
Assets (millions) | | $ 875 | | | $ 142 | | | $ 1,228 | | | $ 950 | | | $ 2,426 | | | $ 1,377 |
Primary Market | | Colorado | | | Colorado | | | Colorado | | | Colorado | | | Greater Kansas City Region | | | Greater Kansas City Region |
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Our Market Area
Our core markets are broadly defined as Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico Texas and Utah. In January 2019, the Company announced its expansion into Utah with a focus on serving commercial and business banking clients in Salt Lake City’s Wasatch Front.Idaho. We are the third largest banking center network among Colorado-based banks and the seventhsixth largest banking center network in the greater Kansas City MSAmetropolitan statistical area (“MSA”) among Missouri- and Kansas-based banks ranked by deposits as of June 30, 20192022 (the last date as of which data are available), according to S&P Global. Other major MSAs in which we operate include Salt Lake City, Utah; Jackson, Wyoming; Dallas-Fort Worth-Arlington, Texas; Boise City, ID and Austin-Round Rock, Texas; and Salt Lake City, Utah.Texas.
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We believe that our established presence in our markets positions us well for growth opportunities. An integral component of our foundation and growth strategy has been to capitalize on market opportunities and acquire financial services franchises. Our primary focus has been on markets that we believe are characterized by some or all of the following: (i) attractive demographics with household income and population growth above the national average; (ii) concentration of business activity; (iii) high quality deposit bases; (iv) an advantageous competitive landscape that provides opportunity to achieve meaningful market presence; (v) consolidation opportunities as well as potential for add-on transactions; and (vi) markets sizeable enough to support our long-term organic growth objectives.
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The table below describes certain key demographic statistics regarding our markets:
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| | | | | # of | | | | | | | | Median | | combined | | | | | # of | | | | | | | | Median | | combined | ||
| | Deposits | | businesses | | Population | | Unemployment | | Population | | household | | deposit | | Deposits | | businesses | | Population | | Unemployment | | Population | | household | | deposit | ||||
| | (billions) | | (thousands) | | (millions) | | rate(1) |
| growth(2) |
| income | | market share | | (billions) | | (thousands) | | (millions) | | rate(1) |
| growth(2) |
| income | | market share | ||||
Denver, CO | | $ | 87.2 |
| 114.9 |
| 3.0 |
| 2.5% | | 18.0% | | $ | 83,768 |
| 53% | | $ | 126.8 |
| 160.5 |
| 3.0 |
| 3.3% | | 16.7% | | $ | 95,551 |
| 52% |
Front Range, CO(3) | |
| 118.5 |
| 182.7 |
| 4.8 |
| 2.5% | | 18.4% | |
| 80,902 |
| 51% | |
| 170.6 |
| > 250.0 |
| 4.8 |
| 3.3% | | 17.2% | |
| 92,157 |
| 51% |
Kansas City, MO-KS MSA | |
| 61.3 |
| 76.0 |
| 2.2 |
| 3.2% | | 8.0% | |
| 69,742 |
| 44% | |
| 85.8 |
| 101.4 |
| 2.2 |
| 2.7% | | 8.0% | |
| 76,169 |
| 45% |
Austin, TX | | | 42.9 | | 68.1 | | 2.2 | | 2.6% | | 30.3% | | | 82,650 | | 54% | | | 71.0 | | 96.2 | | 2.4 | | 2.9% | | 31.7% | | | 91,096 | | 50% |
Dallas, TX | | | 292.8 | | 240.9 | | 7.7 | | 3.1% | | 20.3% | | | 73,009 | | 59% | | | 430.5 | | > 250.0 | | 7.8 | | 3.4% | | 17.9% | | | 81,205 | | 62% |
Salt Lake City, UT | | | 38.2 | | 43.2 | | 1.2 | | 2.3% | | 14.4% | | | 78,785 | | 77% | | | 65.8 | | 55.1 | | 1.3 | | 2.2% | | 13.9% | | | 88,921 | | 78% |
Jackson, WY-ID | | | 4.4 | | 3.0 | | 0.0 | | - | | 12.0% | | | 93,322 | | 74% | ||||||||||||||||
Boise City, ID | | | 18.4 | | 113.2 | | 0.8 | | 2.6% | | 25.7% | | | 73,973 | | 53% | ||||||||||||||||
U.S.(4) | | | | | | | |
| 3.5% | | 7.0% | |
| 66,010 |
| 57% | | | | | | | |
| 3.5% | | 6.8% | |
| 72,465 |
| 57% |
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| Unemployment data is as of December 31, |
(2) |
| For the period |
(3) |
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Source: S&P Global as of December 31, 2019,2022, except Deposits and Top 3 Competitor Combined Deposit Market Shares, which reflects data as of SeptemberJune 30, 2019.2022.
Our Business Strategy
As part of our goal of becoming a leading regional community bank holdingfinancial services company, we seek to continue to generate strong organic growth, as well as pursue selective acquisitions of financial institutions and other complementary businesses. Our focus is on building organic growth through strong banking relationships with small- and medium-sized businesses and consumers in our primary markets, while maintaining a low-risk profile designed to generate reliable income streams and attractive returns.
The key components of our strategic plan are:
| ● | Focus on client-centered, relationship-driven banking strategy. Our business and commercial bankers focus on small- and medium-sized businesses with an advisory approach that emphasizes understanding the client’s business and offering a complete array of loan, deposit and treasury management products and services. Our business and commercial bankers are supported by treasury management teams in each of their markets, which allows us to more effectively deliver a comprehensive suite of products and services to our business clients and further deepen our banking relationships. Our consumer bankers focus on knowing their clients in order to best meet their financial needs, offering a full complement of loan, deposit, online and mobile banking solutions. |
| ● | Expansion of commercial banking, business banking and specialty businesses. We have made significant investments in our commercial relationship managers, as well as developed significant capabilities across our business banking and several specialty commercial banking offerings. Our strategy is to originate a high-quality loan portfolio that is diversified across industries and granular in loan size. We have preferred lender status with the Small Business Administration (“SBA”) providing a leveraged platform for growth in the business lending segment. We believe we are well-positioned to leverage our operating and risk management infrastructure through organic |
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| growth, and we intend to continue to add or repurpose our commercial relationship managers to higher growth opportunities and markets in order to drive increased profitability. |
| ● | Expansion through organic growth, |
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| management services offered through Bank of Jackson Hole Trust and our digital solution 2UniFiSM, will provide an expanded revenue base and new sources of fee income. We conduct regular market and competitive analysis to determine which products and services are best suited for our clients. Our teams also continue to pursue opportunities to deepen client relationships, which we believe will further increase our organic loan origination volumes and attract new transaction accounts that offer lower cost of funds and higher fee generating activity. |
| ● | Expansion through our digital solution 2UniFiSM. We are designing a platform for small and medium-sized businesses that we believe will increase access to financial services while reducing the costs of banking services. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to digital payment tools, under the safety of a regulated bank. We will continue to invest with fintech solution providers to support our ecosystem buildout, support our core bank products and offerings, and to leverage efficiencies and technological solutions in our shared services areas. We believe the expansion into the digital financial ecosystem through our platform will provide an expanded revenue base, new sources of fee income and drive growth in our low cost deposit base on a national scale. |
| ● | Continue to strengthen profitability through organic growth and operating efficiencies. We continue to utilize our comprehensive underwriting and risk management processes under one operating platform while maintaining local branding |
| ● | Maintain conservative risk profile and sound risk management practices. Strong risk management is an important element of our operating philosophy. We maintain a conservative risk culture with adherence to comprehensive and seasoned policies across all areas of the organization. We implement self-imposed concentration limits on our loan portfolio to ensure a granular and diverse loan portfolio and protect against downside risk to any particular industry or real estate sector. To manage credit risk and yield, we are taking careful approach to extending new credit. Our risk management approach seeks to identify, assess and mitigate risk and minimize any resulting losses. We have implemented processes to identify, measure, monitor, report and analyze the types of risk to which we are subject. We believe our risk management policies establish appropriate limitations that allow for the prudent oversight of such risks that include, but are not limited to the following: credit, liquidity, market, operational, legal and compliance, reputational, and strategic and business risk. |
| ● | Pursue disciplined acquisitions or other expansionary opportunities. We expect that acquisitions or other expansionary opportunities |
We believe our strategy of strong organic growth through the retention, expansion and development of client-centered relationships and growth through selective acquisitions or other expansionary opportunities in attractive markets provides flexibility regardless of economic conditions. Our established platform for assessing, executing and integrating acquisitions creates opportunities in an economic downturn, and our attractive market factors, franchise scale in our targeted markets and our relationship-centered banking focus create opportunities in an improving economic environment. While the current
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inflationary environment has created operating stress for many businesses, our teams continually monitor the financial health of our clients in order to manage risk. Our strong capital and liquidity have allowed us to prudently navigate an uncertain economy, and we believe we are well positioned to continue to support our clients and communities.
Products and Services
Through theNBH Bank, our primary business is to offer a full range of traditional banking products and financial services to our commercial, business and consumer clients, who are predominantly located in Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico Texas and Utah.Idaho. Through the Bank of Jackson Hole Trust, our primary business is to provide trust and wealth management services to our clients. We conduct our banking business through 101with over 95 banking centers with 48 of those located in Colorado, 44 in Kansas and Missouri, six in New Mexico, two in Texas and one in Utahacross our footprint as of December 31, 2019.2022. Our distribution network also includes 127129 ATMs as well as fully integrated online banking and mobile banking services. We offer a high level of personalized service to our clients through our relationship managers and banking center associates. We
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believe that a personalized banking relationship that includes multiple services, such as loan and deposit services, online and mobile banking solutions, and treasury management products and services and trust and wealth management services, is the key to profitable and long-lasting client relationships and that our local focus and decision making provide us with a competitive advantage over banks that do not have these attributes.
Our primary strategic objective is to serve small- to medium-sized businesses in our markets with a variety of unique and useful services, including a full array of banking products, while maintaining a strong and disciplined credit culture and delivering excellent client service. We offer a variety of products and services that are focused on the following areas:
Commercial and Specialty Banking
Our commercial bankers focus on small- and medium-sized businesses and commercial real estate investors/developers with an advisory approach that emphasizes understanding the client’s business and offering a complete suite of loan, deposit and treasury management products and services. We have invested significantly in our commercial banking capabilities, attracting experienced commercial bankers from competing institutions in our markets, which have resulted in significantpositions us well for continued growth in our originated loan portfolio. Our commercial relationship managers offer a wide range of commercial loan products, including:
Commercial and Industrial Loans—We originate commercial and industrial loans and leases, including working capital loans, equipment loans, lender finance loans, food and agricultureagribusiness loans, government and non-profit loans, owner occupied commercial real estate loans and other commercial loans and leases. The terms of these loans vary by purpose and by type of underlying collateral, if any.
Working capital loans generally have terms of upone to one year,three years, are usually secured by accounts receivable and inventory and carry the personal guarantees of the principals of the business. Equipment loans are generally secured by the financed equipment at advance rates that we believe are appropriate for the equipment type. In the case of owner-occupied commercial real estate loans, we are usually the primary provider of financial services for the company and/or the principals and the primary source of repayment is through the cash flows generated by the borrowers’ business operations. Owner-occupied commercial real estate loans are typically secured by a first lien mortgage on real property plus assignments of all leases related to the properties. Underwriting guidelines generally require borrowers to contribute cash equity that results in an 80% or less loan-to-value (“LTV”) ratio on owner-occupied properties. As of December 31, 2019,2022, substantially all of our commercial and industrial loans were secured.
Non-Owner Occupied Commercial Real Estate Loans—Non-owner occupied commercial real estate loans (“CRE”) consist of loans to finance the purchase of commercial real estate and development loans. Our non-owner occupied CRE loans include commercial properties such as office buildings, warehouse/distribution buildings, multi-family, hospitality and retail buildings. These loans are typically secured by a first lien mortgage or deed of trust, as well as assignments of all related leases. Underwriting guidelines generally require borrowers to contribute cash equity that results in the lessor of a 75% or less loan to cost or loan to value ratio.
We seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our primary markets. Although non-owner occupied CRE is not a primary focus of our lending strategy, we have developed teams of dedicated
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CRE bankers in each of our markets who possess the depth and breadth of both market knowledge and industry expertise, which serves to further mitigate risk of this product type.
Small Business Administration Loans—We offer a range of U.S. Small Business Administration, or SBA loans, to support manufacturers, distributors and service providers targeted to small businesses and entrepreneurs seeking growth capital, working capital, or other capital investments. As a Preferred Lender Provider of the SBA, we are able to expedite SBA loan approval, closing, and servicing functions through delegated authority to underwrite and approve loans on behalf of the SBA. We utilize the SBA 7(a) loan, SBA 504 loan, SBA Express loan, and CAP Line loan programs. In addition to the SBA program, we also originate U.S. Department of Agriculture and Farm Service Agency loans.
Commercial Deposit and Treasury Management Products (including business online and mobile banking)—Our commercial bankers are focused on providing value-added deposit products to our clients that optimize their cash management program. We are focused on full-relationship banking, including banking core operating accounts and ancillary accounts. We also provide our commercial clients with money market accounts and short-term repurchase reserve accounts depending on their individual needs. In
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addition, we provide a wide array of treasury management solutions to our clients, including: business online and mobile banking, commercial credit card services, wire transfers, automated clearing house services, electronic bill payment, lock box services, remote deposit capture services, merchant processing services, cash vault, controlled disbursements, fraud prevention services through positive pay and other auxiliary services, (includingsuch as account reconciliation, collections, repurchase accounts, zero balance accounts and sweep accounts).
Business, Residential and Consumer Banking
Our business and consumer bankers focus on knowing their clients in order to best meet their financial needs, offering a full complement of loan, deposit and online and mobile banking solutions. We strive to do business in the areas served by our banking centers, which is also where our marketing is focused, and the vast majority of our new loan and deposit clients are located in existing market areas.
All of our newly originated consumer loans are on a direct to consumer basis. We offer a variety of business and consumer loans, including:accounts.
Business Loans—Business loans consist of term loans, line of credit, and real estate secured loans. The terms of these loans vary by purpose and by type of underlying collateral, if any. Business loans generally require LTV ratios of not more than 75 percent. Business loans also assist in the growth of our deposits because many business loan borrowers establish noninterest-bearing and interest-bearing demand deposit accounts and treasury management relationships with us. Those deposit accounts help us to reduce our overall cost of funds, and those treasury management relationships provide us with a source of non-interest income.
Residential and Personal Banking
Our personal bankers focus on knowing their clients in order to best meet their financial needs, offering a full complement of loan, deposit and online and mobile banking solutions. We strive to do business in the areas served by our banking centers, which is also where our marketing is focused, and the vast majority of our new loan and deposit clients are located in existing market areas.
All of our newly originated consumer loans are on a direct to consumer basis. We offer a variety of consumer loans, including:
Residential Real Estate Loans—Residential real estate loans consist of loans secured by the primary or secondary residence of the borrower.borrower as well as properties the borrower holds for investment. These loans consist of closed loans, which are typically amortizing over a 10 to 30-year term. Our loan-to-value (LTV)LTV benchmark for these loans will generally be below 80% at inception unless related to certain internal or government programs where higher LTV’s may be warranted, along with satisfactory debt-to-income ratios. We do not originate or purchase negatively amortizing or sub-prime residential loans. These residential real estate loans are generally originated under terms and conditions consistent with secondary market guidelines. Some of these loans will be placed in the Bank’s loan portfolio; however, a majority are sold in the secondary market and provide a significant source of fee income. The mortgage operation acquired from Peoples added significantmajority of loans sold are sold with servicing released. We have residential banking products, servicing capabilities and residential loan origination channels. In addition to the referral business through our existing consumer client base, we have a dedicated team of mortgage bankers who focus origination efforts primarily on new purchase activity and secondarily on refinance activity. We also offer open- and closed-ended home equity loans, which are loans generally secured by second lien positions on residential real estate, and residential construction loans to consumers and builders for the construction of residential real estate. We do not originate or purchase negatively amortizing or sub-prime residential loans.
Consumer Loans—Consumer loans are structured as small personal lines of credit and term loans, with the latter generally bearing interest at a higher rate and having a shorter term than residential mortgage loans. Consumer loans are both secured (for example by deposit accounts, brokerage accounts or automobiles) and unsecured and carry either a fixed rate or variable
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rate. Examples of our consumer loans include home improvement loans not secured by real estate, new and used automobile loans and personal lines of credit.
Deposit Products (including online and mobile banking)—We offer a variety of deposit products to our clients, including checking accounts, savings accounts, money market accounts, health savings accounts and other deposit accounts, including fixed-rate, fixed maturity time deposits ranging in terms from 30 days to five years, and individual retirement accounts. We view deposits as an important part of the overall client relationship and believe they provide opportunities to cross-sell other products and services. We intend to continue our efforts to attract low-costlower-cost transaction deposits from our client relationships. Consumer deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from areas surrounding our banking centers. In order to attract and retain deposits, we rely on providing competitively priced high-quality service and introducing new products and services that meet our clients' needs.
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We also offer comprehensive, user-friendly mobile and online banking platforms allowing our clients to pay bills, check statements, deposit checks and transfer funds, amongst other features, online or on-the-go.
Trust and Wealth Management Services
With the acquisition of Bank of Jackson Hole Trust, the Company expanded the offerings available to clients with the addition of trust, estate and wealth management services. Our trust and wealth team rounds out the full-service offerings to provide the full spectrum of tools and support required for all our clients’ financial needs.
Lending Activities
Our loan portfolio includes commercial and industrial loans, commercial real estate loans, residential real estate loans, business loans and consumer loans. The principal risk associatedevaluated with each category of loans we make is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower’s market or industry segment. Attributes of the relevant business market or industry segment include the economic and competitive environment, changes to supply or demand, threat of substitutes and barriers to entry and exit. In our credit underwriting process, we carefully evaluate the borrower’s industry, operating performance, liquidity and financial condition. We underwrite credits based on multiple repayment sources, including operating cash flow, liquidation of collateral and guarantor support, where appropriate. We closely monitor the operating performance, liquidity and financial condition of borrowers through analysis of periodic financial statements and meetings with the borrower’s management. As part of our credit underwriting process, we also review the borrower’s total debt obligations on a global basis. Our credit policy requires that key risks be identified and measured, documented and mitigated, to the extent possible, to seek to ensure the soundness of our loan portfolio.
Our credit policy also provides detailed procedures for making loans to individual and business clients along with the regulatory requirements to ensure that all loan applications are evaluated subject to our fair lending policy. Our credit policy addresses the common credit standards for making loans to clients, the credit analysis and financial statement requirements, the collateral requirements, including insurance coverage where appropriate, as well as the documentation required. Our ability to analyze a borrower’s current financial health and credit history, as well as the value of collateral as a secondary source of repayment, when applicable, are significant factors in determining the creditworthiness of loans to clients. We require various levels of internal approvals based on the characteristics of such loans, including the size, nature of the exposure and type of collateral, if any. We believe that the procedures required by our credit policies enhance internal responsibility and accountability for underwriting decisions and permit us to monitor the performance of credit decision-making. An integral element of our credit risk management strategy is the establishment and adherence to concentration limits for our portfolio. We have established concentration limits that apply to our portfolio based on product types such as commercial real estate, consumer lending, and various categories of commercial and industrial lending. For more detail on our credit policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Asset Quality.”
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Competition
The banking landscape in our primary markets of Colorado, the greater Kansas Missouri,City region, Utah, Texas, Wyoming, New Mexico Texas and UtahIdaho is highly competitive and quite fragmented, with many small banks having limited market share while the large out-of-state national and super-regional banks control the majority of deposits and profitable banking relationships. We compete actively with national, regional and local financial services providers, including: banks, thrifts, credit unions, mortgage companies, finance companies and financial technology (“FinTech”fintech”) companies.
Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a variety of traditional brick and mortar banks and nontraditional alternatives, such as online banks and FinTechfintech companies. Competition among providers is based on many factors. The primary factors driving commercial and consumer competition for loans and deposits are interest rates, the fees charged, client service levels and the range of products and services offered. In addition, other competitive factors include the location and hours of our banking centers, the client service orientation of our associates and the availability of digital banking products and services. We believe the most important of these competitive factors that determine our success are our consumer bankers’ focus on knowing their individual clients in order to best meet their financial needs and our business and commercial bankers’ focus on small- and medium-sized businesses with an advisory approach that emphasizes understanding the client’s business and offering a complete array of loan, deposit and treasury management products and services through our banking centers and our digital banking platform.
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We recognize that there are banks and other financial services companies with which we compete that have greater financial resources, access to more capital and higher lending capacity and offer a wider range of deposit and lending instruments. However, given our existing capital base, we expect to be able to meet the majority of small- to medium-sized business and consumer credit and depository service needs.
AssociatesHuman Capital
AtOur core values Integrity, Meritocracy, Teamwork and Citizenship, represent our belief that our Company’s long-term success is deeply tied to having a dedicated and engaged workforce and a commitment to the communities we serve. We are committed to building and contributing to a healthy workplace environment for our associates by investing in competitive compensation and benefit packages, promoting inclusion of diverse viewpoints and backgrounds, providing training and career development opportunities and promoting qualified associates within our organization.
Associate Statistics
We are committed to attracting, developing, and retaining associates who reflect the communities in which we serve. Partnerships with professional associations, schools and universities imbedded within our local footprint, and the use of various technology solutions assist us in connecting and building relationships with a diverse pool of candidates. As of December 31, 2019,2022, we had 1,229employed 1,255 full-time and 67 part-time associates throughout our business footprint.
The market for top talent is highly competitive. We recognize that workforce turnover is not only financially costly, but it does not align with our commitment to our team. We believe we are best served when we can invest through meritocracy within our current talent pool. The average tenure of service of our associates is approximately six years.
Equity, Diversity and Inclusion
We strongly believe that equity, diversity and inclusion are important elements in building and sustaining a successful organization and positive, results-driven culture. Additionally, equity, diversity and inclusion helps us to connect and build better relationships within our Company and communities. As a result of our efforts:
| ● | 64% of the Company’s workforce is female and 54% of the Company’s managerial roles are female, as of December 31, 2022. |
| ● | Minorities represent 23% of the Company’s workforce and 21% of the Company’s managerial roles, as of December 31, 2022. |
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| ● | In 2022, we hired 426 associates, and 66% of those new associates were female and 34% were minorities. |
The Company oversees its Equity, Diversity and Inclusion efforts through our broader Environmental, Social and Governance (“ESG”) Committee that is comprised of a multi-disciplinary group of associates throughout NBH Bank with oversight by the executive management team. To further our diversity goals for our workforce, the Company has also implemented programs developed to foster equality and leadership opportunities for the entire associate base, including associate peer networks, events with keynote speakers, panels and Q&A forums to enable associate feedback. Our management team also plays an integral part in championing women in business by hosting networking events, serving on panels and sponsoring relevant events that foster understanding and engagement.
Associate Development and Training
We believe that building the best team requires investing in our associates’ professional development. Associates have access to our learning center, NBH University, which offers a variety of courses that center around professional development. Additionally, we have connection mentors in place to assist new associates with expanding their network, building professional skills, helping navigate the organization and assist in onboarding.
Compensation and Benefits
Our Company offers comprehensive benefits packages to our associates, including medical and prescription drug insurance, dental insurance and vision insurance as well as several voluntary benefit options. Our compensation structure recognizes the individual performance of our associates through merit-based salary increases with a focus on variable pay and paying for performance.
We also encourage our associates to think about their long-term financial stability. Our associates have the opportunity to participate in our 401(k) plan, which includes contribution matches from the Company. Additionally, we offer a stock purchase plan (ESPP) to our associates which allows those who work 20 hours or more per week to purchase shares in our Company at a 10% discount.
Community Engagement
We strive to make a positive impact in the communities we serve through consistent engagement, as well as maintaining strong partnerships with a wide range of charitable organizations and causes. All bank associates are granted up to eight paid hours each year to donate their time to non-profit organizations that align with our Community Reinvestment Act (“CRA”) initiatives, which include financial literacy, affordable housing and workforce development.
Safety and Respect in the Workplace
We are committed to providing a safe and secure work environment in accordance with applicable labor, safety, health, anti-discrimination and other workplace laws. We strive for all of our associates to feel safe and empowered at work. To that end, we maintain a whistleblower hotline that allows associates and 69 part-time associates.others to anonymously voice concerns. We prohibit retaliation against an individual who reported a concern or assisted with an inquiry or investigation.
SUPERVISION AND REGULATION
The U.S. banking industry is highly regulated under federal and state law. Banking laws, regulations, and policies affect the operations of the Company and its subsidiary.subsidiaries. Investors should understand that the primary objective of the U.S. bank regulatory regime is the protection of depositors, the Depositors Insurance Fund (“DIF”), and the banking system as a whole, not the protection of the Company’s shareholders.
As a bank holding company, we are subject to inspection, examination, supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Our bank subsidiary,National Bank Holdings Corporation holds two subsidiaries, NBH Bank and Bank of Jackson Hole Trust. NBH Bank, is a Colorado state-chartered bank and a member of the Federal Reserve Bank of Kansas City. As such, NBH Bank is subject to examination, supervision and regulation by both the Colorado
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Division of Banking and the Federal Reserve. Our other bank subsidiary, BOJHT, is a Wyoming state-chartered bank and a member of the Federal Reserve Bank of Kansas City. As such, BOJHT is subject to examination, supervision and regulation by both the Wyoming Division of Banking and the Federal Reserve. In addition, we expect that any additional businesses that we may invest in or acquire will be regulated by various state and/or federal banking regulators.
Banking statutes and regulations are subject to continual review and revision by Congress, state legislatures and federal and state regulatory agencies. A change in such statutes or regulations, including changes in how they are interpreted or implemented, could have a material effect on our business. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance pursuant to such laws and regulations, which are binding on us and our subsidiaries.
Banking statutes, regulations and policies could restrict our ability to diversify into other areas of financial services, acquire depository institutions and make distributions or pay dividends on our equity securities. They may also require us to provide financial support to any bank that we control, maintain capital balances in excess of those desired by management and pay higher deposit insurance premiums as a result of a general deterioration in the financial condition of NBH Bank, BOJHT or other depository institutions we control.
The description below summarizes certain elements of the applicable bank regulatory framework. This description is not intended to describe all laws and regulations applicable to us and our subsidiaries. The description is qualified in its entirety by reference to the full text of the statutes, regulations, policies, interpretive letters and other written guidance that are described.
National Bank Holdings Corporation as a Bank Holding Company
As a bank holding company, we are subject to regulation under the Bank Holding Company Act (“BHCA”) and to supervision, examination, and enforcement by the Federal Reserve. Federal Reserve jurisdiction also extends to any company that we may directly or indirectly control, such as non-bank subsidiaries and other companies in which we have a controlling interest. While subjecting us to supervision and regulation, we believe that our status as a bank holding company (as opposed to being a non-controlling investor) broadens the investment opportunities available to us among public and private financial institutions.
The BHCA generally prohibits a bank holding company from engaging, directly or indirectly, in activities other than banking or managing or controlling banks, except for activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. ProvisionsIn 2021, the Company elected to be treated as a financial holding company pursuant to Section 4(l) of the Gramm-Leach-Bliley Financial Modernization ActBHCA. As a financial holding company, the Company is authorized to engage in a broader set of 1999 (the “GLB Act”) expanded the permissiblefinancial activities ofthan a bank holding company that qualifieshas not elected to be a treated as a financial holding company. Under the regulations implementing the GLB Act, a financial holding company, may engage in additionalincluding insurance underwriting and broker-dealer services as well as activities that are jointly determined by the Federal Reserve and the U.S. Treasury to be financial in nature or incidental orto such financial activity. Financial holding companies may also engage in activities that are determined by the Federal Reserve to be complementary to financial activity. Thoseactivities.
Maintaining our financial holding company status requires that the Company and our bank subsidiaries, remain “well-capitalized” and “well-managed” as defined by regulation and that our bank subsidiaries maintain at least a “satisfactory” rating under the CRA. If we or our bank subsidiaries fail to continue to meet these requirements, we could be subject to restrictions on new activities include,
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among otherand acquisitions, and/or be required to cease and possibly divest operations that conduct activities certain insurance and securities activities. We havethat are not yet determined whether it would be appropriate or advisable in the future to becomepermissible for a bank holding company that does not also qualify as a financial holding company.
Subsidiaries as State-Chartered Banks
NBH Bank as a Colorado State-Chartered Bank
Our bank subsidiary, NBH Bank, is a Colorado state-chartered bank and also a member of the Federal Reserve Bank of Kansas City. As such, NBH Bank is subject to examination, supervision and regulation by both the Colorado Division of Banking and the Federal Reserve. NBH Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”)
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through the DIF, in the manner and to the extent provided by law. As an insured bank, NBH Bank is subject to the provisions of the Federal Deposit Insurance Act, as amended (the “FDI Act”), and the FDIC’s implementing regulations thereunder, and may also be subject to supervision and examination by the FDIC under certain circumstances.
Under the FDIC Improvement Act of 1991 (“FDICIA”), NBH Bank must submit financial statements prepared in accordance with GAAP and management reports signed by the Company’s and NBH Bank’s chief executive officer and chief accounting or financial officer concerning management’s responsibility for the financial statements, an assessment of internal controls, and an assessment of NBH Bank’s compliance with various banking laws and FDIC and other banking regulations. In addition, we must submit annual audit reports to federal regulators prepared by independent auditors. As allowed by regulations, we may use our audit report prepared for the Company to satisfy this requirement. We must provide our auditors with examination reports, supervisory agreements and reports of enforcement actions. The auditors must also attest to and report on the statements of management relating to the internal controls. FDICIA also requires that NBH Bank form an independent audit committee consisting of outside directors only, or that the Company’s audit committee be entirely independent.
Bank of Jackson Hole Trust as a Wyoming State-Chartered Bank
Our bank subsidiary, Bank of Jackson Hole Trust, is a Wyoming state-chartered bank and also a member of the Federal Reserve Bank of Kansas City. As such, BOJHT is subject to examination, supervision and regulation by both the Wyoming Division of Banking and the Federal Reserve. BOJHT’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) through the DIF, in the manner and to the extent provided by law. As an insured bank, BOJHT is subject to the provisions of the Federal Deposit Insurance Act, as amended (the “FDI Act”), and the FDIC’s implementing regulations thereunder, and may also be subject to supervision and examination by the FDIC under certain circumstances. BOJHT is subject to the FDICIA requirements discussed above, however, during the year of acquisition the Company has elected to exclude them from the assessment. As of January 1, 2023, BOJHT is included in the FDICIA assessment.
Broad Supervision, Examination and Enforcement Powers
The Federal Reserve, the FDIC and state bank regulators have broad regulatory, examination and enforcement authority over bank holding companies and banks, as applicable. Bank regulators regularly examine the operations of banks and bank holding companies. In addition, banks and bank holding companies are subject to periodic reporting and filing requirements.
Bank regulators have various remedies available if they determine that a banking organization has violated any law or regulation, that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organization’s operations are unsatisfactory, or that the banking organization is operating in an unsafe or unsound manner. The bank regulators have the power to, among other things: enjoin “unsafe or unsound” practices, require affirmative actions to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors, terminate deposit insurance, and appoint a conservator or receiver.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject the Company, its subsidiaries and their respective officers, directors and institution-affiliated parties to the remedies described above and other sanctions. In addition, the FDIC could terminate NBH Bank’s or Bank of Jackson Hole Trust’s deposit insurance if it determined that the Bank’sBanks’ financial condition was unsafe or unsound or that the bankbanks engaged in unsafe or unsound practices or violated an applicable rule, regulation, order or condition enacted or imposed by the bank’sbanks’ regulators.
Regulatory Capital Requirements
In General
As a bank holding company, we are subject to regulatory capital adequacy requirements implemented by the Federal Reserve. The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations. NBH Bank also is, and other depository
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institution subsidiaries that we may acquire or control in the future will be, subject to capital adequacy guidelines as implemented by the relevant federal banking agency. In the case of the Company and NBH Bank, applicable capital guidelines can be found in the Federal Reserve’s Regulations H and Q.
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The capital rules require banks and bank holding companies to maintain a minimum common equity tier 1 capital ratio of 4.5%, a total tier 1 capital ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%. Effective as of January 1, 2019,Additionally, banks and bank holding companies are required to hold a capital conservation buffer of common equity tier 1 capital of 2.5% to avoid limitations on capital distributions and executive compensation payments.
Further, the federal bank regulatory agencies may set higher capital requirements for an individual bank or when a bank’s particular circumstances warrant. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements in order to be considered well-capitalized, and future regulatory change could impose higher capital standards as a routine matter.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. The EGRRCPA directed the federal banking agencies to develop a “Community Bank Leverage Ratio”, calculated by dividing tangible equity capital by average consolidated total assets. In October 2019, the federal banking agencies adopted a Community Bank Leverage Ratio of 9%. If a “qualified community bank”, generally a depository institution or depository institution holding company with consolidated assets of less than $10 billion, has a leverage ratio which exceeds the Community Bank Leverage Ratio, then the institution is considered to have met all generally applicable leverage and risk based capital requirements, the capital ratio requirements for “well capitalized” status under the prompt corrective action rules and any other leverage or capital requirements to which it is subject. At this time the Company, NBH Bank and BOJHT have not elected to apply this regime.
Prompt Corrective Action
The FDI Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to various capital measures and certain other factors, as established by regulation. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. Our regulatory capital ratios and those of NBH Bank are in excess of the levels established for “well-capitalized” institutions.
Bank Holding Companies as a Source of Strength
The Federal Reserve requires that a bank holding company serve as a source of financial and managerial strength to each bank that it controls and, under appropriate circumstances, commit resources to support each such controlled bank. This support may be required at times when the bank holding company may not have the resources to provide the support. Because we are a bank holding company, the Federal Reserve views the Company (and its consolidated assets) as a source of financial and managerial strength for any controlled depository institutions.
Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require its bank holding company to guarantee a capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the
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assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such action is not in the best interests of the bank holding company or its shareholders.
The Dodd-Frank Act codified the requirement that holding companies, like the Company, serve as a source of financial strength for their subsidiary depository institutions, by providing financial assistance to its insured depository institution subsidiaries in the event of financial distress. Under the source of strength doctrine, the Company could be required to provide financial assistance to NBH Bankthe Banks should it experience financial distress.
In addition, capital loans by us to NBH Bankthe Banks will be subordinate in right of payment to deposits and certain other indebtedness of NBH Bank.the Banks. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of NBH Bankthe Banks will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiaries. Because the Company’s consolidated net income consists largely of the net income of NBH Bank and BOJHT, the Company’s ability to pay dividends depends upon its receipt of
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dividends from its subsidiary.subsidiaries. The ability of a bank to pay dividends and make other distributions is limited by federal and state law. The specific limits depend on a number of factors, including the bank’sbanks’ type of charter, recent earnings, recent dividends, level of capital and regulatory status. As a member of the Federal Reserve System and a Colorado state-chartered bank,banks, NBH Bank isand BOJHT are subject to Regulation H and limitations under Coloradostate law with respect to the payment of dividends. Non-bank subsidiaries are also limited by certain federal and state statutory provisions and regulations covering the amount of dividends that may be paid in any given year. State member banks, such as NBH Bank and BOJHT, may not declare or pay a cash dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the Banks’ net income during the current calendar year and the retained net income of the prior two calendar years, unless approved by the Federal Reserve.
The ability of a bank holding company to pay dividends and make other distributions can also be limited. The Federal Reserve has authority to prohibit a bank holding company from paying dividends or making other distributions. A bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. In addition, as a Delaware corporation, the Company is subject to certain limitations and restrictions under Delaware corporate law with respect to the payment of dividends and other distributions.
Depositor Preference
The FDI Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If our insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including us, with respect to any extensions of credit they have made to such insured depository institution.
Limits on Transactions with Affiliates
Federal law restricts the amount and the terms of both credit and non-credit transactions (generally referred to as “Covered Transactions”) between a bank and its non-bank affiliates. Covered Transactions with any single affiliate may not exceed 10% of the capital stock and surplus of the bank,banks, and Covered Transactions with all affiliates may not exceed, in the aggregate, 20% of the bank’sbanks’ capital and surplus. For a bank, capital stock and surplus refers to the bank’s tier 1 and tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for credit losses (“ACL”) excluded from tier 2 capital. The bank’sbanks’ transactions with all of its affiliates in the aggregate are limited to 20% of the foregoing capital. In addition, in connection with Covered Transactions that are extensions of credit, the bankbanks may be required to hold collateral to provide added security to the bank,banks, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates, including an expansion of what types of transactions are Covered Transactions to include credit exposures related to derivatives, repurchase agreements and securities
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lending arrangements and an increase in the amount of time for which collateral requirements regarding Covered Transactions must be satisfied. As of December 31, 2019,2022, the Company did not have any outstanding Covered Transactions.
Regulatory Notice and Approval Requirements for Acquisitions of Control
We must generally receive federal bank regulatory approval before we can acquire a financial institution. Specifically, as a bank holding company, we must obtain prior approval of the Federal Reserve in connection with any acquisition that would result in the Company owning or controlling 5% or more of any class of voting securities of a bank or another bank holding company, including a financial holding company. Our ability to make investments in depository institutions will depend on our ability to obtain approval for such investments from the Federal Reserve. The Federal Reserve could deny our application based on the above criteriastatutory factors outlined in the BHCA, including the financial and managerial resources of the parties and the future prospects of the combined organization, the effects of the transaction on competition, the convenience and needs of the community, including the record of performance of the parties under the Community Reinvestment Act of 1977, the effectiveness of the Company in combating money-laundering activities and the impact of the transaction on the financial stability of the U.S. banking or financial system, or other considerations. For example, we could be required to sell banking centers as a condition to receiving regulatory approval, which condition may not be acceptable to us, or, if acceptable to us, may reduce the benefit of any acquisition.
In addition, federal and state laws, including the BHCA and the Change in Bank Control Act, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. Whether an investor “controls”Under a depository institution is based on allrebuttable presumption established by the Federal Reserve, the acquisition of the facts and circumstances surrounding the investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25%10% or more of anya class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company for purposes of the Change in Bank Control Act.
The BHCA prohibits any entity from acquiring 25% (as noted above, the BHC Act has a lower limit for acquirers that are existing bank holding companies) or more of a bank holding company’s or bank’s voting securities, or is entitled to appointotherwise obtaining control or elect a majority of the board of directors. For investments under those thresholds,
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regulators will examine whether the investor has the ability to exercise a controlling influence over a bank holding company or bank without the depository institution’sapproval of the Federal Reserve. The Federal Reserve has rule-based standards for determining whether one company has control over another. These rules established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares an investor acquires as well as the number of directorsheld by the investor is able(less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to appoint or elect. Similarly, if an investor’s ownership24.9% of ourthe voting securities or abilityand up to appoint or elect directors were to exceed certain thresholds,33% of the investor could be deemed to “control” us for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.total equity of a company without necessarily having a controlling influence.
Anti-Money Laundering Requirements
Under federal law, including the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), certain types of financial institutions, including insured depository institutions, must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing associate training program; and testing of the program by an independent audit function. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence, client identification, and recordkeeping, including in their dealings with non-U.S. financial institutions and non-U.S. clients. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations, and they must consider an institution’s anti-money laundering compliance when considering regulatory applications filed by the institution, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.
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Consumer Laws and Regulations
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Funds Transfer Act, Flood Disaster Protection Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, GLBGramm-Leach Bliley Financial Modernization Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act and Real Estate Settlement Procedures Act.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These state and local laws regulate the manner in which financial institutions deal with clients when taking deposits, making loans or conducting other types of transactions.
The Consumer Financial Protection Bureau (the “CFPB”) has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks. The CFPB is authorized to issue rules for both bank and nonbank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators. In general, however, banks with assets of $10 billion or less, such as NBH Bank, will continue to be examined for consumer compliance by their primary bank regulator. At this time, NBH Bank is not subject to supervision by the CFPB but it will be if our assets grow above $10 billion.
Much of the CFPB’s rulemaking has focused on mortgage lending and servicing, including an important rule requiring lenders to ensure that prospective buyers have the ability to repay their mortgages. Other areas of current CFPB focus include consumer protections for prepaid cards, payday lending, debt collection, overdraft services and privacy notices. The CFPB has been particularly active in issuing rules and guidelines concerning residential mortgage lending and servicing, issuing numerous rules and guidance related to residential mortgages. Perhaps the most significant of these guidelines are the “Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act” portions of Regulation Z and the Know Before You Owe guidelines. Under the Dodd-Frank Act, creditors must make a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable “ability to repay” a residential mortgage according to its terms as well as clearly and concisely disclose the terms and costs associated with these loans.
The CFPB has actively issued enforcement actions against both large and small entities and to entities across the entire financial services industry. The CFPB has relied upon “unfair, deceptive, or abusive acts” prohibitions as its primary
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enforcement tool. However, the CFPB and DOJ continue to be focused on fair lending in taking enforcement actions against banks with renewed emphasis on alleged redlining practices. Failure to comply with these laws and regulations could give rise to regulatory sanctions, client rescission rights, actions by state and local attorneys general and civil or criminal liability.
The Community Reinvestment Act
The Community Reinvestment Act (“CRA”)CRA is intended to encourage banks to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The regulators examine banks and assign each bank a public CRA rating. The CRA then requires bank regulators to take into account the bank’sbanks’ record in meeting the needs of its community when considering certain applications by a bank, including applications to establish a banking center or to conduct certain mergers or acquisitions. Failure to adequately meet these criteria could impose additional requirements and limitations on us. Additionally, we must publicly disclose the terms of various CRA-related agreements. The Federal Reserve is required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company.
When we apply for regulatory approval to make certain investments, the regulators will consider the CRA record of the target institution and our depository institution subsidiary.subsidiaries. An unsatisfactory CRA record could substantially delay approval or result in denial of an application.
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Reserve Requirements
Pursuant to regulations of the Federal Reserve, all banks are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank (“FRB”).FRB.
Deposit Insurance Assessments
All of a depositor’s accounts at an insured bank, including all non-interest bearing transaction accounts, are insured by the FDIC up to $250,000. FDIC-insured banks are required to pay deposit insurance premiums to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.
Assessments are based on an institution’s average total consolidated assets less average tangible equity (subject to risk-based adjustments that would further reduce the assessment base for custodial banks). NBH Bank may be able to pass part or all of this cost on to its clients, including in the form of lower interest rates on deposits, or fees to some depositors, depending on market conditions.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. If deposit insurance for a banking business we invest in or acquire were to be terminated, that would have a material adverse effect on that banking business and potentially on the Company as a whole.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (the “Riegle-Neal Act”), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). Bank holding companies must be well capitalized and well managed, not merely adequately capitalized and adequately managed, in order to acquire a bank located outside of the bank holding company’s home state.
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The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate banking centers. A national or state bank, with the approval of its regulator, may open a de novo banking center in any state if the law of the state in which the banking center is proposed would permit the establishment of the banking center if the bank were a bank chartered in that state.
The Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), and FDIC jointly issued a final rule, effective October 10, 1977, that adopted uniform regulations implementing Section 109 of the Riegle-Neal Act. Section 109 prohibits any bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Congress enacted Section 109 to ensure that interstate branches would not take deposits from a community without the bank reasonably helping to meet the credit needs of that community.
Changes in Laws, Regulations or Policies
Congress and state legislatures may introduce from time to time measures or take actions that would modify the regulation of banks or bank holding companies. In addition, federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. Such changes could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks and other financial institutions, all of which could affect our investment opportunities and our assessment of how attractive such opportunities may be. We cannot predict whether potential legislation will be enacted and, if enacted, the effect that it or any implementing regulations would have on our business, results of operations, liquidity or financial condition.
Recent Regulatory ReformOn October 17, 2022, the FDIC issued a final rule to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023. The assessment rate schedules under this final rule will remain in effect unless and until the reserve ratio of the Deposit Insurance Fund meets or exceeds two percent. Although the FDIC insurance expense will increase as a result of this ruling, the Company does not expect the increase to have a material impact on its financial statements.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as NBH Bank, and their holding companies.
EGRRCPA, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by establishing a single “Community Bank Leverage Ratio” of 9 percent. Any qualifying depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. A major effect of this change is to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, EGRRCPA includes regulatory relief for community banks regarding the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
More Information
Our website is www.nationalbankholdings.com. We make available free of charge, through our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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Item 1A. RISK FACTORS
Risks Relating to Our Banking Operations
Changes in general business and economic conditions could materially and adversely affect us.
Our business and operations are sensitive to general business and economic conditions in the United States and in our core markets of Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico, Texas and Utah.Idaho. If the economies in our core markets, or the U.S. economy more generally, experience worsening economic conditions, including industry-specific conditions, we could be materially and adversely affected. Weak economic conditions may be characterized by deflation,inflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on loans, residential and commercial real estate price declines, lower home sales and commercial activity, further or prolonged pressure on energy prices, high unemployment, and the economic effects of natural disasters, severe weather conditions, health emergencies or pandemics (such as COVID-19), cyberattacks, outbreaks of hostilities, terrorism or other geopolitical instabilities. All of these factors would be detrimental to our business. Our business is significantly affected by monetary and related policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us.
Changes in the assumptions underlying our acquisition method of accounting, or other significant accounting estimates could affect our financial information and have a material adverse effect on us.
A material portion of our financial results is based on, and subject to, significant assumptions and subjective judgments. As a result of our acquisitions, our financial information is influenced by the application of the acquisition method of accounting, which requires us to make complex assumptions, and these assumptions materially affect our financial results. As such, any financial information generated through the use of the acquisition method of accounting is subject to modification or change. If our assumptions are incorrect and we change or modify our assumptions, it could have a material adverse effect on us or our previously reported results. Additionally, a change in our accounting estimates, such as our ability to realize deferred tax assets, the need for a valuation allowance or the recoverability of the goodwill recorded at the time of our acquisitions, could have a material adverse effect on our financial results.
Our business is highly susceptible to credit risk and fluctuations in the value of real estate and other collateral securing such credit.
As a lender, we are exposed to the risk that our clients will be unable to repay their loans according to their terms and that the collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The risks inherent in making any loan include risks with respect to the ability of borrowers to repay their loans and, if applicable, the period of time over which the loan is repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. Similarly, we have credit risk embedded in our securities portfolio. Our credit standards, procedures and policies may not prevent us from incurring substantial credit losses. A decline in residential real estate market prices and reduced levels of home sales, could adversely affect the value of collateral securing mortgage loans resulting in greater charge-offs in future periods, as well as adversely impact mortgage loan originations and gains on sale of mortgage loans. A decline in commercial real estate values would likewise adversely affect the value of collateral securing certain commercial loans and result in greater charge-offs in future periods. Declines in real estate values and home sales volumes, and financial stress on borrowers as a result of job losses or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods, which could materially and adversely affect us.
We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their services.
The execution of our strategy depends in large part on the skills of our executive management team and our ability to motivate and retain these and other key personnel, including key personnel added through mergers and acquisitions. Accordingly, the loss of service of one or more of our executive officers or key personnel could reduce our ability to
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successfully implement our growth strategy and materially and adversely affect us. Our success also depends on the experience of our banking center managers and relationship managers and on their relationships with the clients and communities they serve. The loss of these key personnel could negatively impact our banking operations. Surges in illnesses, including but not limited to COVID-19 cases, may increase the risk of maintaining adequate staffing in our banking centers and other key areas.
Our allowance for loancredit losses and fair value adjustments may prove to be insufficient to absorb losses inherent in our loan or OREO portfolio.
We maintain an allowance for loan losses (“ALL”), which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses inherent in our loan portfolio. The amount of this allowance is determined by our management through periodic reviews.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding our loans, identification of additional problem loans by us and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. If the real estate markets deteriorate, we expect that we will experience increased delinquencies and credit losses, particularly with respect to construction, land development and land loans. In addition, our regulators periodically review our allowance for loan losses and may require an increase in the allowance for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital and may have a material adverse effect on us.owned (“OREO”) portfolio.
On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, the new accounting standard promulgated by the Financial Accounting Standards Board (“FASB”), regarding the recognition of credit losses. This standard makesmade significant changes to the accounting and disclosures for credit losses on financial instruments recorded on an amortized cost basis, including our loans held for investment. The new current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses for financial assets measured over the contractual life of an instrument based on historical experience, current conditions and reasonable and supportable forecasts. The standard provides significant flexibility and requires a high degree of judgment in order to develop an estimate of expected lifetime losses. Providing for lifetime losses for our loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding our loans, identification of additional problem loans by us and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. If the real estate markets deteriorate, we expect that we will experience increased delinquencies and credit losses, particularly with respect to construction, land development and land loans. In addition, our regulators periodically review our allowance for credit losses and may require an increase in the allowance for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and capital and may have a material adverse effect on us.
We hold and acquire an amount of OREO from time to time, which may lead to volatility in operating expenses and vulnerability to declines in real property values.
When necessary, we foreclose on and take title to the real estate serving as collateral for our loans as part of our business. Real estate that we own but do not use in the ordinary course of our operations is referred to as OREO property. HigherWhile our OREO balancesportfolio is smaller than it has been in recent years, future acquisitions could result in a higher OREO balance, which could negatively affect our earning as a result of our acquisitions have led to greater expenses as we incur costs to manage and dispose of the properties. While the carrying value of OREO from acquisitions has decreased substantially in recent years, our earnings may continue to be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with OREO assets. We evaluate OREO properties periodically and write down the carrying value of the properties if the results of our evaluation require it. The expenses
Environmental issues, including external events such as severe weather, natural disasters, and climate change, as well as environmental liability risks associated with OREOour lending activities, could significantly impact our business.
Severe weather, natural disasters, climate change and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, there can be no guarantee of the effectiveness of such policies and procedures, and the occurrence of any further OREO write-downssuch event could have a material adverse effect on us.our business, financial condition and results of operations. Additionally,
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concerns over the long term impacts of climate change have led and will continue to lead to governmental efforts to mitigate those impacts. We are subject to environmental liability risk associated with lending activities.and our clients may face cost increases, asset value reductions, and operating process changes as a result.
A significant portion of our loan portfolio is secured by real property, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. There is a risk that hazardous or toxic substances could be found on these properties, and we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and
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criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
The expanding body of federal, state and local regulation of loan servicing, collections or other aspects of our business may increase the cost of compliance and the risks of noncompliance.
We service the loans held on our balance sheet, and loan servicing is subject to extensive regulation by federal, state and local governmental authorities as well as to various laws and judicial and administrative decisions imposing requirements and restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan servicing activities including delaying or temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more restrictive requirements, we may incur significant additional significant costs to comply with such requirements which may further adversely affect us. In addition, ourThe CARES Act and related legislation imposed additional restrictions with respect to foreclosures and the handling of delinquent payments. Our failure to comply with these laws and regulations could possibly lead to: civil and criminal liability; damage to our reputation in the industry; fines and penalties and litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes could materially and adversely affect us. There is also uncertainty regarding what legislative or regulatory changes may occur as a result of changes in leadership resulting from elections, or, if changes occur, the ultimate effect they would have upon our financial condition or results of operations.
Small Business Administration lending is an important and growing part of our business. Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s SBA Preferred Lender status.
If we were to lose our status as an SBA Preferred Lender, we may lose new opportunities, and a limited number of existing SBA loans, to lenders who are SBA Preferred Lenders. In addition, any changes to the SBA program, including changes to the level of guarantee provided by the federal government on SBA loans, changes to program-specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress, may have a material adverse effect on our SBA lending program. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or collect on guarantees in the event a borrower defaults on its obligations, and could materially adversely affect our SBA lending business.
If we violate U.S. Department of Housing and Urban Development (“HUD”) lending requirements or if the federal government shuts down or otherwise fails to fully fund the federal budget, our commercial FHA origination business could be adversely affected.
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We originate, sell and service loans under FHA insurance programs, and make certifications regarding compliance with applicable requirements and guidelines. If we were to violate these requirements and guidelines, or other applicable laws, or if the FHA loans we originate show a high frequency of loan defaults, we could be subject to monetary penalties and indemnification claims, and could be declared ineligible for FHA programs. Any inability to engage in our commercial FHA origination and servicing business would lead to a decrease in our net income.
In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time in recent years. Federal governmental entities, such as HUD, that rely on funding from the federal budget, could be adversely affected in the event of a government shutdown, which could have a material adverse effect on our commercial FHA origination business and our results of operations.
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The fair value of our investment securities can fluctuate due to market conditions outside of our control.
We have historically taken a conservative investment strategy with our securities portfolio, with concentrations of securities that are primarily backed by government sponsored enterprises. In the future, weenterprises (“GSE”). A portion of our non-marketable securities portfolio is comprised of non-liquid fund investments and direct investments in our fintech partners. We may seek to increase yields through different strategies, which may include a greater percentage of corporate securities and structured credit products. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets.markets or an inability of our partners to successfully execute on their strategies. These factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on us. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.
We face significant competition from other financial institutions and financial services providers, which may materially and adversely affect us.
Consumer and commercial banking is highly competitive. Our markets contain a large number of community and regional banks as well as a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers, in providing various types of loans and other financial services. Some of these competitors have a long history of successful operations in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Some of our competitors also have greater resources and access to capital and possess an advantage by being capable of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed internetonline banking platform. Competitors may also exhibit a greater tolerance for risk and behave more aggressively with respect to pricing in order to increase their market share. In addition, the effects of disintermediation can also impact the banking business because of the fast growing body of FinTechfintech companies that use software to deliver mortgage lending, payment services and other financial services.
Our ability to compete successfully depends on a number of factors, including, among others:
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| 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; |
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| the scope, relevance and pricing of products and services offered to meet client needs and demands; |
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| the rate at which we introduce new products and services, including internet-based or other digital services, relative to our competitors; |
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| the ability to attract and retain highly qualified associates to operate our business; |
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| the ability to expand our market position; |
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| client satisfaction with our level of service; |
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● | | the ability to invest in new |
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| the ability to operate our business effectively and efficiently; and |
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| industry and general economic trends. |
Failure to perform in any of these areas could significantly weaken our competitive position, which could materially and adversely affect us.
We may not be able to meet the cash flow requirements of deposit withdrawals and other business needs unless we maintain sufficient liquidity.
We require liquidity to make loans and to repay deposit and other liabilities as they become due or are demanded by clients. We principally depend on checking, savings and money market deposit account balances and other forms of client deposits as
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our primary source of funding for our lending activities. As a result of a decline in overall depositor confidence, an increase in interest rates paid by competitors, general interest rate levels, higher returns being available to clients on alternative investments and general economic conditions, a substantial number of our clients could withdraw their bank deposits with us from time to time, resulting in our deposit levels decreasing substantially, and our cash on hand may not be able to cover such withdrawals and our other business needs, including amounts necessary to operate and grow our business. This would require us to seek third party funding or other sources of liquidity, such as asset sales. Our access to third party funding sources, including our ability to raise funds through the issuance of additional shares of our common stock or other equity or equity-related securities, incurrence of debt, or federal funds purchased, may be impacted by our financial strength, performance and prospects and may also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry, all of which may make potential funding sources more difficult to access, less reliable and more expensive. We may not have access to third party funding in sufficient amounts on favorable terms, or the ability to undertake asset sales or access other sources of liquidity, when needed, or at all, which could materially and adversely affect us.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of clients and counterparties and the level and volatility of trading markets. Such factors can impact clients and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income. When interest-bearing liabilities increase at a pace exceeding interest earning assets, an increase in interest rates would reduce net interest income. Also, when interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest rates would reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because the magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates would reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and liabilities, loan and investment securities portfolios and our overall results. Changes in interest rates may also have a significant impact on any future loan origination revenues. Historically, there has been an inverse correlation between the demand for loans and interest rates. Loan origination volume and revenues usually decline during periods of rising or high interest rates and increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of the assets, both loans and investment securities, on our balance sheet. We may
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incur debt in the future and that debt may also be sensitive to interest rates and any increase in interest rates could materially and adversely affect us. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Changes in the Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions could materially and adversely affect us.
Reforms to and uncertainty regarding LIBOR and certain other indices may adversely affect our business.
The U.K. Financial Conduct Authority announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. This announcement, in conjunction with financial benchmark reforms more generally and changes in the interbank lending markets, have resulted in uncertainty about the future of LIBOR and certain other rates or indices that areLondon Interbank Offered Rate (“LIBOR”) is a short-term interest rate used as interest rate “benchmarks.” In addition, regulators, industry groups and certain committees (e.g. the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked
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financial instruments, identified recommended alternativesa pricing reference for certain loans, derivatives and other financial instruments. On June 30, 2023, LIBOR rates (e.g. thewill cease to be published. Our internal working group began indexing new retail adjustable rate mortgages to Secured Overnight Financing Rate as(“SOFR”) in the recommended alternative to U.S. Dollar LIBOR),third quarter of 2020 and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve and what the effect of their implementation may be on the market for floating-rate financial instruments. Uncertainty asare addressing LIBOR-based commercial loans, including adhering to the natureISDA IBOR Fallbacks Protocol as needed. We stopped originating LIBOR-based products in the fourth quarter of 2021 and effectare using substitute interest rates such as Prime and SOFR. While many of such reforms and actions, and the potential or actual discontinuance of benchmark quotes, may adversely affect our financial condition or results of operations, including the value of, return on and trading market for our financial assets and liabilities that areclient relationships still involve products based on orLIBOR, we are linkedworking to benchmarks, including any LIBOR-based securities, loans and derivatives. Furthermore,correctly transition these products to substitute interest rates with as little impact to our clients as possible. While we believe we have prepared as much as possible for the transition from LIBOR, there can be no assurances that we and other market participants will be adequately prepared for an actual discontinuation of benchmarks, including LIBOR, that may have an unpredictable impact on contractual mechanics (including, but not limited to, interest rates to be paid to or by us), which may also result in adversely affecting our financial condition or results of operations. In addition, such transition may result in litigation with counterparties impacted by the transition as well as increased regulatory scrutiny and other adverse consequences.
We are highly dependent on our information technology and telecommunications systemsthe internet, cloud technologies and third-party providers, and systemsproviders. Systems failures or interruptions could have a material adverse effect on us.
Our business is highly dependent on the successfulincreasing use of the internet, mobile devices and uninterrupted functioningcloud technologies. Further, we have and will continue to be subject to an increasing risk of operational disruption and information security incidents as a result. These events can arise from a variety of sources, many of which are not under our control because of our informationreliance on third party technology and telecommunications systems and third-party providers. We outsource many of our major systems, such asoutsourcing services for key processes including data processing, loan servicing and deposit processing systems. The failureprocessing; and for key services including internet, and mobile technology. Potential causes for incidents may include human error, electrical or telecommunication outages, hardware failures, and malicious activity. Any of these systems, orevents could cause interruption to the terminationCompany’s operations, as well as the operations 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.clients. If significant, sustained or repeated, a system failure or service denialthese events could compromise our ability to operate effectively, damage our reputation, result in a loss of client business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.
A failure in or breach of our security systems or infrastructure, or those of our third-party providers, could result in financial losses to us or in the disclosure or misuse of confidential or proprietary information, including client information, or could trigger further regulatory and financial penalty if determined to be non-compliant with evolving privacy and data protection laws. These events could have a material adverse effect on us, or noncompliance with evolving privacy and data protection laws could have a material adverse effect on us.the Company.
As a financial institution, we may be the target of fraudulent activity that may result in financial losses to us or our clients, privacy breaches against our clients or damage to our reputation and regulatory relationships. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, unauthorized intrusion into or use of our systems, ATM skimming or jackpotting, and other dishonest acts. We provide our clients with the ability to bank remotely, including via online, mobile and phone. The secure transmission of confidential information over the internet and other remote channels is a critical element of remote banking.
Our systems and network could be vulnerableare subject to ongoing cyber incidents such as unauthorized access, loss or destruction of data, account takeovers, unavailability of service, computer viruses or other malicious code, phishing schemes, ransomware and other security breaches.similar events. Third parties with whom we do business may also be sources of cybersecurity risks. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
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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 tocause serious negative consequences, including reputational damage, claims,litigation exposure and, regulatory scrutiny, litigation and other possible liabilities.could result in a violation of applicable privacy and data protection laws. Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in our systems and could materially and adversely affect us. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of the threats from organized cybercriminals and hackers, and our plans to continue to provide digital banking products and services to our clients.
Information security risks for financial institutions like us have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against large financial institutions, particularly denial of service or ransomware attacks that are designed to disrupt key business services, such as client-facing web sites. We are not able to anticipate or implement effective preventive
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measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with credit or debit card, including ATM-related, transactions that typically involve the transmission of sensitive information regarding our clients through various third parties, including merchant acquiring banks, payment processors, payment card networks (e.g., Visa, MasterCard) and our third-party processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely significantly on numerous other third party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we regularly conduct security assessments on thesemany of our agreements with third parties we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.
Our growth and expansion may also subject us to evolving laws and regulations regarding privacy and data protections, including the EU General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018. It is possible that these laws may be interpreted and applied by various jurisdictions in a manner inconsistent with our current or future practices, or that is inconsistent with one another. If personal, confidential or proprietary information of customers or clients in our possession is mishandled or misused,contain indemnification provisions, we may face regulatory, reputational and operational risks which could have an adverse effect on our financial condition and results of operations.not be able to recover sufficiently, or at all, under the provisions to offset any losses we may incur from third-party cyber incidents.
The value of our mortgage and Small Business Administration servicing rights can decline during periods of falling interest rates, and we may be required to take a charge against earnings for the decreased value.
A mortgage servicing right (“MSR”) is the right to service a mortgage loan for a fee. The majority of our MSRs were assets assumed as part of acquisitions.A Small Business Administration servicing right is the right to service loans sold for a fee. We can also capitalize MSRsservicing rights when we originate mortgage or SBA loans and retain the servicing rights after we sell the loans. We carry MSRsservicing rights at the lower of amortized cost or estimated fair value. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers. Changes in interest rates can affect prepayment assumptions. When interest rates fall, borrowers are more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of our MSRsservicing rights can decrease. Each quarter we evaluate our MSRsservicing rights for impairment based on the difference between the carrying amount and fair value, and, if a temporary impairment exists, we establish a valuation allowance through a charge that negatively affects our earnings.
We may be required to repurchase mortgage loans or reimburse investors and others as a result of breaches in contractual representations and warranties.
We sell residential mortgage loans to various parties, including GSEs and other financial institutions that purchase mortgage loans for investment or private label securitization. The agreements under which we sell mortgage loans and the insurance or guaranty agreements with the FHA and VA contain various representations and warranties regarding the origination and characteristics of the mortgage loans, including ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, fraudulent documentation and compliance with applicable origination laws. WeIf any of these items prove defective or insufficient, we may be required to repurchase mortgage loans, indemnify the investor or insurer, or reimburse the investor or
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insurer for credit losses incurred on loans in the event of a breach of contractual representations or warranties that is not remedied within a period (usually 90 days or less) after we receive notice of the breach. Contracts for mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied to inadequate responses to repurchase requests. Similarly, the agreements under which we sell mortgage loans require us to deliver various documents to the investor, and we may be obligated to repurchase any mortgage loan as to which the required documents are not delivered or are defective. We establish a mortgage repurchase liability related to the various representations and warranties that reflect management's estimate of losses for loans which we have a repurchase obligation. Our mortgage repurchase liability represents management's best estimate of the probable loss that we may expect to incur for the representations and warranties in the contractual provisions of our sales of mortgage loans. Because the level of mortgage loan
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repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. If economic conditions and the housing market deteriorate or future investor repurchase demand and our success at appealing repurchase requests differ from past experience, we could experience increased repurchase obligations and increased loss severity on repurchases, requiring additions to the repurchase liability.
The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Under U.S. GAAP, we are required to record loans acquired through acquisitions at fair value. Estimating the fair value of such loans requires management to make estimates based on available information, facts, and circumstances on the acquisition date. Any discount on acquired loans is accreted into interest income over the weighted average remaining contractual life of the loans. Therefore, our net interest margins may initially increase due to the discount accretion. We expect the yields on the total loan portfolio will decline as our acquired loan portfolios pay down or mature and the corresponding accretion of the discount decreases. We expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolios is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
We have recorded goodwill as a result of acquisitions that can significantly affect our earnings if it becomes impaired.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying value.
We face risks due to our mortgage banking activities that could negatively impact net income and profitability.
We sell a majority of the mortgage loans that we originate. The sale of these loans generates non-interest income and can be a source of liquidity for the Banks. Disruption in the secondary market for residential mortgage loans as well as declines in real estate values could result in one or more of the following:
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● | if it is determined that loans were made in breach of our representations and warranties to the secondary market, we could incur losses associated with the loans; | |
● | increased compliance requirements, including with respect to the CARES Act, could result in higher compliance costs, higher foreclosure proceedings or lower loan origination volume, all which could negatively impact future earnings; and |
Increases in prevailing interest rates have caused and may continue to cause declines in mortgage originations including declines in mortgage refinance activity, which have impacted and may continue to negatively impact our earnings.Mortgage interest rates are influenced by many elements including inflation, monetary policy set by the Federal Reserve and macro-economic factors. A prolonged period of rising interest rates may result in changes in consumer spending, borrowing and savings habits. Such conditions could have adverse effects on our ability to originate mortgage loans due to reduced
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consumer demand, increased pressure from competing lenders and increased costs, which could impact earnings in the form of reduced interest from fewer mortgages, reduced fees from loan sales and tighter net interest margins.
Risks Relating to our Growth Strategy
We may not be able to effectively manage our growth or other expansionary activity.
Our expansionary activity, whether through de novo branching, acquisitions, or organic growth or the implementation of our digital banking strategy has placed, and it may continue to place, significant demands on our operations and management. The success of our expansionary activity is dependent upon our ability to:
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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, banks and banks.growth of our client base through our digital banking strategy and our trust and wealth management business. Thus, our growth strategy may divert management from our existing franchises and may require us to incur additional expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage and grow our financial services franchise, we could be materially and adversely affected. In addition, if we are unable to manage future expansion in our operations, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could materially and adversely affect us.
We face increased risk of claims and litigation relating to our fiduciary responsibilities in connection with our trust and wealth management business.
Services we provide in connection with our trust and wealth management business may require us to act as fiduciaries for our clients and others. Third parties or government agencies may assert claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. If these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability or our reputation could be damaged. Either of these results may adversely impact demand for our products and services or otherwise have an adverse effect on our business, financial condition, results of operations and growth prospects.
Our digital growth strategy may subject us to additional operational, strategic, reputational and regulatory risks.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. Our future success will depend, in part, upon our ability to continue to address the needs of our clients by using innovative technologies to provide products and services that will satisfy client demands for convenience and security, as well as to create additional efficiencies in our operations. The implementation of such new technologies may expose us to additional operational, financial, operational, strategic, reputational and regulatory risks.
New technology-driven products and services are rapidly being introduced throughout the financial services industry, often through fintech companies. We have made and will continue to make investments in and also partner with third party fintech companies in connection with our digital growth strategy and the digital solution, 2UniFiSM. Our investments may include companies that may be unseasoned, unprofitable or have no established operating histories or earnings and may lack technical, marketing, financial and other resources and are therefore more vulnerable to financial failure. The innovations these companies develop for utilization by 2UniFiSM, may prove more difficult to successfully integrate into our existing
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operations. We may be required to employ and maintain qualified personnel and as our business expands into new and expanding markets, and we may be required to install additional operational and control systems to manage fraud, operational, legal and compliance risks. Any failure to successfully manage this integration may adversely affect our timeline for our digital strategy, future financial condition and results of operations. Additionally, any adverse regulatory treatment of the companies and technologies we have invested in, may impact our digital growth and our ability to satisfy our clients’ demands for digital offerings in the 2UniFiSM ecosystem.
Our acquisitions generally will require regulatory approvals, and failure to obtain them would restrict our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of financial services franchises. Generally, any acquisition of target financial institutions, banking centers or other banking assets by us will require approval by, and cooperation from, a number of governmental regulatory agencies, including the Federal Reserve, the Colorado Division of Banking and Coloradothe Wyoming Division of Banking. In acting on applications, our banking regulators consider, among other factors:
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Such regulators could deny our application based on the above criteria or other considerations, which would restrict our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell banking centers as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may reduce the benefit of any acquisition. In addition, prior to the submission of an application our regulators could discourage us from pursuing strategic acquisitions or indicate that regulatory approvals may not be granted on terms that would be acceptable to us, which could have the same effect of restricting our growth or reducing the benefit of any acquisitions.
The success of future transactions will depend on our ability to successfully identify and consummate acquisitions of financial services franchises that meet our investment objectives. Because of the intense competition for acquisition opportunities and the limited number of potential targets, we may not be able to successfully consummate acquisitions on attractive terms.
There are significant risks associated with our strategy to identify and successfully consummate acquisitions. There are a limited number of acquisition opportunities, and we expect to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions and financial services franchises. Many of these entities are well established and have extensive experience in identifying and consummating acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater financial, technical, human and other resources and access to capital than we do, which could limit the acquisition opportunities we pursue. Our competitors may be able to achieve greater cost savings, through consolidating operations or otherwise, than we could. These competitive limitations give others an advantage in pursuing certain acquisitions. In addition, increased competition may drive up the prices for the acquisitions we pursue and make the other acquisition terms more onerous, which would make the identification and successful consummation of those acquisitions less attractive to us. Competitors may be willing to pay more for acquisitions than we believe are justified, which could result in us having to pay more for them than we prefer or to forego the opportunity. The trading price of our common stock and of the stock of other potential acquirers may affect our ability to offer a competitive price for acquisitions where stock is proposed as acquisition consideration. As a result of the foregoing, we may be unable to successfully identify and consummate acquisitions on attractive terms, or at all, that are necessary to grow our business.
To the extent that we are unable to identify and consummate attractive acquisitions, or continue to increase loans through organic loan growth, we may be unable to successfully implement our growth strategy, which could materially and adversely affect us.
We intend to continue to grow our business through organic loan growth and strategic acquisitions of financial services franchises. Previous availability of attractive acquisition targets may not be indicative of future acquisition opportunities, and we may be unable to identify any acquisition targets that meet our investment objectives. As our acquired loan portfolio, which generally produces higher yields than our originated loans due to loan discounts and accretable yield, is paid down, we expect downward pressure on our income to the extent that the runoff is not replaced with other high-yielding loans. As a result of the foregoing, if we are unable to replace loans in our existing portfolio with comparable high-yielding loans, we
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could be materially and adversely affected. We could also be materially and adversely affected if we choose to pursue riskier higher-yielding loans that fail to perform.
Projected operating results for businesses acquired by us may be inaccurate and may vary significantly from actual results. To the extent that we make acquisitions that involve distressed assets, we may not be able to realize the value we predict from these assets or make sufficient provision for future losses in the value of, or accurately estimate the future writedownswrite-downs to be taken in respect of, these assets.
We will generally establish the pricing of transactions and the capital structure of financial services franchises to be acquired by us on the basis of financial projections for such financial services franchises. In general, projected operating results will be based on the judgment of our management team. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed and the projected results may vary significantly from
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actual results. General economic, political and market conditions can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with our acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect us.
Delinquencies and losses in the loan portfolios and other assets we acquire may exceed our initial forecasts developed during our due diligence investigation prior to acquisition and, thus, produce lower returns than we believed our purchase price supported. Furthermore, our due diligence investigation may not reveal all material issues. If, during the diligence process, we fail to identify all relevant issues related to an acquisition, we may be forced to later write downwrite-down or write off assets, restructure our operations, or incur impairment or other charges that could result in significant losses. Any of these events could materially and adversely affect us. Economic conditions may create an uncertain environment with respect to asset valuations and there is no certainty that we will be able to sell assets or institutions after we acquire them if we determine it would be in our best interests to do so. In addition, there may be limited liquidity for certain asset classes we hold, including commercial real estate and construction and development loans. Any of the foregoing matters could materially and adversely affect us.
We face additional risks due to our increased mortgage banking activities that could negatively impact net income and profitability.
We sell a majority of the mortgage loans that we originate. The sale of these loans generates non-interest income and can be a source of liquidity for the Bank. Disruption in the secondary market for residential mortgage loans as well as declines in real estate values could result in one or more of the following:
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Our use of appraisals in deciding whether to make loans secured by real property does not ensure that the value of the real property collateral will be sufficient to repay our loans.
In considering whether to make a loan secured by real property, we require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made and requires the exercise of a considerable degree of judgment. If the appraisal does not accurately reflect the amount that may be obtained upon sale or foreclosure of the property, whether due to a decline in property value after the date of the original appraisal or defective preparation of the appraisal, we may not realize an amount equal to the indebtedness secured by the property and as a result, we may suffer losses.
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Risks Relating to the Regulation of Our Industry
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could materially and adversely affect us.
We are subject to extensive regulation, supervision, and legislation by federal and state regulators and bodies that govern almost all aspects of our operations. Intended to protect clients, depositors and the DIF, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage (including foreclosure and collection practices), limit the dividends or distributions that we can pay, restrict the ability of institutions to guarantee our debt, and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP. Compliance with laws and regulations, including the effects of the Dodd Frank Act Wall Street Reform and Consumer Protection Act of 2010, can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could materially and adversely affect us. Further, any new laws, rules and regulations could make compliance more difficult or expensive and also materially and adversely affect us.
The FDIC’s restoration plan for the DIF and any related increased assessment rates could materially and adversely affect us.
The FDIC insures deposits at FDIC-insured depository institutions, such as our subsidiary bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. If current assessments imposed by the FDIC are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially and adversely affect us, including by reducing our profitability or limiting our ability to pursue certain business opportunities.
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Federal and state banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we become subject as a result of such examinations could materially and adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, a federal or state banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or our management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, we could be materially and adversely affected.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
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The Federal Reserve may require us to commit capital resources to support our subsidiary bank.banks.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under this requirement, we could be required to provide financial assistance to our subsidiary bank should our subsidiary bank experience financial distress.
A capital injection may be required at times when we do not have the resources to provide it and therefore we may be required to borrow the funds or raise additional equity capital from third parties. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its indebtedness. Any financing that must be done by the holding company in order to make the required capital injection may be difficult and expensive and may not be available on attractive terms, or at all, which likely would have a material adverse effect on us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federalFederal 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
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those requirements, and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as the Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions (such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans), which could materially and adversely affect us. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans or cause us to reduce the average percentage rate or the points and fees on loans that we do make.
Our ability to pay dividends is subject to regulatory limitations and our bank subsidiary’s ability to pay dividends to us is also subject to regulatory limitations.
Our ability to declare and pay dividends depends both on the ability of our bank subsidiary to pay dividends to us and on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and
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dividends. Because we are a separate legal entity from our bank subsidiary and we do not have significant operations of our own, any dividends paid by us to our shareholders would have to be paid from funds at the holding company level that are legally available therefor. However, as a bank holding company, we are subject to general regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which depending on the financial condition and liquidity of the holding company at the time, could include the payment of dividends. Additionally, various federal and state statutory provisions limit the amount of dividends that our bank subsidiary can pay to us as its holding company without regulatory approval. Finally, holders of our common stock are only entitled to receive such dividends as our board of directors may declare in its unilateral discretion. Dividends are paid out of funds legally available for such purpose based on a variety of considerations, including, without limitation, our historical and projected financial condition, liquidity and results of operations, capital levels, tax considerations, statutory and regulatory prohibitions and other limitations, general economic conditions and other factors deemed relevant by our board of directors. Accordingly, we may not pay the amount of dividends referenced in our current intention above, or any dividends at all, to our shareholders in the future.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We operate in multiple jurisdictions, and we are subject to tax laws and regulations of the U.S. federal, state and local governments. From time to time, legislative initiatives may be adopted, which may impact our effective tax rate and could adversely affect our deferred tax assets, tax positions and/or our tax liabilities. In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our historical tax positions will not be challenged by relevant tax authorities or that we would be successful in defending our positions in connection with any such challenge.
33
Item 1B. UNRESOLVED STAFF COMMENTS.
None
Item 2. PROPERTIES.
Our principal executive offices are located in the Denver Tech Center area immediately south of Denver, Colorado.Colorado and cover approximately 47,000 square feet. We also have approximately 70,00057,000 square feet of office and operations space in Kansas City, Missouri. At December 31, 2019,2022, we operated 4838 banking centers in Colorado, 4434 in Kansas and Missouri, sixnine in Wyoming, eight in Utah, two in Texas, four in New Mexico twoand three in Texas and one in Utah.Idaho. Of these banking centers, 3169 were owned and 29 locations were leased and 70 were owned.leased.
Item 3. LEGAL PROCEEDINGS.
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We aredo not presently party tobelieve that any of our pending legal proceedings, individually or in the resolution of which we believe wouldaggregate, will have a material adverse effect on our business, prospects, financial condition, results of operations or liquidity.
Item 4. MINE SAFETY DISCLOSURES.
None.
30
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Registrant’s Common Equity
Shares of the Company’s common stock are traded on the New York Stock Exchange (“NYSE”) under the symbol “NBHC”. The following table presentsCompany had 231 shareholders of record as of February 24, 2023. Management estimates that the cash dividends paid for the periods indicated:
| | | | | | |
Quarter | | 2019 | | 2018 | ||
Fourth | | $ | 0.20 | | $ | 0.17 |
Third | | | 0.19 | | | 0.14 |
Second | | | 0.19 | | | 0.14 |
First | | | 0.17 | | | 0.09 |
Total | | $ | 0.75 | | $ | 0.54 |
In October 2012, upon the initial public offering, the Company commenced the paymentnumber of a $0.05 per share quarterly cash dividend to holders of its common stock. As of December 31, 2019, the quarterly cash dividend was $0.20 per share, representing a cumulative increase of 300% since the initial public offering.beneficial owners is significantly greater.
3134
Performance Graph
The following graph presents a comparison of the Company’s performance to the indices named below. It assumes $100 invested on December 31, 2014,2017, with dividends invested on a total return basis.
| | | | | | | | | | | ||
| Period Ending | Period Ending | ||||||||||
Index | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 |
NBHC | 100.00 | 111.21 | 167.55 | 172.19 | 166.28 | 193.81 | 100.00 | 96.57 | 112.55 | 107.53 | 147.37 | 144.19 |
KBW Regional Banking Index | 100.00 | 106.00 | 147.46 | 150.13 | 123.87 | 153.44 | 100.00 | 82.51 | 102.20 | 93.33 | 127.53 | 118.71 |
Russell 2000 Index | 100.00 | 95.59 | 115.93 | 132.88 | 118.23 | 148.36 | 100.00 | 88.97 | 111.65 | 133.90 | 153.70 | 122.25 |
35
The following table sets forth information about our repurchases of our common stock during the fourth quarter of 2019:2022:
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| |
| Maximum |
| |
| | |
| |
| Maximum | ||
| | | | | | | Total number of | | approximate dollar | | | | | | | Total number of | | approximate dollar | ||
| | | | | | | shares purchased | | value of shares | | | | | | | shares purchased | | value of shares | ||
| | | | | | as part of publicly | | that may yet be | | | | | | as part of publicly | | that may yet be | ||||
| | Total number | | Average price | | announced plans | | purchased under the | | Total number | | Average price | | announced plans | | purchased under the | ||||
Period | | of shares purchased | | paid per share | | or programs | | plans or programs (2) | | of shares purchased | | paid per share | | or programs | | plans or programs (2) | ||||
October 1 - October 31, 2019(1) | | 740 | | $ | 34.29 | | — | | $ | 12,562,825 | ||||||||||
November 1 - November 30, 2019(1) | | 3,445 | | | 35.89 | | — | | | 12,562,825 | ||||||||||
October 1 - October 31, 2022(1) | | 5,484 | | $ | 40.79 | | — | | $ | 38,618,179 | ||||||||||
November 1 - November 30, 2022(1) | | 1,481 | | | 48.65 | | — | | | 38,618,179 | ||||||||||
December 1 - December 31, 2022(1) | | 2,373 | | | 43.48 | | — | | $ | 38,618,179 | ||||||||||
Total |
| 4,185 | | $ | 35.61 |
| — | | $ | 12,562,825 |
| 9,338 | | | 42.72 |
| — | | | |
| | |
(1) | |
|
(2) |
| On |
32
Securities Authorized for Issuance under Equity Compensation Plans
During the second quarter of 2014, shareholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the Compensation Committee of the Board of Directors has the authority to grant, from time to time, awards of options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons. As of December 31, 2019,2022, the aggregate number of Company common stock available for issuance under the 2014 Plan was 4,996,1563,608,461 shares.
During the second quarter of 2015, shareholders approved the Company’s 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP allows employees to purchase shares of common stock through payroll deductions up to a limit of $25,000 per calendar year or 2,000 shares per offering period. The price an employee pays for shares is 90% of the fair market value of Company common stock on the last day of the offering period. As of December 31, 2019,2022, the aggregate number of Company common stock available for issuance under the ESPP was 326,088262,482 shares.
See note 1617 to the consolidated financial statements for further detail related to these equity compensation plans.
| | | | | | | |
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted-average exercise price of outstanding options, warrants and rights |
| Number of securities remaining available for future issuance under equity compensation plans | |
Equity plans approved by security holders | | 657,114 | | $ | 26.69 | | 5,322,244 |
Equity plans not approved by security holders | | — | | | — | | — |
Total | | 657,114 | | $ | 26.69 | | 5,322,244 |
| | | | | | | |
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted-average exercise price of outstanding options, warrants and rights |
| Number of securities remaining available for future issuance under equity compensation plans | |
Equity plans approved by security holders | | 717,088 | | $ | 29.79 | | 3,870,943 |
Equity plans not approved by security holders | | — | | | — | | — |
Total | | 717,088 | | $ | 29.79 | | 3,870,943 |
33
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth a summary of selected historical financial information derived from our audited consolidated financial statements as of and for the five years ended December 31, 2019.2022. This information should be read together with the related notes thereto as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report. Such information is not necessarily indicative of anticipated future results. All amounts are presented in thousands, except share and per share data, or as otherwise noted.
36
Summary of Selected Historical Consolidated Financial Data
Consolidated Statements of Financial Condition Data:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, | ||||||||||
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | ||||||||||
Cash and cash equivalents | | $ | 110,190 | | $ | 109,556 | | $ | 257,364 | | $ | 152,736 | | $ | 166,092 | | $ | 195,505 | | $ | 845,695 | | $ | 605,565 | | $ | 110,190 | | $ | 109,556 |
Investment securities available-for-sale (at fair value) | |
| 638,249 | |
| 791,102 | |
| 855,345 | |
| 884,232 | |
| 1,157,246 | |
| 706,289 | |
| 691,847 | |
| 661,955 | |
| 638,249 | |
| 791,102 |
Investment securities held-to-maturity | |
| 182,884 | |
| 235,398 | |
| 258,730 | |
| 332,505 | |
| 427,503 | |
| 651,527 | |
| 609,012 | |
| 376,615 | |
| 182,884 | |
| 235,398 |
Non-marketable securities | |
| 29,751 | |
| 27,555 | |
| 15,030 | |
| 14,949 | |
| 22,529 | |
| 89,049 | |
| 50,740 | |
| 17,260 | |
| 29,751 | |
| 27,555 |
Loans (1) | |
| 4,415,406 | |
| 4,092,308 | |
| 3,178,947 | |
| 2,860,921 | |
| 2,587,673 | |
| 7,220,469 | |
| 4,513,383 | |
| 4,353,726 | |
| 4,415,406 | |
| 4,092,308 |
Allowance for loan losses | |
| (39,064) | |
| (35,692) | |
| (31,264) | |
| (29,174) | |
| (27,119) | |||||||||||||||
Allowance for credit losses | |
| (89,553) | |
| (49,694) | |
| (59,777) | |
| (39,064) | |
| (35,692) | |||||||||||||||
Loans, net | |
| 4,376,342 | |
| 4,056,616 | |
| 3,147,683 | |
| 2,831,747 | |
| 2,560,554 | |
| 7,130,916 | |
| 4,463,689 | |
| 4,293,949 | |
| 4,376,342 | |
| 4,056,616 |
Loans held for sale | |
| 117,444 | |
| 48,120 | |
| 4,629 | |
| 24,187 | |
| 13,292 | |
| 22,767 | |
| 139,142 | |
| 247,813 | |
| 117,444 | |
| 48,120 |
Other real estate owned | |
| 7,300 | |
| 10,596 | |
| 10,491 | |
| 15,662 | |
| 20,814 | |
| 3,731 | |
| 7,005 | |
| 4,730 | |
| 7,300 | |
| 10,596 |
Premises and equipment, net | |
| 112,151 | |
| 109,986 | |
| 93,708 | |
| 95,671 | |
| 103,103 | |
| 136,111 | |
| 96,747 | |
| 106,982 | |
| 112,151 | |
| 109,986 |
Goodwill and other intangible assets, net | |
| 126,388 | |
| 128,497 | |
| 61,237 | |
| 66,579 | |
| 72,059 | |
| 339,019 | |
| 127,349 | |
| 132,955 | |
| 126,388 | |
| 128,497 |
Other assets | |
| 194,813 | |
| 159,240 | |
| 139,248 | |
| 154,778 | |
| 140,716 | |
| 298,329 | |
| 182,785 | |
| 212,126 | |
| 194,813 | |
| 159,240 |
Total assets | | $ | 5,895,512 | | $ | 5,676,666 | | $ | 4,843,465 | | $ | 4,573,046 | | $ | 4,683,908 | | $ | 9,573,243 | | $ | 7,214,011 | | $ | 6,659,950 | | $ | 5,895,512 | | $ | 5,676,666 |
Deposits | | $ | 4,737,132 | | $ | 4,535,621 | | $ | 3,979,559 | | $ | 3,868,649 | | $ | 3,840,677 | | $ | 7,872,626 | | $ | 6,228,173 | | $ | 5,676,232 | | $ | 4,737,132 | | $ | 4,535,621 |
Long-term debt, net | | | 53,890 | | | 39,478 | | | — | | | — | | | — | |||||||||||||||
Other liabilities | |
| 391,460 | |
| 446,039 | |
| 331,499 | |
| 168,208 | |
| 225,687 | |
| 554,525 | |
| 106,254 | |
| 163,027 | |
| 391,460 | |
| 446,039 |
Total liabilities | |
| 5,128,592 | |
| 4,981,660 | |
| 4,311,058 | |
| 4,036,857 | |
| 4,066,364 | |
| 8,481,041 | |
| 6,373,905 | |
| 5,839,259 | |
| 5,128,592 | |
| 4,981,660 |
Total shareholders’ equity | |
| 766,920 | |
| 695,006 | |
| 532,407 | |
| 536,189 | |
| 617,544 | |
| 1,092,202 | |
| 840,106 | |
| 820,691 | |
| 766,920 | |
| 695,006 |
Total liabilities and shareholders’ equity | | $ | 5,895,512 | | $ | 5,676,666 | | $ | 4,843,465 | | $ | 4,573,046 | | $ | 4,683,908 | | $ | 9,573,243 | | $ | 7,214,011 | | $ | 6,659,950 | | $ | 5,895,512 | | $ | 5,676,666 |
| | |
(1) |
| Total loans are net of unearned discounts and deferred fees and costs. |
34
Consolidated Statements of Operations Data:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the years ended | | As of and for the years ended | ||||||||||||||||||||||||||
|
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, |
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | ||||||||||
|
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | ||||||||||
Interest income | | $ | 242,601 | | $ | 221,391 | | $ | 164,421 | | $ | 160,448 | | $ | 171,407 | | $ | 284,688 | | $ | 200,965 | | $ | 218,002 | | $ | 242,601 | | $ | 221,391 |
Interest expense | |
| 36,771 | |
| 23,954 | |
| 18,115 | |
| 14,808 | |
| 14,462 | |
| 17,853 | |
| 13,821 | |
| 25,056 | |
| 36,771 | |
| 23,954 |
Net interest income | |
| 205,830 | |
| 197,437 | |
| 146,306 | |
| 145,640 | |
| 156,945 | |
| 266,835 | |
| 187,144 | |
| 192,946 | |
| 205,830 | |
| 197,437 |
Provision for loan losses | |
| 11,643 | |
| 5,197 | |
| 12,972 | |
| 23,651 | |
| 12,444 | |||||||||||||||
Net interest income after provision for loan losses | |
| 194,187 | |
| 192,240 | |
| 133,334 | |
| 121,989 | |
| 144,501 | |||||||||||||||
Provision expense (release) for credit losses | |
| 36,729 | |
| (9,293) | |
| 17,630 | |
| 11,643 | |
| 5,197 | |||||||||||||||
Net interest income after provision for credit losses | |
| 230,106 | |
| 196,437 | |
| 175,316 | |
| 194,187 | |
| 192,240 | |||||||||||||||
Non-interest income | |
| 82,752 | |
| 70,775 | |
| 39,205 | |
| 40,027 | |
| 21,448 | |
| 67,312 | |
| 110,364 | |
| 140,258 | |
| 82,752 | |
| 70,775 |
Non-interest expense | |
| 180,745 | |
| 189,334 | |
| 136,677 | |
| 136,009 | |
| 158,024 | |
| 211,234 | |
| 191,830 | |
| 206,177 | |
| 180,745 | |
| 189,334 |
Income before income taxes | |
| 96,194 | |
| 73,681 | |
| 35,862 | |
| 26,007 | |
| 7,925 | |
| 86,184 | |
| 114,971 | |
| 109,397 | |
| 96,194 | |
| 73,681 |
Income tax expense | |
| 15,829 | |
| 12,230 | |
| 21,283 | |
| 2,947 | |
| 3,044 | |
| 14,910 | |
| 21,365 | |
| 20,806 | |
| 15,829 | |
| 12,230 |
Net income | | $ | 80,365 | | $ | 61,451 | | $ | 14,579 | | $ | 23,060 | | $ | 4,881 | | $ | 71,274 | | $ | 93,606 | | $ | 88,591 | | $ | 80,365 | | $ | 61,451 |
Share Information: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share, basic | | $ | 2.57 | | $ | 2.00 | | $ | 0.54 | | $ | 0.81 | | $ | 0.14 | | $ | 2.20 | | $ | 3.04 | | $ | 2.87 | | $ | 2.57 | | $ | 2.00 |
Earnings per share, diluted | | | 2.55 | | | 1.95 | | | 0.53 | | | 0.79 | | | 0.14 | | | 2.18 | | | 3.01 | | | 2.85 | | | 2.55 | | | 1.95 |
Dividends paid | | | 0.75 | | | 0.54 | | | 0.34 | | | 0.22 | | | 0.20 | | | 0.94 | | | 0.87 | | | 0.80 | | | 0.75 | | | 0.54 |
Book value per share | | | 24.60 | | | 22.59 | | | 19.81 | | | 20.32 | | | 20.34 | | | 29.04 | | | 28.04 | | | 26.79 | | | 24.60 | | | 22.59 |
Tangible common book value per share(1) | | | 20.89 | | | 18.77 | | | 17.94 | | | 18.15 | | | 18.22 | | | 20.63 | | | 24.33 | | | 23.09 | | | 20.89 | | | 18.77 |
Total shareholders' equity to total assets | | | 13.01% | | | 12.24% | | | 10.99% | | | 11.72% | | | 13.18% | | | 11.41% | | | 11.65% | | | 12.32% | | | 13.01% | | | 12.24% |
Tangible common equity to tangible assets(1) | | | 11.27% | | | 10.39% | | | 10.06% | | | 10.61% | | | 11.98% | | | 8.38% | | | 10.26% | | | 10.80% | | | 11.27% | | | 10.39% |
Weighted average common shares outstanding, basic | |
| 31,175,825 | |
| 30,748,234 | |
| 26,928,763 | |
| 28,313,061 | |
| 34,349,996 | |
| 32,360,005 | |
| 30,727,566 | |
| 30,857,086 | |
| 31,175,825 | |
| 30,748,234 |
Weighted average common shares outstanding, diluted | |
| 31,530,817 | |
| 31,430,074 | |
| 27,709,659 | |
| 29,091,343 | |
| 34,363,487 | |
| 32,680,932 | |
| 31,068,159 | |
| 31,075,857 | |
| 31,530,817 | |
| 31,430,074 |
Common shares outstanding | |
| 31,176,627 | |
| 30,769,063 | |
| 26,875,585 | |
| 26,386,583 | |
| 30,358,509 | |
| 37,608,519 | |
| 29,958,764 | |
| 30,634,291 | |
| 31,176,627 | |
| 30,769,063 |
| | | ||
(1) | | Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. We believe that the most directly comparable GAAP financial measures are book value per share and total shareholders’ equity to total assets. See the reconciliation under “About Non-GAAP Financial Measures.” | ||
3537
| | | | | | | | | | |
| | | | | | | | | | |
| | As of and for the years ended | ||||||||
| | December 31, | | December 31, | | December 31, | | December 31, | | December 31, |
| | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
Key Ratios | | | | | | | | | | |
Return on average assets |
| 1.38% | | 1.10% | | 0.31% | | 0.50% | | 0.10% |
Return on average tangible assets(1) |
| 1.42% | | 1.15% | | 0.38% | | 0.57% | | 0.17% |
Return on average tangible assets, adjusted(1) | | 1.42% | | 1.26% | | 0.82% | | 0.57% | | 0.17% |
Return on average equity |
| 10.89% | | 9.28% | | 2.67% | | 3.95% | | 0.70% |
Return on average tangible common equity(1) |
| 13.07% | | 11.60% | | 3.61% | | 5.04% | | 1.29% |
Return on average tangible common equity, adjusted(1) | | 13.07% | | 12.76% | | 7.75% | | 5.04% | | 1.29% |
Loan to deposit ratio (end of period) | | 93.21% | | 90.23% | | 80.00% | | 74.58% | | 67.72% |
Non-interest bearing deposits to total deposits (end of period) |
| 25.01% | | 23.64% | | 22.68% | | 21.89% | | 21.22% |
Net interest margin(3) |
| 3.83% | | 3.85% | | 3.36% | | 3.39% | | 3.54% |
Net interest margin FTE(1)(3)(8) |
| 3.93% | | 3.93% | | 3.50% | | 3.49% | | 3.60% |
Interest rate spread FTE(4)(8) |
| 3.65% | | 3.77% | | 3.35% | | 3.38% | | 3.48% |
Yield on earning assets(2) |
| 4.52% | | 4.31% | | 3.78% | | 3.74% | | 3.86% |
Yield on earning assets FTE(1)(2)(8) |
| 4.61% | | 4.40% | | 3.91% | | 3.84% | | 3.92% |
Cost of interest bearing liabilities |
| 0.96% | | 0.63% | | 0.56% | | 0.46% | | 0.44% |
Cost of deposits |
| 0.64% | | 0.45% | | 0.41% | | 0.36% | | 0.36% |
Non-interest income to total revenue FTE(8) | | 28.18% | | 25.95% | | 20.49% | | 21.09% | | 11.84% |
Non-interest expense to average assets |
| 3.10% | | 3.38% | | 2.90% | | 2.92% | | 3.27% |
Non-interest expense to average assets, adjusted(1) | | 3.10% | | 3.23% | | 2.84% | | 2.92% | | 3.27% |
Efficiency ratio | | 62.22% | | 69.78% | | 70.80% | | 70.30% | | 85.55% |
Efficiency ratio FTE(1)(8) |
| 61.15% | | 68.64% | | 68.63% | | 68.79% | | 84.28% |
| | | | | | | | | | |
Total Loans Asset Quality Data(5)(6)(7) | | | | | | | | | | |
Non-performing loans to total loans |
| 0.49% | | 0.60% | | 0.66% | | 1.07% | | 0.99% |
Non-performing assets to total loans and OREO |
| 0.66% | | 0.85% | | 0.99% | | 1.61% | | 1.81% |
Allowance for loan losses to total loans |
| 0.88% | | 0.87% | | 0.98% | | 1.02% | | 1.05% |
Allowance for loan losses to non-performing loans |
| 179.62% | | 145.94% | | 148.88% | | 94.98% | | 105.74% |
Net charge-offs to average loans |
| 0.19% | | 0.02% | | 0.36% | | 0.80% | | 0.12% |
Key Metrics
| | | | | | | | | | | | | | | |
| | | As of and for the years ended | ||||||||||||
| | | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, |
| | 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 | |||||
Return on average assets | | | 0.91% | | | 1.33% | | | 1.40% | | | 1.38% | | | 1.10% |
Return on average tangible assets(1) | | | 0.95% | | | 1.37% | | | 1.44% | | | 1.42% | | | 1.15% |
Return on average tangible assets, adjusted(1)(2) | | | 1.32% | | | 1.37% | | | 1.44% | | | 1.42% | | | 1.26% |
Return on average equity | | | 7.88% | | | 11.06% | | | 11.24% | | | 10.89% | | | 9.28% |
Return on average tangible common equity(1) | | | 9.91% | | | 12.87% | | | 13.27% | | | 13.07% | | | 11.60% |
Return on average tangible common equity, adjusted(1)(2) | | | 13.75% | | | 12.87% | | | 13.27% | | | 13.07% | | | 12.76% |
Loan to deposit ratio (end of period)(9) | | | 91.72% | | | 72.47% | | | 76.70% | | | 93.21% | | | 90.23% |
Non-interest bearing deposits to total deposits (end of period) | | | 39.82% | | | 40.24% | | | 37.19% | | | 25.01% | | | 23.64% |
Net interest margin(3) | | | 3.65% | | | 2.87% | | | 3.33% | | | 3.83% | | | 3.85% |
Net interest margin FTE(1)(3)(4) | | | 3.73% | | | 2.95% | | | 3.42% | | | 3.93% | | | 3.93% |
Interest rate spread FTE(1)(4)(5) | | | 3.54% | | | 2.79% | | | 3.21% | | | 3.65% | | | 3.77% |
Yield on earning assets(6) | | | 3.90% | | | 3.08% | | | 3.76% | | | 4.52% | | | 4.31% |
Yield on earning assets FTE(1)(4)(6) | | | 3.97% | | | 3.16% | | | 3.85% | | | 4.61% | | | 4.40% |
Cost of interest bearing liabilities | | | 0.43% | | | 0.37% | | | 0.64% | | | 0.96% | | | 0.63% |
Cost of deposits | | | 0.22% | | | 0.23% | | | 0.45% | | | 0.64% | | | 0.45% |
Non-interest income to total revenue FTE(4) | | | 19.82% | | | 36.46% | | | 41.46% | | | 28.18% | | | 25.95% |
Non-interest expense to average assets | | | 2.70% | | | 2.73% | | | 3.26% | | | 3.10% | | | 3.38% |
Efficiency ratio | | | 63.22% | | | 64.48% | | | 61.88% | | | 62.63% | | | 70.59% |
Efficiency ratio FTE(1)(4) | | | 62.19% | | | 63.38% | | | 60.94% | | | 61.55% | | | 69.43% |
Efficiency ratio FTE, adjusted(1)(2)(4) | | | 57.07% | | | 62.99% | | | 60.59% | | | 61.15% | | | 68.64% |
Pre-provision net revenue | | $ | 122,913 | | $ | 105,678 | | $ | 127,027 | | $ | 107,837 | | $ | 78,878 |
Pre-provision net revenue FTE(1)(4) | | | 128,425 | | | 110,839 | | | 132,130 | | | 112,902 | | | 83,360 |
Pre-provision net revenue FTE adjusted for acquisition-related expense(1)(2)(4) | | | 143,492 | | | 110,839 | | | 132,130 | | | 112,902 | | | 83,360 |
| | | | | | | | | | | | | | | |
Total Loans Asset Quality Data(7)(8)(9) | | | | | | | | | | | | | | | |
Non-performing loans to total loans | | | 0.23% | | | 0.24% | | | 0.47% | | | 0.49% | | | 0.60% |
Non-performing assets to total loans and OREO | | | 0.28% | | | 0.39% | | | 0.58% | | | 0.66% | | | 0.85% |
Allowance for credit losses to total loans | | | 1.24% | | | 1.10% | | | 1.37% | | | 0.88% | | | 0.87% |
Allowance for credit losses to non-performing loans | | | 542.35% | | | 458.77% | | | 293.21% | | | 179.62% | | | 145.94% |
Net charge-offs to average loans | | | 0.03% | | | 0.03% | | | 0.06% | | | 0.19% | | | 0.02% |
| | |
(1) |
| Ratio represents a non-GAAP financial measure. See non-GAAP reconciliation below. |
(2) | |
|
(3) |
| Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets. |
(4) | | Presented on a fully taxable equivalent (“FTE”) basis using the statutory rate of 21% for all periods presented. The taxable equivalent adjustments included above are $5,512, $5,161, $5,103, $5,065 and $4,482 for the years ended 2022, 2021, 2020, 2019 and 2018, respectively. |
(5) |
| Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities. |
| | Interest earning assets include assets that earn interest/accretion or dividends. Any market value adjustments on investment securities or loans are excluded from interest-earning assets. |
(7) |
| Non-performing loans consist of non-accruing loans and restructured loans on |
|
| Non-performing assets include non-performing loans, other real estate owned and other repossessed assets. |
|
| Total loans are net of unearned discounts and fees. |
|
|
|
3638
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible assets,” “average tangible assets,” “return on average tangible assets,” “tangible common equity,” “tangible common equity to tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity to tangible assets,” “tangible common equity to tangible assets,book value, excluding accumulated other comprehensive loss, net of tax,” “tangible common book value per share, excluding accumulated other comprehensive loss, net of tax,” “adjusted non-interest expense,” “adjusted non-interest“non-interest expense to average assets, adjusted,” “adjusted net income,” “adjusted net income excluding core deposit intangible amortization expense, after tax,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” “non-interest expense adjusted for CDI asset amortization and acquisition-related expenses,” “non-interest expense adjusted for acquisition-related expenses,” “efficiency ratio adjusted for CDI and WMI amortization and acquisition-related expenses,” “pre-provision net revenue,” “pre-provision net revenue adjusted for acquisition-related expenses,” “tangible common book value, excluding accumulated other comprehensive loss (income), net of tax,” “tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax,” “adjusted net income excluding CDI amortization expense, after tax,” “net income adjusted for the impact of CDI and WMI amortization expense and acquisition-related expenses, after tax,” “net income excluding the impact of CDI and WMI amortization expense, after tax,” and “fully taxable equivalent (FTE)”equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expensesexpenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.
3739
A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:
Tangible Common Book Value Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | ||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 | ||||||||||
Total shareholders’ equity | | $ | 766,920 | | $ | 695,006 | | $ | 532,407 | | $ | 536,189 | | $ | 617,544 | |||||||||||||||
Less: goodwill and core deposit intangible assets, net | |
| (123,758) | |
| (124,941) | |
| (61,237) | |
| (66,580) | |
| (72,060) | |||||||||||||||
Total shareholders' equity | | $ | 1,092,202 | | $ | 840,106 | | $ | 820,691 | | $ | 766,920 | | $ | 695,006 | |||||||||||||||
Less: goodwill, core deposit (“CDI”) and wealth management (“WMI”) intangible assets, net | |
| (327,191) | |
| (121,392) | |
| (122,575) | |
| (123,758) | |
| (124,941) | |||||||||||||||
Add: deferred tax liability related to goodwill | |
| 8,241 | |
| 7,327 | |
| 10,873 | |
| 9,323 | |
| 7,772 | |
| 10,984 | |
| 10,070 | |
| 9,155 | |
| 8,241 | |
| 7,327 |
Tangible common equity (non-GAAP) | | $ | 651,403 | | $ | 577,392 | | $ | 482,043 | | $ | 478,932 | | $ | 553,256 | | $ | 775,995 | | $ | 728,784 | | $ | 707,271 | | $ | 651,403 | | $ | 577,392 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 5,895,512 | | $ | 5,676,666 | | $ | 4,843,465 | | $ | 4,573,046 | | $ | 4,683,908 | | $ | 9,573,243 | | $ | 7,214,011 | | $ | 6,659,950 | | $ | 5,895,512 | | $ | 5,676,666 |
Less: goodwill and core deposit intangible assets, net | |
| (123,758) | |
| (124,941) | |
| (61,237) | |
| (66,580) | |
| (72,060) | |||||||||||||||
Less: goodwill, CDI and WMI assets, net | |
| (327,191) | |
| (121,392) | |
| (122,575) | |
| (123,758) | |
| (124,941) | |||||||||||||||
Add: deferred tax liability related to goodwill | |
| 8,241 | |
| 7,327 | |
| 10,873 | |
| 9,323 | |
| 7,772 | |
| 10,984 | |
| 10,070 | |
| 9,155 | |
| 8,241 | |
| 7,327 |
Tangible assets (non-GAAP) | | $ | 5,779,995 | | $ | 5,559,052 | | $ | 4,793,101 | | $ | 4,515,789 | | $ | 4,619,620 | | $ | 9,257,036 | | $ | 7,102,689 | | $ | 6,546,530 | | $ | 5,779,995 | | $ | 5,559,052 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible common equity to tangible assets calculations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total shareholders' equity to total assets | |
| 13.01% | |
| 12.24% | |
| 10.99% | |
| 11.72% | |
| 13.18% | |
| 11.41% | |
| 11.65% | |
| 12.32% | |
| 13.01% | |
| 12.24% |
Less: impact of goodwill and core deposit intangible assets, net | |
| (1.74)% | |
| (1.85)% | |
| (0.93)% | |
| (1.11)% | |
| (1.20)% | |||||||||||||||
Less: impact of goodwill, CDI and WMI assets, net | |
| (3.03)% | |
| (1.39)% | |
| (1.52)% | |
| (1.74)% | |
| (1.85)% | |||||||||||||||
Tangible common equity to tangible assets (non-GAAP) | |
| 11.27% | |
| 10.39% | |
| 10.06% | |
| 10.61% | |
| 11.98% | |
| 8.38% | |
| 10.26% | |
| 10.80% | |
| 11.27% | |
| 10.39% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible common book value per share calculations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible common equity (non-GAAP) | | $ | 651,403 | | $ | 577,392 | | $ | 482,043 | | $ | 478,932 | | $ | 553,256 | | $ | 775,995 | | $ | 728,784 | | $ | 707,271 | | $ | 651,403 | | $ | 577,392 |
Divided by: ending shares outstanding | |
| 31,176,627 | |
| 30,769,063 | |
| 26,875,585 | |
| 26,386,583 | |
| 30,358,509 | |
| 37,608,519 | |
| 29,958,764 | |
| 30,634,291 | |
| 31,176,627 | |
| 30,769,063 |
Tangible common book value per share (non-GAAP) | | $ | 20.89 | | $ | 18.77 | | $ | 17.94 | | $ | 18.15 | | $ | 18.22 | | $ | 20.63 | | $ | 24.33 | | $ | 23.09 | | $ | 20.89 | | $ | 18.77 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible common book value per share, excluding accumulated other comprehensive (income) loss calculations: | | | | | | | | | | | | | | | | |||||||||||||||
Tangible common book value per share, excluding accumulated other comprehensive income calculations: | | | | | | | | | | | | | | | | |||||||||||||||
Tangible common equity (non-GAAP) | | $ | 651,403 | | $ | 577,392 | | $ | 482,043 | | $ | 478,932 | | $ | 553,256 | | $ | 775,995 | | $ | 728,784 | | $ | 707,271 | | $ | 651,403 | | $ | 577,392 |
Accumulated other comprehensive (income) loss, net of tax | |
| (2,062) | |
| 11,275 | |
| 6,242 | |
| 1,762 | |
| (95) | |||||||||||||||
Tangible common book value, excluding accumulated other comprehensive (income) loss, net of tax (non-GAAP) | |
| 649,341 | |
| 588,667 | |
| 488,285 | |
| 480,694 | |
| 553,161 | |||||||||||||||
Accumulated other comprehensive loss (income), net of tax | |
| 88,204 | |
| 6,963 | |
| (9,766) | |
| (2,062) | |
| 11,275 | |||||||||||||||
Tangible common book value, excluding accumulated other comprehensive loss, net of tax (non-GAAP) | |
| 864,199 | |
| 735,747 | |
| 697,505 | |
| 649,341 | |
| 588,667 | |||||||||||||||
Divided by: ending shares outstanding | |
| 31,176,627 | |
| 30,769,063 | |
| 26,875,585 | |
| 26,386,583 | |
| 30,358,509 | |
| 37,608,519 | |
| 29,958,764 | |
| 30,634,291 | |
| 31,176,627 | |
| 30,769,063 |
Tangible common book value per share, excluding accumulated other comprehensive (income) loss, net of tax (non-GAAP) | | $ | 20.83 | | $ | 19.13 | | $ | 18.17 | | $ | 18.22 | | $ | 18.22 | |||||||||||||||
Tangible common book value per share, excluding accumulated other comprehensive loss, net of tax (non-GAAP) | | $ | 22.98 | | $ | 24.56 | | $ | 22.77 | | $ | 20.83 | | $ | 19.13 | |||||||||||||||
3840
Return on Average Tangible Assets and Return on Average Tangible Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the years ended |
| As of and for the years ended | ||||||||||||||||||||||||||
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, | | December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, | ||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | | 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 | ||||||||||
Net income | $ | 80,365 | | $ | 61,451 | | $ | 14,579 | | $ | 23,060 | | $ | 4,881 | | $ | 71,274 | | $ | 93,606 | | $ | 88,591 | | $ | 80,365 | | $ | 61,451 |
Add: impact of core deposit intangible amortization expense, after tax |
| 899 | |
| 1,649 | |
| 3,259 | |
| 3,343 | |
| 3,295 | |||||||||||||||
Net income adjusted for impact of core deposit intangible amortization expense, after tax | $ | 81,264 | | $ | 63,100 | | $ | 17,838 | | $ | 26,403 | | $ | 8,176 | |||||||||||||||
Add: impact of CDI and WMI amortization expense, after tax | |
| 1,799 | |
| 909 | |
| 910 | |
| 899 | |
| 1,649 | ||||||||||||||
Net income excluding the impact of CDI and WMI amortization expense, after tax (non-GAAP) | | $ | 73,073 | | $ | 94,515 | | $ | 89,501 | | $ | 81,264 | | $ | 63,100 | ||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||
Net income excluding the impact of CDI and WMI amortization expense, after tax | | $ | 73,073 | | $ | 94,515 | | $ | 89,501 | | $ | 81,264 | | $ | 63,100 | ||||||||||||||
Add: acquisition-related adjustments, after tax (non-GAAP)(1) | | | 28,303 | | | — | | | — | | | — | | | 6,321 | ||||||||||||||
Net income adjusted for the impact of CDI and WMI amortization expense and acquisition-related expenses, after tax (non-GAAP)(1) | | $ | 101,376 | | $ | 94,515 | | $ | 89,501 | | $ | 81,264 | | $ | 69,421 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average assets | $ | 5,837,121 | | $ | 5,607,532 | | $ | 4,705,241 | | $ | 4,651,953 | | $ | 4,831,070 | | $ | 7,829,792 | | $ | 7,020,111 | | $ | 6,326,268 | | $ | 5,837,121 | | $ | 5,607,532 |
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill |
| (116,104) | |
| (118,546) | |
| (52,958) | |
| (59,977) | |
| (66,549) | |||||||||||||||
Less: average goodwill, CDI and WMI assets, net of deferred tax liability related to goodwill | |
| (166,857) | |
| (111,944) | |
| (114,031) | |
| (116,104) | |
| (118,546) | ||||||||||||||
Average tangible assets (non-GAAP) | $ | 5,721,017 | | $ | 5,488,986 | | $ | 4,652,283 | | $ | 4,591,976 | | $ | 4,764,521 | | $ | 7,662,935 | | $ | 6,908,167 | | $ | 6,212,237 | | $ | 5,721,017 | | $ | 5,488,986 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average shareholders' equity | $ | 737,923 | | $ | 662,420 | | $ | 546,716 | | $ | 583,686 | | $ | 701,476 | | $ | 904,381 | | $ | 846,539 | | $ | 788,286 | | $ | 737,923 | | $ | 662,420 |
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill |
| (116,104) | |
| (118,546) | |
| (52,958) | |
| (59,977) | |
| (66,549) | |||||||||||||||
Less: average goodwill, CDI and WMI assets, net of deferred tax liability related to goodwill | |
| (166,857) | |
| (111,944) | |
| (114,031) | |
| (116,104) | |
| (118,546) | ||||||||||||||
Average tangible common equity (non-GAAP) | $ | 621,819 | | $ | 543,874 | | $ | 493,758 | | $ | 523,709 | | $ | 634,927 | | $ | 737,524 | | $ | 734,595 | | $ | 674,255 | | $ | 621,819 | | $ | 543,874 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on average assets |
| 1.38% | |
| 1.10% | |
| 0.31% | |
| 0.50% | |
| 0.10% | |
| 0.91% | |
| 1.33% | |
| 1.40% | |
| 1.38% | |
| 1.10% |
Return on average tangible assets (non-GAAP) |
| 1.42% | |
| 1.15% | |
| 0.38% | |
| 0.57% | |
| 0.17% | |
| 0.95% | |
| 1.37% | |
| 1.44% | |
| 1.42% | |
| 1.15% |
Adjusted return on average tangible assets (non-GAAP) | |
| 1.32% | |
| 1.37% | |
| 1.44% | | | 1.42% | |
| 1.26% | ||||||||||||||
Return on average equity |
| 10.89% | |
| 9.28% | |
| 2.67% | |
| 3.95% | |
| 0.70% | |
| 7.88% | |
| 11.06% | |
| 11.24% | |
| 10.89% | |
| 9.28% |
Return on average tangible common equity (non-GAAP) |
| 13.07% | |
| 11.60% | |
| 3.61% | |
| 5.04% | |
| 1.29% | |
| 9.91% | |
| 12.87% | |
| 13.27% | |
| 13.07% | |
| 11.60% |
Adjusted return on average tangible common equity (non-GAAP) | |
| 13.75% | |
| 12.87% | |
| 13.27% | |
| 13.07% | |
| 12.76% | ||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||
(1) Acquisition-related adjustments: | | | | | | | | | | | | | | | | ||||||||||||||
Provision expense adjustments: | | | | | | | | | | | | | | | | ||||||||||||||
CECL day 1 provision expense (non-GAAP) | | $ | 21,706 | | $ | — | | $ | — | | $ | — | | $ | — | ||||||||||||||
Non-interest expense adjustments: | | | | | | | | | | | | | | | | ||||||||||||||
Acquisition-related expenses (non-GAAP) | | | 15,067 | | | — | | | — | | | — | | | 7,957 | ||||||||||||||
Acquisition-related adjustments before tax (non-GAAP) | | | 36,773 | | | — | | | — | | | — | | | 7,957 | ||||||||||||||
Tax expense impact | | | (8,470) | | | — | | | — | | | — | | | (1,636) | ||||||||||||||
Acquisition-related adjustments, after tax (non-GAAP) | | $ | 28,303 | | $ | — | | $ | — | | $ | — | | $ | 6,321 | ||||||||||||||
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
| | | | | | | | | | | | | | |
| As of and for the years ended | |||||||||||||
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, | |||||
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |||||
Interest income | $ | 242,601 | | $ | 221,391 | | $ | 164,421 | | $ | 160,448 | | $ | 171,407 |
Add: impact of taxable equivalent adjustment |
| 5,065 | |
| 4,482 | |
| 5,852 | |
| 4,081 | |
| 2,695 |
Interest income FTE (non-GAAP) | $ | 247,666 | | $ | 225,873 | | $ | 170,273 | | $ | 164,529 | | $ | 174,102 |
| | | | | | | | | | | | | | |
Net interest income | $ | 205,830 | | $ | 197,437 | | $ | 146,306 | | $ | 145,640 | | $ | 156,945 |
Add: impact of taxable equivalent adjustment |
| 5,065 | |
| 4,482 | |
| 5,852 | |
| 4,081 | |
| 2,695 |
Net interest income FTE (non-GAAP) | $ | 210,895 | | $ | 201,919 | | $ | 152,158 | | $ | 149,721 | | $ | 159,640 |
| | | | | | | | | | | | | | |
Average earning assets | $ | 5,368,073 | | $ | 5,131,694 | | $ | 4,353,320 | | $ | 4,290,171 | | $ | 4,439,139 |
Yield on earning assets |
| 4.52% | |
| 4.31% | |
| 3.78% | |
| 3.75% | |
| 3.86% |
Yield on earning assets FTE (non-GAAP) |
| 4.61% | |
| 4.40% | |
| 3.91% | |
| 3.84% | |
| 3.92% |
Net interest margin |
| 3.83% | |
| 3.85% | |
| 3.36% | |
| 3.39% | |
| 3.54% |
Net interest margin FTE (non-GAAP) |
| 3.93% | |
| 3.93% | |
| 3.50% | |
| 3.49% | |
| 3.60% |
Efficiency Ratio
| | | | | | | | | | | | | | |
| As of and for the years ended | |||||||||||||
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |||||
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
Net interest income | $ | 205,830 | | $ | 197,437 | | $ | 146,306 | | $ | 145,640 | | $ | 156,945 |
Add: impact of taxable equivalent adjustment |
| 5,065 | |
| 4,482 | |
| 5,852 | |
| 4,081 | |
| 2,695 |
Net interest income, FTE (non-GAAP) | $ | 210,895 | | $ | 201,919 | | $ | 152,158 | | $ | 149,721 | | $ | 159,640 |
| | | | | | | | | | | | | | |
Non-interest income | $ | 82,752 | | $ | 70,775 | | $ | 39,205 | | $ | 40,027 | | $ | 21,448 |
| | | | | | | | | | | | | | |
Non-interest expense | $ | 180,745 | | $ | 189,334 | | $ | 136,677 | | $ | 136,009 | | $ | 158,024 |
Less: core deposit intangible asset amortization |
| (1,183) | |
| (2,170) | |
| (5,342) | |
| (5,480) | |
| (5,401) |
Non-interest expense, adjusted for core deposit intangible asset amortization | $ | 179,562 | | $ | 187,164 | | $ | 131,335 | | $ | 130,529 | | $ | 152,623 |
| | | | | | | | | | | | | | |
Efficiency ratio | | 62.22% | | | 69.78% | | | 70.80% | | | 70.30% | | | 85.55% |
Efficiency ratio FTE (non-GAAP) | | 61.15% | | | 68.64% | | | 68.63% | | | 68.79% | | | 84.28% |
| | | | | | | | | | | | | | | |
| | As of and for the years ended | |||||||||||||
|
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, | |||||
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | |||||
Interest income | | $ | 284,688 | | $ | 200,965 | | $ | 218,002 | | $ | 242,601 | | $ | 221,391 |
Add: impact of taxable equivalent adjustment | |
| 5,512 | |
| 5,161 | |
| 5,103 | |
| 5,065 | |
| 4,482 |
Interest income FTE (non-GAAP) | | $ | 290,200 | | $ | 206,126 | | $ | 223,105 | | $ | 247,666 | | $ | 225,873 |
| | | | | | | | | | | | | | | |
Net interest income | | $ | 266,835 | | $ | 187,144 | | $ | 192,946 | | $ | 205,830 | | $ | 197,437 |
Add: impact of taxable equivalent adjustment | |
| 5,512 | |
| 5,161 | |
| 5,103 | |
| 5,065 | |
| 4,482 |
Net interest income FTE (non-GAAP) | | $ | 272,347 | | $ | 192,305 | | $ | 198,049 | | $ | 210,895 | | $ | 201,919 |
| | | | | | | | | | | | | | | |
Average earning assets | | $ | 7,308,753 | | $ | 6,521,300 | | $ | 5,795,864 | | $ | 5,368,073 | | $ | 5,131,694 |
Yield on earning assets | |
| 3.90% | |
| 3.08% | |
| 3.76% | |
| 4.52% | |
| 4.31% |
Yield on earning assets FTE (non-GAAP) | |
| 3.97% | |
| 3.16% | |
| 3.85% | |
| 4.61% | |
| 4.40% |
Net interest margin | |
| 3.65% | |
| 2.87% | |
| 3.33% | |
| 3.83% | |
| 3.85% |
Net interest margin FTE (non-GAAP) | |
| 3.73% | |
| 2.95% | |
| 3.42% | |
| 3.93% | |
| 3.93% |
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Efficiency Ratio and Pre-provision Net Revenue
| | | | | | | | | | | | | | | |
| | As of and for the years ended | |||||||||||||
| | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |||||
| | 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 | |||||
Net interest income | | $ | 266,835 | | $ | 187,144 | | $ | 192,946 | | $ | 205,830 | | $ | 197,437 |
Add: impact of taxable equivalent adjustment | |
| 5,512 | |
| 5,161 | |
| 5,103 | |
| 5,065 | |
| 4,482 |
Net interest income FTE (non-GAAP) | | $ | 272,347 | | $ | 192,305 | | $ | 198,049 | | $ | 210,895 | | $ | 201,919 |
| | | | | | | | | | | | | | | |
Non-interest income | | $ | 67,312 | | $ | 110,364 | | $ | 140,258 | | $ | 82,752 | | $ | 70,775 |
| | | | | | | | | | | | | | | |
Non-interest expense | | $ | 211,234 | | $ | 191,830 | | $ | 206,177 | | $ | 180,745 | | $ | 189,334 |
Less: CDI and WMI asset amortization | |
| (2,338) | |
| (1,183) | |
| (1,183) | |
| (1,183) | |
| (2,170) |
Less: acquisition-related expenses (non-GAAP) | | | (15,067) | | | — | | | — | | | — | | | — |
Non-interest expense adjusted for CDI and WMI asset amortization and acquisition-related expenses (non-GAAP) | | $ | 193,829 | | $ | 190,647 | | $ | 204,994 | | $ | 179,562 | | $ | 187,164 |
| | | | | | | | | | | | | | | |
Non-interest expense | | $ | 211,234 | | $ | 191,830 | | $ | 206,177 | | $ | 180,745 | | $ | 189,334 |
Less: acquisition-related expenses (non-GAAP) | |
| (15,067) | |
| — | |
| — | |
| — | |
| — |
Non-interest expense, adjusted for impact of CDI and WMI amortization expense and acquisition-related expenses (non-GAAP) | | $ | 196,167 | | $ | 191,830 | | $ | 206,177 | | $ | 180,745 | | $ | 189,334 |
| | | | | | | | | | | | | | | |
Efficiency ratio | | | 63.22% | | | 64.48% | | | 61.88% | | | 62.63% | | | 70.59% |
Efficiency ratio FTE (non-GAAP) | | | 62.19% | | | 63.38% | | | 60.94% | | | 61.55% | | | 69.43% |
Efficiency ratio adjusted for CDI and WMI amortization and acquisition-related expenses FTE (non-GAAP) | | | 57.07% | | | 62.99% | | | 60.59% | | | 61.15% | | | 68.64% |
| | | | | | | | | | | | | | | |
Pre-provision net revenue (non-GAAP) | | $ | 122,913 | | $ | 105,678 | | $ | 127,027 | | $ | 107,837 | | $ | 78,878 |
Pre-provision net revenue, FTE (non-GAAP) | | | 128,425 | | | 110,839 | | | 132,130 | | | 112,902 | | | 83,360 |
Pre-provision net revenue FTE, adjusted for acquisition-related expenses (non-GAAP) | | | 143,492 | | | 110,839 | | | 132,130 | | | 112,902 | | | 83,360 |
Adjusted Financial ResultsNet Income and Earnings Per Share
| | | | | | | | | | | | | | | |
| | As of and for the years ended | |||||||||||||
| | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |||||
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |||||
Adjustments to net income: | | | | | | | | | | | | | | | |
Net income | | $ | 80,365 | | $ | 61,451 | | $ | 14,579 | | $ | 23,060 | | $ | 4,881 |
Adjustments(1) | | | — | | | 6,321 | | | 20,430 | | | — | | | — |
Adjusted net income (non-GAAP) | | $ | 80,365 | | $ | 67,772 | | $ | 35,009 | | $ | 23,060 | | $ | 4,881 |
| | | | | | | | | | | | | | | |
Adjustments to earnings per share: | | | | | | | | | | | | | | | |
Earnings per share | | $ | 2.55 | | $ | 1.95 | | $ | 0.53 | | $ | 0.79 | | $ | 0.14 |
Adjustments(1) | | | — | | | 0.21 | | | 0.73 | | | — | | | — |
Adjusted earnings per share - diluted (non-GAAP) | | $ | 2.55 | | $ | 2.16 | | $ | 1.26 | | $ | 0.79 | | $ | 0.14 |
| | | | | | | | | | | | | | | |
Adjustments to return on average tangible assets: | | | | | | | | | | | | | | | |
Adjusted net income (non-GAAP) | | $ | 80,365 | | $ | 67,772 | | $ | 35,009 | | $ | 23,060 | | $ | 4,881 |
Add: impact of core deposit intangible amortization expense, after tax | | | 899 | | | 1,649 | | | 3,259 | | | 3,343 | | | 3,295 |
Net income adjusted for impact of core deposit intangible amortization expense, after tax | | | 81,264 | | | 69,421 | | | 38,268 | | | 26,403 | | | 8,176 |
Average tangible assets (non-GAAP) | | | 5,721,017 | | | 5,488,986 | | | 4,652,283 | | | 4,591,976 | | | 4,764,521 |
Adjusted return on average tangible assets (non-GAAP) | | | 1.42% | | | 1.26% | | | 0.82% | | | 0.57% | | | 0.17% |
| | | | | | | | | | | | | | | |
Adjustments to return on average tangible common equity: | | | | | | | | | | | | | | | |
Net income adjusted for impact of core deposit intangible amortization expense, after tax | | $ | 81,264 | | $ | 69,421 | | $ | 38,268 | | $ | 26,403 | | $ | 8,176 |
Average tangible common equity (non-GAAP) | | | 621,819 | | | 543,874 | | | 493,758 | | | 523,709 | | | 634,927 |
Adjusted return on average tangible common equity (non-GAAP) | | | 13.07% | | | 12.76% | | | 7.75% | | | 5.04% | | | 1.29% |
| | | | | | | | | | | | | | | |
Adjustments to non-interest expense: | | | | | | | | | | | | | | | |
Non-interest expense | | $ | 180,745 | | $ | 189,334 | | $ | 136,677 | | $ | 136,009 | | $ | 158,024 |
Adjustments(1) | | | — | | | 7,957 | | | 3,182 | | | — | | | — |
Adjusted non-interest expense (non-GAAP) | | | 180,745 | | | 181,377 | | | 133,495 | | | 136,009 | | | 158,024 |
Non-interest expense to average assets, adjusted (non-GAAP) | | | 3.10% | | | 3.23% | | | 2.84% | | | 2.92% | | | 3.27% |
| | | | | | | | | | | | | | | |
(1) Adjustments: | | | | | | | | | | | | | | | |
Non-interest expense adjustments: | | | | | | | | | | | | | | | |
Non-recurring Peoples acquisition-related expenses | | $ | — | | $ | 7,957 | | $ | 2,691 | | $ | — | | $ | — |
Tax reform bonus(2) | | | — | | | — | | | 491 | | | — | | | — |
Total non-interest expense adjustments (non-GAAP) | | $ | — | | $ | 7,957 | | $ | 3,182 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | |
Total pre-tax adjustments (non-GAAP) | | $ | — | | $ | 7,957 | | $ | 3,182 | | $ | — | | $ | — |
Collective tax expense impact | | | — | | | (1,636) | | | (1,209) | | | — | | | — |
Deferred tax asset remeasurement | | | — | | | — | | | 18,457 | | | — | | | — |
Adjustments (non-GAAP) | | $ | — | | $ | 6,321 | | $ | 20,430 | | $ | — | | $ | — |
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the years ended December 31, 2019, 2018,2022, 2021, and 2017,2020, and with the other financial and statistical data presented in this annual report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” and should be read herewith.
Management’s discussion focuses on 20192022 results compared to 2018.2021. For a discussion of 20182021 results compared to 2017,2020, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2021.
All amounts are in thousands, except share and per share data, or as otherwise noted.
Overview
Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We are executing on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to digital payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets that are outperforming national averages positionsof Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, as well as our ongoing investment in digital solutions and strategic acquisitions, position us well for growth opportunities. As of December 31, 2019,2022, we had $5.9$9.6 billion in assets, $4.4$7.2 billion in loans, $4.7$7.9 billion in deposits, $1.1 billion in equity and $0.8 billion in equity.
Completing 2019 marks the 10th yearassets under management in our Company’s history. During our first decade, we completed six acquisitionstrust and built a bank with a balance sheet and capital position that we believe will withstand any economic environment. We are proud of our industry-leading credit quality metrics and our high-quality client relationships. We have positioned ourselves in strong markets and created meaningful value for our clients, associates, communities and shareholders. We begin the next decade with a solid foundation, strong capital and momentum for future growth.wealth management business.
Operating Highlights and Key Challenges
On September 1, 2022, the Company completed its acquisition of Community Bancorporation, the holding company for Rock Canyon Bank (“RCB”), headquartered in Provo, Utah. At the close of the acquisition, the Company acquired seven banking centers in the greater Salt Lake City region. The acquisition added $832.2 million in total assets, $537.7 million in loans and $734.5 million in deposits as of September 1, 2022. The merger consideration totaled $140.4 million and consisted of $124.3 million in Company stock and $16.1 million in cash. All core operating systems were converted during the fourth quarter of 2022.
On October 1, 2022, the Company completed its acquisition of Bancshares of Jackson Hole Incorporated, the holding company for Bank of Jackson Hole (“BOJH”), with operations in Jackson Hole, Wyoming and Idaho. At the close of the acquisition, the Company acquired 12 banking centers. As of October 1, 2022, the acquisition added $1.5 billion in total assets, $1.2 billion in loans and $1.4 billion in deposits and an attractive Wyoming-based trust and wealth management business with $0.8 billion in assets under management. The merger consideration totaled $213.4 million and consisted of $162.5 million in Company stock and $51.0 million in cash. All core operating systems were converted in December of 2022.
Increased profitabilityProfitability and returns
| | |
● |
| Net income |
● |
| The return on average tangible assets was |
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| ||
● |
| The return on average tangible common equity was |
Strategic execution
| | |
● | |
|
● | | Completed the acquisition of BOJH on |
● | | Continued to invest in digital solutions for our clients through our financial eco-system, 2UniFiSM, for small and medium-sized businesses that we |
● |
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|
|
|
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|
| Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at |
|
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Loan portfolio
| | |
● |
|
|
|
| |
● | |
|
● | | Loans outstanding totaled a record $7.2 billion, increasing $2.7 billion, or 60.0%, from the prior year. |
Credit quality
| | |
● | | Allowance for credit losses totaled 1.24% of total loans at December 31, 2022, compared to 1.10% at December 31, 2021. |
● |
|
|
● |
| Net charge-offs of |
● | | Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual |
Client deposit funded balance sheet
| |
|
● | | Average |
● | | Average total deposits for the fourth quarter of 2022 totaled $8.0 billion, increasing 29.6%, compared to $6.2 billion for the same period in the prior year. |
● |
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|
| |
● | | Cost of deposits |
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Revenues
| | |
● |
| Fully taxable equivalent net interest income totaled |
|
|
|
● | | The FTE net interest margin |
● | | Non-interest income totaled |
● | | Other non-interest income decreased $5.6 million largely due to market adjustments on company-owned life insurance and higher unrealized gains on equity method investments included in the prior year. |
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Expenses
| | |
● |
| Non-interest expense totaled |
● | | Included in the year ended December 31, 2022 were $36.8 million |
● | | The FTE efficiency ratio during the year ended December 31, 2022 totaled 62%, compared to 63% during the year ended December 31, 2021. Adjusting for CDI and WMI asset amortization and non-recurring acquisition-related expenses, |
● |
| Income tax expense totaled |
Strong capital managementposition
| | |
● |
| Capital ratios |
● |
| At December 31, |
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Key Challenges
There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy, includingstrategy. These include growing theour assets, particularly loans, and deposits of our business amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive environment. While at the beginning of 2019 we anticipated a generally rising rate environment throughout the year, prevailing interest rates began decreasing during the third quarter and generally have continued to decrease since that time, as a result of three Federal Reserve rate cuts from August 2019 through October 2019.inflationary environment.
GeneralThe COVID-19 pandemic has caused disruption to the U.S. labor market, supply chain, consumer spending and business operations. The prolonged economic conditions remained stable in 2019. Amidst national economic concerns surrounding trade tensionsimpacts from the pandemic, including inflationary pressures and indicators of decreasing consumer confidence, residential real estate values remain strong in our markets and nationally, with many markets, including Denver, hitting new post-crisis highs. Wedemand for labor, are likely to continue to seepresent challenges to our markets outperforming national averagesbusiness and to our clients.
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We are focused on many key indicators. Commercial real estate property fundamentals also remain strong, with stable occupancygrowing our loan portfolio while adhering to our established underwriting standards and increasing lease rates, along with cyclically low capitalization rates leading to increasing valuations.self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.
The agriculture industry iscontinues to be impacted by elevated and volatile commodity prices and intermittent disruptions in the fifth year of depressed commodity prices.supply chains. Our food and agricultureagribusiness portfolio is only 5.6%4.9% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 1.4% of total loans. We have maintained relationships with food and agricultureagribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.
Our originatedFuture growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and acquired loans outstanding portfolioother high-quality earning assets such as investment securities. Cash balances total $195.5 million at December 31, 20192022 and have decreased $650.2 million from December 31, 2021. Investment securities totaled $4.4$1.4 billion representing an increase of $339.9at December 31, 2022 and increased $57.0 million, or 8.5%4.4%, compared to December 31, 2018. Our 310-302021. At December 31, 2022, our loans have produced higher yields than our originatedoutstanding totaled a record $7.2 billion, increasing $2.7 billion, or 60.0%, compared to December 31, 2021. Loans outstanding at December 31, 2022 included $1.7 billion of loans acquired through the RCB and acquired loans, due to accretion of fair value adjustments.BOJH acquisitions. During 2019,the year ended December 31, 2022, our weighted average rate on new loans funded at the time of origination was 4.96% (fully taxable equivalent)5.25%, compared to the weighted average yield of our originated loan portfolio of 4.78% (fully taxable equivalent)4.58% (FTE). Fully taxable equivalent net interest income reached an inflection point inDuring the second quarter of 2017 and continued throughyear ended December 31, 2022, the fourth quarter of 2019 as the yields and volumes of originated and acquired loans outpaced the decrease in higher yielding 310-30 loan balances. The inflection point was driven
43
by strong new loan originations. Future growth in our interest income will ultimately be dependent on our ability to continue to generate sufficient volumes of high-quality originated loans as well as Federal Reserve increased prevailing interest rates by a total of 425 basis points. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions.
Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges.challenges and expand our offerings in digital technology, including by partnering with and investing in fintechs where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.
Application of Critical Accounting Policies and Significant Estimates
We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the allowance for loan losses.credit losses and accounting for acquired loans. See additional discussion of our ALLLACL policy in note 2 – Summary of Significant Accounting Policies in the notes to our consolidated financial statements for the year ended December 31, 2019.2022.
Allowance for credit losses
The determination of the ALL,ACL, which represents management’s estimate of probablelifetime credit losses inherent in our loan portfolio at the balance sheet date, including acquired loans to the extent necessary, involves a high degree of judgment and complexity. The determinationCompany estimates the collective ACL by first disaggregating the loan portfolio into segments based upon broad characteristics such as primary use and underlying collateral. Within these segments, the portfolio is further disaggregated into classes of loans with similar attributes and risk characteristics. The collective ACL is determined at the ALL takes into consideration, among other matters,class level, analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. The Company utilizes a discounted cash flow (“DCF”) model that incorporates forecasts of certain national macroeconomic factors (reasonable and supportable forecasts) which drive the estimated fair valuelosses predicted in establishing the Company’s collective ACL. Management accounts for the inherent uncertainty of the underlying collateral, economic conditions, particularly as such conditions relateforecast by reviewing and weighting alternate forecast scenarios. For periods beyond the reasonable and supportable forecast period, the Company reverts to historical long-term average loss rates on a straight-line basis. Additionally, the market areas in which we operate, historical net loan losses and othercollective ACL calculation includes subjective adjustments for qualitative risk factors that warrant recognition. Any changeare likely to cause estimated credit losses to differ from historical experience. Changes in these factors,assumptions, estimates or the riseconditions
46
surrounding them may have a material impact on our regulators, may deem necessary to consider when estimating the ALL, may materially affect the ALL and provisions for loan losses.financial condition. For further discussion of the ALL,ACL, see “—Financial Condition—Asset Quality” and “—Financial Condition—Allowance for Loan Losses” and notes 2 and 7 to our consolidated financial statements.
Accounting for Acquired Loans
ASC Topic 805, Business Combinations, requires that acquired loans are recorded at fair value at the date of acquisition. The fair value for acquired loans at the time of acquisition is based on a variety of factors including discounted expected cash flows, adjusted for estimated prepayments and credit losses. In accordance with ASC 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan. Loans that have been identified as having experienced a more-than-insignificant deterioration in credit quality since origination are purchase credit deteriorated (“PCD”) loans. The net premium or discount on PCD loans is adjusted by our allowance for credit losses recorded at the time of acquisition. The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using the level yield method. The net premium or discount on non-PCD loans, that includes credit quality and interest rate considerations, is accreted or amortized into interest income over the remaining life of the loan using the level yield method. The Company then records the necessary allowance for credit losses on the non-PCD loans through provision for credit losses expense.
Future Accounting Pronouncements
The expected impact of accounting pronouncements recently issued but not yet required to be adopted is discussed below.
Financial Instruments - Credit Losses— In June 2016,March 2022, the FASB issued ASU 2016-13,2022-02, Measurement of Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on Financial Instruments. This update replacesTDRs and requires disclosure of current-period gross write-offs by year of origination. The guidance also updates the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This amendment broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the update amends therequirements related to accounting for credit losses for available-for-sale debt securitiesunder ASC Topic 326 and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requiresadds enhanced disclosures for creditors with respect to help investorsloan refinancing and otherrestructuring for borrowers experiencing financial statement users better understand significant estimatesdifficulty. The guidance will be effective for fiscal years, and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. We will adoptinterim periods, beginning after December 15, 2022 for entities that have adopted ASU 2016-13 effective January 1, 2020 using a modified retrospective approach. Using a third-party vendor solution, we have developed a discounted cash flow model that estimates an allowance for expected lifetime credit losses of the loan and securities portfolios. As of the implementation date, the Company expects to recognize an increase of up to $6.0 million in its allowance for credit losses with a corresponding maximum reduction to its common equity tier 1 capital ratio of 12 basis points. The overall estimate for the current expected credit loss (“CECL”) methodology is significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts.
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Other Pronouncements—2016-13. The Company reviewed ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,and ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair ValueMeasurement and ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment and does not expect the adoption of these pronouncementsthat pronouncement to have a material impact on its financial statements.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. The purpose of this updated guidance is to further align risk management objectives with hedge accounting results on the application of the last-of-layer method, which was first introduced in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022. The Company does not expect the adoption of that pronouncement to have a material impact on its financial statements.
Financial Condition
Total assets increased to $5.9were $9.6 billion at December 31, 2019 from $5.72022, compared to $7.2 billion at December 31, 2018,2021, an increase of $2.4 billion, or 32.7% primarily driven by increases indue to the acquisitions of RCB and BOJH. At December 31, 2022, cash and cash equivalents decreased $650.2 million, compared to December 31, 2021, as excess cash liquidity was deployed into higher yielding investment securities and loans. At December 31, 2022, investment securities increased $57.0 million, or 4.4%, and total loans increased $2.7 billion, or 60.0% compared to December 31, 2021. Total loans increased $1.7 billion through the acquisitions of $323.1 million, or 7.9%,RCB and loans held for sale of $69.3 million, or 144.1%, which were partially offset by a decrease in total investment securities of $203.2 million, or 19.3%.BOJH.
During 2019,2022, lower cost demand, savings and money market deposits (“transaction deposits”) increased $223.9 million,$1.6 billion, or 6.5%29.8%, as we continuecompared to developthe prior year, largely due to the acquisitions of RCB and BOJH and the continued development of full banking relationships with our clients. The increase in transaction deposits provided low costlower-cost funding utilized to fund loan growth.
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Investment securities
Available-for-sale
Total investment securities available-for-sale were $638.2$706.3 million at December 31, 2019,2022, compared to $791.1$691.8 million at December 31, 2018, a decrease2021, an increase of $152.9 million.$14.4 million, or 2.1%. During 20192022 and 2018, maturities2021, purchases of available-for-sale securities totaled $259.8million and $288.6 million, respectively. Maturities and paydowns of available-for-sale securities during 2022 and 2021 totaled $195.5$141.9 million and $216.1$235.9 million, respectively. PurchasesThe Company sold $128.4 million of the available-for-sale securities during 2019 and 2018 totaled $45.7million and $72.6 million, respectively. Proceeds fromacquired through the BOJH acquisition. The remaining BOJH available-for-sale portfolio was reclassified to held-to-maturity on Day 1. There were no sales of available-for-sale securities during 2019 and 2018 totaled $20.4 million and $33.6 million, respectively.2021.
Available-for-sale investment securities are summarized as follows as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | | December 31, 2022 | | December 31, 2021 | ||||||||||||||||||||||||||||||||
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| | |
| | |
| |
| Weighted |
| | |
| | |
| |
| Weighted |
| | |
| | |
| |
| Weighted |
| | |
| | |
| |
| Weighted |
| | Amortized | | Fair | | Percent of | | average | | Amortized | | Fair | | Percent of | | average | | Amortized | | Fair | | Percent of | | average | | Amortized | | Fair | | Percent of | | average | ||||||||
| | cost | | value | | portfolio | | yield | | cost | | value | | portfolio | | yield | | cost | | value | | portfolio | | yield | | cost | | value | | portfolio | | yield | ||||||||
Mortgage-backed securities ("MBS"): | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
Treasury securities | | $ | 74,031 | | $ | 71,388 | | 10.1% | | 2.54% | | $ | — | | $ | — | | 0.0% | | 0.00% | ||||||||||||||||||||
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | | $ | 93,770 | | $ | 95,256 | | 14.9% | | 2.59% | | $ | 147,283 | | $ | 146,642 | | 18.5% | | 2.53% | | | 263,939 | | | 226,131 | | 32.0% | | 1.72% | | | 231,523 | | | 227,696 | | 32.9% | | 1.38% |
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises | |
| 543,275 | |
| 542,037 | | 84.9% | | 2.13% | |
| 661,354 | |
| 643,381 | | 81.3% | | 2.15% | |
| 478,866 | |
| 405,926 | | 57.5% | | 1.69% | |
| 467,490 | |
| 461,334 | | 66.7% | | 1.47% |
Municipal securities | | | 495 | | | 487 | | 0.1% | | 3.60% | | | 619 | | | 610 | | 0.1% | | 3.67% | | | 155 | | | 153 | | 0.0% | | 3.17% | | | 230 | | | 237 | | 0.0% | | 3.17% |
Corporate debt | | | 2,000 | | | 1,920 | | 0.3% | | 5.87% | | | 2,000 | | | 2,111 | | 0.3% | | 5.80% | ||||||||||||||||||||
Other securities | |
| 469 | |
| 469 | | 0.1% | | 0.00% | |
| 469 | |
| 469 | | 0.1% | | 0.00% | |
| 771 | |
| 771 | | 0.1% | | 0.00% | |
| 469 | |
| 469 | | 0.1% | | 0.00% |
Total investment securities available-for-sale | | $ | 638,009 | | $ | 638,249 | | 100.0% | | 2.20% | | $ | 809,725 | | $ | 791,102 | | 100.0% | | 2.22% | | $ | 819,762 | | $ | 706,289 | | 100.0% | | 1.79% | | $ | 701,712 | | $ | 691,847 | | 100.0% | | 1.46% |
As of December 31, 20192022 and 2018,2021, nearly all the available-for-sale investment portfolio was primarily backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Government National Mortgage Association (“GNMA”) securities. The other mortgage-backed securities (“MBS”) are comprised of securities backed by FHLMC, FNMA and GNMA securities.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 2.95.4 years and 3.24.2 years at December 31, 20192022 and December 31, 2018,2021, respectively. This estimate is based on assumptions and actual results may differ. At December 31, 20192022 and December 31, 2018,2021, the duration of the total available-for-sale investment portfolio was 2.74.4 years and 3.03.8 years, respectively.
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At December 31, 20192022 and 2018,2021, adjustable rate securities comprised 2.8%11.5% and 3.7%1.7%, respectively, of the available-for-sale MBSmortgage-backed security portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 2.40%1.75% per annum and 2.39%1.70% per annum at December 31, 20192022 and 2018,2021, respectively.
The available-for-sale investment portfolio included $0.2$113.5 million of net unrealized gains and $18.6 million of net unrealized losses at December 31, 20192022. At December 31, 2021, the available-for-sale investment portfolio included $3.4 million of unrealized gains and 2018, respectively.$13.3 million of unrealized losses. We believe any unrecognizedunrealized losses during 2018 wereare a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were other-than-temporarily-impaired.impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.
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Held-to-maturity
At December 31, 2019,2022, we held $182.9$651.5 million of held-to-maturity investment securities, compared to $235.4$609.0 million at December 31, 2018, a decrease2021, an increase of $52.5$42.5 million, or 22.3%7.0%. During 2019Purchases of held-to-maturity securities totaled $101.7 million and 2018, maturities$397.8 million during 2022 and 2021, respectively. Maturities and paydowns of held-to-maturity securities totaled $60.9$133.4 million and $61.9 million, respectively. Purchases of held-to-maturity securities totaled $10.2 million and $40.7$161.9 million during 20192022 and 2018,2021, respectively. The Company sold a portion of the available-for-sale securities acquired through the BOJH acquisition. The Company transferred the remaining $75.3 million of available-for-sale securities acquired through the BOJH acquisition to held-to-maturity.
Held-to-maturity investment securities are summarized as follows as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | | December 31, 2022 | | December 31, 2021 | ||||||||||||||||||||||||||||||||
| | | | | | | | | | Weighted | | | | | | | | | | Weighted | | | | | | | | | | Weighted | | | | | | | | | | Weighted |
|
| Amortized |
| Fair |
| Percent of |
| average |
| Amortized |
| Fair |
| Percent of |
| average |
| Amortized |
| Fair |
| Percent of |
| average |
| Amortized |
| Fair |
| Percent of |
| average | ||||||||
| | cost | | value | | portfolio | | yield | | cost | | value | | portfolio | | yield | | cost | | value | | portfolio | | yield | | cost | | value | | portfolio | | yield | ||||||||
Treasury securities | | $ | 49,045 | | $ | 47,629 | | 7.5% | | 3.14% | | $ | — | | $ | — | | — | | — | ||||||||||||||||||||
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | | $ | 127,560 | | $ | 128,770 | | 69.7% | | 3.19% | | $ | 157,115 | | $ | 154,412 | | 66.7% | | 3.24% | | | 339,815 | | | 298,816 | | 52.2% | | 2.29% | | | 312,916 | | | 309,614 | | 51.4% | | 1.56% |
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises | |
| 55,324 | |
| 54,971 | | 30.3% | | 1.90% | |
| 78,283 | |
| 76,514 | | 33.3% | | 2.25% | |
| 262,667 | |
| 213,479 | | 40.3% | | 1.60% | |
| 296,096 | |
| 289,646 | | 48.6% | | 1.25% |
Total investment securities held-to-maturity | | $ | 182,884 | | $ | 183,741 | | 100.0% | | 2.80% | | $ | 235,398 | | $ | 230,926 | | 100.0% | | 2.91% | | $ | 651,527 | | $ | 559,924 | | 100.0% | | 2.07% | | $ | 609,012 | | $ | 599,260 | | 100.0% | | 1.41% |
The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.
The fair value of the held-to-maturity investment portfolio was $183.7included $0.2 million of unrealized gains and $230.9$91.8 million of unrealized losses at December 31, 2019 and 2018, respectively, and2022. At December 31, 2021, the held-to-maturity investment portfolio included $0.9$2.2 million of net unrealized gains and $4.5$11.9 million of net unrealized losses.
The Company does not measure expected credit losses on a financial asset, or groups of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the respective periods.amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the total held-to-maturity mortgage-backed securities portfolio as of December 31, 20192022 and December 31, 20182021 was 2.46.0 years and 2.84.1 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity portfolio was 2.34.8 years and 2.53.8 years as of December 30, 20192022 and December 31, 2018,2021, respectively.
Non-marketable securities
Non-marketable securities totaled $89.0 million and $50.7 million at December 31, 2022 and 2021, respectively, and included FRB stock, FHLB stock and other non-marketable securities.
At December 31, 2022, the Company held $20.3 million of FHLB stock and $18.1 million of FRB stock for regulatory or debt facility purposes. During the year ended December 31, 2022, purchases of FHLB and FRB stock totaled $23.8 million, and FHLB and FRB stock from the acquisitions of RCB and BOJH totaled $4.0 million. Redemptions of FHLB stock totaled
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$4.0 million during 2022. At December 31, 2021, the Company held $0.7 million of FHLB stock and $13.9 million of FRB stock. There were no purchases of FHLB and FRB stock during 2021. These are restricted securities which, lacking a market, are carried at cost. The Company is not aware of any events or changes in circumstances that may have an adverse effect on the investments carried at cost.
At December 31, 2022, other non-marketable securities totaled $50.7 million and consisted of equity method investments totaling $21.7 million and convertible preferred stock without readily determinable fair values totaling $29.0 million. At December 31, 2021, other non-marketable securities totaled $36.2 million and consisted of equity method investments totaling $14.2 million and convertible preferred stock without readily determinable fair values totaling $22.0 million. During the years ended December 31, 2022 and 2021, purchases of other non-marketable securities totaled $13.5 million and $27.7 million, respectively. The Company continues to invest with fintech solution providers to support our digital ecosystem buildout, support our core bank products and offerings, and to leverage efficiencies and technological solutions in our shared services areas.
Loans overview
At December 31, 2019,2022, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our sixeight acquisitions to date. Loans that exhibit signsThe Company added $537.7 million of credit deteriorationloans to the acquired loan portfolio on September 1, 2022 from the acquisition of RCB and $1.2 billion of loans on October 1, 2022 from the acquisition of BOJH.
As discussed in note 4 to our consolidated financial statements, under ASC Topic 805, Business Combinations, all acquired loans are recorded at fair value at the date of acquisition. The fair value for acquired loans at the time of acquisition are accountedis based on a variety of factors including discounted expected cash flows, adjusted for inestimated prepayments and credit losses. In accordance with ASC 326, the provisionsfair value adjustment is recorded as premium or discount to the unpaid principal balance of ASC 310-30.each acquired loan. Loans that have been identified as having experienced a more-than-insignificant deterioration in credit quality since origination are PCD loans. The net premium or discount on PCD loans is adjusted by our allowance for credit losses recorded at the time of acquisition. The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using a level yield method. The net premium or discount on non-PCD loans, that includes credit quality and interest rate considerations, is accreted or amortized into interest income over the remaining life of the loan using a level yield method. The Company then records the necessary allowance for credit losses on the non-PCD loans through provision for credit losses expense.
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The table below shows the loan portfolio composition at the respective dates:
| | | | | | | |
| | | | | | | December 31, 2019 vs. |
| | | | | | | December 31, 2018 |
| December 31, 2019 | | December 31, 2018 | | % Change | ||
Originated: | | | | | | | |
Commercial: | | | | | | | |
Commercial and industrial | $ | 2,171,436 | | $ | 1,877,221 | | 15.7% |
Owner-occupied commercial real estate | | 414,477 | | | 337,258 | | 22.9% |
Food and agriculture | | 245,320 | | | 217,294 | | 12.9% |
Energy | | 42,519 | | | 49,204 | | (13.6)% |
Total commercial | | 2,873,752 | | | 2,480,977 | | 15.8% |
Commercial real estate non-owner occupied | | 505,479 | | | 407,431 | | 24.1% |
Residential real estate | | 651,656 | | | 657,633 | | (0.9)% |
Consumer | | 21,030 | | | 22,895 | | (8.1)% |
Total originated | | 4,051,917 | | | 3,568,936 | | 13.5% |
| | | | | | | |
Acquired: | | | | | | | |
Commercial: | | | | | | | |
Commercial and industrial | | 34,561 | | | 53,926 | | (35.9)% |
Owner-occupied commercial real estate | | 65,429 | | | 84,408 | | (22.5)% |
Food and agriculture | | 3,265 | | | 4,862 | | (32.8)% |
Total commercial | | 103,255 | | | 143,196 | | (27.9)% |
Commercial real estate non-owner occupied | | 92,639 | | | 144,388 | | (35.8)% |
Residential real estate | | 112,755 | | | 163,187 | | (30.9)% |
Consumer | | 746 | | | 1,722 | | (56.7)% |
Total acquired | | 309,395 | | | 452,493 | | (31.6)% |
| | | | | | | |
ASC 310-30 loans | | 54,094 | | | 70,879 | | (23.7)% |
Total loans | $ | 4,415,406 | | $ | 4,092,308 | | 7.9% |
| | | | | | | |
| | | | | | | December 31, 2022 vs. |
| | | | | | | December 31, 2021 |
| December 31, 2022 | | December 31, 2021 | | % Change | ||
Originated: | | | | | | | |
Commercial: | | | | | | | |
Commercial and industrial | $ | 1,841,313 | | $ | 1,479,895 | | 24.4% |
Municipal and non-profit | | 959,305 | | | 928,705 | | 3.3% |
Owner-occupied commercial real estate | | 656,361 | | | 503,663 | | 30.3% |
Food and agribusiness | | 284,714 | | | 200,412 | | 42.1% |
Total commercial | | 3,741,693 | | | 3,112,675 | | 20.2% |
Commercial real estate non-owner occupied | | 841,657 | | | 611,765 | | 37.6% |
Residential real estate | | 827,030 | | | 616,135 | | 34.2% |
Consumer | | 16,986 | | | 17,336 | | (2.0)% |
Total originated | | 5,427,366 | | | 4,357,911 | | 24.5% |
| | | | | | | |
Acquired: | | | | | | | |
Commercial: | | | | | | | |
Commercial and industrial | | 183,522 | | | 16,252 | | >100% |
Municipal and non-profit | | 321 | | | 340 | | (5.6)% |
Owner-occupied commercial real estate | | 256,979 | | | 29,973 | | >100% |
Food and agribusiness | | 69,265 | | | 3,177 | | >100% |
Total commercial | | 510,087 | | | 49,742 | | >100% |
Commercial real estate non-owner occupied | | 854,393 | | | 52,964 | | >100% |
Residential real estate | | 424,251 | | | 52,521 | | >100% |
Consumer | | 4,372 | | | 245 | | >100% |
Total acquired | | 1,793,103 | | | 155,472 | | >100% |
Total loans | $ | 7,220,469 | | $ | 4,513,383 | | 60.0% |
The table below shows the originatedCompany maintains a granular and acquired loans by loan segment at the respective dates:
| | | | | | | | |
| | | | | | | | December 31, 2019 vs. |
| | | | | | December 31, 2018 | ||
| December 31, 2019 | | December 31, 2018 | | | % Change | ||
Commercial | $ | 2,977,007 | | $ | 2,624,173 | | | 13.4% |
Commercial real estate non-owner occupied | | 598,118 | | | 551,819 | | | 8.4% |
Residential real estate | | 764,411 | | | 820,820 | | | (6.9)% |
Consumer | | 21,776 | | | 24,617 | | | (11.5)% |
Total originated and acquired loans | $ | 4,361,312 | | $ | 4,021,429 | | | 8.5% |
Ourwell-diversified loan portfolio totaled $4.4with self-imposed concentration limits. The loan portfolio increased $2.7 billion, ator 60.0%, from December 31, 2019, increasing $323.1 million, or 7.9%, since2021 to December 31, 2018, driven by new loan originations. The strong originations were2022. Excluding loans totaling $537.7 million from the resultacquisition of continued market penetration benefitingRCB and $1.2 billion from our focus on building client relationships. Originated and acquiredthe acquisition of BOJH, loans grew $339.9increased $980.9 million or 8.5%, led by originated and acquired commercial loan growth of $352.8$629.0 million, or 13.4%20.2%. The acquired 310-30 loan portfolio declined $16.8 million, or 23.7%, from December 31, 2018.
Our commercial and industrial loan portfolio is comprisedhighly diversified across industry sectors and geography. As of diverse industry segments, and our ability to generate new relationships with small- to medium-sized businesses has driven strong loan growth within these segments. At December 31, 2019, these2022, there were no industry sectors representing more than 10% of our total loan portfolio. Key segments included government and municipalgovernment/non-profit loans of $531.3$559.9 million, financeor 7.8% of total loans, and financial services, primarily lender financehealth care/hospital loans of $361.5$402.8 million, healthcare-related loans of $199.6 million, manufacturing-related loans of $156.3 million, and a variety of smaller subcategories of commercial and industrial loans. Food and agriculture loans, which are well-diversified across food production, crop and livestock types, totaled $253.1 million and were 37.1% of the Company’s risk-based capital. Crop and livestock loans represent 1.4%or 5.6% of total loans.
Originated and acquired non-ownerNon-owner occupied CRE loans were 87.6%169.5% of the Company’s risk based capital, or 13.5%23.5% of total loans, and no specific property type comprised more than 4.0%5.0% of total loans. The Company maintains very little exposure to
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non-owner occupied CRE retail properties and office properties, comprising less than 1.7%2.0% and 1.6% of total loans.loans, respectively. Multi-family loans totaled $55.8$214.8 million, or 1.3%3.0% of total loans as of December 31, 2019.2022.
When considering the loan portfolio in its entirety, 76.7%76.9% of loans were located within our footprint of Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico Texas and UtahIdaho as of December 31, 2019,2022, based on the domicile of the borrower or, in the case of collateral-dependent loans, the geographical location of the collateral.
New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan originationsfundings totaled $1.2a record $2.0 billion during 2019,over the past 12 months, led by commercial loan originationsfundings of $781.7 million. Originations$1.2 billion. Fundings are defined as closed end funded loans and revolving lines
51
of credit advances net of any current period paydowns. Management utilizes this more conservative definition of originationsfundings to better approximate the impact of originationsfundings on loans outstanding and ultimately net interest income.
The following tables represent new loan originationsfundings during 20192022 and 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth quarter |
| Third quarter |
| Second quarter |
| First quarter |
| Total | Fourth quarter |
| Third quarter |
| Second quarter |
| First quarter |
| Total | ||||||||||
| 2019 | | 2019 | | 2019 | | 2019 | | 2019 | 2022 | | 2022 | | 2022 | | 2022 | | 2022 | ||||||||||
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 118,969 | | $ | 172,969 | | $ | 163,138 | | $ | 153,547 | | $ | 608,623 | $ | 177,693 | | $ | 201,106 | | $ | 152,550 | | $ | 169,168 | | $ | 700,517 |
Municipal and non-profit | | 20,393 | | | 20,845 | | | 81,428 | | | 49,906 | | | 172,572 | ||||||||||||||
Owner occupied commercial real estate |
| 46,965 | |
| 16,149 | |
| 41,380 | |
| 26,405 | |
| 130,899 |
| 40,912 | |
| 65,125 | |
| 78,905 | |
| 67,597 | |
| 252,539 |
Food and agriculture |
| 20,348 | |
| (4,894) | |
| 18,217 | |
| 15,213 | |
| 48,884 | ||||||||||||||
Energy | | (3,807) | | | 3,067 | | | (12,098) | | | 6,138 | | | (6,700) | ||||||||||||||
Food and agribusiness |
| 28,518 | |
| 76,293 | |
| (4,186) | |
| 18,620 | |
| 119,245 | ||||||||||||||
Total commercial | | 182,475 | | | 187,291 | | | 210,637 | | | 201,303 | | | 781,706 | | 267,516 | | | 363,369 | | | 308,697 | | | 305,291 | | | 1,244,873 |
Commercial real estate non-owner occupied |
| 41,256 | |
| 79,929 | |
| 36,632 | |
| 69,125 | |
| 226,942 |
| 133,271 | |
| 166,739 | |
| 88,612 | |
| 63,416 | |
| 452,038 |
Residential real estate |
| 43,493 | |
| 49,022 | |
| 40,012 | |
| 38,627 | |
| 171,154 |
| 95,067 | |
| 99,951 | |
| 93,220 | |
| 49,040 | |
| 337,278 |
Consumer |
| 2,315 | |
| 2,986 | |
| 3,264 | |
| 1,958 | |
| 10,523 |
| 1,396 | |
| 1,505 | |
| 1,989 | |
| 1,904 | |
| 6,794 |
Total | $ | 269,539 | | $ | 319,228 | | $ | 290,545 | | $ | 311,013 | | $ | 1,190,325 | $ | 497,250 | | $ | 631,564 | | $ | 492,518 | | $ | 419,651 | | $ | 2,040,983 |
Included in originationsthe table above are net fundings under revolving lines of credit of $1,756, $37,062, $48,955$96,903, $124,834, $21,762 and $105,235 as of$66,430 for the fourth quarter 2019, third quarter 2019, second quarter 2019 and first quarter 2019,dates noted in the table above, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth quarter |
| Third quarter |
| Second quarter |
| First quarter |
| Total | Fourth quarter |
| Third quarter |
| Second quarter |
| First quarter |
| Total | ||||||||||
| 2018 | | 2018 | | 2018 | | 2018 | | 2018 | 2021 | | 2021 | | 2021 | | 2021 | | 2021 | ||||||||||
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 213,335 | | $ | 123,440 | | $ | 232,643 | | $ | 123,984 | | $ | 693,402 | $ | 229,529 | | $ | 196,289 | | $ | 147,030 | | $ | 144,531 | | $ | 717,379 |
Municipal and non-profit | | 101,450 | | | 43,516 | | | 25,131 | | | 7,999 | | | 178,096 | ||||||||||||||
Owner occupied commercial real estate |
| 34,727 | |
| 35,549 | |
| 19,009 | |
| 23,576 | |
| 112,861 |
| 28,914 | |
| 53,445 | |
| 48,225 | |
| 27,093 | |
| 157,677 |
Food and agriculture |
| 14,046 | |
| 23,833 | |
| 38,220 | |
| 25,873 | |
| 101,972 | ||||||||||||||
Energy | | 7,640 | | | 5,412 | | | (929) | | | (10,778) | | | 1,345 | ||||||||||||||
Food and agribusiness |
| 11,016 | |
| 8,442 | |
| 26,956 | |
| (10,104) | |
| 36,310 | ||||||||||||||
Total Commercial | | 269,748 | | | 188,234 | | | 288,943 | | | 162,655 | | | 909,580 | | 370,909 | | | 301,692 | | | 247,342 | | | 169,519 | | | 1,089,462 |
Commercial real estate non-owner occupied |
| 41,031 | |
| 42,300 | |
| 28,316 | |
| 20,694 | |
| 132,341 |
| 46,128 | |
| 55,392 | |
| 58,532 | |
| 49,195 | |
| 209,247 |
Residential real estate |
| 51,017 | |
| 40,293 | |
| 30,259 | |
| 21,698 | |
| 143,267 |
| 55,873 | |
| 54,442 | |
| 53,962 | |
| 74,145 | |
| 238,422 |
Consumer |
| 2,592 | |
| 3,797 | |
| 3,588 | |
| 3,238 | |
| 13,215 |
| 2,524 | |
| 1,810 | |
| 2,267 | |
| 1,353 | |
| 7,954 |
Total | $ | 364,388 | | $ | 274,624 | | $ | 351,106 | | $ | 208,285 | | $ | 1,198,403 | $ | 475,434 | | $ | 413,336 | | $ | 362,103 | | $ | 294,212 | | $ | 1,545,085 |
Included in originationsthe table above are net fundings (paydowns) under revolving lines of credit of $6,263, $34,070, $151,888$138,777, $29,154, $59,520 and $59,236 as of($26,395) for the fourth quarter 2018, third quarter 2018, second quarter 2018 and first quarter 2018,dates noted in the table above, respectively.
4852
The tables below show the contractual maturities of our loans for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2022 | |||||||||||||||||||||||
|
| Due within |
| Due after 1 but |
| Due after |
| | |
| Due within |
| Due after 1 but |
| Due after 5 but |
| Due after |
| | | |||||||
| | 1 year | | within 5 years | | 5 years | | Total | | 1 year | | within 5 years | | within 15 years | | 15 Years | | Total | |||||||||
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 158,769 | | $ | 1,102,774 | | $ | 944,995 | | $ | 2,206,538 | | $ | 234,028 | | $ | 1,421,752 | | $ | 353,909 | | $ | 15,146 | | $ | 2,024,835 |
Municipal and non-profit | | | 1,184 | | | 134,012 | | | 513,872 | | | 310,558 | | | 959,626 | ||||||||||||
Owner occupied commercial real estate | |
| 18,663 | |
| 170,092 | |
| 301,367 | |
| 490,122 | |
| 61,598 | |
| 261,305 | |
| 478,104 | |
| 112,333 | |
| 913,340 |
Food and agriculture | |
| 57,159 | |
| 168,827 | |
| 27,142 | |
| 253,128 | |||||||||||||||
Energy | | | 4,636 | | | 37,613 | | | 270 | | | 42,519 | |||||||||||||||
Food and agribusiness | |
| 83,254 | |
| 203,910 | |
| 46,624 | |
| 20,191 | |
| 353,979 | ||||||||||||
Total commercial | | | 239,227 | | | 1,479,306 | | | 1,273,774 | | | 2,992,307 | | | 380,064 | | | 2,020,979 | | | 1,392,509 | | | 458,228 | | | 4,251,780 |
Commercial real estate non-owner occupied | |
| 85,188 | |
| 377,850 | |
| 167,868 | |
| 630,906 | |
| 234,962 | |
| 863,842 | |
| 579,843 | |
| 17,403 | |
| 1,696,050 |
Residential real estate | |
| 27,251 | |
| 49,818 | |
| 693,348 | |
| 770,417 | |
| 72,035 | |
| 169,024 | |
| 372,638 | |
| 637,584 | |
| 1,251,281 |
Consumer | |
| 6,600 | |
| 11,978 | |
| 3,198 | |
| 21,776 | |
| 6,142 | |
| 12,494 | |
| 2,721 | |
| 1 | |
| 21,358 |
Total loans | | $ | 358,266 | | $ | 1,918,952 | | $ | 2,138,188 | | $ | 4,415,406 | | $ | 693,203 | | $ | 3,066,339 | | $ | 2,347,711 | | $ | 1,113,216 | | $ | 7,220,469 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2021 | |||||||||||||||||||||||
|
| Due within |
| Due after 1 but |
| Due after |
| | |
| Due within |
| Due after 1 but |
| Due after 5 but |
| Due after |
| | | |||||||
| | 1 year | | within 5 years | | 5 years | | Total | | 1 year | | within 5 years | | within 15 years | | 15 Years | | Total | |||||||||
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 191,088 | | $ | 844,015 | | $ | 896,910 | | $ | 1,932,013 | | $ | 143,152 | | $ | 1,119,195 | | $ | 226,793 | | $ | 7,007 | | $ | 1,496,147 |
Municipal and non-profit | | | 23,827 | | | 112,022 | | | 559,493 | | | 233,703 | | | 929,045 | ||||||||||||
Owner occupied commercial real estate | |
| 37,284 | |
| 124,289 | |
| 273,737 | |
| 435,310 | |
| 40,510 | |
| 160,853 | |
| 266,664 | |
| 65,609 | |
| 533,636 |
Food and agriculture | |
| 53,845 | |
| 143,909 | |
| 30,290 | |
| 228,044 | |||||||||||||||
Energy | | | 9,397 | | | 39,807 | | | — | | | 49,204 | |||||||||||||||
Food and agribusiness | |
| 79,507 | |
| 107,799 | |
| 11,193 | |
| 5,090 | |
| 203,589 | ||||||||||||
Total commercial | | | 291,614 | | | 1,152,020 | | | 1,200,937 | | | 2,644,571 | | | 286,996 | | | 1,499,869 | | | 1,064,143 | | | 311,409 | | | 3,162,417 |
Commercial real estate non-owner occupied | |
| 87,581 | |
| 330,282 | |
| 174,349 | |
| 592,212 | |
| 200,042 | |
| 316,473 | |
| 147,783 | |
| 431 | |
| 664,729 |
Residential real estate | |
| 30,376 | |
| 56,914 | |
| 743,525 | |
| 830,815 | |
| 12,605 | |
| 30,233 | |
| 201,918 | |
| 423,900 | |
| 668,656 |
Consumer | |
| 7,748 | |
| 12,997 | |
| 3,965 | |
| 24,710 | |
| 3,504 | |
| 11,507 | |
| 2,570 | |
| — | |
| 17,581 |
Total loans | | $ | 417,319 | | $ | 1,552,213 | | $ | 2,122,776 | | $ | 4,092,308 | | $ | 503,147 | | $ | 1,858,082 | | $ | 1,416,414 | | $ | 735,740 | | $ | 4,513,383 |
The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of originated and acquiredtotal loans with maturities over one year is as follows at the dates indicated:
| | | | | | | | | | | | | | | |
| | December 31, 2019 | |||||||||||||
| | Fixed | | Variable | | Total | |||||||||
|
| | |
| Weighted |
| | |
| Weighted |
| | |
| Weighted |
| | Balance | | average rate | | Balance | | average rate | | Balance | | average rate | |||
Commercial | | | | | | | | | | | | | | | |
Commercial and industrial(1) | | $ | 1,073,181 |
| 3.97% | | $ | 974,133 |
| 4.36% | | $ | 2,047,314 |
| 4.16% |
Owner occupied commercial real estate | |
| 229,757 |
| 4.87% | |
| 232,968 |
| 4.79% | |
| 462,725 |
| 4.99% |
Food and agriculture | |
| 49,147 |
| 5.19% | |
| 143,270 |
| 4.61% | |
| 192,417 |
| 4.76% |
Energy | | | 270 | | 4.99% | | | 37,613 | | 4.38% | | | 37,883 | | 4.39% |
Total commercial | | | 1,352,355 | | 4.22% | | | 1,387,984 | | 4.46% | | | 2,740,339 | | 4.34% |
Commercial real estate non-owner occupied | |
| 230,368 |
| 4.75% | |
| 288,016 |
| 4.46% | |
| 518,384 |
| 4.59% |
Residential real estate | |
| 323,792 |
| 3.66% | |
| 413,370 |
| 4.54% | |
| 737,162 |
| 4.15% |
Consumer | |
| 12,156 |
| 5.52% | |
| 3,020 |
| 4.94% | |
| 15,176 |
| 5.40% |
Total loans with > 1 year maturity | | $ | 1,918,671 |
| 4.20% | | $ | 2,092,390 |
| 4.48% | | $ | 4,011,061 |
| 4.34% |
| | | | | | | | | | | | | | | |
| | December 31, 2022 | |||||||||||||
| | Fixed | | Variable | | Total | |||||||||
|
| | |
| Weighted |
| | |
| Weighted |
| | |
| Weighted |
| | Balance | | average rate | | Balance | | average rate | | Balance | | average rate | |||
Commercial | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 726,568 |
| 4.62% | | $ | 1,064,239 |
| 7.00% | | $ | 1,790,807 |
| 6.04% |
Municipal and non-profit(1) | | | 965,635 | | 3.50% | | | 22,483 | | 4.77% | | | 988,118 | | 3.63% |
Owner occupied commercial real estate | |
| 417,675 |
| 4.51% | |
| 434,066 |
| 6.00% | |
| 851,741 |
| 5.33% |
Food and agribusiness | |
| 49,961 |
| 5.26% | |
| 220,764 |
| 7.19% | |
| 270,725 |
| 6.83% |
Total commercial | | | 2,159,839 | | 4.14% | | | 1,741,552 | | 6.75% | | | 3,901,391 | | 5.35% |
Commercial real estate non-owner occupied | |
| 569,788 |
| 4.28% | |
| 891,299 |
| 5.88% | |
| 1,461,087 |
| 5.25% |
Residential real estate | |
| 500,170 |
| 3.75% | |
| 679,075 |
| 4.88% | |
| 1,179,245 |
| 4.40% |
Consumer | |
| 11,480 |
| 4.98% | |
| 3,736 |
| 7.21% | |
| 15,216 |
| 5.52% |
Total loans with > 1 year maturity | | $ | 3,241,277 |
| 4.11% | | $ | 3,315,662 |
| 6.13% | | $ | 6,556,939 |
| 5.15% |
4953
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2021 | ||||||||||||||||||||||||||
| | Fixed | | Variable | | Total | | Fixed | | Variable | | Total | ||||||||||||||||||
|
| | |
| Weighted |
| | |
| Weighted |
| | |
| Weighted |
| | |
| Weighted |
| | |
| Weighted |
| | |
| Weighted |
| | Balance | | average rate | | Balance | | average rate | | Balance | | average rate | | Balance | | average rate | | Balance | | average rate | | Balance | | average rate | ||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 933,202 |
| 3.92% | | $ | 807,139 |
| 4.98% | | $ | 1,740,341 |
| 4.41% | | $ | 480,034 |
| 4.05% | | $ | 872,961 |
| 3.41% | | $ | 1,352,995 |
| 3.63% |
Municipal and non-profit(1) | | | 881,339 | | 3.37% | | | 23,879 | | 2.76% | | | 905,218 | | 3.35% | |||||||||||||||
Owner occupied commercial real estate | |
| 195,354 |
| 4.61% | |
| 192,133 |
| 5.09% | |
| 387,487 |
| 5.04% | |
| 293,190 |
| 4.70% | |
| 199,936 |
| 3.75% | |
| 493,126 |
| 4.45% |
Food and agriculture | |
| 44,351 |
| 5.00% | |
| 124,234 |
| 5.21% | |
| 168,585 |
| 5.15% | |||||||||||||||
Energy | | | 21 | | 4.50% | | | 39,786 | | 4.81% | | | 39,807 | | 4.81% | |||||||||||||||
Food and agribusiness | |
| 49,303 |
| 5.21% | |
| 74,779 |
| 3.95% | |
| 124,082 |
| 4.45% | |||||||||||||||
Total commercial | | | 1,172,928 | | 4.14% | | | 1,163,292 | | 5.02% | | | 2,336,220 | | 4.58% | | | 1,703,866 | | 3.88% | | | 1,171,555 | | 3.49% | | | 2,875,421 | | 3.72% |
Commercial real estate non-owner occupied | |
| 209,759 |
| 4.70% | |
| 273,115 |
| 5.11% | |
| 482,874 |
| 4.93% | |
| 214,463 |
| 4.28% | |
| 250,224 |
| 3.51% | |
| 464,687 |
| 3.86% |
Residential real estate | |
| 361,147 |
| 3.56% | |
| 429,909 |
| 4.61% | |
| 791,056 |
| 4.13% | |
| 360,648 |
| 3.45% | |
| 295,403 |
| 4.00% | |
| 656,051 |
| 3.70% |
Consumer | |
| 13,672 |
| 5.27% | |
| 3,196 |
| 5.57% | |
| 16,868 |
| 5.33% | |
| 11,567 |
| 4.37% | |
| 2,510 |
| 3.52% | |
| 14,077 |
| 4.21% |
Total loans with > 1 year maturity | | $ | 1,757,506 |
| 4.10% | | $ | 1,869,512 |
| 4.94% | | $ | 3,627,018 |
| 4.53% | | $ | 2,290,544 |
| 3.85% | | $ | 1,719,692 |
| 3.58% | | $ | 4,010,236 |
| 3.74% |
| | |
(1) |
| Included in |
Accretable yield
At December 31, 2019, the accretable yield balance on loans accounted for under ASC 310-30 was $28.1 million compared to $35.9 million at December 31, 2018. We have remeasured the expected cash flows during 2019 for all 22 remaining loan pools accounted for under ASC 310-30 utilizing the same cash flow methodology used at the time of acquisition. This remeasurement resulted in a net $5.3 million and $8.5 million reclassification from non-accretable difference to accretable yield during 2019 and 2018, respectively.
In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. Total remaining accretable yield and fair value mark were as follows for the dates indicated:
| | | | | | |
|
| December 31, 2019 |
| December 31, 2018 | ||
Remaining accretable yield on loans accounted for under ASC 310-30 | | $ | 28,134 | | $ | 35,901 |
Remaining accretable fair value mark on acquired loans | |
| 6,727 | |
| 8,659 |
Total remaining accretable yield and fair value mark | | $ | 34,861 | | $ | 44,560 |
Asset quality
Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.
Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution tofor the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans
50
