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NBHC National Bank

Filed: 4 May 21, 5:03pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from                     to

Commission File Number: 001-35654

NATIONAL BANK HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

    

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: (303892-8715

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Class A Common Stock

NBHC

NYSE

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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

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 April 30, 2021, the registrant had outstanding 30,789,788 shares of Class A voting common stock, each with $0.01 par value per share, excluding 153,728 shares of restricted Class A common stock issued but not yet vested.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, liquidity, results of operations, business strategy and growth prospects.

Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

       our ability to execute our business strategy, as well as changes in our business strategy or development plans;

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

       effects of any potential government shutdowns;

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

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

       changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions;

       effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations;

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

       changes in consumer spending, borrowings and savings habits;

       with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the related loans if the loans fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the geographic concentration of our servicing portfolio;

       our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions, consolidations or other expansion opportunities on attractive terms, or at all;

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

       our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from time to time without significant change in our client service or risk to our control environment;

       our dependence on information technology and telecommunications systems of third-party service providers and the risk of system failures, interruptions or breaches of security, including those that could result in disclosure or misuse of confidential or proprietary client or other information;

3

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

       changes in sources and uses of funds, including loans, deposits and borrowings;

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

       continued consolidation in the financial services industry;

       our ability to maintain or increase market share and control expenses;

       the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

       the trading price of shares of the Company's stock;

       the effects of tax legislation, including the potential of future increases to prevailing tax rates, or challenges to our position;

       our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws on our deferred tax assets;

       costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries; and changes in regulations that apply to us as a Colorado state-chartered bank;

       technological changes;

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

       changes in our management personnel and our continued ability to attract, hire and retain qualified personnel;

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

       regulatory limitations on dividends from our bank subsidiary;

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

       widespread natural and other disasters, dislocations, political instability, pandemics, acts of war or terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically;

       adverse effects due to the novel Coronavirus Disease 2019 (“COVID-19”) on the Company and its clients, counterparties, employees and third-party service providers, and the adverse impacts on our business, financial position, results of operations and prospects;

       a cyber-security incident, data breach or a failure of a key information technology system;

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

4

       other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission; and

       our success at managing the risks involved in the foregoing items.

Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.

5

PART I: FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

(In thousands, except share and per share data)

    

March 31, 2021

    

December 31, 2020

ASSETS

Cash and due from banks

$

822,018

$

605,065

Interest bearing bank deposits

 

500

 

500

Cash and cash equivalents

822,518

605,565

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

 

666,915

 

661,955

Investment securities held-to-maturity (fair value of $517,448 and $381,691 at March 31, 2021 and December 31, 2020, respectively)

 

520,823

 

376,615

Non-marketable securities

 

15,493

 

16,493

Loans

 

4,303,246

 

4,353,726

Allowance for credit losses

 

(55,057)

 

(59,777)

Loans, net

 

4,248,189

 

4,293,949

Loans held for sale

 

228,888

 

247,813

Other real estate owned

 

5,669

 

4,730

Premises and equipment, net

 

101,830

 

106,982

Goodwill

 

115,027

 

115,027

Intangible assets, net

 

20,205

 

17,928

Other assets

 

203,944

 

212,893

Total assets

$

6,949,501

$

6,659,950

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Deposits:

Non-interest bearing demand deposits

$

2,295,704

$

2,111,045

Interest bearing demand deposits

 

557,850

 

514,286

Savings and money market

 

2,199,420

 

2,064,769

Time deposits

 

948,676

 

986,132

Total deposits

 

6,001,650

 

5,676,232

Securities sold under agreements to repurchase

 

19,405

 

22,897

Other liabilities

 

96,456

 

140,130

Total liabilities

 

6,117,511

 

5,839,259

Shareholders’ equity:

Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,487,907 shares issued; 30,715,790 and 30,634,291 shares outstanding at March 31, 2021 and December 31, 2020, respectively

 

515

 

515

Additional paid-in capital

 

1,010,798

 

1,011,362

Retained earnings

 

243,446

 

223,175

Treasury stock of 20,608,658 and 20,686,986 shares at March 31, 2021 and December 31, 2020, respectively, at cost

 

(423,254)

 

(424,127)

Accumulated other comprehensive income, net of tax

 

485

 

9,766

Total shareholders’ equity

 

831,990

 

820,691

Total liabilities and shareholders’ equity

$

6,949,501

$

6,659,950

See accompanying notes to the consolidated interim financial statements.

6

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

For the three months ended

March 31, 

2021

    

2020

Interest and dividend income:

Interest and fees on loans

$

44,938

$

53,527

Interest and dividends on investment securities

 

3,900

 

4,631

Dividends on non-marketable securities

 

210

 

414

Interest on interest-bearing bank deposits

 

165

 

96

Total interest and dividend income

 

49,213

 

58,668

Interest expense:

Interest on deposits

 

3,987

 

7,326

Interest on borrowings

 

5

 

995

Total interest expense

 

3,992

 

8,321

Net interest income before provision for loan losses

 

45,221

 

50,347

Provision (release) expense for loan losses

 

(3,575)

 

6,159

Net interest income after provision for loan losses

 

48,796

 

44,188

Non-interest income:

Service charges

 

3,474

 

4,126

Bank card fees

 

4,073

 

3,513

Mortgage banking income

 

22,379

 

13,673

Bank-owned life insurance income

 

548

 

590

Other non-interest income

 

2,852

 

1,602

OREO-related income

 

35

 

28

Total non-interest income

 

33,361

 

23,532

Non-interest expense:

Salaries and benefits

 

33,523

 

33,180

Occupancy and equipment

 

6,550

 

6,898

Telecommunications and data processing

 

2,337

 

2,265

Marketing and business development

 

452

 

696

FDIC deposit insurance

 

444

 

(76)

Bank card expenses

 

1,144

 

1,026

Professional fees

 

742

 

609

Other non-interest expense

 

2,476

 

3,090

Problem asset workout

438

648

(Gain) loss on OREO sales, net

(29)

39

Core deposit intangible asset amortization

 

296

 

296

Banking center consolidation-related expense

 

1,295

 

Total non-interest expense

 

49,668

 

48,671

Income before income taxes

 

32,489

 

19,049

Income tax expense

 

5,677

 

3,225

Net income

$

26,812

$

15,824

Earnings per share—basic

$

0.87

$

0.51

Earnings per share—diluted

0.86

0.50

Weighted average number of common shares outstanding:

Basic

 

30,828,262

 

31,157,476

Diluted

 

31,143,322

 

31,361,296

See accompanying notes to the consolidated interim financial statements.

7

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

For the three months ended

March 31, 

2021

2020

Net income

$

26,812

    

$

15,824

Other comprehensive income, net of tax:

Securities available-for-sale:

Net unrealized (losses) gains arising during the period, net of tax benefit (expense) of $2,832 and ($3,301) for the three months ended March 31, 2021 and 2020, respectively.

 

(9,118)

 

10,521

Less: amortization of net unrealized holding gains to income, net of tax benefit of $51 and $68 for the three months ended March 31, 2021 and 2020, respectively.

 

(163)

 

(216)

Other comprehensive (loss) income

 

(9,281)

 

10,305

Comprehensive income

$

17,531

$

26,129

See accompanying notes to the consolidated interim financial statements.

8

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three months ended March 31, 2021 and 2020

(In thousands, except share and per share data)

    

    

    

    

Accumulated

    

Additional

other

Common

paid-in

Retained

Treasury

comprehensive

stock

capital

earnings

stock

income (loss), net

Total

Balance, December 31, 2019

$

515

$

1,009,223

$

164,082

$

(408,962)

$

2,062

$

766,920

Cumulative effect adjustment(1)

(4,623)

(4,623)

Net income

 

15,824

 

15,824

Stock-based compensation

 

1,222

 

1,222

Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $414, net

 

(967)

548

 

(419)

Repurchase of 734,117 shares

(19,476)

(19,476)

Cash dividends declared ($0.20 per share)

 

(6,299)

(6,299)

Other comprehensive income

 

10,305

10,305

Balance, March 31, 2020

$

515

$

1,009,478

$

168,984

$

(427,890)

$

12,367

$

763,454

Balance, December 31, 2020

$

515

$

1,011,362

$

223,175

$

(424,127)

$

9,766

$

820,691

Net income

 

26,812

 

26,812

Stock-based compensation

 

1,130

 

1,130

Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,533 net

 

(1,694)

873

 

(821)

Cash dividends declared ($0.21 per share)

 

(6,541)

(6,541)

Other comprehensive loss

 

(9,281)

 

(9,281)

Balance, March 31, 2021

$

515

$

1,010,798

$

243,446

$

(423,254)

$

485

$

831,990

(1)

Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.

See accompanying notes to the consolidated interim financial statements.

9

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

    

For the three months ended

March 31, 

2021

    

2020

Cash flows from operating activities:

Net income

$

26,812

$

15,824

Adjustments to reconcile net income to net cash provided by operating activities:

Provision (release) expense for loan losses

 

(3,575)

 

6,159

Provision expense for mortgage loan repurchases

5

279

Depreciation and amortization

 

4,080

 

3,597

Change in current income tax receivable

 

4,030

 

3,902

Change in deferred income taxes

 

(1,322)

 

2,503

Net excess tax (benefit) expense on stock-based compensation

(175)

28

Discount accretion, net of premium amortization on securities

 

1,367

 

501

Loan accretion

 

(1,899)

 

(4,142)

Gain on sale of mortgages, net

 

(20,639)

 

(13,483)

Origination of loans held for sale, net of repayments

 

(583,008)

 

(337,155)

Proceeds from sales of loans held for sale

 

624,756

 

341,019

Bank-owned life insurance income

(548)

(590)

(Gain) loss on the sale of other real estate owned, net

 

(29)

 

39

Originations of mortgage serving rights

(2,869)

(142)

(Recovery) impairment of mortgage servicing rights

(671)

509

Impairment on fixed assets related to banking center consolidations

 

1,259

 

Gain on sale of fixed assets

(1,556)

Stock-based compensation

 

1,130

 

1,227

Operating lease payments

(1,320)

(1,396)

Change in other assets

 

3,798

 

(28,953)

Change in other liabilities

 

(43,262)

 

36,516

Net cash provided by operating activities

 

6,364

 

26,242

Cash flows from investing activities:

Purchase of FHLB stock

 

(3)

 

(197)

Proceeds from redemption of FHLB stock

1,003

Proceeds from maturities of investment securities held-to-maturity

 

29,003

 

15,351

Proceeds from maturities of investment securities available-for-sale

 

68,626

 

48,830

Purchase of investment securities held-to-maturity

(174,129)

(25,824)

Purchase of investment securities available-for-sale

(86,199)

(26,485)

Net decrease (increase) in loans

 

48,553

 

(91,384)

Sales (purchases) of premises and equipment, net

 

3,681

 

(2,161)

Proceeds from sales of other real estate owned

 

612

 

228

Net cash used in investing activities

 

(108,853)

 

(81,642)

Cash flows from financing activities:

Net increase in deposits

 

325,418

 

4,724

Net decrease in repurchase agreements and other short-term borrowings

 

(3,492)

 

(33,232)

Advances from FHLB

607,000

FHLB repayments

(473,169)

Issuance of stock under purchase and equity compensation plans

(1,279)

(457)

Proceeds from exercise of stock options

423

6

Payment of dividends

 

(6,628)

 

(6,260)

Repurchase of common stock

 

 

(19,476)

Net cash provided by financing activities

 

314,442

 

79,136

Increase in cash, cash equivalents and restricted cash(1)

 

211,953

 

23,736

Cash, cash equivalents and restricted cash at beginning of the year(1)

 

615,565

 

120,190

Cash, cash equivalents and restricted cash at end of period(1)

$

827,518

$

143,926

Supplemental disclosure of cash flow information during the period:

Cash paid for interest

$

4,304

$

8,086

Net tax payment

88

54

Supplemental schedule of non-cash activities:

Loans transferred to other real estate owned at fair value

$

1,522

$

18

Decrease in loans purchased but not settled

(4,450)

Loans transferred from loans held for sale to loans

2,184

376

(1)

Included in restricted cash at March 31, 2021 and 2020 is $5.0 million and $10.0 million, respectively, held in escrow for certain potential liabilities the Company is indemnified for pursuant to the Peoples merger agreement. The restricted cash is included in other assets in the Company’s consolidated statements of financial condition.

See accompanying notes to the consolidated interim financial statements.

10

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2021

Note 1 Basis of Presentation

National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Denver, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank, (the "Bank"), a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides a variety of banking products to both commercial and consumer clients through a network of 89 banking centers, as of March 31, 2021, located primarily in Colorado and the greater Kansas City region, and through online and mobile banking products and services.

The accompanying interim unaudited consolidated financial statements serve to update the National Bank Holdings Corporation Annual Report on Form 10-K for the year ended December 31, 2020 and include the accounts of the Company and its wholly owned subsidiary, NBH Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and where applicable, with general practices in the banking industry or guidelines prescribed by bank regulatory agencies. However, they may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Company's most recent Form 10-K. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results presented. All such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years' amounts are made whenever necessary to conform to current period presentation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the full year or any other interim period. All amounts are in thousands, except share data, or as otherwise noted.

While general economic conditions have been improving, the COVID-19 pandemic caused substantial disruption to the communities we serve and has changed the way we live and work. The length of the pandemic and the efficacy of the extraordinary government-mandated measures that have been put into place to address it are still unknown, but have already had, and are likely to continue to have, a significant impact to the financial condition and operations of the Company.

GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment and available information. Management has made significant estimates in certain areas, such as the fair values of financial instruments, contingent liabilities and the allowance for credit losses (“ACL”). Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.

The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended December 31, 2020 and are contained in the Company's Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2020.

Note 2 Recent Accounting Pronouncements

The Company has not adopted any recent accounting pronouncements in addition to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Note 3 Investment Securities

The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities. These investment securities totaled $1.2 billion at March 31, 2021 and included $0.7 billion of available-for-sale securities and $0.5 billion of held-to-maturity securities. At December 31, 2020, investment securities totaled $1.0 billion and included $0.6 billion of available-for-sale securities and $0.4 billion of held-to-maturity securities.

11

Available-for-sale

Available-for-sale securities are summarized as follows as of the dates indicated:

March 31, 2021

    

Amortized

    

Gross

    

Gross

    

cost

unrealized gains

unrealized losses

Fair value

Mortgage-backed securities:

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

$

228,924

$

2,412

$

(4,823)

$

226,513

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

 

435,753

 

7,142

 

(5,471)

 

437,424

Municipal securities

362

10

372

Corporate debt

2,000

137

2,137

Other securities

 

469

 

 

 

469

Total investment securities available-for-sale

$

667,508

$

9,701

$

(10,294)

$

666,915

December 31, 2020

    

Amortized

    

Gross

    

Gross

    

cost

unrealized gains

unrealized losses

Fair value

Mortgage-backed securities:

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

$

193,424

$

2,952

$

(42)

$

196,334

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

 

454,345

 

8,778

 

(344)

 

462,779

Municipal securities

362

13

375

Corporate debt

2,000

(2)

1,998

Other securities

 

469

 

 

 

469

Total investment securities available-for-sale

$

650,600

$

11,743

$

(388)

$

661,955

During the three months ended March 31, 2021 and 2020, purchases of available-for-sale securities totaled $86.2 million and $26.5 million, respectively. Maturities and paydowns of available-for-sale securities during the three months ended March 31, 2021 and 2020 totaled $68.6 million and $48.8 million, respectively. There were 0 sales of available-for-sale securities during the three months ended March 31, 2021 or 2020.

At March 31, 2021 and December 31, 2020, the Company’s available-for-sale investment portfolio was primarily comprised of mortgage-backed securities, and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”), and the government owned agency Government National Mortgage Association (“GNMA”).

The tables below summarize the available-for-sale securities with unrealized losses as of the dates shown, along with the length of the impairment period:

March 31, 2021

Less than 12 months

12 months or more

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

value

losses

value

losses

value

losses

Mortgage-backed securities:

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

$

167,785

$

(4,823)

$

$

$

167,785

$

(4,823)

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

130,051

(5,461)

1,899

(10)

131,950

(5,471)

Total

$

297,836

$

(10,284)

$

1,899

$

(10)

$

299,735

$

(10,294)

12

December 31, 2020

Less than 12 months

12 months or more

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

value

losses

value

losses

value

losses

Mortgage-backed securities:

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

$

26,878

$

(42)

$

1

$

$

26,879

$

(42)

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

 

95,888

(328)

 

2,138

 

(16)

 

98,026

(344)

Corporate debt

1,998

(2)

1,998

(2)

Total

$

124,764

$

(372)

$

2,139

$

(16)

$

126,903

$

(388)

Management evaluated all of the available-for-sale securities in an unrealized loss position at March 31, 2021 and December 31, 2020. The portfolio included 32 securities, which were in an unrealized loss position at March 31, 2021, compared to 22 securities at December 31, 2020. The unrealized losses in the Company's investment portfolio at March 31, 2021 were caused by changes in interest rates. The Company has no intention to sell these securities and believes it will not be required to sell the securities before the recovery of their amortized cost. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank (“FRB”), if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $397.6 million and $385.8 million at March 31, 2021 and December 31, 2020, respectively. The Bank may also pledge available-for-sale investment securities as collateral for Federal Home Loan Bank (“FHLB”) advances. NaN securities were pledged for this purpose at March 31, 2021 or December 31, 2020.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. As of March 31, 2021, municipal securities with an amortized cost and fair value of $0.1 million were due in one year or less and municipal securities with an amortized cost and fair value of $0.3 million were due between one to five years. Corporate debt securities with an amortized costs and fair value of $2.0 million were due after five years through ten years. Other securities with an amortized cost and fair value of $0.5 million as of March 31, 2021, have no stated contractual maturity date.

As of March 31, 2021 and December 31, 2020, accrued interest receivable (“AIR”) from available-for-sale investment securities totaled $1.1 million and $1.1 million, respectively, and was included within other assets on the statements of financial condition.

Held-to-maturity

Held-to-maturity investment securities are summarized as follows as of the dates indicated:

March 31, 2021

    

    

Gross

    

Gross

    

Amortized

unrealized

unrealized

cost

gains

losses

Fair value

Mortgage-backed securities:

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

$

344,412

$

3,687

$

(5,730)

$

342,369

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

 

176,411

 

423

 

(1,755)

 

175,079

Total investment securities held-to-maturity

$

520,823

$

4,110

$

(7,485)

$

517,448

13

December 31, 2020

    

    

Gross

    

Gross

    

Amortized

unrealized

unrealized

cost

gains

losses

Fair value

Mortgage-backed securities:

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

$

306,187

$

4,940

$

(197)

$

310,930

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

 

70,428

 

396

 

(63)

 

70,761

Total investment securities held-to-maturity

$

376,615

$

5,336

$

(260)

$

381,691

During the three months ended March 31, 2021 and 2020, purchases of held-to-maturity securities totaled $174.1 million and $25.8 million, respectively. Maturities and paydowns of held-to-maturity securities totaled $29.0 million and $15.4 million during the first quarter of 2021 and 2020, respectively.

The held-to-maturity portfolio included 32 securities which were in an unrealized loss position as of March 31, 2021 compared to 9 securities at December 31, 2020. The tables below summarize the held-to-maturity securities with unrealized losses as of the dates shown, along with the length of the impairment period:

March 31, 2021

Less than 12 months

12 months or more

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

value

losses

value

losses

value

losses

Mortgage-backed securities:

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

$

242,029

$

(5,730)

$

$

$

242,029

$

(5,730)

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

99,986

(1,755)

99,986

(1,755)

Total

$

342,015

$

(7,485)

$

$

$

342,015

$

(7,485)

December 31, 2020

Less than 12 months

12 months or more

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

value

losses

value

losses

value

losses

Mortgage-backed securities:

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

$

53,453

$

(197)

$

$

$

53,453

$

(197)

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

19,554

(63)

19,554

(63)

Total

$

73,007

$

(260)

$

$

$

73,007

$

(260)

The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell any held-to-maturity securities and believes it will not be required to sell any held-to-maturity securities before the recovery of their amortized cost.

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the FRB, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $138.6 million and $140.6 million at March 31, 2021 and December 31, 2020, respectively. The Bank may also pledge held-to-maturity investment securities as collateral for FHLB advances. NaN held-to-maturity investment securities were pledged for this purpose at March 31, 2021 or December 31, 2020.

14

Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments.

As of March 31, 2021 and December 31, 2020, AIR from held-to-maturity investment securities totaled $0.9 million and $0.7 million, respectively, and was included within other assets on the statements of financial condition.

Note 4 Loans

The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value of loans is net of discounts, fees, cost and fair value marks of $17.8 million and $16.2 million as of March 31, 2021 and December 31, 2020, respectively. Included in commercial loans are loans originated as part of the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) of which $217.7 million, net of fees and costs, were outstanding at March 31, 2021, and were fully guaranteed by the SBA.

March 31, 2021

Total loans

    

% of total

Commercial

$

2,976,679

69.2%

Commercial real estate non-owner occupied

 

634,360

14.7%

Residential real estate

 

674,142

15.7%

Consumer

 

18,065

0.4%

Total

$

4,303,246

100.0%

December 31, 2020

Total loans

    

% of total

Commercial

$

3,044,065

70.0%

Commercial real estate non-owner occupied

 

631,996

14.5%

Residential real estate

 

658,659

15.1%

Consumer

 

19,006

0.4%

Total

$

4,353,726

100.0%

Information about delinquent and non-accrual loans is shown in the following tables at March 31, 2021 and December 31, 2020:

March 31, 2021

Greater

30-89 days

than 90 days

Total past

past due and

past due and

Non-accrual

due and

accruing

accruing

loans

non-accrual

Current

Total loans

Commercial:

Commercial and industrial

$

427

$

$

5,581

$

6,008

$

1,409,858

$

1,415,866

Municipal and non-profit

851,033

851,033

Owner occupied commercial real estate

5,401

5,401

521,831

527,232

Food and agribusiness

183

82

265

182,283

182,548

Total commercial

610

11,064

11,674

2,965,005

2,976,679

Commercial real estate non-owner occupied:

Construction

 

 

 

 

 

55,114

 

55,114

Acquisition/development

 

 

 

3

 

3

 

21,849

 

21,852

Multifamily

 

 

 

 

 

98,917

 

98,917

Non-owner occupied

 

258

 

411

 

135

 

804

 

457,673

 

458,477

Total commercial real estate

 

258

 

411

 

138

 

807

 

633,553

 

634,360

Residential real estate:

 

 

 

 

 

 

Senior lien

922

593

4,583

6,098

601,321

607,419

Junior lien

 

41

17

581

 

639

 

66,084

66,723

Total residential real estate

 

963

610

5,164

6,737

667,405

674,142

Consumer

 

36

 

 

8

 

44

 

18,021

 

18,065

Total loans

$

1,867

$

1,021

$

16,374

$

19,262

$

4,283,984

$

4,303,246

15

December 31, 2020

Greater

30-89 days

than 90 days

Total past

past due and

past due and

Non-accrual

due and

accruing

accruing

loans

non-accrual

Current

Total loans

Commercial:

Commercial and industrial

$

170

$

$

6,312

$

6,482

$

1,440,256

$

1,446,738

Municipal and non-profit

870,791

870,791

Owner occupied commercial real estate

 

 

5,450

 

5,450

 

510,789

 

516,239

Food and agribusiness

 

146

 

422

 

568

 

209,729

 

210,297

Total commercial

316

12,184

12,500

3,031,565

3,044,065

Commercial real estate non-owner occupied:

Construction

 

 

 

 

 

91,125

 

91,125

Acquisition/development

 

 

 

6

 

6

 

24,665

 

24,671

Multifamily

 

 

 

1,523

 

1,523

 

67,233

 

68,756

Non-owner occupied

 

 

 

135

 

135

 

447,309

 

447,444

Total commercial real estate

 

 

 

1,664

 

1,664

 

630,332

 

631,996

Residential real estate:

 

Senior lien

 

527

 

160

5,820

 

6,507

 

577,764

584,271

Junior lien

 

95

 

709

804

73,584

74,388

Total residential real estate

 

622

 

160

6,529

7,311

651,348

658,659

Consumer

 

30

 

2

 

10

42

18,964

19,006

Total loans

$

968

$

162

$

20,387

$

21,517

$

4,332,209

$

4,353,726

March 31, 2021

Non-accrual loans

Non-accrual loans

with a related

with no related

allowance for

allowance for

Non-accrual

credit loss

credit loss

loans

Commercial:

Commercial and industrial

$

5,581

$

$

5,581

Municipal and non-profit

Owner occupied commercial real estate

3,260

2,141

5,401

Food and agribusiness

82

82

Total commercial

8,923

2,141

11,064

Commercial real estate non-owner occupied:

Construction

 

 

 

Acquisition/development

 

3

 

 

3

Multifamily

 

 

 

Non-owner occupied

 

135

 

 

135

Total commercial real estate

 

138

 

 

138

Residential real estate:

 

 

 

Senior lien

3,853

730

4,583

Junior lien

581

 

581

Total residential real estate

4,434

730

 

5,164

Consumer

 

8

 

 

8

Total loans

$

13,503

$

2,871

$

16,374

16

December 31, 2020

Non-accrual loans

Non-accrual loans

with a related

with no related

allowance for

allowance for

Non-accrual

credit loss

credit loss

loans

Commercial:

Commercial and industrial

$

6,080

$

232

$

6,312

Municipal and non-profit

Owner occupied commercial real estate

2,698

2,752

5,450

Food and agribusiness

88

334

422

Total commercial

8,866

3,318

12,184

Commercial real estate non-owner occupied:

Construction

 

 

 

Acquisition/development

 

6

 

 

6

Multifamily

 

 

1,523

 

1,523

Non-owner occupied

 

135

 

 

135

Total commercial real estate

 

141

 

1,523

 

1,664

Residential real estate:

 

 

 

Senior lien

4,158

1,662

5,820

Junior lien

709

 

709

Total residential real estate

4,867

1,662

 

6,529

Consumer

 

10

 

 

10

Total loans

$

13,884

$

6,503

$

20,387

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual status. There was 0 interest income recognized from non-accrual loans during the three months ended March 31, 2021 or 2020.

The Company’s internal risk rating system uses a series of grades, which reflect our assessment of the credit quality of loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. For a description of the general characteristics of the risk grades, refer to note 2 Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2020 Annual Report on Form 10-K.

17

The amortized cost basis for all loans as determined by the Company’s internal risk rating system and year of origination is shown in the following tables as of March 31, 2021 and December 31, 2020:

March 31, 2021

Revolving

Revolving

loans

loans

Origination year

amortized

converted

2021

2020

2019

2018

2017

Prior

cost basis

to term

Total

Commercial:

Commercial and industrial:

Pass

$

152,099

$

283,047

$

207,700

$

181,981

$

78,209

$

30,343

$

422,318

$

15,347

$

1,371,044

Special mention

3,268

7,273

4,753

6,186

1,993

335

23,808

Substandard

240

25

1,347

893

11,700

4,542

1,100

19,847

Doubtful

43

310

785

29

1,167

Total commercial and industrial

152,339

283,072

212,315

190,190

94,972

41,856

425,440

15,682

1,415,866

Municipal and non-profit:

Pass

31,543

90,017

89,670

124,444

155,242

359,392

725

851,033

Total municipal and non-profit

31,543

90,017

89,670

124,444

155,242

359,392

725

851,033

Owner occupied commercial real estate:

Pass

11,308

112,877

105,939

85,059

49,485

115,521

2,497

482,686

Special mention

1,581

3,747

5,019

1,488

22,307

34,142

Substandard

1,900

3,885

243

3,754

9,782

Doubtful

587

35

622

Total owner occupied commercial real estate

11,308

114,458

112,173

93,963

51,216

141,617

2,497

527,232

Food and agribusiness:

Pass

391

27,945

8,743

18,501

6,746

31,761

87,247

86

181,420

Special mention

219

219

Substandard

277

632

909

Total food and agribusiness

391

27,945

8,743

18,501

7,023

32,612

87,247

86

182,548

Total commercial

195,581

515,492

422,901

427,098

308,453

575,477

515,909

15,768

2,976,679

Commercial real estate non-owner occupied:

Construction:

Pass

16

4,612

47,167

228

3,091

55,114

Total construction

16

4,612

47,167

228

3,091

55,114

Acquisition/development:

Pass

1,000

768

1,966

1,944

8,286

7,736

5

21,705

Special mention

108

108

Substandard

39

39

Total acquisition/development

1,000

768

1,966

1,944

8,286

7,883

5

21,852

Multifamily:

Pass

1,495

29,708

14,873

13,685

208

38,524

98,493

Special mention

424

424

Total multifamily

1,495

29,708

14,873

13,685

208

38,948

98,917

Non-owner occupied

Pass

8,117

60,577

92,690

27,874

101,602

133,069

4,008

427,937

Special mention

5,744

5,760

9,866

4,034

100

25,504

Substandard

763

4,273

5,036

Total non-owner occupied

8,117

60,577

98,434

34,397

111,468

141,376

4,108

458,477

Total commercial real estate non-owner occupied

10,628

95,665

162,440

50,026

120,190

188,207

7,204

634,360

Residential real estate:

Senior lien

Pass

82,016

125,137

61,953

32,804

43,271

234,894

21,002

172

601,249

Special mention

468

468

Substandard

199

807

20

312

4,364

5,702

Total senior lien

82,016

125,336

62,760

32,824

43,583

239,726

21,002

172

607,419

Junior lien

Pass

360

3,140

3,784

2,430

1,424

4,628

49,285

647

65,698

Special mention

21

342

363

Substandard

9

21

110

99

172

251

662

Total junior lien

369

3,161

3,894

2,529

1,596

4,900

49,627

647

66,723

Total residential real estate

82,385

128,497

66,654

35,353

45,179

244,626

70,629

819

674,142

Consumer

Pass

2,031

8,046

2,683

1,411

354

808

2,674

14

18,021

Substandard

37

7

44

Total consumer

2,031

8,046

2,683

1,448

354

815

2,674

14

18,065

Total loans

$

290,625

$

747,700

$

654,678

$

513,925

$

474,176

$

1,009,125

$

596,416

$

16,601

$

4,303,246

18

December 31, 2020

Revolving

Revolving

loans

loans

Origination year

amortized

converted

2020

2019

2018

2017

2016

Prior

cost basis

to term

Total

Commercial:

Commercial and industrial:

Pass

$

372,041

$

212,388

$

189,753

$

93,822

$

15,145

$

17,662

$

499,283

$

991

$

1,401,085

Special mention

1,445

7,381

4,845

5,810

729

2,329

1,478

24,017

Substandard

23

1,238

925

11,885

56

4,840

1,341

20,308

Doubtful

34

456

809

29

1,328

Total commercial and industrial

372,064

215,071

198,093

111,008

21,011

24,040

502,982

2,469

1,446,738

Municipal and non-profit:

Pass

131,961

91,911

125,247

156,275

124,269

238,453

2,675

870,791

Total municipal and non-profit

131,961

91,911

125,247

156,275

124,269

238,453

2,675

870,791

Owner occupied commercial real estate:

Pass

100,791

107,558

90,398

53,131

32,648

87,758

1,401

473,685

Special mention

1,581

2,236

2,714

544

3,254

19,341

29,670

Substandard

1,988

6,211

251

93

3,802

12,345

Doubtful

511

28

539

Total owner occupied commercial real estate

102,372

112,293

99,323

53,926

35,995

110,929

1,401

516,239

Food and agribusiness:

Pass

28,139

9,198

20,242

7,198

9,556

28,330

106,007

126

208,796

Special mention

222

222

Substandard

302

977

1,279

Total food and agribusiness

28,139

9,198

20,242

7,500

9,556

29,529

106,007

126

210,297

Total commercial

634,536

428,473

442,905

328,709

190,831

402,951

613,065

2,595

3,044,065

Commercial real estate non-owner occupied:

Construction:

Pass

15,841

49,658

17,349

4,072

2,006

1,807

90,733

Special mention

392

392

Total construction

16,233

49,658

17,349

4,072

2,006

1,807

91,125

Acquisition/development:

Pass

3,762

1,997

1,947

8,373

4,559

3,694

11

24,343

Special mention

34

253

287

Substandard

41

41

Total acquisition/development

3,762

1,997

1,947

8,407

4,559

3,988

11

24,671

Multifamily:

Pass

29,738

13,670

137

212

18,050

4,990

66,797

Special mention

436

436

Substandard

1,523

1,523

Total multifamily

29,738

13,670

137

212

18,050

6,949

68,756

Non-owner occupied

Pass

51,445

92,225

25,362

86,975

26,613

118,144

3,083

643

404,490

Special mention

70

5,458

5,841

22,737

3,662

100

37,868

Substandard

779

3,937

370

5,086

Total non-owner occupied

51,515

97,683

31,982

109,712

30,550

122,176

3,183

643

447,444

Total commercial real estate non-owner occupied

101,248

163,008

51,415

122,403

53,159

133,113

5,200

2,450

631,996

Residential real estate:

Senior lien

Pass

129,551

76,504

36,493

47,887

88,358

173,091

24,884

218

576,986

Special mention

463

463

Substandard

95

818

20

1,232

550

4,107

6,822

Total senior lien

129,646

77,322

36,513

49,119

88,908

177,661

24,884

218

584,271

Junior lien

Pass

3,479

4,217

2,553

1,775

1,226

3,760

55,860

365

73,235

Special mention

21

341

362

Substandard

112

101

177

55

287

59

791

Total junior lien

3,479

4,329

2,654

1,952

1,281

4,068

56,201

424

74,388

Total residential real estate

133,125

81,651

39,167

51,071

90,189

181,729

81,085

642

658,659

Consumer

Pass

9,777

3,348

1,674

489

329

623

2,700

19

18,959

Substandard

37

2

8

47

Total consumer

9,777

3,348

1,711

489

331

631

2,700

19

19,006

Total loans

$

878,686

$

676,480

$

535,198

$

502,672

$

334,510

$

718,424

$

702,050

$

5,706

$

4,353,726

19

Loans evaluated individually

We evaluate loans individually when they no longer share risk characteristics with pooled loans. These loans include loans on non-accrual status, loans in bankruptcy, and TDRs as described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted expected cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral-dependent loans.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Management individually evaluates collateral-dependent loans with an amortized cost basis of $250 thousand or more and includes collateral-dependent loans less than $250 thousand within the general allowance population. The amortized cost basis of collateral-dependent loans over $250 thousand was as follows at March 31, 2021 and December 31, 2020:

March 31, 2021

Total amortized

Real property

Business assets

cost basis

Commercial

Commercial and industrial

$

8,216

$

2,412

$

10,628

Owner-occupied commercial real estate

3,409

284

3,693

Total Commercial

11,625

2,696

14,321

Commercial real estate non owner-occupied

Acquisition/development

 

1,296

 

 

1,296

Total commercial real estate

 

1,296

 

 

1,296

Residential real estate

 

 

 

Senior lien

 

1,993

 

 

1,993

Total residential real estate

 

1,993

 

 

1,993

Total loans

$

14,914

$

2,696

$

17,610

December 31, 2020

Total amortized

Real property

Business assets

cost basis

Commercial

Commercial and industrial

$

7,579

$

3,005

$

10,584

Owner-occupied commercial real estate

3,701

284

3,985

Food and agribusiness

334

334

Total Commercial

11,614

3,289

14,903

Commercial real estate non owner-occupied

Acquisition/development

 

1,573

 

 

1,573

Multifamily

 

1,523

 

 

1,523

Total commercial real estate

 

3,096

 

 

3,096

Residential real estate

 

 

 

Senior lien

 

2,021

 

 

2,021

Total residential real estate

 

2,021

 

 

2,021

Total loans

$

16,731

$

3,289

$

20,020

Loan modifications and troubled debt restructurings

The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include restructuring a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been reaffirmed by the borrower, regardless of past due status, the loan is considered to be a TDR.

The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19 pandemic without requiring the modifications to be classified as TDRs under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments. The Company modified 10 loans totaling $1.4 million during the three months ended March 31, 2021 and 4 loans totaling $122 thousand during the three months ended March 31, 2020, due to the

20

effects of the COVID-19 pandemic, that were not classified as TDRs. Modified loans that remained on a payment deferral plan at March 31, 2021 totaled $144.1 million, or 3.3% of the total loan portfolio. Of those loans, principal payment deferrals totaled $139.2 million and full payment deferrals totaled $4.9 million. At March 31, 2021, 6.4% of loan modifications related to COVID-19 were subsequently modified. All COVID-19 modified loans were classified as performing as of March 31, 2021. At December 31, 2020, modified loans that remained on a payment deferral plan totaled $173.6 million, or 4.0% of the total loan portfolio, of which 26.2% were subsequently modified.

During the three months ended March 31, 2021, the Company restructured 5 loans with an amortized cost basis of $2.6 million to facilitate repayment that are considered TDRs. Loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of term. The tables below provide additional information related to accruing TDRs at March 31, 2021 and December 31, 2020:

March 31, 2021

Amortized

Average year-to-date

Unpaid

Unfunded commitments

cost basis

amortized cost basis

principal balance

to fund TDRs

Commercial

$

8,718

$

8,803

$

9,127

$

150

Commercial real estate non-owner occupied

 

2,232

 

2,287

 

3,668

 

Residential real estate

 

2,836

 

2,850

 

3,664

 

35

Consumer

 

37

 

37

 

39

 

Total

$

13,823

$

13,977

$

16,498

$

185

December 31, 2020

Amortized

Average year-to-date

Unpaid

Unfunded commitments

cost basis

amortized cost basis

principal balance

to fund TDRs

Commercial

$

9,387

$

9,544

$

9,978

$

150

Commercial real estate non-owner occupied

 

2,400

 

2,351

 

4,105

 

Residential real estate

 

2,121

 

2,185

 

2,922

 

12

Consumer

 

37

 

37

 

37

 

Total

$

13,945

$

14,117

$

17,042

$

162

The following table summarizes the Company’s carrying value of non-accrual TDRs as of March 31, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

Commercial

    

$

2,666

    

$

3,397

Commercial real estate non-owner occupied

 

123

 

1,644

Residential real estate

 

2,147

 

3,156

Consumer

 

 

Total non-accruing TDRs

$

4,936

$

8,197

Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for a period of time. The Company had 2 TDRs totaling $1.6 million that were modified within the past twelve months and had defaulted on their restructured terms during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company had 5 TDRs totaling $0.8 million that were modified within the past twelve months and had defaulted on their restructured terms. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest. The allowance for credit losses related to TDRs on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as TDRs.

21

Note 5 Allowance for Credit Losses

The tables below detail the Company’s allowance for credit losses as of the dates shown:

Three months ended March 31, 2021

Non-owner

occupied

commercial

Residential

    

Commercial

    

real estate

    

real estate

    

Consumer

    

Total

Beginning balance

$

30,376

$

17,448

$

11,492

$

461

$

59,777

Charge-offs

 

(160)

 

 

(22)

(120)

 

(302)

Recoveries

 

129

 

6

 

8

 

39

 

182

Provision (release) expense

 

(2,260)

 

(2,400)

 

68

 

(8)

 

(4,600)

Ending balance

$

28,085

$

15,054

$

11,546

$

372

$

55,057

Three months ended March 31, 2020

Non-owner

occupied

commercial

Residential

    

Commercial

    

real estate

    

real estate

    

Consumer

    

Total

Beginning balance

$

30,442

$

4,850

$

3,468

$

304

$

39,064

Cumulative effect adjustment(1)

(1,299)

1,666

5,314

155

5,836

Charge-offs

 

(218)

 

 

(28)

 

(251)

 

(497)

Recoveries

 

91

 

 

5

 

48

 

144

Provision expense

 

1,541

 

2,762

 

1,937

 

169

 

6,409

Ending balance

$

30,557

$

9,278

$

10,696

$

425

$

50,956

(1)

Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.

In evaluating the loan portfolio for an appropriate ACL level, excluding loans evaluated individually, loans were grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of developing the underlying data used within the discounted cash flow model including, but not limited to, prepayment and recovery rates as well as loss rates tied to macro-economic conditions within management’s reasonable and supportable forecast. The ACL also includes subjective adjustments based upon qualitative risk factors including asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results.

Net charge-offs on loans during the three months ended March 31, 2021 and 2020 were $0.1 million and $0.4 million, respectively. The Company recorded $4.6 million of provision release during the three months ended March 31, 2021 driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. Included in the first quarter of 2021 was $1.0 million of provision expense for unfunded loan commitment reserves. Provision expense for loan losses totaled $6.2 million, net of a $0.2 million reduction in unfunded loan commitment reserves, for the three months ended March 31, 2020 to support originated loan growth and provide coverage for the impact of deterioration in the macro-economic environment as a result of COVID-19.

The Company has elected to exclude AIR from the allowance for credit losses calculation. As of March 31, 2021 and December 31, 2020, AIR from loans totaled $18.5 million and $16.7 million, respectively.

22

Note 6 Other Real Estate Owned

A summary of the activity in other real estate owned (“OREO”) during the three months ended March 31, 2021 and 2020 is as follows:

For the three months ended March 31, 

2021

2020

Beginning balance

$

4,730

    

$

7,300

Transfers from loan portfolio, at fair value

 

1,522

 

18

Sales

 

(583)

 

(267)

Ending balance

$

5,669

$

7,051

During the three months ended March 31, 2021 and 2020, the Company sold OREO properties with net book balances of $0.6 million and $0.3 million, respectively. Sales of OREO properties resulted in net OREO gains of $29 thousand and net OREO losses of $39 thousand during the three months ended March 31, 2021 and 2020, respectively, which were included in the consolidated statements of operations.

Note 7 Goodwill and Intangible Assets

Goodwill and core deposit intangible

In connection with our acquisitions, the Company recorded goodwill of $115.0 million. Goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets acquired. NaN goodwill impairment was recorded during the three months ended March 31, 2021 or the year ended December 31, 2020.

The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at March 31, 2021 and December 31, 2020, are presented as follows:

March 31, 2021

December 31, 2020

Gross

Net

Gross

Net

carrying

Accumulated

carrying

carrying

Accumulated

carrying

amount

amortization

amount

amount

amortization

amount

Core deposit intangible

$

48,834

    

$

(41,581)

$

7,253

$

48,834

    

$

(41,286)

$

7,548

The Company is amortizing the core deposit intangibles from acquisitions on a straight line basis over 7-10 years from the date of the respective acquisition, which represents the expected useful life of the assets. The Company recognized core deposit intangible amortization expense of $0.3 million and $0.3 million during the three months ended March 31, 2021 and 2020, respectively.

The following table shows the estimated future amortization expense for the core deposit intangibles as of March 31, 2021:

Years ending December 31,

Amount

For the nine months ending December 31, 2021

$

887

For the year ending December 31, 2022

1,127

For the year ending December 31, 2023

1,048

For the year ending December 31, 2024

1,048

For the year ending December 31, 2025

1,048

Mortgage servicing rights

Mortgage servicing rights (“MSRs”) represent rights to service loans originated by the Company and sold to government-sponsored enterprises including FHLMC, FNMA, GNMA and FHLB and are included in other assets in the consolidated statements of financial condition. Mortgage loans serviced for others were $1.6 billion and $301.8 million at March 31, 2021 and 2020, respectively.

23

Below are the changes in the MSRs for the periods presented:

For the three months ended March 31, 

2021

2020

Beginning balance

$

10,380

    

$

2,630

Originations

2,869

142

Recovery (impairment)

671

(509)

Amortization

 

(968)

 

(210)

Ending balance

12,952

2,053

Fair value of mortgage servicing rights

$

16,171

$

2,053

The fair value of MSRs was determined based upon a discounted cash flow analysis. The cash flow analysis included assumptions for discount rates and prepayment speeds. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from 11.2% to 17.5% for the March 31, 2021 valuation. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from 16.9% to 21.4% for the March 31, 2020 valuation. Included in mortgage banking income in the consolidated statements of operations were servicing income of $1.0 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively.

MSRs are evaluated and impairment is recognized to the extent fair value is less than the carrying amount. The Company evaluates impairment by stratifying MSRs based on the predominant risk characteristics of the underlying loans, including loan type and loan term. The Company is amortizing the MSRs in proportion to and over the period of the estimated net servicing income of the underlying loans.

The following table shows the estimated future amortization expense for the MSRs as of March 31, 2021:

Years ending December 31,

Amount

For the nine months ending December 31, 2021

$

1,452

For the year ending December 31, 2022

1,723

For the year ending December 31, 2023

1,470

For the year ending December 31, 2024

1,254

For the year ending December 31, 2025

1,070

Note 8 Borrowings

The Company enters into repurchase agreements to facilitate the needs of its clients. As of March 31, 2021 and December 31, 2020, the Company sold securities under agreements to repurchase totaling $19.4 million and $22.9 million, respectively. The Company pledged mortgage-backed securities with a fair value of approximately $26.3 million and $27.7 million as of March 31, 2021 and December 31, 2020, respectively, for these agreements. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. As of March 31, 2021 and December 31, 2020, the Company had $6.3 million and $2.1 million, respectively, of excess collateral pledged for repurchase agreements.

As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $0.9 billion at March 31, 2021. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At March 31, 2021 and December 31, 2020, the Bank had 0 outstanding borrowings from the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were 0 investment securities pledged at March 31, 2021 or December 31, 2020. Loans pledged were $1.2 billion at both March 31, 2021 and December 31, 2020. There was 0 interest expense related to FHLB advances and other short-term borrowings for the three months ended March 31, 2021, compared to $0.9 million during the three months ended March 31, 2020.

Note 9 Regulatory Capital

As a bank holding company, the Company is subject to regulatory capital adequacy requirements implemented by the Federal Reserve. The federal banking agencies have risk based capital adequacy regulations intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations. Under these regulations, assets are assigned to one of several risk categories, and nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by a risk adjustment percentage for the category.

24

Under the Basel III requirements, at March 31, 2021 and December 31, 2020, the Company and the Bank met all capital requirements including the capital conservation buffer of 2.5%. The Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below.

March 31, 2021

Required to be

Required to be

well capitalized under

considered

prompt corrective

adequately

Actual

action provisions

 capitalized

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

Tier 1 leverage ratio:

Consolidated

 

10.8%

$

716,296

 

N/A

N/A

 

4.0%

$

265,237

NBH Bank

 

9.3%

 

613,997

 

5.0%

$

331,432

 

4.0%

 

265,146

Common equity tier 1 risk based capital:

Consolidated

15.2%

$

716,296

N/A

N/A

7.0%

$

329,283

NBH Bank

13.1%

613,997

6.5%

$

305,484

7.0%

328,983

Tier 1 risk based capital ratio:

Consolidated

 

15.2%

$

716,296

 

N/A

N/A

 

8.5%

$

399,843

NBH Bank

 

13.1%

 

613,997

 

8.0%

$

375,980

 

8.5%

 

399,479

Total risk based capital ratio:

Consolidated

 

16.3%

$

766,992

 

N/A

N/A

 

10.5%

$

493,924

NBH Bank

 

14.1%

 

664,692

 

10.0%

$

469,975

 

10.5%

 

493,474

December 31, 2020

Required to be

Required to be

well capitalized under

considered

prompt corrective

 adequately

Actual

action provisions

 capitalized

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

Tier 1 leverage ratio:

Consolidated

 

10.7%

$

696,311

 

N/A

N/A

 

4.0%

$

260,370

NBH Bank

 

9.2%

 

600,622

 

5.0%

$

325,447

 

4.0%

 

260,358

Common equity tier 1 risk based capital:

Consolidated

14.7%

$

696,311

N/A

N/A

7.0%

$

331,632

NBH Bank

12.7%

600,622

6.5%

$

307,631

7.0%

331,295

Tier 1 risk based capital ratio:

Consolidated

 

14.7%

$

696,311

 

N/A

N/A

 

8.5%

$

402,696

NBH Bank

 

12.7%

 

600,622

 

8.0%

$

378,623

 

8.5%

 

402,287

Total risk based capital ratio:

Consolidated

 

15.8%

$

749,899

 

N/A

N/A

 

10.5%

$

497,448

NBH Bank

 

13.8%

 

654,209

 

10.0%

$

473,279

 

10.5%

 

496,943

f

Note 10 Revenue from Contracts with Clients

Revenue is recognized when obligations under the terms of a contract with clients are satisfied. Below is the detail of the Company’s revenue from contracts with clients.

Service charges and other fees

Service charge fees are primarily comprised of monthly service fees, check orders, and other deposit account related fees. Other fees include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account-related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to clients’ accounts.

25

Bank card fees

Bank card fees are primarily comprised of debit card income, ATM fees, merchant services income, and other fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their debit card transactions. The Company’s performance obligation for bank card fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gain on OREO sales, net

Gain on OREO sales, net is recognized when the Company meets its performance obligation to transfer title to the buyer. The gain or loss is measured as the excess of the proceeds received compared to the OREO carrying value. Sales proceeds are received in cash at the time of transfer.

The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and non-interest expense in-scope of Topic 606 for the three months ended March 31, 2021 and 2020.

For the three months ended March 31, 

    

2021

    

2020

Non-interest income

In-scope of Topic 606:

Service charges and other fees

$

3,951

$

4,665

Bank card fees

4,073

3,513

Non-interest income (in-scope of Topic 606)

8,024

8,178

Non-interest income (out-of-scope of Topic 606)

25,337

15,354

Total non-interest income

$

33,361

$

23,532

Non-interest expense

In-scope of Topic 606:

Gain (loss) on OREO sales, net

$

29

$

(39)

Total revenue in-scope of Topic 606

$

8,053

$

8,139

Contract acquisition costs

The Company utilizes the practical expedient which allows entities to expense immediately contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract acquisition costs.

Note 11 Stock-based Compensation and Benefits

The Company provides stock-based compensation in accordance with shareholder-approved plans and is authorized to issue awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons.

Stock options

The Company issues stock options which are primarily time-vesting with 1/3 vesting on each of the first, second and third anniversary of the date of grant or date of hire. The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing model. The outstanding option awards vest or have vested on a graded basis over 1-4 years of continuous service and have 10-year contractual terms.

26

The following table summarizes stock option activity for the three months ended March 31, 2021:

    

    

    

Weighted

    

average

Weighted

remaining

average

contractual

Aggregate

exercise 

 term in 

intrinsic 

Options

price

years

value

Outstanding at December 31, 2020

 

768,129

$

26.35

 

6.91

$

5,224

Granted

 

 

Exercised

(35,892)

24.74

Forfeited

 

(6,131)

 

29.71

Outstanding at March 31, 2021

 

726,106

$

26.40

 

6.85

$

9,641

Options exercisable at March 31, 2021

 

376,186

25.71

 

5.30

5,257

Options vested and expected to vest

 

702,720

26.43

 

6.78

9,311

Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $140 thousand and $208 thousand for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, there was $0.3 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted average period of 1.8 years.

Restricted stock awards

The Company issues primarily time-based restricted stock awards that vest over a range of a 1-3 year period. Restricted stock with time-based vesting was valued at the fair value of the shares on the date of grant as they are assumed to be held beyond the vesting period.

Performance stock units

The Company grants performance stock units which represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results, which are to be determined at the end of the three-year performance period (vesting date). The actual number of shares to be awarded at the end of the performance period will range from 0% - 150% of the initial target awards. For awards granted prior to 2020, 60% of the award is based on the Company’s cumulative earnings per share (EPS target) during the performance period, and 40% of the award is based on the Company’s cumulative total shareholder return (TSR target), or TSR, during the performance period. On the vesting date, the Company’s TSR will be compared to the respective TSRs of the companies comprising the KBW Regional Index at the grant date to determine the shares awarded. The fair value of the EPS target portion of the award was determined based on the closing stock price of the Company’s common stock on the grant date. The fair value of the TSR target portion of the award was determined using a Monte Carlo Simulation at the grant date.

In establishing the PSU components during 2021 and 2020, the Compensation Committee determined the EPS target portion of the award would not be an effective metric in light of economic uncertainty surrounding COVID-19. Consequently, the Compensation Committee granted an award based upon a relative return on tangible assets (“ROTA”). Annually, the Company’s ROTA will be compared to the respective ROTA of companies comprising the KBW Regional Index. At the end of the measurement period, the Company’s ranking will be averaged to determine the shares awarded. The fair value of the ROTA award was determined based on the closing stock price of the Company’s common stock on the grant date.

The weighted-average grant date fair value per unit for the ROTA target portion and the TSR target portion granted during 2020 was $28.43 and $24.58, respectively. The initial weighted-average performance price for the TSR target portion granted during 2020 was $35.95. During the three months ended March 31, 2021, the Company awarded an additional 30,024 units due to final performance results related to performance stock units granted in 2018.

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The following table summarizes restricted stock and performance stock unit activity during the three months ended March 31, 2021:

    

    

Weighted

Weighted

 Restricted

average grant-

Performance

average grant-

stock shares

date fair value

stock units

date fair value

Unvested at December 31, 2020