National Bank Holdings Corp (Form: 10-Q, Received: 08/05/2020 16:38:53)

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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 June 30, 2020

☐ 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, Suite 300, Greenwood Village, Colorado 80111

(Address of principal executive offices) (Zip Code)

Registrant’s telephone, including area code: (303) 892-8715

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


Title of each class:	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 August 3, 2020, the registrant had outstanding 30,569,011 shares of Class A voting common stock, each with $0.01 par value per share, excluding 180,386 shares of restricted Class A common stock issued but not yet vested.


		Page
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	5

	Consolidated Statements of Financial Condition as of June 30, 2020 and December 31, 2019	5

	Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019	6

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019	7

	Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019	8

	Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	9

	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	69

Part II. Other Information

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 5.	Other Information	71

Item 6.	Exhibits	72

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

● effects of a government shutdown;

● 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;

● 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;

Table of Contents

● 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 tax

position;

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

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

● technological changes;

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

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

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

● regulatory limitations on dividends from our bank subsidiary;

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

● widespread natural and other disasters, dislocations, political instability, pandemics such as the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”), 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 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;

● 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.

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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)


	June 30, 2020		December 31, 2019
ASSETS
Cash and due from banks	$	141,885	$	109,690
Interest bearing bank deposits		500		500
Cash and cash equivalents		142,385		110,190
Investment securities available-for-sale (at fair value)		610,735		638,249
Investment securities held-to-maturity (fair value of $219,656 and $183,741 at June 30, 2020 and December 31, 2019, respectively)		215,183		182,884
Non-marketable securities		30,188		29,751
Loans		4,782,383		4,415,406
Allowance for credit losses		(60,465)		(39,064)
Loans, net		4,721,918		4,376,342
Loans held for sale		204,856		117,444
Other real estate owned		6,491		7,300
Premises and equipment, net		110,019		112,151
Goodwill		115,027		115,027
Intangible assets, net		12,175		11,361
Other assets		216,454		194,813
Total assets	$	6,385,431	$	5,895,512
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits	$	1,502,948	$	1,184,945
Interest bearing demand deposits		955,951		738,496
Savings and money market		1,903,427		1,755,538
Time deposits		1,051,563		1,058,153
Total deposits		5,413,889		4,737,132
Securities sold under agreements to repurchase		24,504		56,935
Federal Home Loan Bank advances		15,000		207,675
Other liabilities		155,071		126,850
Total liabilities		5,608,464		5,128,592
Shareholders’ equity:
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,487,907 shares issued; 30,569,011 and 31,176,627 shares outstanding at June 30, 2020 and December 31, 2019, respectively		515		515
Additional paid-in capital		1,008,773		1,009,223
Retained earnings		180,537		164,082
Treasury stock of 20,736,266 and 20,189,082 shares at June 30, 2020 and December 31, 2019, respectively, at cost		(425,053)		(408,962)
Accumulated other comprehensive income, net of tax		12,195		2,062
Total shareholders’ equity		776,967		766,920
Total liabilities and shareholders’ equity	$	6,385,431	$	5,895,512

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)


	For the three months ended				For the six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Interest and dividend income:
Interest and fees on loans	$	49,171	$	55,995	$	102,698	$	108,770
Interest and dividends on investment securities		4,250		5,535		8,881		11,547
Dividends on non-marketable securities		310		459		724		882
Interest on interest-bearing bank deposits		13		204		109		414
Total interest and dividend income		53,744		62,193		112,412		121,613
Interest expense:
Interest on deposits		6,087		7,649		13,413		14,264
Interest on borrowings		329		2,053		1,324		3,692
Total interest expense		6,416		9,702		14,737		17,956
Net interest income before provision for loan losses		47,328		52,491		97,675		103,657
Provision for loan losses		10,271		3,239		16,430		4,773
Net interest income after provision for loan losses		37,057		49,252		81,245		98,884
Non-interest income:
Service charges		3,094		4,541		7,220		8,862
Bank card fees		3,654		3,766		7,167		7,194
Mortgage banking income		30,630		10,398		44,303		17,335
Bank-owned life insurance income		589		424		1,179		845
Other non-interest income		870		1,472		2,472		3,355
OREO-related income		—		59		28		120
Total non-interest income		38,837		20,660		62,369		37,711
Non-interest expense:
Salaries and benefits		36,457		30,667		69,637		58,557
Occupancy and equipment		7,078		6,721		13,976		13,603
Telecommunications and data processing		2,255		2,124		4,520		4,414
Marketing and business development		600		840		1,296		1,826
FDIC deposit insurance		411		493		335		991
Bank card expenses		1,033		1,423		2,059		2,233
Professional fees		759		1,041		1,368		1,855
Other non-interest expense		2,479		2,439		5,569		5,612
Problem asset workout		629		725		1,277		1,848
Loss (gain) on OREO sales, net		55		(318)		94		(686)
Core deposit intangible asset amortization		296		296		592		592
Banking center consolidation-related expense		1,708		—		1,708		—
Total non-interest expense		53,760		46,451		102,431		90,845
Income before income taxes		22,134		23,461		41,183		45,750
Income tax expense		4,429		3,179		7,654		6,546
Net income	$	17,705	$	20,282	$	33,529	$	39,204
Earnings per share—basic	$	0.57	$	0.65	$	1.08	$	1.26
Earnings per share—diluted		0.57		0.64		1.08		1.24
Weighted average number of common shares outstanding:
Basic		30,731,758		31,155,264		30,944,617		31,058,761
Diluted		30,857,606		31,604,658		31,128,084		31,558,615

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	For the three months ended				For the six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Net income	$	17,705	$	20,282	$	33,529	$	39,204
Other comprehensive (loss) income, net of tax:
Securities available-for-sale:
Net unrealized gains arising during the period, net of tax expense of $9 and $2,480 for the three months ended June 30, 2020 and 2019, respectively; and net of tax expense of $3,311 and $4,187 for the six months ended June 30, 2020 and 2019, respectively		30		7,905		10,551		13,322
Less: amortization of net unrealized holding gains to income, net of tax benefit of $64 and $81 for the three months ended June 30, 2020 and 2019, respectively; and net of tax benefit of $131 and $171 for the six months ended June 30, 2020 and 2019, respectively		(202)		(259)		(418)		(541)
Other comprehensive (loss) income		(172)		7,646		10,133		12,781
Comprehensive income	$	17,533	$	27,928	$	43,662	$	51,985

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share and per share data)


	For the three months ended June 30,
									Accumulated
			Additional						other
	Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings		stock		income (loss), net		Total
Balance, March 31, 2019	$	515	$	1,012,974	$	120,879	$	(413,226)	$	(6,140)	$	715,002
Net income		—		—		20,282		—		—		20,282
Stock-based compensation		—		1,508		—		—		—		1,508
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $3,382, net		—		(8,474)		—		3,904		—		(4,570)
Cash dividends declared ($0.19 per share)		—		—		(5,951)		—		—		(5,951)
Other comprehensive income		—		—		—		—		7,646		7,646
Balance, June 30, 2019	$	515	$	1,006,008	$	135,210	$	(409,322)	$	1,506	$	733,917

Balance, March 31, 2020	$	515	$	1,009,478	$	168,984	$	(427,890)	$	12,367	$	763,454
Net income		—		—		17,705		—		—		17,705
Stock-based compensation		—		1,616		—		—		—		1,616
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $621 net		—		(2,321)		—		2,837		—		516
Cash dividends declared ($0.20 per share)		—		—		(6,152)		—		—		(6,152)
Other comprehensive loss		—		—		—		—		(172)		(172)
Balance, June 30, 2020	$	515	$	1,008,773	$	180,537	$	(425,053)	$	12,195	$	776,967


	For the six months ended June 30,
									Accumulated
			Additional						other
	Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings		stock		income (loss), net		Total
Balance, December 31, 2018	$	515	$	1,014,399	$	106,990	$	(415,623)	$	(11,275)	$	695,006
Net income		—		—		39,204		—		—		39,204
Stock-based compensation		—		1,884		—		—		—		1,884
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $5,673, net		—		(10,275)		—		6,301		—		(3,974)
Cash dividends declared ($0.36 per share)		—		—		(11,240)		—		—		(11,240)
Cumulative effect adjustment⁽¹⁾		—		—		256		—		—		256
Other comprehensive income		—		—		—		—		12,781		12,781
Balance, June 30, 2019	$	515	$	1,006,008	$	135,210	$	(409,322)	$	1,506	$	733,917

Balance, December 31, 2019	$	515	$	1,009,223	$	164,082	$	(408,962)	$	2,062	$	766,920
Net income		—		—		33,529		—		—		33,529
Stock-based compensation		—		2,839		—		—		—		2,839
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,035, net		—		(3,289)		—		3,385		—		96
Repurchase of 734,117 shares		—		—		—		(19,476)		—		(19,476)
Cash dividends declared ($0.40 per share)		—		—		(12,451)		—		—		(12,451)
Cumulative effect adjustment⁽²⁾		—		—		(4,623)		—		—		(4,623)
Other comprehensive income		—		—		—		—		10,133		10,133
Balance, June 30, 2020	$	515	$	1,008,773	$	180,537	$	(425,053)	$	12,195	$	776,967



(1)		Related to the adoption of Accounting Standards Update No. 2016-02, Leases.
(2)		Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments. Refer to note 2 – Recent Accounting Pronouncements of our consolidated financial statements for further details.

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	For the six months ended
	June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	33,529	$	39,204
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		16,430		4,773
Provision (release) for mortgage loan repurchases		320		(528)
Depreciation and amortization		7,600		7,376
Current income tax receivable		1,852		693
Deferred income taxes		1,059		5,140
Net excess tax expense (benefit) on stock-based compensation		128		(2,136)
Discount accretion, net of premium amortization on securities		1,208		952
Loan accretion		(6,821)		(8,273)
Gain on sale of mortgages, net		(43,315)		(16,050)
Origination of loans held for sale, net of repayments		(984,452)		(490,411)
Proceeds from sales of loans held for sale		941,153		450,360
Bank-owned life insurance income		(1,179)		(845)
Loss (gain) on the sale of other real estate owned, net		94		(686)
Impairment of mortgage servicing rights		1,102		277
Impairment on other real estate owned		26		684
Impairment on fixed assets related to banking center consolidations		1,631		—
Stock-based compensation		2,839		1,885
Operating lease payments		(2,778)		(2,802)
Change in other assets		(30,718)		2,762
Change in other liabilities		46,964		6,855
Net cash used in operating activities		(13,328)		(770)
Cash flows from investing activities:
Purchase of FHLB stock		(437)		(11,418)
Proceeds from redemption of FHLB stock		—		8,247
Proceeds from maturities of investment securities held-to-maturity		34,150		28,152
Proceeds from maturities of investment securities available-for-sale		110,102		97,625
Purchase of investment securities held-to-maturity		(67,361)		—
Purchase of investment securities available-for-sale		(69,571)		—
Net increase in loans		(379,420)		(240,977)
Purchases of premises and equipment, net		(3,515)		(5,279)
Proceeds from sales of other real estate owned		1,835		3,832
Net cash used in investing activities		(374,217)		(119,818)
Cash flows from financing activities:
Net increase in deposits		676,757		152,376
Net decrease in repurchase agreements and other short-term borrowings		(32,431)		(5,617)
Advances from FHLB		947,431		812,149
FHLB repayments		(1,140,106)		(841,395)
Issuance of stock under purchase and equity compensation plans		(936)		(6,384)
Proceeds from exercise of stock options		1,006		2,387
Payment of dividends		(12,505)		(11,325)
Repurchase of common stock		(19,476)		—
Net cash provided by financing activities		419,740		102,191
Increase (decrease) in cash, cash equivalents and restricted cash⁽¹⁾		32,195		(18,397)
Cash, cash equivalents and restricted cash at beginning of the year⁽¹⁾		120,190		119,556
Cash, cash equivalents and restricted cash at end of period⁽¹⁾	$	152,385	$	101,159
Supplemental disclosure of cash flow information during the period:
Cash paid for interest	$	15,535	$	16,924
Net tax payment		7,923		4,729
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value	$	1,146	$	288
Decrease in loans purchased but not settled		(16,351)		(8,979)
Loans transferred from loans held for sale to loans		798		1,645
Lease right-of-use assets obtained		—		30,474


(1)		Included in restricted cash is $10.0 million placed in escrow for certain potential liabilities the Company is indemnified for pursuant to the Peoples merger agreement. The restricted cash is included in other assets in the Company’s consolidated statements of financial condition at June 30, 2020 and 2019.

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2020

Note 1 Basis of Presentation

National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Denver, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank (the "Bank"), a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides a variety of banking products to both commercial and consumer clients through a network of 101 banking centers, as of June 30, 2020, 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, 2019 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. During the first quarter of 2020, the Company updated the loan classifications in its allowance for credit losses model and loans previously referred to as “310-30” were reclassified to “acquired loans”. Certain loan classifications within the consolidated financial disclosures have been updated to reflect this change. The prior period presentations have been reclassified to conform to the current period presentations. Refer to note 4 for further discussion. The results of operations for the interim period is 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.

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

GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment and available information. Management has made significant estimates in certain areas, such as the amount and timing of expected cash flows from assets, the valuation of other real estate owned (“OREO”), the fair value adjustments on assets acquired and liabilities assumed, the valuation of core deposit intangible assets, the valuation of investment securities, the valuation of stock-based compensation, the valuation of mortgage servicing rights (“MSRs”), the fair values of financial instruments, the allowance for credit losses (“ACL”) and contingent liabilities. Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.

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, 2019 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, 2019, except for the following:

Allowance for credit losses (“ACL”)—The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. This update replaced the current incurred loss methodology for recognizing credit losses with a Current Expected Credit Loss model (“CECL”), which requires a lifetime loss 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.

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Loans

The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified four primary loan segments that are further stratified into 11 loan classes to provide more granularity in analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan classes will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Those loans include loans on non-accrual status, loans in bankruptcy, and troubled debt restructurings (“TDRs”) described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted expected cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral-dependent loans.

The Company utilizes a discounted cash flow ("DCF") model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules. The model incorporates forecasts of certain national macroeconomic factors which drive correlated Probability of Default (“PD”) and Loss Given Default (“LGD”) rates, which in turn, drive the losses predicted in establishing our ACL. PD and LGD rates along with prepayment rates and loss recovery time delays are determined at a loan class level making use of both internal and peer historical loss rate data. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. For periods beyond the near term, we revert to historical long-term average loss rates on a straight-line basis. The length of the forecast and reversion periods is based on management’s assessment of the length and pattern of the current economic cycle.

Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting alternate forecast scenarios. Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth and industry concentrations. The Company has elected to exclude accrued interest receivable ("AIR") from the allowance for credit losses calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income.

The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations. Various regulatory agencies, as an integral part of the examination process, periodically review the ACL. Such agencies may require the Company to recognize additions to the ACL or reserve increases to adversely graded classified loans based on their judgments about information available to them at the time of their examinations.

The ACL is decreased by net charge-offs and is increased by provisions for loan losses that are charged to the statements of operations. Charge-offs, if any, are typically measured for each loan based on a thorough analysis of the most probable source of repayment, such as the present value of the loan’s expected future cash flows, the loan’s estimated fair value, or the estimated fair value of the underlying collateral less costs of disposition for collateral-dependent loans. When it is determined that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the ACL.

The Company uses an internal risk rating system to indicate credit quality in the loan portfolio. The risk rating system is applied to all loans and uses a series of grades, which reflect management’s assessment of the risk attributable to loans based on an analysis of the borrower’s financial condition and ability to meet contractual debt service requirements. Loans that management perceives to have acceptable risk are categorized as “Pass” loans. The “Special Mention” loans represent loans that have potential credit weaknesses that deserve management’s close attention. Special mention loans include borrowers that have potential weaknesses or unwarranted risks that, unless corrected, may threaten the borrower’s ability to meet debt requirements. However, these borrowers are still believed to have the ability to respond to and resolve the financial issues that threaten their financial situation. Loans classified as “Substandard” are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. “Doubtful” loans are loans that management believes the collection of payments in accordance with the terms of the loan agreement is highly questionable and improbable. Credit quality indicators are reviewed and updated in accordance with internal policy based on loan balance and risk rating. Interest accrual is discontinued on doubtful loans and certain substandard loans, as is more fully discussed in note 4.

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Unfunded loan commitments

In addition to the ACL for funded loans, the Company maintains reserves to cover the risk of loss associated with off-balance sheet unfunded loan commitments. The allowance for off-balance sheet credit losses is maintained within the other liabilities in the statements of financial condition. Under the CECL framework, adjustments to this liability are recorded as provision for credit losses in the statements of operations. Unfunded loan commitment balances are evaluated by loan class and further segregated by revolving and non-revolving commitments. In order to establish the required level of reserve, the Company applies average historical utilization rates and ACL loan model loss rates for each loan class to the outstanding unfunded commitment balances.

Investment securities

Management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, we evaluate whether the decline in fair value is the result of credit losses or other factors. In making the assessment, we may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss. For U.S. agency-backed held-to-maturity securities, since the risk of nonpayment of the amortized cost basis is zero, the Company will not measure expected credit losses on these securities. When the loss is not considered a result of credit loss, the cost basis of the security is written down to fair value, with the loss charge recognized in accumulated other comprehensive income (“AOCI”). Credit losses are not estimated for AIR from investment securities as interest deemed uncollectible is written off through interest income.

Note 2 Recent Accounting Pronouncements

Financial Instruments - Credit Losses—In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaces the current incurred loss methodology for recognizing credit losses with a CECL model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amendment broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. We adopted ASU 2016-13 on January 1, 2020 using a modified retrospective approach. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption, the Company recognized a $5.8 million increase in the allowance for credit losses with a corresponding reduction to retained earnings, net of tax, of $4.6 million. Since the investment securities portfolio was comprised of mortgage-backed securities issued by government sponsored entities as of January 1, 2020, no credit loss allowance was required upon adoption. See CECL loan related financial statement disclosures included within note 1 and note 4 of the consolidated financial statements.

Other Pronouncements—The Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement and ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment with no material impact on its financial statements.

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 $0.8 billion at June 30, 2020 and included $0.6 billion of available-for-sale securities and $0.2 billion of held-to-maturity securities. At December 31, 2019, investment securities totaled $0.8 billion and included $0.6 billion of available-for-sale securities and $0.2 billion of held-to-maturity securities.

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Available-for-sale

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


	June 30, 2020
	Amortized		Gross		Gross
	cost		unrealized gains		unrealized losses		Fair value
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	98,126	$	2,927	$	—	$	101,053
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		495,544		11,288		(128)		506,704
Municipal securities		495		14		—		509
Corporate debt		2,000		—		—		2,000
Other securities		469		—		—		469
Total investment securities available-for-sale	$	596,634	$	14,229	$	(128)	$	610,735


	December 31, 2019
	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	$	93,770	$	1,497	$	(11)	$	95,256
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		543,275		3,818		(5,056)		542,037
Municipal securities		495		—		(8)		487
Other securities		469		—		—		469
Total investment securities available-for-sale	$	638,009	$	5,315	$	(5,075)	$	638,249

At June 30, 2020 and December 31, 2019, mortgage-backed securities represented primarily all of the Company’s available-for-sale investment portfolio and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral such as 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:


	June 30, 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:
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	32,520	$	(88)	$	6,640	$	(40)	$	39,160	$	(128)
Total	$	32,520	$	(88)	$	6,640	$	(40)	$	39,160	$	(128)

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	December 31, 2019
	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	$	10,413	$	(7)	$	1,421	$	(4)	$	11,834	$	(11)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		41,983		(281)		254,380		(4,775)		296,363		(5,056)
Municipal securities		—		—		372		(8)		372		(8)
Total	$	52,396	$	(288)	$	256,173	$	(4,787)	$	308,569	$	(5,075)

Management evaluated all of the available-for-sale securities in an unrealized loss position at June 30, 2020 and December 31, 2019. The portfolio included 12 securities, which were in an unrealized loss position at June 30, 2020, compared to 67 securities at December 31, 2019. The unrealized losses in the Company's investment portfolio at June 30, 2020 were caused by changes in interest rates. The Company has no intention to sell these securities and believes it will not be required to sell the securities before the recovery of their amortized cost. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank (“FRB”), if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $414.8 million and $352.3 million at June 30, 2020 and at December 31, 2019, respectively. The Bank had available-for-sale investment securities pledged as collateral for Federal Home Loan Bank (“FHLB”) advances totaling $12.2 million and $13.6 million at June 30, 2020 and December 31, 2019, respectively.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. As of June 30, 2020, the entire municipal securities portfolio with an amortized cost and fair value of $0.5 million was due between one to five years. Corporate debt securities with a 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 June 30, 2020, have no stated contractual maturity date.

As of June 30, 2020 and December 31, 2019, AIR from available-for-sale investment securities totaled $1.5 million and $1.5 million, respectively, and was included with 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:


	June 30, 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	$	165,638	$	4,071	$	(39)	$	169,670
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		49,545		441		—		49,986
Total investment securities held-to-maturity	$	215,183	$	4,512	$	(39)	$	219,656

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	December 31, 2019
			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	$	127,560	$	1,239	$	(29)	$	128,770
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		55,324		82		(435)		54,971
Total investment securities held-to-maturity	$	182,884	$	1,321	$	(464)	$	183,741

There was one held-to-maturity security in an unrealized loss position as of June 30, 2020 compared to 13 securities at December 31, 2019. The tables below summarize the held-to-maturity securities with unrealized losses as of the dates shown, along with the length of the impairment period:


	June 30, 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	$	10,433	$	(39)	$	—	$	—	$	10,433	$	(39)
Total	$	10,433	$	(39)	$	—	$	—	$	10,433	$	(39)


	December 31, 2019
	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	$	10,478	$	(26)	$	338	$	(3)	$	10,816	$	(29)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		3,925		(9)		28,554		(426)		32,479		(435)
Total	$	14,403	$	(35)	$	28,892	$	(429)	$	43,295	$	(464)

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

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the FRB, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $155.8 million and $144.2 million at June 30, 2020 and December 31, 2019, respectively. The Bank had held-to-maturity investment securities pledged as collateral for FHLB advances totaling $3.6 million and $4.0 million at June 30, 2020 and December 31, 2019, respectively.

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 June 30, 2020 and December 31, 2019, AIR from held-to-maturity investment securities totaled $0.5 million and $0.5 million, respectively, and was included with other assets on the statements of financial condition.

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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. During the first quarter of 2020, the Company updated its loan classifications to include energy loans within the commercial and industrial loan class and present municipal and non-profit loans as their own class within the commercial segment. In addition, as the concept of impaired loans does not exist under CECL, disclosures that related solely to impaired loans have been removed.

The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value of loans is net of discounts, fees, cost and fair value marks of $26.7 million and $21.9 million as of June 30, 2020 and December 31, 2019, respectively. Included in commercial loans are loans originated as part of the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) of $348.7 million, net of fees and costs, at June 30, 2020, which are fully guaranteed by the SBA.


	June 30, 2020
	Total loans		% of total
Commercial	$	3,390,633	71.0%
Commercial real estate non-owner occupied		641,824	13.4%
Residential real estate		729,014	15.2%
Consumer		20,912	0.4%
Total	$	4,782,383	100.0%


	December 31, 2019
	Total loans		% of total
Commercial	$	2,992,307	67.8%
Commercial real estate non-owner occupied		630,906	14.3%
Residential real estate		770,417	17.4%
Consumer		21,776	0.5%
Total	$	4,415,406	100.0%

Delinquency for loans is shown in the following tables at June 30, 2020 and December 31, 2019:


	June 30, 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	$	909	$	2,127	$	9,039	$	12,075	$	1,724,754	$	1,736,829
Municipal and non-profit		—		—		—		—		912,880		912,880
Owner occupied commercial real estate		1,713		176		1,254		3,143		517,755		520,898
Food and agribusiness		158		—		798		956		219,070		220,026
Total commercial		2,780		2,303		11,091		16,174		3,374,459		3,390,633
Commercial real estate non-owner occupied:
Construction		—		—		—		—		75,250		75,250
Acquisition/development		—		—		—		—		24,982		24,982
Multifamily		—		—		—		—		94,077		94,077
Non-owner occupied		250		141		36		427		447,088		447,515
Total commercial real estate		250		141		36		427		641,397		641,824
Residential real estate:
Senior lien		587		—		8,048		8,635		633,156		641,791
Junior lien		291		—		791		1,082		86,141		87,223
Total residential real estate		878		—		8,839		9,717		719,297		729,014
Consumer		24		—		33		57		20,855		20,912
Total loans	$	3,932	$	2,444	$	19,999	$	26,375	$	4,756,008	$	4,782,383

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	June 30, 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	$	4,951	$	4,088	$	9,039
Municipal and non-profit		—		—		—
Owner occupied commercial real estate		762		492		1,254
Food and agribusiness		411		387		798
Total commercial		6,124		4,967		11,091
Commercial real estate non-owner occupied:
Construction		—		—		—
Acquisition/development		—		—		—
Multifamily		—		—		—
Non-owner occupied		36		—		36
Total commercial real estate		36		—		36
Residential real estate:
Senior lien		4,876		3,172		8,048
Junior lien		791		—		791
Total residential real estate		5,667		3,172		8,839
Consumer		33		—		33
Total loans	$	11,860	$	8,139	$	19,999


	December 31, 2019
			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	$	2,252	$	879	$	10,330	$	13,461	$	1,398,070	$	1,411,531
Municipal and non-profit		226		—		—		226		837,300		837,526
Owner occupied commercial real estate		595		630		2,264		3,489		486,633		490,122
Food and agribusiness		190		—		317		507		252,621		253,128
Total commercial		3,263		1,509		12,911		17,683		2,974,624		2,992,307
Commercial real estate non-owner occupied:
Construction		—		—		—		—		77,733		77,733
Acquisition/development		187		—		416		603		26,276		26,879
Multifamily		—		—		—		—		55,808		55,808
Non-owner occupied		438		65		43		546		469,940		470,486
Total commercial real estate		625		65		459		1,149		629,757		630,906
Residential real estate:
Senior lien		2,101		9		7,597		9,707		668,955		678,662
Junior lien		245		79		731		1,055		90,700		91,755
Total residential real estate		2,346		88		8,328		10,762		759,655		770,417
Consumer		116		—		50		166		21,610		21,776
Total loans	$	6,350	$	1,662	$	21,748	$	29,760	$	4,385,646	$	4,415,406

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and TDRs on non-accrual status. There was no interest income recognized from non-accrual loans during the six months ended June 30, 2020 or 2019.

The Company’s internal risk rating system uses a series of grades, which reflect our assessment of the credit quality of loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. For a description of the general characteristics of the risk grades, refer to note 1 Basis of Presentation.

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The amortized cost basis for all loans as determined by the Company’s internal risk rating system and year of origination was as follows at June 30, 2020:


	June 30, 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	$	456,897	$	241,545	$	230,340	$	111,592	$	30,734	$	36,968	$	574,377	$	13,627	$	1,696,080
Special mention		389		1,467		5,681		4,892		6,339		881		5,465		147		25,261
Substandard		32		1,386		1,195		3,050		121		4,629		1,875		2,050		14,338
Doubtful		—		—		—		450		—		674		26		—		1,150
Total commercial and industrial		457,318		244,398		237,216		119,984		37,194		43,152		581,743		15,824		1,736,829
Municipal and non-profit:
Pass		112,124		95,786		140,218		171,021		133,197		257,489		3,045		—		912,880
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total municipal and non-profit		112,124		95,786		140,218		171,021		133,197		257,489		3,045		—		912,880
Owner occupied commercial real estate:
Pass		53,575		116,823		97,232		50,319		34,529		110,342		1,284		206		464,310
Special mention		1,581		5,078		2,623		11,788		5,658		18,037		119		—		44,884
Substandard		—		—		6,253		—		290		5,161		—		—		11,704
Doubtful		—		—		—		—		—		—		—		—		—
Total owner occupied commercial real estate		55,156		121,901		106,108		62,107		40,477		133,540		1,403		206		520,898
Food and agribusiness:
Pass		7,505		10,932		32,448		7,623		9,956		29,375		119,551		78		217,468
Special mention		—		—		—		—		—		942		—		—		942
Substandard		—		—		—		314		—		1,040		230		—		1,584
Doubtful		—		—		—		—		—		6		26		—		32
Total food and agribusiness		7,505		10,932		32,448		7,937		9,956		31,363		119,807		78		220,026
Total commercial		632,103		473,017		515,990		361,049		220,824		465,544		705,998		16,108		3,390,633
Commercial real estate non-owner occupied:
Construction:
Pass		10,648		36,775		18,118		3,856		—		—		3,903		1,760		75,060
Special mention		190		—		—		—		—		—		—		—		190
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total construction		10,838		36,775		18,118		3,856		—		—		3,903		1,760		75,250
Acquisition/development:
Pass		3,075		2,065		2,155		8,546		4,585		4,027		54		—		24,507
Special mention		—		—		—		—		—		253		—		—		253
Substandard		—		—		—		36		—		186		—		—		222
Doubtful		—		—		—		—		—		—		—		—		—
Total acquisition/development		3,075		2,065		2,155		8,582		4,585		4,466		54		—		24,982
Multifamily:
Pass		21,485		13,815		867		27,700		21,314		6,502		—		—		91,683
Special mention		—		—		—		—		—		1,934		—		—		1,934
Substandard		—		—		—		—		—		460		—		—		460
Doubtful		—		—		—		—		—		—		—		—		—
Total multifamily		21,485		13,815		867		27,700		21,314		8,896		—		—		94,077
Non-owner occupied
Pass		31,453		91,164		28,211		116,484		29,176		124,405		1,962		101		422,956
Special mention		—		—		5,995		9,867		3,967		3,708		100		—		23,637
Substandard		—		—		66		—		1		855		—		—		922
Doubtful		—		—		—		—		—		—		—		—		—
Total non-owner occupied		31,453		91,164		34,272		126,351		33,144		128,968		2,062		101		447,515
Total commercial real estate		66,851		143,819		55,412		166,489		59,043		142,330		6,019		1,861		641,824
Residential real estate:
Senior lien
Pass		53,775		106,999		53,745		65,907		110,724		215,042		26,106		311		632,609
Special mention		—		—		—		—		—		449		—		—		449
Substandard		98		367		21		1,549		537		6,111		—		50		8,733
Doubtful		—		—		—		—		—		—		—		—		—

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	June 30, 2020
													Revolving		Revolving
													loans		loans
	Origination year												amortized		converted
	2020		2019		2018		2017		2016		Prior		cost basis		to term		Total
Total senior lien		53,873		107,366		53,766		67,456		111,261		221,602		26,106		361		641,791
Junior lien
Pass		3,453		5,111		4,184		1,939		1,001		4,724		64,138		1,402		85,952
Special mention		—		—		—		—		—		21		346		—		367
Substandard		—		—		229		175		173		304		—		23		904
Doubtful		—		—		—		—		—		—		—		—		—
Total junior lien		3,453		5,111		4,413		2,114		1,174		5,049		64,484		1,425		87,223
Total residential real estate		57,326		112,477		58,179		69,570		112,435		226,651		90,590		1,786		729,014
Consumer
Pass		5,572		7,083		2,422		944		599		842		3,401		17		20,880
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		23		9		—		—		32
Doubtful		—		—		—		—		—		—		—		—		—
Total consumer		5,572		7,083		2,422		944		622		851		3,401		17		20,912
Total loans	$	761,852	$	736,396	$	632,003	$	598,052	$	392,924	$	835,376	$	806,008	$	19,772	$	4,782,383

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 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 June 30, 2020:


	June 30, 2020
					Total amortized
	Real property		Business assets		cost basis
Commercial
Commercial and industrial	$	8,059	$	5,580	$	13,639
Owner-occupied commercial real estate		4,372		—		4,372
Food and agribusiness		1,090		313		1,403
Total Commercial		13,521		5,893		19,414
Commercial real estate non owner-occupied
Acquisition/development		1,299		—		1,299
Non-owner occupied		556		—		556
Total commercial real estate		1,855		—		1,855
Residential real estate
Senior lien		3,172		—		3,172
Total residential real estate		3,172		—		3,172
Total loans	$	18,548	$	5,893	$	24,441

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.

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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 troubled debt restructurings under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments as of December 31, 2019. During the six months ended June 30, 2020, the Company modified 463 loans totaling $492.4 million, or 10.3% of the total loan portfolio, due to the effects of the COVID-19 pandemic that were not classified as TDRs. Of the total COVID loan modifications, three-month principal payment deferrals totaled $255.5 million and three-month full payment deferrals totaled $228.7 million.

During the six months ended June 30, 2020, the Company restructured 12 loans with an amortized cost basis of $11.9 million to facilitate repayment. Included in the total TDR balance as of June 30, 2020 were loans totaling $4.2 million previously accounted for under ASC 310-30. Loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of term. The tables below provide additional information related to accruing TDRs at June 30, 2020 and December 31, 2019:


	June 30, 2020
	Amortized		Average year-to-date		Unpaid		Unfunded commitments
	cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	15,337	$	15,473	$	16,151	$	182
Commercial real estate non-owner occupied		2,975		3,024		5,213		—
Residential real estate		1,972		2,003		2,842		12
Consumer		—		—		12		—
Total	$	20,284	$	20,500	$	24,218	$	194


	December 31, 2019
	Recorded		Average year-to-date		Unpaid		Unfunded commitments
	investment		amortized cost basis		principal balance		to fund TDRs
Commercial	$	5,615	$	5,788	$	5,714	$	—
Commercial real estate non-owner occupied		141		172		192		—
Residential real estate		1,129		1,178		1,206		12
Consumer		—		—		—		—
Total	$	6,885	$	7,138	$	7,112	$	12

The following table summarizes the Company’s carrying value of non-accrual TDRs as of June 30, 2020 and December 31, 2019:


	June 30, 2020		December 31, 2019
Commercial	$	1,663	$	1,891
Commercial real estate non-owner occupied		—		410
Residential real estate		2,458		2,553
Consumer		—		—
Total non-accruing TDRs	$	4,121	$	4,854

Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for a period of time. The Company had two TDRs totaling $0.4 million that were modified within the past 12 months and had defaulted on their restructured terms during the six months ended June 30, 2020. During the six months ended June 30, 2019, the Company had two TDRs totaling $0.2 million that were modified within the past 12 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.

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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 June 30, 2020
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	30,557	$	9,278	$	10,696	$	425	$	50,956
Charge-offs		(694)		—		(12)		(146)		(852)
Recoveries		172		—		15		49		236
Provision		3,107		3,036		3,826		156		10,125
Ending balance	$	33,142	$	12,314	$	14,525	$	484	$	60,465


	Six months ended June 30, 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		(912)		—		(40)		(397)		(1,349)
Recoveries		263		—		20		97		380
Provision		4,648		5,798		5,763		325		16,534
Ending balance	$	33,142	$	12,314	$	14,525	$	484	$	60,465


(1)		Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments. Refer to note 2 – Recent Accounting Pronouncements of our consolidated financial statements for further details.

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


	Three months ended June 30, 2019
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	28,075	$	4,914	$	3,718	$	348	$	37,055
Charge-offs		(70)		—		(24)		(200)		(294)
Recoveries		3		—		16		63		82
Provision		2,815		153		141		130		3,239
Ending balance	$	30,823	$	5,067	$	3,851	$	341	$	40,082


	Six months ended June 30, 2019
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	27,137	$	4,406	$	3,800	$	349	$	35,692
Charge-offs		(82)		—		(47)		(433)		(562)
Recoveries		30		11		29		109		179
Provision		3,738		650		69		316		4,773
Ending balance	$	30,823	$	5,067	$	3,851	$	341	$	40,082

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-

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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 June 30, 2020 were $0.6 million. Provision for loan losses for funded loans of $10.1 million was recorded during the three months ended June 30, 2020 to provide for further declines in the macro-economic forecast within the CECL model as a result of COVID-19.

Net charge-offs on loans during the six months ended June 30, 2020 were $1.0 million. Provision for loan losses for funded loans of $16.5 million was recorded during the six months ended June 30, 2020 to provide coverage for the impact of deteriorating economic conditions as a results of COVID-19 and to support non-PPP originated loan growth and net charge-offs.

Provision for loan losses totaled $3.3 million and $4.8 million for the three and six months ended June 30, 2019, respectively, to support originated loan growth and net charge-offs.

The Company has elected to exclude AIR from the allowance for credit losses calculation. As of June 30, 2020 and December 31, 2019, AIR from loans totaled $17.8 million and $17.2 million, respectively.

Note 6 Other Real Estate Owned

A summary of the activity in OREO during the six months ended June 30, 2020 and 2019 is as follows:


	For the six months ended June 30,
	2020		2019
Beginning balance	$	7,300	$	10,596
Transfers from loan portfolio, at fair value		1,146		288
Impairments		(26)		(684)
Sales		(1,929)		(3,146)
Ending balance	$	6,491	$	7,054

During the six months ended June 30, 2020 and 2019, the Company sold OREO properties with net book balances of $1.9 million and $3.1 million, respectively. The sales resulted in net OREO losses of $0.1 million and net OREO gains of $0.3 million, which were included in the consolidated statements of operations for the three months ended June 30, 2020 and 2019, respectively. Net OREO losses of $0.1 million and net OREO gains of $0.7 million were included in the consolidated statements of operations for the six months ended June 30, 2020 and 2019, respectively.

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. No goodwill impairment was recorded during the three or six months ended June 30, 2020 or the year ended December 31, 2019.

The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at June 30, 2020 and December 31, 2019, are presented as follows:

June 30, 2020

December 31, 2019

Gross

Net

Gross

Net

carrying

Accumulated

carrying

Accumulated

carrying

amount

amortization

amount

amortization

amount

Core deposit intangible

48,834

(40,694)

8,140

48,834

(40,103)

8,731

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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 $0.6 million during the three and six months ended June 30, 2020, respectively, and $0.3 million and $0.6 million during the three and six months ended June 30, 2019, respectively.

The following table shows the estimated future amortization expense for the core deposit intangibles as of June 30, 2020:


Years ending December 31,		Amount
For the six months ending December 31, 2020	$	592
For the year ending December 31, 2021		1,183
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

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. Mortgage loans serviced for others were $623.1 million and $357.0 million at June 30, 2020 and 2019, respectively, and are included in other assets in the consolidated statements of financial condition.

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


	For the six months ended June 30,
	2020		2019
Beginning balance	$	2,630	$	3,556
Originations		3,189		18
Impairment		(1,102)		(277)
Amortization		(682)		(353)
Ending balance		4,035		2,944
Fair value of mortgage servicing rights	$	4,173	$	2,945

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 18.3% to 21.3% for the June 30, 2020 valuation. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from 15.9% to 23.2% for the June 30, 2019 valuation. Included in mortgage banking income in the consolidated statements of operations were service fees of $0.3 million and $0.5 million for the three and six months ended June 30, 2020, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2019, respectively.

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

The following table shows the estimated future amortization expense for the MSRs as of June 30, 2020:


Years ending December 31,		Amount
For the six months ending December 31, 2020	$	601
For the year ending December 31, 2021		1,066
For the year ending December 31, 2022		824
For the year ending December 31, 2023		636
For the year ending December 31, 2024		491

Note 8 Borrowings

The Company enters into repurchase agreements to facilitate the needs of its clients. As of June 30, 2020 and December 31, 2019, the Company sold securities under agreements to repurchase totaling $24.5 million and $56.9 million, respectively. The Company pledged

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mortgage-backed securities with a fair value of approximately $27.5 million and $65.6 million as of June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019, the Company had $2.3 million and $7.0 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 $1.0 billion at June 30, 2020. At June 30, 2020, the Bank had no line of credit advances from the FHLB. At December 31, 2019, the Bank had $192.7 million in line of credit advances from the FHLB that matured within a day. At June 30, 2020 and December 31, 2019, the Bank had one term advance from the FHLB totaling $15.0 million with a fixed interest rate of 2.33% and a maturity date in October 2020.

The Bank had investment securities and loans pledged as collateral for FHLB advances. Investment securities pledged were $15.9 million and $17.6 million at June 30, 2020 and December 31, 2019, respectively. Loans pledged were $1.4 billion at June 30, 2020 and $1.5 billion at December 31, 2019. Interest expense related to FHLB advances and other short-term borrowings totaled $0.3 million and $1.2 million for the three and six months ended June 30, 2020, respectively, and $1.9 million and $3.4 million for the three and six months ended June 30, 2019, respectively.

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.

Under the Basel III requirements, at June 30, 2020 and December 31, 2019, the Company and the Bank met all capital requirements including the capital conservation buffer of 2.5%, which was fully phased in on January 1, 2019. The Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below:


	June 30, 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	10.5%	$	649,593	N/A		N/A	4.0%	$	246,796
NBH Bank	9.1%		563,428	5.0%	$	308,337	4.0%		246,670
Common equity tier 1 risk based capital:
Consolidated	13.2%	$	649,593	N/A		N/A	7.0%	$	344,199
NBH Bank	11.5%		563,428	6.5%	$	319,357	7.0%		343,923
Tier 1 risk based capital ratio:
Consolidated	13.2%	$	649,593	N/A		N/A	8.5%	$	417,956
NBH Bank	11.5%		563,428	8.0%	$	393,054	8.5%		417,620
Total risk based capital ratio:
Consolidated	14.3%	$	701,086	N/A		N/A	10.5%	$	516,298
NBH Bank	12.5%		614,921	10.0%	$	491,318	10.5%		515,884

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	December 31, 2019
				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	11.0%	$	640,440	N/A		N/A	4.0%	$	231,950
NBH Bank	9.1%		528,028	5.0%	$	289,926	4.0%		231,940
Common equity tier 1 risk based capital:
Consolidated	13.2%	$	640,440	N/A		N/A	7.0%	$	405,912
NBH Bank	10.9%		528,028	6.5%	$	376,903	7.0%		405,896
Tier 1 risk based capital ratio:
Consolidated	13.2%	$	640,440	N/A		N/A	8.5%	$	412,620
NBH Bank	10.9%		528,028	8.0%	$	387,701	8.5%		411,932
Total risk based capital ratio:
Consolidated	14.1%	$	682,645	N/A		N/A	10.5%	$	509,707
NBH Bank	11.8%		570,233	10.0%	$	484,626	10.5%		508,857

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.

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.

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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 and six months ended June 30, 2020 and 2019:


	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019
Non-interest income
In-scope of Topic 606:
Service charges and other fees	$	3,543	$	4,868	$	8,208	$	9,710
Bank card fees		3,654		3,766		7,167		7,194
Non-interest income (in-scope of Topic 606)		7,197		8,634		15,375		16,904
Non-interest income (out-of-scope of Topic 606)		31,640		12,026		46,994		20,807
Total non-interest income	$	38,837	$	20,660	$	62,369	$	37,711
Non-interest expense
In-scope of Topic 606:
(Loss) gain on OREO sales, net	$	(55)	$	318	$	(94)	$	686
Total revenue in-scope of Topic 606	$	7,142	$	8,952	$	15,281	$	17,590

Contract acquisition costs

In accordance with Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a client if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a client that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient, which allows entities to expense immediately contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract acquisition costs.

Note 11 Stock-based Compensation and Benefits

The Company provides stock-based compensation in accordance with shareholder-approved plans. In 2014, shareholders approved the 2014 Omnibus Incentive Plan (the "2014 Plan"). The 2014 Plan replaces the NBH Holdings Corp. 2009 Equity Incentive Plan (the "Prior Plan"), pursuant to which the Company granted equity awards prior to the approval of the 2014 Plan. Pursuant to the 2014 Plan, the Compensation Committee of the Board of Directors has the authority to grant, from time to time, awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons.

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.

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The following table summarizes stock option activity for the six months ended June 30, 2020:


				Weighted
				average
		Weighted		remaining
		average		contractual	Aggregate
		exercise		term in	intrinsic
	Options	price		years	value
Outstanding at December 31, 2019	657,114	$	26.69	6.41	$	5,626
Granted	224,305		23.11
Exercised	(52,479)		20.01
Forfeited	(3,909)		32.70
Outstanding at June 30, 2020	825,031	$	26.11	7.29	$	2,951
Options exercisable at June 30, 2020	459,138		25.20	5.73		2,077
Options vested and expected to vest	778,233		26.08	7.16		2,826

Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $502 thousand and $220 thousand for the three months ended June 30, 2020 and 2019, respectively, and $710 thousand and $267 thousand for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020, there was $0.8 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted average period of 2.3 years.

Restricted stock awards

The Company issues primarily time-based restricted stock awards that vest over a range of 1 - 3 years. 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. Historically, 60% of the award is based on the Company’s cumulative earnings per share (EPS target) during the performance period, and 40% of the award is based on the Company’s cumulative total shareholder return (TSR target), or TSR, during the performance period. On the vesting date, the Company’s TSR will be compared to the respective TSRs of the companies comprising the KBW Regional Index at the grant date to determine the shares awarded. The fair value of the EPS target portion of the award was determined based on the closing stock price of the Company’s common stock on the grant date. The fair value of the TSR target portion of the award was determined using a Monte Carlo Simulation at the grant date.

In establishing the PSU components during 2020, the Compensation Committee determined the EPS target portion of the award would not be an effective metric in light of economic uncertainty surrounding COVID-19. Consequently, the Compensation Committee did not grant the EPS portion of the award during the six months ended June 30, 2020 while it evaluated alternative metrics for such component (the Compensation Committee has determined to use a relative return on tangible assets metric instead).

The weighted-average grant date fair value per unit for the TSR target portion granted during the six months ended June 30, 2020 was $24.58 and the beginning weighted-average measurement price was $35.95. During the six months ended June 30, 2020, the Company awarded an additional 17,852 units due to final performance results related to performance stock units granted in 2017.

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The following table summarizes restricted stock and performance stock unit activity during the six months ended June 30, 2020:


		Weighted				Weighted
	Restricted	average grant-		Performance		average grant-
	stock shares	date fair value		stock units		date fair value
Unvested at December 31, 2019	122,198	$	34.19	158,874	$	31.19
Granted	118,326		23.54	30,072		24.58
Adjustment due to performance	—		—	17,852		33.22
Vested	(53,995)		34.40	(53,540)		33.22
Forfeited	(3,899)		30.62	(328)		30.38
Unvested at June 30, 2020	182,630	$	27.30	152,930	$	29.42

As of June 30, 2020, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled $3.4 million and $2.5 million, respectively, and is expected to be recognized over a weighted average period of approximately 2.2 years and 1.7 years, respectively. Expense related to non-vested restricted stock awards totaled $0.7 million and $0.8 million during the three months ended June 30, 2020 and 2019, respectively, and $1.2 million and $0.9 million during the six months ended June 30, 2020 and 2019, respectively. Expense related to non-vested performance stock units totaled $0.4 million and $0.5 million during the three months ended June 30, 2020 and 2019, respectively, and $0.9 million and $0.7 million during the six months ended June 30, 2020 and 2019, respectively. Expense related to non-vested restricted stock awards and units is a component of salaries and benefits in the Company’s consolidated statements of operations.

Employee stock purchase plan

The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of the Internal Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll deductions up to a limit of $25,000 per calendar year and 2,000 shares per offering period. The price an employee pays for shares is 90.0% of the fair market value of Company common stock on the last day of the offering period. The offering periods are the six-month periods commencing on March 1 and September 1 of each year and ending on August 31 and February 28 (or February 29 in the case of a leap year) of each year. There are no vesting or other restrictions on the stock purchased by employees under the ESPP. Under the ESPP, the total number of shares of common stock reserved for issuance totaled 400,000 shares, of which 317,198 was available for issuance.

Under the ESPP, employees purchased 8,890 shares and 6,201 shares during the six months ended June 30, 2020 and 2019, respectively.

Note 12 Common Stock

The Company had 30,569,011 and 31,176,627 shares of Class A common stock outstanding at June 30, 2020 and December 31, 2019, respectively. Additionally, the Company had 182,630 and 122,198 shares outstanding at June 30, 2020 and December 31, 2019, respectively, of restricted Class A common stock issued but not yet vested under the 2014 Plan that are not included in shares outstanding until such time that they are vested; however, these shares do have voting and certain dividend rights during the vesting period.

On February 26, 2020, the Board of Directors authorized a new share repurchase program for up to $50.0 million from time to time in either the open market or through privately negotiated transactions. During the first quarter of 2020, the Company repurchased 734,117 shares for $19.5 million. Of those repurchases, $12.6 million were part of the previous authorization from August 2016. That authorization has been completed. The remaining authorization under the new program as of June 30, 2020 was $43.1 million.

Note 13 Earnings Per Share

The Company calculates earnings per share under the two-class method, as certain non-vested share awards contain non-forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the Company. Non-vested shares are discussed further in note 12.

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The Company had 30,569,011 and 31,139,044 shares of Class A common stock outstanding as of June 30, 2020 and 2019, respectively, exclusive of issued non-vested restricted shares. Certain stock options and non-vested restricted shares are potentially dilutive securities, but are not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for the three and six months ended June 30, 2020 and 2019.

The following table illustrates the computation of basic and diluted earnings per share for the three and six months ended June 30, 2020 and 2019:


	For the three months ended				For the six months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Net income	$	17,705	$	20,282	$	33,529	$	39,204
Less: income allocated to participating securities		(37)		(26)		(61)		(44)
Income allocated to common shareholders	$	17,668	$	20,256	$	33,468	$	39,160
Weighted average shares outstanding for basic earnings per common share		30,731,758		31,155,264		30,944,617		31,058,761
Dilutive effect of equity awards		125,848		449,394		183,467		499,854
Weighted average shares outstanding for diluted earnings per common share		30,857,606		31,604,658		31,128,084		31,558,615
Basic earnings per share	$	0.57	$	0.65	$	1.08	$	1.26
Diluted earnings per share		0.57		0.64		1.08		1.24

The Company had 825,031 and 683,384 outstanding stock options to purchase common stock at weighted average exercise prices of $26.11 and $26.56 per share at June 30, 2020 and 2019, respectively, which have time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those stock options is dilutive. The Company had 335,560 and 298,882 unvested restricted shares and performance stock units issued as of June 30, 2020 and 2019, respectively, which have performance, market and/or time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those restricted shares and performance stock units is dilutive.

Note 14 Derivatives

Risk management objective of using derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company has established policies that neither carrying value nor fair value at risk should exceed established guidelines. The Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently, the Company employs certain interest rate swaps that are designated as fair value hedges as well as economic hedges. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

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Fair values of derivative instruments on the balance sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial condition as of June 30, 2020 and December 31, 2019.

Information about the valuation methods used to measure fair value is provided in note 16.


		Asset derivatives fair value					Liability derivatives fair value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	location	2020		2019		Location	2020		2019
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	—	$	1,171	Other liabilities	$	48,616	$	13,537
Total derivatives designated as hedging instruments		$	—	$	1,171		$	48,616	$	13,537

Derivatives not designated as hedging instruments:
Interest rate products	Other assets	$	22,646	$	9,004	Other liabilities	$	22,737	$	9,021
Interest rate lock commitments	Other assets		9,251		1,499	Other liabilities		181		141
Forward contracts	Other assets		10		16	Other liabilities		2,383		299
Total derivatives not designated as hedging instruments		$	31,907	$	10,519		$	25,301	$	9,461

Fair value hedges

Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2020, the Company had interest rate swaps with a notional amount of $406.0 million, which were designated as fair value hedges of interest rate risk. As of December 31, 2019, the Company had interest rate swaps with a notional amount of $403.7 million, that were designated as fair value hedges. These interest rate swaps were associated with $409.2 million and $405.9 million of the Company’s fixed-rate loans included in loans receivable on the statements of financial condition as of June 30, 2020 and December 31, 2019, respectively, before a gain of $49.8 million and $13.9 million from the fair value hedge adjustment in the carrying amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.

Non-designated hedges

Derivatives not designated as hedges are not speculative and consist of interest rate swaps with commercial banking clients that facilitate their respective risk management strategies. Interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2020, the Company had matched interest rate swap transactions with an aggregate notional amount of $511.8 million related to this program. As of December 31, 2019, the Company had matched interest rate swap transactions with an aggregate notional amount of $478.9 million related to this program.

As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Fair value changes of certain loans under interest rate lock commitments are hedged with forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in non-interest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying assets. The fair value of

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the underlying assets is impacted by current interest rates, remaining origination fees, costs of production to be incurred and the probability that the interest rate lock commitments will close or will be funded.

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Company does not expect any counterparty to any MBS contract to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Company fails to deliver the loans subject to interest rate risk lock commitments, it will still be obligated to “pair off” MBS to the counterparty. Should this be required, the Company could incur significant costs in acquiring replacement loans and such costs could have an adverse effect on the consolidated financial statements.

The fair value of the mortgage banking derivative is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.

The Company had interest rate lock commitments with a notional value of $388.7 million and forward contracts with a notional value of $402.3 million at June 30, 2020. At December 31, 2019, the Company had interest rate lock commitments with a notional value of $99.8 million and forward contracts with a notional value of $181.5 million.

Effect of derivative instruments on the consolidated statements of operations

The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three and six months ended June 30, 2020 and 2019:


	Location of gain (loss)	Amount of gain (loss) recognized in income on derivatives
Derivatives in fair value	recognized in income on	For the three months ended June 30,				For the six months ended June 30,
hedging relationships	derivatives	2020		2019		2020		2019
Interest rate products	Interest and fees on loans	$	31,037	$	(7,514)	$	(3,733)	$	(17,600)
Total		$	31,037	$	(7,514)	$	(3,733)	$	(17,600)


	Location of gain (loss)	Amount of (loss) gain recognized in income on hedged items
	recognized in income on	For the three months ended June 30,				For the six months ended June 30,
Hedged items	hedged items	2020		2019		2020		2019
Interest rate products	Interest and fees on loans	$	(31,654)	$	4,780	$	2,124	$	14,917
Total		$	(31,654)	$	4,780	$	2,124	$	14,917


	Location of gain (loss)	Amount of gain (loss) recognized in income on derivatives
Derivatives not designated	recognized in income on	For the three months ended June 30,				For the six months ended June 30,
as hedging instruments	derivatives	2020		2019		2020		2019
Interest rate products	Other non-interest expense	$	(50)	$	(290)	$	(73)	$	(563)
Interest rate lock commitments	Mortgage banking income		3,428		616		10,931		1,768
Forward contracts	Mortgage banking income		3,617		(1,502)		(2,090)		(2,302)
Total		$	6,995	$	(1,176)	$	8,768	$	(1,097)

Credit-risk-related contingent features

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness for reasons other than an error or omission of an administrative or operational nature, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of June 30, 2020, the termination value of derivatives in a net liability position related to these agreements was $73.3 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and, as of June 30, 2020, the Company had posted $80.1 million in eligible collateral. If the Company had breached any of these provisions at June 30, 2020, it could have been required to settle its obligations under the agreements at the termination value.

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Note 15 Commitments and Contingencies

In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. The same credit policies are applied to these commitments as the loans on the consolidated statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.

Total unfunded commitments at June 30, 2020 and December 31, 2019 were as follows:


	June 30, 2020		December 31, 2019
Commitments to fund loans	$	318,900	$	249,914
Unfunded commitments under lines of credit		571,131		600,407
Commercial and standby letters of credit		10,415		11,929
Total unfunded commitments	$	900,446	$	862,250

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

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

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

Contingencies

Mortgage loans sold to investors may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company established a reserve liability for expected losses related to these representations and warranties based upon management’s evaluation of actual and historic loss history, delinquency trends in the portfolio and economic conditions. The Company recorded a repurchase reserve of $2.7 million and $2.6 million at June 30, 2020 and December 31, 2019, respectively, which is included in other liabilities on the consolidated statements of financial condition.

The following table summarizes mortgage repurchase reserve activity for the periods presented:


	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019
Beginning balance	$	2,790	$	3,275	$	2,589	$	3,286
Provision charged to (released from) operating expense, net		41		(560)		320		(528)
Charge-offs		(106)		(82)		(184)		(125)
Ending balance	$	2,725	$	2,633	$	2,725	$	2,633

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In the ordinary course of business, the Company and the Bank may be subject to litigation. Based upon the available information and advice from the Company’s legal counsel, management does not believe that any potential, threatened or pending litigation to which it is a party will have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

Note 16 Fair Value Measurements

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

●

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

●

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

●

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

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

Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfer occurs. During the six months ended June 30, 2020 and 2019, there were no transfers of financial instruments between the hierarchy levels.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the valuation hierarchy:

Fair Value of Financial Instruments Measured on a Recurring Basis

Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as level 1. At June 30, 2020 and December 31, 2019, the Company did not hold any level 1 securities. When quoted market prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the securities are then classified as level 2.

Loans held for sale—The Company has elected to record loans originated and intended for sale in the secondary market at estimated fair value. The portfolio consists primarily of fixed rate residential mortgage loans that are sold within 45 days. The Company estimates fair value based on quoted market prices for similar loans in the secondary market and is classified as level 2.

Interest rate swap derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as fair value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar amount of the

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fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the potential loss over the life of the trade. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the respective counterparties’ credit spreads to the exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large financial institutions ("dealers"). International Swaps and Derivative Association Master Agreements ("ISDA") and Credit Support Annexes ("CSA") are employed for all contracts with dealers. These contracts contain bilateral collateral arrangements. The fair value inputs of these financial instruments are determined using discounted cash flow analysis through the use of third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk, and are classified as level 2.

Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an average 86.3% estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.

The tables below present the financial instruments measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 on the consolidated statements of financial condition utilizing the hierarchy structure described above:


	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	—	$	101,053	$	—	$	101,053
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		506,704		—		506,704
Municipal securities		—		394		—		394
Corporate debt		—		2,000		—		2,000
Loans held for sale		—		204,856		—		204,856
Interest rate swap derivatives		—		22,646		—		22,646
Mortgage banking derivatives		—		—		9,261		9,261
Total assets at fair value	$	—	$	837,653	$	9,261	$	846,914
Liabilities:
Interest rate swap derivatives	$	—	$	71,353	$	—	$	71,353
Mortgage banking derivatives		—		—		2,564		2,564
Total liabilities at fair value	$	—	$	71,353	$	2,564	$	73,917

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	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	—	$	95,256	$	—	$	95,256
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		542,037		—		542,037
Municipal securities		—		372		—		372
Loans held for sale		—		117,444		—		117,444
Interest rate swap derivatives		—		10,175		—		10,175
Mortgage banking derivatives		—		—		1,515		1,515
Total assets at fair value	$	—	$	765,284	$	1,515	$	766,799
Liabilities:
Interest rate swap derivatives	$	—	$	22,558	$	—	$	22,558
Mortgage banking derivatives		—		—		440		440
Total liabilities at fair value	$	—	$	22,558	$	440	$	22,998

The table below details the changes in level 3 financial instruments during the six months ended June 30, 2020:


		Mortgage banking
		derivatives, net
Balance at December 31, 2019	$	1,075
Gain included in earnings, net		8,841
Fees and costs included in earnings, net		(3,219)
Balance at June 30, 2020	$	6,697

Fair Value of Financial Instruments Measured on a Non-recurring Basis

Certain assets may be recorded at fair value on a non-recurring basis as conditions warrant. These non-recurring fair value measurements typically result from the application of lower of cost or fair value accounting or a write-down occurring during the period.

Individually evaluated loans—The Company records individually evaluated loans based on the fair value of the collateral when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of 3% - 26% with a weighted average discount rate of 16.8%, in determining the estimated fair values of these loans. The inputs used to determine the fair values of loans are considered level 3 inputs in the fair value hierarchy. At June 30, 2020, the Company recorded a specific reserve of $1.3 million related to six loans with a carrying balance of $4.4 million. At June 30, 2019, the Company recorded a specific reserve of $3.9 million related to nine loans with a carrying balance of $14.5 million.

OREO—OREO is recorded at the fair value of the collateral less estimated selling costs using a range of 6% to 10% with a weighted average discount rate of 9.7%. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized $26 thousand and $684 thousand of OREO impairments in its consolidated statements of operations during the six months ended June 30, 2020 and 2019, respectively. The fair values of OREO are derived from third-party price opinions or appraisals that generally use an income approach or a market value approach. If reasonable comparable appraisals are not available, then the Company may use internally developed models to determine fair values. The inputs used to determine the fair value of OREO properties are considered level 3 inputs in the fair value hierarchy.

Mortgage servicing rights—MSRs represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates ranging from 9.5% to 10.5% with a weighted average rate of 9.5% at June 30, 2020 and prepayment speed assumption ranges of 18.3% to 21.3% with a weighted average rate of 18.9% at June 30, 2020 as inputs. The weighted average MSRs are subject to impairment testing. The carrying values of these MSRs are reviewed quarterly for impairment based upon the

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calculation of fair value. For purposes of measuring impairment, the MSRs are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance and the adjustment is included in mortgage banking income on the consolidated statements of operations. The inputs used to determine the fair values of MSRs are considered level 3 inputs in the fair value hierarchy.

Premises and equipment—During the second quarter of 2020, the Company approved plans to consolidate 12 banking centers throughout the Community Banks of Colorado, Bank Midwest and Hillcrest Bank markets. Premise and equipment held-for-sale are written down to estimated fair value less costs to sell in the period in which the held-for-sale criteria are met. Fair value is estimated in a process that considers current local commercial real estate market conditions and the judgment of the sales agent and often involves obtaining third-party appraisals from certified real estate appraisers. These fair value measurements are classified as level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. The Company recognized $1.6 million of impairments in its unaudited consolidated statements of operations related to premises and equipment classified as held-for-sale totaling $8.0 million during the six months ended June 30, 2020.

The Company may be required to record fair value adjustments on other available-for-sale and municipal securities valued at par on a non-recurring basis.

The tables below provide information regarding the assets recorded at fair value on a non-recurring basis during the six months ended June 30, 2020 and 2019:


	June 30, 2020
	Total		Losses from fair value changes
Individually evaluated loans	$	33,075	$	1,349
Premises and equipment		8,024		1,631
Mortgage servicing rights		4,035		1,102
Total	$	45,134	$	4,082


	June 30, 2019
	Total		Losses from fair value changes
Individually evaluated loans	$	40,398	$	508
Other real estate owned		7,054		684
Mortgage servicing rights		2,944		277
Total	$	50,396	$	1,469

The Company did not record any liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2020.

Note 17 Fair Value of Financial Instruments

The fair value of a financial instrument is the amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is determined based upon quoted market prices to the extent possible; however, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques that may be significantly impacted by the assumptions used, including the discount rate and estimates of future cash flows. Changes in any of these assumptions could significantly affect the fair value estimates. The fair value of the financial instruments listed below does not reflect a premium or discount that could result from offering all of the Company’s holdings of financial instruments at one time, nor does it reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are based on the exit price concept within ASC Topic 825 and applied to this disclosure on a prospective basis. Considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.

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The fair value of financial instruments at June 30, 2020 and December 31, 2019, including methods and assumptions utilized for determining fair value of financial instruments are set forth below:


	Level in fair value	June 30, 2020				December 31, 2019
	measurement	Carrying		Estimated		Carrying		Estimated
	hierarchy	amount		fair value		amount		fair value
ASSETS
Cash and cash equivalents	Level 1	$	142,385	$	142,385	$	110,190	$	110,190
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale	Level 2		101,053		101,053		95,256		95,256
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale	Level 2		506,704		506,704		542,037		542,037
Municipal securities available-for-sale	Level 2		394		394		372		372
Municipal securities available-for-sale	Level 3		115		115		115		115
Corporate debt	Level 2		2,000		2,000		—		—
Other available-for-sale securities	Level 3		469		469		469		469
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity	Level 2		165,638		169,670		127,560		128,770
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity	Level 2		49,545		49,986		55,324		54,971
Non-marketable securities	Level 2		30,188		30,188		29,751		29,751
Loans receivable	Level 3		4,782,383		4,980,008		4,415,406		4,481,209
Loans held for sale	Level 2		204,856		204,856		117,444		117,444
Accrued interest receivable	Level 2		19,844		19,844		19,157		19,157
Interest rate swap derivatives	Level 2		22,646		22,646		10,175		10,175
Mortgage banking derivatives	Level 3		9,261		9,261		1,515		1,515
LIABILITIES
Deposit transaction accounts	Level 2		4,362,326		4,362,326		3,678,979		3,678,979
Time deposits	Level 2		1,051,563		1,062,353		1,058,153		1,058,354
Securities sold under agreements to repurchase	Level 2		24,504		24,504		56,935		56,935
Federal Home Loan Bank advances	Level 2		15,000		15,073		207,675		207,890
Accrued interest payable	Level 2		8,530		8,530		9,328		9,328
Interest rate swap derivatives	Level 2		71,353		71,353		22,558		22,558
Mortgage banking derivatives	Level 3		2,564		2,564		440		440

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Item 2: 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 three and six months ended June 30, 2020, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2019, 2018 and 2017. 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” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report on Form 10-K, referenced above, and should be read herewith.

All amounts are in thousands, except share and per share data, or as otherwise noted.

Overview

Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We also believe that our established presence in our core markets of Colorado, the greater Kansas City region, New Mexico, Texas and Utah, which are outperforming national averages, positions us well for growth opportunities. As of June 30, 2020, we had $6.4 billion in assets, $4.8 billion in loans, $5.4 billion in deposits and $0.8 billion in equity.

Recent Events

The COVID-19 pandemic has caused substantial disruption to the communities we serve and has changed the way we live and work. We continue to remain committed to ensuring our associates, clients, and communities are receiving the support they need during these challenging times. All of our banking centers remain operational through our drive-thru services and on an appointment-only basis in the lobbies. We have leveraged our digital banking platform with our clients, and we have implemented a four-phase return to office plan for our associates. Our teams have been working diligently to support our clients who are experiencing financial hardship due to COVID-19 through participation in the SBA’s Paycheck Protection Program and loan modifications, as needed. 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 significantly negative impact to the U.S. labor market, consumer spending and business operations.

The Company shifted its strategic priorities in March 2020 to address the impacts from the COVID-19 pandemic. We remain focused on our priorities to 1) protect the health of our associates and clients, 2) ensure the safety and soundness of our bank, and 3) act on every opportunity to prudently support our clients and the communities where we do business.

Operating Highlights and Key Challenges

Profitability and returns


●		Net income was $33.5 million, or $1.08 per diluted share, for the six months ended June 30, 2020, compared to net income of $39.2 million, or $1.24 per diluted share, for the same period in the prior year. Net income during the six months ended June 30, 2020 included $1.3 million, after tax, of expenses related to banking center consolidations. Adjusting for these expenses, net income would have been $34.8 million, or $1.12 per diluted share.
●		The six months ended June 30, 2020 included a $16.4 million loan loss provision from the CECL model, driven by deteriorating economic conditions caused by the impact of COVID-19, compared to a loan loss provision of $4.8 million for the six months ended June 30, 2019.
●		The return on average tangible assets was 1.14% for the six months ended June 30, 2020, compared to 1.41% for the same period in the prior year. Adjusting for the banking center consolidation-related expense, the return on average tangible assets for the six months ended June 30, 2020 was 1.19%.

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●

The return on average tangible common equity was 10.38% for the six months ended June 30, 2020, compared to 13.30% for the same period in the prior year. Adjusting for the banking center consolidation-related expense, the return on average tangible common equity for the six months ended June 30, 2020 was 10.78%.

Strategic execution


●		Pro-actively continue to address the impacts of the COVID-19 pandemic through executing on our priorities as detailed in the “Recent Events” section above.
●		Funded $358.8 million in SBA Paycheck Protection Program loans for 2,164 clients.
●		As part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients, during the second quarter of 2020, we approved plans to consolidate 12 banking centers throughout the Community Banks of Colorado, Bank Midwest and Hillcrest Bank markets. An expense of $1.7 million was recorded to non-interest expense during the second quarter of 2020 related to the consolidations.
●		Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits.
●		We have carefully evaluated our entire loan portfolio and have no industry exposure exceeding 5% of total loans for industries highly impacted by COVID-19, such as restaurants, retailers, hospital/medical, multifamily, oil and gas, hotels and lodging. The Company has no direct exposure to other industries highly impacted, including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, gaming and casinos, convention centers, malls and taxi/ride share companies. Furthermore, we have no exposure to consumer credit card, indirect auto finance or car leasing.

Loan portfolio


●		Total loans ended the quarter at $4.8 billion and increased $367.0 million, or 8.3%, since December 31, 2019, primarily driven by PPP loans originated during the second quarter of 2020. Commercial loan growth, excluding PPP loans, totaled $49.6 million, or 1.7%.
●		Total loan originations during the six months ended June 30, 2020 were $754.5 million, led by PPP loans of $358.8 million and commercial loan originations, excluding PPP loans, of $216.1 million.
●		COVID-related loan modifications are handled individually on a relationship basis. During the six months ended June 30, 2020, $492.4 million, or 10.3%, of total loans were modified due to the impact from COVID-19.

Credit quality


●		Provision for loan losses totaled $16.4 million during the first six months of 2020, net of a $0.1 million reduction in unfunded loan commitment reserves, to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19.
●		Net charge-offs to average total loans for the six months ended June 30, 2020 totaled 0.04%, annualized, compared to 0.19% for the full year ended December 31, 2019.
●		Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) improved to 0.42% of total loans, compared to 0.49% at December 31, 2019. Non-performing assets to total loans and OREO improved to 0.55% at June 30, 2020, compared to 0.66% at December 31, 2019. Excluding PPP loans, non-performing loans to total loans were 0.45%, and non-performing assets to total loans and OREO were 0.60%.
●		Allowance for credit loss balance increased by 54.8% from December 31, 2019 to June 30, 2020 due to the adoption of CECL on January 1, 2020 and the impact of continued deteriorating economic conditions driven by the COVID-19 pandemic. The allowance for credit losses totaled 1.26% of total loans compared to 0.88% at December 31, 2019. Excluding PPP loans, the allowance for credit losses totaled 1.36% of total loans at June 30, 2020.

Client deposit funded balance sheet


●		Average non-interest bearing demand deposits increased $154.9 million, or 13.7% during the six months ended June 30, 2020, compared to the same period in the prior year.
●		Total deposits averaged $5.0 billion during the six months ended June 30, 2020, increasing 6.8%, compared to $4.6 billion for the same period in the prior year.
●		Time deposits averaged $1.1 billion during the six months ended June 30, 2020, decreasing $28.6 million, or 2.6%, from the same period in the prior year.

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●		The mix of transaction deposits to total deposits improved 370 basis points to 80.6% at June 30, 2020, compared to 76.9% at June 30, 2019.
●		Cost of deposits totaled 0.55%, decreasing nine basis points from December 31, 2019, and the cost of funds totaled 0.76%, decreasing 20 basis points from December 31, 2019.

Revenues


●		Fully taxable equivalent (“FTE”) net interest income totaled $100.2 million during the six months ended June 30, 2020 and decreased $5.9 million, or 5.6%, compared to the same period in the prior year due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve.
●		The FTE net interest margin narrowed 41 basis points to 3.62% for the six months ended June 30, 2020, as compared to the same period in the prior year due to lower earning asset yields. The yield on earning assets decreased 55 basis points, led by a 74 basis point decrease in the originated loan portfolio yields due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve. The cost of funds decreased 18 basis points to 0.76%.
●		Non-interest income totaled $62.4 million during the six months ended June 30, 2020, increasing $24.7 million from the six months ended June 30, 2019, primarily driven by an increase of $27.0 million, or 155.6%, in mortgage banking income. Service charges and bank card fees decreased a combined $1.7 million, and other non-interest income decreased $0.9 million from the same period during the prior year.

Expenses


●		Non-interest expense totaled $102.4 million during the six months ended June 30, 2020, representing an increase of $11.6 million, or 12.8%, from the six months ended June 30, 2019. Salaries and benefits increased $11.1 million due to higher mortgage banking commissions. Banking center consolidation-related expense totaling $1.7 million was incurred during 2020. Other non-interest expense decreased $1.3 million largely due to a decrease in FDIC deposit insurance fees and marketing and development expense.
●		Income tax expense totaled $7.7 million during the six months ended June 30, 2020, compared to $6.5 million during the six months ended June 30, 2019. Included in income tax expense was $0.1 million of expense and $2.1 million of benefit from stock compensation activity during the first six months of 2020 and 2019, respectively. Adjusting for stock compensation activity, the effective tax rate for the first six months of 2020 was 18.3%, compared to 19.0% in the prior period. The lower rate compared to the statutory rate reflects the continued success of our tax strategies and tax exempt income.

Strong capital position


●		Capital ratios are strong as our capital position remains in excess of federal bank regulatory thresholds. As of June 30, 2020, our consolidated tier 1 leverage ratio was 10.53% and our common equity tier 1 and consolidated tier 1 risk based capital ratios were 13.21%.
●		The Bank maintains ample liquidity with access to $1.0 billion in readily available funds.
●		At June 30, 2020, common book value per share was $25.42. The tangible common book value per share increased $0.78 to $21.67 at June 30, 2020, compared to December 31, 2019, as the earnings and positive fair market value adjustments in the available-for-sale securities portfolio outpaced the share repurchases, dividends and CECL cumulative effect adjustment.

Key Challenges

There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy, including growing the assets, particularly loans, and deposits of our business amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive environment. Prevailing interest rates began decreasing in mid-2019 and have continued to decrease as a result of five Federal Reserve rate cuts from August 2019 through June 30, 2020.

General economic conditions continue to decline as a result of the COVID-19 pandemic. While we continue to respond quickly and prudently to minimize any disruptions to our business, our clients and communities are facing significant changes and disruption. The markets in which we do business have been subject to shelter-in-place orders, which forced non-essential businesses to close temporarily. Our markets are in varying phases of reopening plans and are subject to varying state and local mandates, and many businesses continue to be impacted by these actions. Our banking centers remain open by appointment-only and through drive-thru

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services. We have leveraged our digital banking platform, and are currently executing a four-phase return to office plan for all associates. Our teams have been working diligently to support our clients experiencing financial hardship due to COVID-19 through participation in the SBA’s Paycheck Participation Program and loan modifications as needed. 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 significantly negative impact to the U.S. labor market, consumer spending and business operations.

Our markets have historically outperformed the national averages on many key indicators; however, the economic impact from the COVID-19 pandemic is continuing to cause economic strain nationally and across all of our markets. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.

As of June 30, 2020, the Company had low exposure to industries highly impacted by the COVID-19 pandemic. Within the commercial loan segment, restaurants were 4.5%, retailers 2.5%, hospital/medical 4.5% and oil and gas 1.0% of total loans. Within the commercial real estate non-owner occupied loan segment, hotel and lodging was 3.8%, multifamily 2.0% and retail 1.2% of total loans. The Company had no direct exposure to other industries and loan types more highly impacted by the pandemic including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, gaming and casinos, convention centers, credit cards, malls and taxi/ride share businesses. Furthermore, the Company had no consumer credit card, indirect auto or car leasing exposure.

The agriculture industry is in the sixth year of depressed commodity prices and is also being impacted by the COVID-19 pandemic. Our food and agribusiness portfolio is only 4.6% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 1.1% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.

Our loans outstanding portfolio at June 30, 2020 totaled $4.8 billion, representing an increase of $367.0 million, or 8.3%, compared to December 31, 2019. Excluding PPP loans totaling $348.7 million, loans grew $18.3 million, or 0.4%, compared to December 31, 2019. During the six months ended June 30, 2020, our weighted average rate on new loans funded at the time of origination was 3.20% (FTE), compared to the weighted average yield of our originated loan portfolio of 4.15% (FTE). Future growth in our interest income will ultimately be dependent on our ability to continue to generate sufficient volumes of high-quality originated loans and other high-quality earning assets as well as Federal Reserve interest rate policy decisions.

Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.

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Performance Overview

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



	As of and for the three months ended			As of and for the six months ended
	June 30,	December 31,	June 30,	June 30,	June 30,
	2020	2019	2019	2020	2019
Key Ratios⁽¹⁾
Return on average assets	1.13%	1.31%	1.39%	1.11%	1.37%
Return on average tangible assets⁽²⁾	1.16%	1.35%	1.44%	1.14%	1.41%
Return on average tangible assets, adjusted^(2)(10)	1.25%	1.35%	1.44%	1.19%	1.41%
Return on average equity	9.23%	10.13%	11.17%	8.72%	11.01%
Return on average tangible common equity⁽²⁾	10.98%	12.07%	13.45%	10.38%	13.30%
Return on average tangible common equity, adjusted^(2)(10)	11.78%	12.07%	13.45%	10.78%	13.30%
Loan to deposit ratio (end of period)	88.34%	93.21%	92.37%	88.34%	92.37%
Non-interest bearing deposits to total deposits (end of period)	27.76%	25.01%	24.90%	27.76%	24.90%
Net interest margin⁽⁴⁾	3.30%	3.68%	3.91%	3.53%	3.93%
Net interest margin FTE^(2)(4)(9)	3.39%	3.77%	4.00%	3.62%	4.03%
Interest rate spread FTE^(2)(5)(9)	3.19%	3.49%	3.72%	3.40%	3.77%
Yield on earning assets⁽³⁾	3.75%	4.35%	4.63%	4.06%	4.61%
Yield on earning assets FTE^(2)(3)(9)	3.84%	4.44%	4.73%	4.16%	4.71%
Cost of interest bearing liabilities⁽³⁾	0.65%	0.95%	1.01%	0.76%	0.94%
Cost of deposits	0.47%	0.64%	0.66%	0.55%	0.62%
Non-interest income to total revenue FTE⁽²⁾	44.40%	28.19%	27.76%	38.35%	26.21%
Non-interest expense to average assets	3.42%	3.09%	3.19%	3.38%	3.17%
Non-interest expense to average assets, adjusted^(1)(10)	3.31%	3.09%	3.19%	3.33%	3.17%
Efficiency ratio⁽²⁾	62.05%	64.82%	63.10%	63.63%	63.84%
Efficiency ratio FTE⁽²⁾⁽⁹⁾	61.13%	63.66%	62.01%	62.63%	62.73%
Efficiency ratio FTE, adjusted^(2)(9)(10)	59.17%	63.66%	62.01%	61.58%	62.73%

Total Loans Asset Quality Data^(6)(7)(8)
Non-performing loans to total loans	0.42%	0.49%	0.78%	0.42%	0.78%
Non-performing loans to total loans excluding PPP loans	0.45%	0.49%	0.78%	0.45%	0.78%
Non-performing assets to total loans and OREO	0.55%	0.66%	0.94%	0.55%	0.94%
Non-performing assets to total loans and OREO excluding PPP loans	0.60%	0.66%	0.94%	0.60%	0.94%
Allowance for credit losses to total loans	1.26%	0.88%	0.93%	1.26%	0.93%
Allowance for credit losses to total loans excluding PPP loans	1.36%	0.88%	0.93%	1.36%	0.93%
Allowance for credit losses to non-performing loans	302.34%	179.62%	118.93%	302.34%	118.93%
Net charge-offs to average loans	0.05%	0.07%	0.02%	0.04%	0.02%
Net charge-offs to average loans excluding PPP loans	0.05%	0.07%	0.02%	0.04%	0.02%


(1)		Ratios are annualized.
(2)		Ratio represents non-GAAP financial measure. See non-GAAP reconciliations below.
(3)		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.
(4)		Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets.
(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.
(6)		Non-performing loans consist of non-accruing loans and restructured loans on non-accrual.
(7)		Non-performing assets include non-performing loans and OREO.
(8)		Total loans are net of unearned discounts and fees.
(9)		Presented on an FTE basis using the statutory rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,301, $1,290 and $1,285 for the three months ended June 30, 2020, December 31, 2019 and June 30, 2019, respectively. The taxable equivalent adjustments included above are $2,568 and $2,512 for the six months ended June 30, 2020 and June 30, 2019, respectively.
(10)		Ratios are adjusted for banking center consolidation-related expense. See non-GAAP reconciliations below.

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About Non-GAAP Financial Measures

Certain of the financial measures and ratios we present, including “tangible assets,” “return on average tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity,” “tangible common equity to tangible assets,” “adjusted non-interest expense,” “adjusted non-interest expense to average assets,” “adjusted net income,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” and “fully taxable equivalent (FTE)” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.

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A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:

Tangible Common Book Value Ratios


	June 30,		December 31,		June 30,
	2020		2019		2019
Total shareholders’ equity	$	776,967	$	766,920	$	733,917
Less: goodwill and core deposit intangible assets, net		(123,166)		(123,758)		(124,350)
Add: deferred tax liability related to goodwill		8,698		8,241		7,784
Tangible common equity (non-GAAP)	$	662,499	$	651,403	$	617,351

Total assets	$	6,385,431	$	5,895,512	$	5,858,002
Less: goodwill and core deposit intangible assets, net		(123,166)		(123,758)		(124,350)
Add: deferred tax liability related to goodwill		8,698		8,241		7,784
Tangible assets (non-GAAP)	$	6,270,963	$	5,779,995	$	5,741,436

Tangible common equity to tangible assets calculations:
Total shareholders' equity to total assets		12.17%		13.01%		12.53%
Less: impact of goodwill and core deposit intangible assets, net		(1.61)%		(1.74)%		(1.78)%
Tangible common equity to tangible assets (non-GAAP)		10.56%		11.27%		10.75%

Tangible common book value per share calculations:
Tangible common equity (non-GAAP)	$	662,499	$	651,403	$	617,351
Divided by: ending shares outstanding		30,569,011		31,176,627		31,139,044
Tangible common book value per share (non-GAAP)	$	21.67	$	20.89	$	19.83

Tangible common book value per share, excluding accumulated other comprehensive income calculations:
Tangible common equity (non-GAAP)	$	662,499	$	651,403	$	617,351
Accumulated other comprehensive income, net of tax		(12,195)		(2,062)		(1,506)
Tangible common book value, excluding accumulated other comprehensive income, net of tax (non-GAAP)		650,304		649,341		615,845
Divided by: ending shares outstanding		30,569,011		31,176,627		31,139,044
Tangible common book value per share, excluding accumulated other comprehensive income, net of tax (non-GAAP)	$	21.27	$	20.83	$	19.78

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Return on Average Tangible Assets and Return on Average Tangible Equity


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2020		2019		2019		2020		2019
Net income	$	17,705	$	19,519	$	20,282	$	33,529	$	39,204
Add: impact of core deposit intangible amortization expense, after tax		227		225		225		454		450
Net income adjusted for impact of core deposit intangible amortization expense, after tax	$	17,932	$	19,744	$	20,507	$	33,983	$	39,654

Average assets	$	6,318,596	$	5,924,459	$	5,844,561	$	6,090,724	$	5,778,159
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill		(114,631)		(115,665)		(116,712)		(114,779)		(116,858)
Average tangible assets (non-GAAP)	$	6,203,965	$	5,808,794	$	5,727,849	$	5,975,945	$	5,661,301

Average shareholders' equity	$	771,593	$	764,694	$	728,091	$	772,986	$	718,017
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill		(114,631)		(115,665)		(116,712)		(114,779)		(116,858)
Average tangible common equity (non-GAAP)	$	656,962	$	649,029	$	611,379	$	658,207	$	601,159

Return on average assets		1.13%		1.31%		1.39%		1.11%		1.37%
Return on average tangible assets (non-GAAP)		1.16%		1.35%		1.44%		1.14%		1.41%
Return on average equity		9.23%		10.13%		11.17%		8.72%		11.01%
Return on average tangible common equity (non-GAAP)		10.98%		12.07%		13.45%		10.38%		13.30%

Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2020		2019		2019		2020		2019
Interest income	$	53,744	$	59,616	$	62,193	$	112,412	$	121,613
Add: impact of taxable equivalent adjustment		1,301		1,290		1,285		2,568		2,512
Interest income FTE (non-GAAP)	$	55,045	$	60,906	$	63,478	$	114,980	$	124,125

Net interest income	$	47,328	$	50,388	$	52,491	$	97,675	$	103,657
Add: impact of taxable equivalent adjustment		1,301		1,290		1,285		2,568		2,512
Net interest income FTE (non-GAAP)	$	48,629	$	51,678	$	53,776	$	100,243	$	106,169

Average earning assets	$	5,766,672	$	5,438,041	$	5,387,156	$	5,562,538	$	5,317,596
Yield on earning assets		3.75%		4.35%		4.63%		4.06%		4.61%
Yield on earning assets FTE (non-GAAP)		3.84%		4.44%		4.73%		4.16%		4.71%
Net interest margin		3.30%		3.68%		3.91%		3.53%		3.93%
Net interest margin FTE (non-GAAP)		3.39%		3.77%		4.00%		3.62%		4.03%

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Efficiency Ratio


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2020		2019		2019		2020		2019
Net interest income	$	47,328	$	50,388	$	52,491	$	97,675	$	103,657
Add: impact of taxable equivalent adjustment		1,301		1,290		1,285		2,568		2,512
Net interest income, FTE (non-GAAP)	$	48,629	$	51,678	$	53,776	$	100,243	$	106,169

Non-interest income	$	38,837	$	20,282	$	20,660	$	62,369	$	37,711

Non-interest expense	$	53,760	$	46,107	$	46,451	$	102,431	$	90,845
Less: core deposit intangible asset amortization		(296)		(296)		(296)		(592)		(592)
Non-interest expense, adjusted for core deposit intangible asset amortization	$	53,464	$	45,811	$	46,155	$	101,839	$	90,253

Non-interest expense, adjusted for core deposit intangible asset amortization	$	53,464	$	45,811	$	46,155	$	101,839	$	90,253
Banking center consolidation-related expense		(1,708)		—		—		(1,708)		—
Adjusted non-interest expense (non-GAAP)	$	51,756	$	45,811	$	46,155	$	100,131	$	90,253

Efficiency ratio		62.05%		64.82%		63.10%		63.63%		63.84%
Efficiency ratio FTE (non-GAAP)		61.13%		63.66%		62.01%		62.63%		62.73%
Adjusted efficiency ratio FTE (non-GAAP)		59.17%		63.66%		62.01%		61.58%		62.73%

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Adjusted Financial Results


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2020		2019		2019		2020		2019
Adjustments to net income:
Net income	$	17,705	$	19,519	$	20,282	$	33,529	$	39,204
Adjustments⁽¹⁾		1,310		—		—		1,310		—
Adjusted net income (non-GAAP)	$	19,015	$	19,519	$	20,282	$	34,839	$	39,204

Adjustments to earnings per share:
Earnings per share - diluted	$	0.57	$	0.62	$	0.64	$	1.08	$	1.24
Adjustments⁽¹⁾		0.05		—		—		0.04		—
Adjusted earnings per share - diluted (non-GAAP)	$	0.62	$	0.62	$	0.64	$	1.12	$	1.24

Adjustments to return on average tangible assets:
Adjusted net income (non-GAAP)	$	19,015	$	19,519	$	20,282	$	34,839	$	39,204
Add: impact of core deposit intangible amortization expense, after tax		227		225		225		454		450
Net income adjusted for impact of core deposit intangible amortization expense, after tax		19,242		19,744		20,507		35,293		39,654
Average tangible assets (non-GAAP)		6,203,965		5,808,794		5,727,849		5,975,945		5,661,301
Adjusted return on average tangible assets (non-GAAP)		1.25%		1.35%		1.44%		1.19%		1.41%

Adjustments to return on average tangible common equity:
Net income adjusted for impact of core deposit intangible amortization expense, after tax	$	19,242	$	19,744	$	20,507	$	35,293	$	39,654
Average tangible common equity (non-GAAP)		656,962		649,029		611,379		658,207		601,159
Adjusted return on average tangible common equity (non-GAAP)		11.78%		12.07%		13.45%		10.78%		13.30%

Adjustments to non-interest expense:
Non-interest expense	$	53,760	$	46,107	$	46,451	$	102,431	$	90,845
Adjustments⁽¹⁾		1,708		—		—		1,708		—
Adjusted non-interest expense (non-GAAP)		52,052		46,107		46,451		100,723		90,845
Non-interest expense to average assets, adjusted (non-GAAP)		3.31%		3.09%		3.19%		3.33%		3.17%

(1) Adjustments:
Non-interest expense adjustments:
Banking center consolidation-related expense	$	1,708	$	—	$	—	$	1,708	$	—
Tax expense impact		(398)		—		—		(398)		—
Adjustments (non-GAAP)	$	1,310	$	—	$	—	$	1,310	$	—

Application of Critical Accounting Policies

We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the ACL. See additional discussion of our ACL policy in note 1 – Basis of Presentation.

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Future Accounting Pronouncements

The Company is still evaluating the impact from ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Company has reviewed ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes and does not expect the adoption of that pronouncement to have a material impact on its financial statements.

Financial Condition

Total assets increased to $6.4 billion at June 30, 2020 from $5.9 billion at December 31, 2019. Total loans increased 8.3% or $367.0 million, cash and cash equivalents increased 29.2% or $32.2 million, and other assets increased 11.1% or $21.6 million. The allowance for credit losses increased 54.8% or $60.5 million at June 30, 2020 from $39.1 million at December 31, 2019, and included a CECL adoption day 1 increase of $5.8 million, partially offsetting the increase in total assets.

During the first six months of 2020, lower cost demand, savings and money market deposits (“transaction deposits”) increased $683.3 million, or 37.4% annualized, compared to December 31, 2019, as we continued to develop full banking relationships with our clients. Additionally, our clients used their core operating accounts for PPP funds and economic stimulus checks, which aided the strong deposit growth. The increase in transaction deposits provided low-cost funding utilized to fund PPP loans and pay down short-term borrowings.

Investment securities

Available-for-sale

At June 30, 2020, available-for-sale investment securities decreased 4.3%, compared to December 31, 2019, due to maturities and paydowns totaling $110.1 million. Purchases of available-for-sale securities during the six months ended June 30, 2020 totaled $69.6 million. Maturities and paydowns of available-for-sale securities during the six months ended June 30, 2019 totaled $97.6 million. There were no purchases of available-for-sale securities during the six months ended June 30, 2019.

Our available-for-sale investment securities portfolio is summarized as follows as of the dates indicated:


	June 30, 2020						December 31, 2019
						Weighted						Weighted
	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average
	cost		value		portfolio	yield	cost		value		portfolio	yield
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	98,126	$	101,053	16.5%	2.02%	$	93,770	$	95,256	14.9%	2.59%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		495,544		506,704	83.0%	1.70%		543,275		542,037	84.9%	2.13%
Municipal securities		495		509	0.1%	3.59%		495		487	0.1%	3.60%
Corporate debt		2,000		2,000	0.3%	5.88%		—		—	—	—
Other securities		469		469	0.1%	0.00%		469		469	0.1%	0.00%
Total investment securities available-for-sale	$	596,634	$	610,735	100.0%	1.76%	$	638,009	$	638,249	100.0%	2.20%

As of June 30, 2020 and December 31, 2019, nearly all the available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC, FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.

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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 2.2 years and 2.9 years at June 30, 2020 and December 31, 2019, respectively. This estimate is based on assumptions and actual results may differ. At June 30, 2020 and December 31, 2019, the duration of the total available-for-sale investment portfolio was 2.1 years and 2.7 years, respectively.

At June 30, 2020 and December 31, 2019, adjustable rate securities comprised 2.6% and 2.8%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 2.39% per annum and 2.40% per annum at June 30, 2020 and December 31, 2019, respectively.

The available-for-sale investment portfolio included $14.2 million and $5.3 million of unrealized gains and $0.1 million and $5.1 million of unrealized losses at June 30, 2020 and December 31, 2019, respectively. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Held-to-maturity

At June 30, 2020, held-to-maturity investment securities increased 17.7%, compared to December 31, 2019, due to purchases totaling $67.4 million. Maturities and paydowns of held-to-maturity securities totaled $34.2 million and $28.2 million during the six months ended June 30, 2020 and 2019, respectively. There were no purchases of held-to-maturity securities during the six months ended June 30, 2019.

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


	June 30, 2020						December 31, 2019
						Weighted						Weighted
	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average
	cost		value		portfolio	yield	cost		value		portfolio	yield
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	165,638	$	169,670	77.0%	2.41%	$	127,560	$	128,770	69.7%	3.19%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		49,545		49,986	23.0%	1.24%		55,324		54,971	30.3%	1.90%
Total investment securities held-to-maturity	$	215,183	$	219,656	100.0%	2.14%	$	182,884	$	183,741	100.0%	2.80%

The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.

The fair value of the held-to-maturity investment portfolio included $4.5 million and $1.3 million of unrealized gains and $0.0 million and $0.5 million of unrealized losses at June 30, 2020 and December 31, 2019, respectively.

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

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This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 2.0 years and 2.3 years as of June 30, 2020 and December 31, 2019, respectively.

Loans overview

At June 30, 2020, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our six acquisitions to date.

The table below shows the loan portfolio composition at the respective dates:


					June 30, 2020 vs.
					December 31, 2019
	June 30, 2020		December 31, 2019		% Change
Originated:
Commercial:
Commercial and industrial	$	1,360,679	$	1,380,248	(1.4)%
Municipal and non-profit		912,287		833,707	9.4%
Owner-occupied commercial real estate		455,846		414,477	10.0%
Food and agribusiness		213,789		245,320	(12.9)%
PPP loans		348,689		—	100.0%
Total commercial		3,291,290		2,873,752	14.5%
Commercial real estate non-owner occupied		540,412		505,479	6.9%
Residential real estate		631,032		651,656	(3.2)%
Consumer		20,370		21,030	(3.1)%
Total originated		4,483,104		4,051,917	10.6%

Acquired:
Commercial:
Commercial and industrial		27,461		31,284	(12.2)%
Municipal and non-profit		593		3,819	(84.5)%
Owner-occupied commercial real estate		65,052		75,645	(14.0)%
Food and agribusiness		6,237		7,807	(20.1)%
Total commercial		99,343		118,555	(16.2)%
Commercial real estate non-owner occupied		101,412		125,426	(19.1)%
Residential real estate		97,982		118,762	(17.5)%
Consumer		542		746	(27.3)%
Total acquired		299,279		363,489	(17.7)%
Total loans	$	4,782,383	$	4,415,406	8.3%

Our loan portfolio increased $367.0 million, or 16.7% annualized, since December 31, 2019, primarily driven by PPP loans of $348.7 million, which are fully guaranteed by the SBA. Commercial loans, excluding PPP loans, increased $49.6 million. Excluding PPP loans, the loan portfolio increased $18.3 million, or 0.8% annualized, since December 31, 2019.

Our commercial and industrial loan portfolio is comprised of diverse industry segments, and our ability to generate new relationships with small- to medium-sized businesses has driven strong loan growth within these segments. At June 30, 2020, these segments included finance and financial services, primarily lender finance loans, of $343.8 million, hospital/medical loans of $216.9 million, manufacturing-related loans of $132.4 million, and a variety of smaller subcategories of commercial and industrial loans. Food and agribusiness loans, which are well-diversified across food production, crop and livestock types, totaled $220.0 million and were 31.4% of the Company’s risk based capital. Crop and livestock loans represent 1.1% of total loans.

Non-owner occupied CRE loans were 91.5% of the Company’s risk based capital, or 13.4% of total loans, and no specific property type comprised more than 4.0% of total loans. The Company maintains very little exposure to retail properties, comprising 3.7% of total loans. Multi-family loans totaled $94.1 million, or 2.0% of total loans as of June 30, 2020.

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. In light of the strain placed on certain industries by the COVID-19 pandemic, the Company has carefully evaluated and continues to closely monitor our entire loan portfolio. Within the commercial loan segment, certain higher impacted industries are noted as follows: restaurants were 4.5%, retailers 2.5%, hospital/medical 4.5% and oil and gas 1.0% of total loans. Within the commercial real estate non-owner

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occupied loan segment, hotel and lodging was 3.8%, multifamily 2.0% and retail 1.2% of total loans. The Company had no direct exposure to other industries more highly impacted by the pandemic including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, gaming and casinos, convention centers, credit cards, malls and taxi/ride share businesses. Furthermore, the Company had no consumer credit card, indirect auto or car leasing exposure.

New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan originations totaled $1.3 billion over the past 12 months, led by commercial loan originations excluding PPP loans of $585.9 million and PPP loan originations of $358.8 million. Originations are defined as closed end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of originations to better approximate the impact of originations on loans outstanding and ultimately net interest income.

The following table represents new loan originations during 2020 and 2019:


	Second quarter		First quarter		Fourth quarter		Third quarter		Second quarter
	2020		2020		2019		2019		2019
Commercial:
Commercial and industrial	$	(8,726)	$	118,999	$	69,048	$	144,554	$	125,527
Municipal and non-profit		49,679		13,968		46,114		31,482		25,513
Owner occupied commercial real estate		22,078		37,372		46,965		16,149		41,380
Food and agribusiness		(10,480)		(6,787)		20,348		(4,894)		18,217
PPP loans		358,798		—		—		—		—
Total commercial		411,349		163,552		182,475		187,291		210,637
Commercial real estate non-owner occupied		18,992		80,792		41,256		79,929		36,632
Residential real estate		29,024		46,273		43,493		49,022		40,012
Consumer		2,206		2,320		2,315		2,986		3,264
Total	$	461,571	$	292,937	$	269,539	$	319,228	$	290,545

Included in originations are net fundings under revolving lines of credit of ($55,826), $48,789, $1,756, $37,062, and $48,955 as of the second quarter 2020, first quarter 2020, fourth quarter 2019, third quarter 2019 and second quarter 2019, respectively.

The tables below show the contractual maturities of our total loans for the dates indicated:


	June 30, 2020
	Due within		Due after 1 but		Due after
	1 year		within 5 years		5 years		Total
Commercial:
Commercial and industrial	$	86,933	$	1,077,746	$	223,461	$	1,388,140
Municipal and non-profit		62,349		139,947		710,584		912,880
Owner occupied commercial real estate		15,124		176,206		329,568		520,898
Food and agribusiness		73,094		120,265		26,667		220,026
PPP loans		—		348,689		—		348,689
Total commercial		237,500		1,862,853		1,290,280		3,390,633
Commercial real estate non-owner occupied		114,862		367,532		159,430		641,824
Residential real estate		26,911		42,416		659,687		729,014
Consumer		6,109		11,165		3,638		20,912
Total loans	$	385,382	$	2,283,966	$	2,113,035	$	4,782,383

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	December 31, 2019
	Due within		Due after 1 but		Due after
	1 year		within 5 years		5 years		Total
Commercial:
Commercial and industrial	$	137,396	$	1,013,753	$	260,382	$	1,411,531
Municipal and non-profit		26,009		126,634		684,883		837,526
Owner occupied commercial real estate		18,663		170,092		301,367		490,122
Food and agribusiness		57,159		168,827		27,142		253,128
Total commercial		239,227		1,479,306		1,273,774		2,992,307
Commercial real estate non-owner occupied		85,188		377,850		167,868		630,906
Residential real estate		27,251		49,818		693,348		770,417
Consumer		6,600		11,978		3,198		21,776
Total loans	$	358,266	$	1,918,952	$	2,138,188	$	4,415,406

The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of total loans with maturities over one year is as follows at the dates indicated:


	June 30, 2020
	Fixed			Variable			Total
			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	296,176	4.87%	$	1,005,031	3.11%	$	1,301,207	3.51%
Municipal and non-profit⁽¹⁾		821,904	3.57%		28,627	2.95%		850,531	3.55%
Owner occupied commercial real estate		263,720	5.00%		242,054	3.87%		505,774	4.55%
Food and agribusiness		46,873	5.09%		100,060	3.51%		146,933	4.01%
PPP loans		348,689	1.00%		—	0.00%		348,689	1.00%
Total commercial		1,777,362	4.18%		1,375,772	3.27%		3,153,134	3.73%
Commercial real estate non-owner occupied		233,153	4.71%		293,809	3.34%		526,962	3.94%
Residential real estate		300,553	3.72%		401,549	4.31%		702,102	4.06%
Consumer		11,525	5.22%		3,278	3.56%		14,803	4.85%
Total loans with > 1 year maturity	$	2,322,593	3.69%	$	2,074,408	3.48%	$	4,397,001	3.59%


	December 31, 2019
	Fixed			Variable			Total
			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	294,406	4.95%	$	979,730	4.39%	$	1,274,136	4.52%
Municipal and non-profit⁽¹⁾		779,293	3.60%		32,224	3.60%		811,517	3.60%
Owner occupied commercial real estate		235,337	4.87%		236,122	4.79%		471,459	4.99%
Food and agribusiness		50,287	5.19%		145,682	4.61%		195,969	4.76%
Total commercial		1,359,323	4.22%		1,393,758	4.46%		2,753,081	4.34%
Commercial real estate non-owner occupied		243,201	4.75%		302,516	4.46%		545,717	4.59%
Residential real estate		326,210	3.66%		416,955	4.54%		743,165	4.15%
Consumer		12,156	5.52%		3,020	4.94%		15,176	5.40%
Total loans with > 1 year maturity	$	1,940,890	4.20%	$	2,116,249	4.48%	$	4,057,139	4.34%


(1)		Included in municipal and non-profit fixed rate loans are loans totaling $406,001 and $403,700 that have been swapped to variable rates at current market pricing at June 30, 2020 and December 31, 2019, respectively. Included in the municipal and non-profit segment are tax exempt loans totaling $729,382 and $701,825 with a weighted average rate of 3.37% and 3.41% at June 30, 2120 and December 31, 2019, respectively.

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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 to the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below.

In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDRs in accordance with ASC 310-40. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ALL and any subsequent declines in carrying value charged to impairments on OREO.

Non-performing assets and past due loans

Non-performing assets consist of non-accrual loans, TDRs on non-accrual and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and six months ended June 30, 2020 was $0.3 million and $0.6 million, respectively, and $0.5 million and $0.9 million during the three and six months ended June 30, 2019, respectively.

Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection.

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The following table sets forth the non-performing assets and past due loans as of the dates presented:


	June 30, 2020		December 31, 2019
Non-accrual loans:
Non-accrual loans, excluding restructured loans	$	15,878	$	16,894
Restructured loans on non-accrual		4,121		4,854
Non-performing loans		19,999		21,748
OREO		6,491		7,300
Total non-performing assets	$	26,490	$	29,048

Loans 30-89 days past due and still accruing interest	$	3,932	$	6,350
Loans 90 days or more past due and still accruing interest		2,444		1,662
Non-accrual loans		19,999		21,748
Total past due and non-accrual loans	$	26,375	$	29,760
Accruing restructured loans	$	20,284	$	11,359
Allowance for credit losses		60,465		39,064
Non-performing loans to total loans		0.42%		0.49%
Non-performing loans to total loans excluding PPP loans		0.45%		0.49%
Total 90 days past due and still accruing interest and non-accrual loans to total loans		0.47%		0.53%
Total non-performing assets to total loans and OREO		0.55%		0.66%
Total non-performing assets to total loans and OREO excluding PPP loans		0.60%		0.66%
ACL to non-performing loans		302.34%		179.62%

During the six months ended June 30, 2020, total non-performing loans decreased $1.7 million, or 8.0%, from December 31, 2019. During the six months ended June 30, 2020, accruing TDRs increased $8.9 million.

Loans 30-89 days past due and still accruing interest decreased $2.4 million from December 31, 2019 to June 30, 2020, and loans 90 days or more past due and still accruing interest increased $0.8 million from December 31, 2019 to June 30, 2020 for a collective decrease in total past due loans of $1.6 million.

The Company continues to monitor the operating status and trends of our clients to enable us to quickly detect credit deterioration and take action where needed. The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19 pandemic without requiring the modifications to be classified as troubled debt restructurings under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments as of December 31, 2019. As of June 30, 2020, the Company has executed COVID-related loan modifications on 10.3% of our loan portfolio totaling $492.4 million. All COVID modified loans were classified as performing as of June 30, 2020.

The following table sets forth the COVID-19 loan modifications as of the date presented:


	June 30, 2020
	Loans outstanding			Loans modified			Modification type
			Percentage of			Percentage of	3-month		3-month full		>3 month payment
	Balance		loan portfolio	Balance		loan segment	interest only		payment deferral		modification
Commercial	$	3,041,944	63.7%	$	265,522	8.7%	$	194,955		66,771		3,796
PPP loans		348,689	7.3%		—	0.0%		—		—		—
Commercial real estate non-owner occupied		641,824	13.4%		199,204	31.0%		45,238		149,441		4,525
Residential real estate		729,014	15.2%		27,500	3.8%		15,054		12,446		—
Consumer		20,912	0.4%		219	1.0%		219		—		—
Total loans	$	4,782,383	100.0%	$	492,445	10.3%	$	255,466	$	228,658	$	8,321

Allowance for credit losses

The ACL represents the amount that we believe is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. On January 1, 2020, the Company adopted ASU 2016-13,

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Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology for recognizing credit losses with a CECL model. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The DCF model allows for individual, life of loan, cash flow modeling using loan specific interest rates and scheduled repayment rates. The model incorporates national economic forecasts of certain macroeconomic factors which drive correlated PD and LGD rates. PD and LGD rates, along with prepayment rates and loss recovery time delays, are determined at a loan class level making use of both peer loss rate data and internal historical data. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis and includes qualitative adjustments and reserves for individually evaluated loans. The DCF model allows for individual life of loan cash flow modeling using loan specific interest rates and scheduled repayment rates. The model incorporates forecasted national macro-economic data for unemployment, GDP, retail sales, and home price index, which drive correlated PD and LGD rates. PD and LGD rates along with prepayment rates and loss recovery time delays are determined at a loan class level making use of both peer loss rate data and internal historical data.

As mentioned above, we utilize national forecast projections to predict near-term national economic conditions, which in turn, drive the losses predicted in establishing our ACL. For periods beyond the near term, we revert to historical long-term average losses on a straight-line basis. The length of the forecast and reversion periods is based on management’s assessment of the length and pattern of the current economic cycle. Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting alternate forecast scenarios. We continually monitor economic trends within relevant markets as a means to capture leading and lagging indicators, including national unemployment, national GDP, national retail sales and national home price index, that could be indicative of probable losses.

We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the allowance for credit losses model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:


	Non-owner occupied
Commercial	commercial real estate	Residential real estate	Consumer
Commercial and industrial	Construction	Senior lien	Consumer
Owner occupied commercial real estate	Acquisition and development	Junior lien
Food and agribusiness	Multifamily
Municipal and non-profit	Non-owner occupied

Loans on non-accrual, in bankruptcy and TDRs with a balance greater than $250,000 are excluded from the pooled analysis and are evaluated individually. If management determines that foreclosure is probable, expected credit losses are evaluated based on the criteria listed below, adjusted for selling costs as appropriate. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:


●		the borrower's resources, ability, and willingness to repay in accordance with the terms of the loan agreement;
●		the likelihood of receiving financial support from any guarantors;
●		the adequacy and present value of future cash flows, less disposal costs, of any collateral; and
●		the impact current economic conditions may have on the borrower's financial condition and liquidity or the value of the collateral.

The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.

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During the three and six months ended June 30, 2019, provision for loan losses of $3.2 million and $4.8 million, respectively, was recorded to support originated loan growth. Net charge-offs were $0.2 million, or 0.02%, annualized, and specific reserves on individually evaluated loans totaled $3.9 million at June 30, 2019.

The Company has elected to exclude AIR from the allowance for credit losses calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As of June 30, 2020 and December 31, 2019, AIR from loans totaled $17.8 million and $17.2 million, respectively.

Total ACL

After considering the above mentioned factors, we believe that the ACL of $60.5 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at June 30, 2020. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to impacts of COVID-19 on the macro-economic forecast, used in determining the ACL could adversely affect the Company's results of operations, liquidity or financial condition.

The following schedules present, by class stratification, the changes in the ACL during the periods listed:


	As of and for the three months ended
	June 30, 2020		June 30, 2019
	Total loans		Total loans
Beginning allowance for credit losses	$	50,956	$	37,055
Charge-offs:
Commercial		(694)		(70)
Commercial real estate non owner-occupied		—		—
Residential real estate		(12)		(24)
Consumer		(146)		(200)
Total charge-offs		(852)		(294)
Recoveries		236		82
Net charge-offs		(616)		(212)
Provision for loan loss		10,125		3,239
Ending allowance for credit losses	$	60,465	$	40,082
Ratio of annualized net charge-offs to average total loans during the period		0.05%		0.02%
Ratio of annualized net charge-offs to average total loans excluding PPP loans during the period		0.05%		0.02%
Average total loans outstanding during the period	$	4,794,466	$	4,289,963
Average total loans outstanding excluding PPP loans during the period		4,512,010		4,289,963

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	As of and for the six months ended
	June 30, 2020		June 30, 2019
	Total loans		Total loans
Beginning allowance for loan losses	$	39,064	$	35,692
Cumulative effect adjustment⁽¹⁾		5,836		—
Charge-offs:
Commercial		(912)		(82)
Commercial real estate non-owner occupied		—		—
Residential real estate		(40)		(47)
Consumer		(397)		(433)
Total charge-offs		(1,349)		(562)
Recoveries		380		179
Net charge-offs		(969)		(383)
Provision for loan loss		16,534		4,773
Ending allowance for credit losses	$	60,465	$	40,082
Ratio of annualized net charge-offs to average total loans during the period		0.04%		0.02%
Ratio of annualized net charge-offs to average total loans excluding PPP loans during the period		0.04%		0.02%
Ratio of ACL to total loans outstanding at period end		1.26%		0.93%
Ratio of ACL to total loans outstanding excluding PPP loans at period end		1.36%		0.93%
Ratio of ACL to total non-performing loans at period end		302.34%		118.93%
Total loans	$	4,782,383	$	4,330,263
Average total loans outstanding during the period		4,603,393		4,209,472
Average total loans outstanding excluding PPP loans during the period		4,462,165		4,209,472
Non-performing loans		19,999		33,703


(1)		Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments. Refer to note 1 – Basis of Presentation and note 5 – Allowance for Credit Losses of our consolidated financial statements for further details.

The following tables present the allocation of the ACL and the percentage of the total amount of loans in each loan category listed as of the dates presented:


	June 30, 2020
						ACL as a %
	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	3,041,944	63.7%	$	33,142	54.8%
PPP loans⁽¹⁾		348,689	7.3%		—	0.0%
Commercial real estate non-owner occupied		641,824	13.4%		12,314	20.4%
Residential real estate		729,014	15.2%		14,525	24.0%
Consumer		20,912	0.4%		484	0.8%
Total	$	4,782,383	100.0%	$	60,465	100.0%


(1)		PPP loans are fully guaranteed by the SBA.


	December 31, 2019
						ALL as a %
	Total loans		% of total loans	Related ALL		of total ALL
Commercial	$	2,992,307	67.8%	$	30,442	77.9%
Commercial real estate non-owner occupied		630,906	14.3%		4,850	12.4%
Residential real estate		770,417	17.4%		3,468	8.9%
Consumer		21,776	0.5%		304	0.8%
Total	$	4,415,406	100.0%	$	39,064	100.0%

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Deposits

Deposits from banking clients serve as a primary funding source for our banking operations and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low-cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. The following table presents information regarding our deposit composition at June 30, 2020 and December 31, 2019:


							Increase (decrease)
	June 30, 2020			December 31, 2019			Amount		% Change
Non-interest bearing demand deposits	$	1,502,948	27.7%	$	1,184,945	25.0%	$	318,003	26.8%
Interest bearing demand deposits		955,951	17.7%		738,496	15.6%		217,455	29.4%
Savings accounts		598,715	11.1%		542,531	11.5%		56,184	10.4%
Money market accounts		1,304,712	24.1%		1,213,007	25.6%		91,705	7.6%
Total transaction deposits		4,362,326	80.6%		3,678,979	77.7%		683,347	18.6%
Time deposits < $250,000		872,243	16.1%		894,459	18.9%		(22,216)	(2.5)%
Time deposits > $250,000		179,320	3.3%		163,694	3.4%		15,626	9.5%
Total time deposits		1,051,563	19.4%		1,058,153	22.3%		(6,590)	(0.6)%
Total deposits	$	5,413,889	100.0%	$	4,737,132	100.0%	$	676,757	14.3%

The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $250,000 as of June 30, 2020:


	June 30, 2020
Three months or less	$	38,340
Over 3 months through 6 months		20,699
Over 6 months through 12 months		36,522
Thereafter		83,759
Total time deposits > $250,000	$	179,320

At June 30, 2020 and December 31, 2019, time deposits that were scheduled to mature within 12 months totaled $618.7 million and $726.9 million, respectively. Of the time deposits scheduled to mature within 12 months at June 30, 2020, $95.6 million were in denominations of $250,000 or more, and $523.1 million were in denominations less than $250,000.

Other borrowings

As of June 30, 2020 and December 31, 2019, the Bank sold securities under agreements to repurchase totaling $24.5 million and $56.9 million, respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $1.0 billion at June 30, 2020. The Bank utilizes its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2020 and December 31, 2019, the Bank had $0.0 million and $192.7 million in line of credit advances from the FHLB, respectively, that matured within a day. At June 30, 2020 and December 2019, the Bank had one term advance totaling $15.0 million with a fixed interest rate of 2.33% and a maturity date in October 2020. On July 8, 2020, the Bank paid off its one remaining FHLB term advance totaling $15.0 million. The Bank pledged investment securities and loans as collateral for FHLB advances. Investment securities pledged were $15.9 million at June 30, 2020 and $17.6 million at December 31, 2019. Loans pledged were $1.4 billion at June 30, 2020 and $1.5 billion at December 31, 2019. Interest expense related to FHLB advances totaled $0.3 million and $1.2 million for the three and six months ended June 30, 2020, respectively, and $1.9 million and $3.4 million for the three and six months ended June 30, 2019, respectively.

Results of Operations

Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan losses and non-interest income, such as service charges, bank card income, swap fee income, and gain on sale of mortgages, net. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, telecommunications data processing expense and intangible asset amortization. Any expenses related to the resolution of problem assets are also included in non-interest expense.

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Overview of results of operations

We recorded net income of $17.7 million and $33.5 million, or $0.57 and $1.08 per diluted share, during the three and six months ended June 30, 2020, respectively. During the three and six months ended June 30, 2019, we recorded net income of $20.3 million and $39.2 million, or $0.64 and $1.24 per diluted share, respectively. Adjusting for the banking center consolidation-related expense, net income was $19.0 million and $34.8 million, or $0.62 and $1.12 per diluted share, during the three and six months ended June 30, 2020, respectively.

Net interest income

We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods.

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The table below presents the components of net interest income on a FTE basis for the three months ended June 30, 2020 and 2019. The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.


	For the three months ended					For the three months ended
	June 30, 2020					June 30, 2019
	Average balance		Interest		Average rate	Average balance		Interest		Average rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,432,725	$	42,440	3.85%	$	3,821,981	$	46,728	4.90%
Acquired loans		312,723		6,722	8.65%		467,982		9,619	8.24%
Loans held for sale		157,887		1,310	3.34%		87,222		934	4.30%
Investment securities available-for-sale		607,132		3,050	2.01%		738,970		4,002	2.17%
Investment securities held-to-maturity		189,360		1,201	2.54%		215,497		1,533	2.85%
Other securities		30,087		310	4.12%		28,425		458	6.45%
Interest earning deposits and securities purchased under agreements to resell		36,758		12	0.13%		27,079		204	3.02%
Total interest earning assets FTE⁽²⁾	$	5,766,672	$	55,045	3.84%	$	5,387,156	$	63,478	4.73%
Cash and due from banks	$	76,041				$	75,780
Other assets		532,867					419,368
Allowance for credit losses		(56,984)					(37,743)
Total assets	$	6,318,596				$	5,844,561
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,719,433	$	1,951	0.29%	$	2,429,686	$	3,559	0.59%
Time deposits		1,048,772		4,136	1.59%		1,084,011		4,090	1.51%
Securities sold under agreements to repurchase		23,485		18	0.31%		57,571		162	1.13%
Federal Home Loan Bank advances		163,263		311	0.77%		294,524		1,891	2.58%
Total interest bearing liabilities	$	3,954,953	$	6,416	0.65%	$	3,865,792	$	9,702	1.01%
Demand deposits	$	1,436,671				$	1,155,710
Other liabilities		155,379					94,968
Total liabilities		5,547,003					5,116,470
Shareholders' equity		771,593					728,091
Total liabilities and shareholders' equity	$	6,318,596				$	5,844,561
Net interest income FTE⁽²⁾			$	48,629				$	53,776
Interest rate spread FTE⁽²⁾					3.19%					3.72%
Net interest earning assets	$	1,811,719				$	1,521,364
Net interest margin FTE⁽²⁾					3.39%					4.00%
Average transaction deposits	$	4,156,104				$	3,585,396
Average total deposits		5,204,876					4,669,407
Ratio of average interest earning assets to average interest bearing liabilities		145.81%					139.35%


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,301 and $1,285 for the three months ended June 30, 2020 and 2019, respectively.
(3)		Loan fees included in interest income totaled $2,611 and $1,599 for the three months ended June 30, 2020 and 2019, respectively.

Net interest income totaled $47.3 million and $52.5 million during the three months ended June 30, 2020 and 2019, respectively. The yield on earning assets decreased 89 basis points, led by a 105 basis point decrease in the originated portfolio yields due to monetary policy actions by the Federal Reserve. The cost of funds decreased 36 basis points, compared to the three months ended June 30, 2019, to 0.65%.

Average loans comprised $4.7 billion, or 82.3%, of total average interest earning assets during the three months ended June 30, 2020, compared to $4.3 billion, or 79.6%, during the three months ended June 30, 2019. The increase in average loan balances was driven by

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a $610.7 million increase in average originated loans, which included an average $282.5 million of PPP loans originated during the second quarter of 2020.

Average investment securities comprised 13.8% and 17.7% of total interest earning assets during the three months ended June 30, 2020 and 2019, respectively. The decrease in the investment portfolio was a result of scheduled paydowns and reflects the re-mixing of the interest earning assets as we have utilized the paydowns of the investment portfolio to fund loan originations.

Average balances of interest bearing liabilities increased $89.2 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019. The increase was driven by interest bearing demand, savings and money market deposits of $289.7 million. The increase was partially offset by decreases in FHLB advances of $131.3 million, time deposits of $35.2 million and securities sold under agreements to repurchase of $34.1 million. Total interest expense related to interest bearing liabilities was $6.4 million and $9.7 million during the three months ended June 30, 2020 and 2019, respectively, at an average cost of 0.65% and 1.01% during the three months ended June 30, 2020 and 2019, respectively. Additionally, the cost of deposits decreased 19 basis points to 0.47% during the three months ended June 30, 2020, compared to 0.66% during the three months ended June 30, 2019, due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve.

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The table below presents the components of net interest income on a fully taxable equivalent basis for the six months ended June 30, 2020 and 2019:


	For the six months ended					For the six months ended
	June 30, 2020					June 30, 2019
	Average				Average	Average				Average
	balance		Interest		rate	balance		Interest		rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,237,946	$	87,419	4.15%	$	3,723,932	$	90,301	4.89%
Acquired loans		328,165		15,601	9.56%		485,540		19,560	8.12%
Loans held for sale		130,411		2,246	3.46%		65,167		1,422	4.40%
Investment securities available-for-sale		617,027		6,445	2.09%		763,034		8,363	2.19%
Investment securities held-to-maturity		189,211		2,436	2.57%		222,411		3,184	2.86%
Other securities		29,920		724	4.84%		27,659		881	6.37%
Interest earning deposits and securities purchased under agreements to resell		29,858		109	0.73%		29,853		414	2.80%
Total interest earning assets FTE⁽²⁾	$	5,562,538	$	114,980	4.16%	$	5,317,596	$	124,125	4.71%
Cash and due from banks	$	75,412				$	76,861
Other assets		503,669					420,486
Allowance for credit losses		(50,895)					(36,784)
Total assets	$	6,090,724				$	5,778,159
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,608,281	$	4,839	0.37%	$	2,419,902	$	6,567	0.55%
Time deposits		1,052,732		8,574	1.64%		1,081,297		7,697	1.44%
Securities sold under agreements to repurchase		34,192		115	0.68%		59,072		315	1.08%
Federal Home Loan Bank advances		191,308		1,209	1.27%		271,778		3,377	2.51%
Total interest bearing liabilities	$	3,886,513	$	14,737	0.76%	$	3,832,049	$	17,956	0.94%
Demand deposits	$	1,286,972				$	1,132,062
Other liabilities		144,253					96,031
Total liabilities		5,317,738					5,060,142
Stockholders' equity		772,986					718,017
Total liabilities and shareholders’ equity	$	6,090,724				$	5,778,159
Net interest income FTE⁽²⁾			$	100,243				$	106,169
Interest rate spread FTE⁽²⁾					3.40%					3.77%
Net interest earning assets	$	1,676,025				$	1,485,547
Net interest margin FTE⁽²⁾					3.62%					4.03%
Average transaction deposits	$	3,895,253				$	3,551,964
Average total deposits		4,947,985					4,633,261
Ratio of average interest earning assets to average interest bearing liabilities		143.12%					138.77%


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $2,568 and $2,512 for the six months ended June 30, 2020 and 2019, respectively.
(3)		Loan fees included in interest income totaled $4,434 and $2,924 for the six months ended June 30, 2020 and 2019, respectively.

Net interest income totaled $97.7 million and $103.7 million during the six months ended June 30, 2020 and 2019, respectively. The yield on earnings assets decreased 55 basis points, led by a 74 basis point decrease in the originated loan portfolio yields, due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve.

Average loans comprised $4.6 billion, or 82.1%, of total average interest earning assets during the six months ended June 30, 2020, compared to $4.2 billion, or 79.2%, of total average interest earning assets during the six months ended June 30, 2019. The $514.0 million increase in average loan balances was primarily driven by commercial loan growth of $310.5 million and average PPP loan originations of $141.2 million.

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Average investment securities comprised 14.5% and 18.5% of total interest earning assets during the six months ended June 30, 2020 and 2019, respectively. The decrease in the investment portfolio was a result of scheduled paydowns and reflects the re-mixing of the interest earning assets as we have utilized the paydowns of the investment portfolio to fund loan originations.

Average balances of interest bearing liabilities increased $54.5 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019. The increase was driven by interest bearing demand, savings and money market deposits of $188.4 million. These increases were partially offset by decreases in FHLB advances of $80.5 million, time deposits of $28.6 million and securities sold under agreements to repurchase of $24.9 million. Total interest expense related to interest bearing liabilities was $14.7 million and $18.0 million during the six months ended June 30, 2020 and 2019, respectively, at an average cost of 0.76% and 0.94% during the six months ended June 30, 2020 and 2019, respectively. Additionally, the cost of deposits decreased seven basis points to 0.55% during the six months ended June 30, 2020, compared to 0.62% during the six months ended June 30, 2019, due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve.

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The following table summarizes the changes in net interest income on a FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019:


	Three months ended June 30, 2020						Six months ended June 30, 2020
	compared to						compared to
	Three months ended June 30, 2019						Six months ended June 30, 2019
	Increase (decrease) due to						Increase (decrease) due to
	Volume		Rate		Net		Volume		Rate		Net
Interest income:
Originated loans FTE^(1)(2)(3)	$	5,847	$	(10,135)	$	(4,288)	$	10,603	$	(13,485)	$	(2,882)
Acquired loans		(3,337)		440		(2,897)		(7,482)		3,523		(3,959)
Loans held for sale		586		(210)		376		1,124		(300)		824
Investment securities available-for-sale		(662)		(290)		(952)		(1,525)		(393)		(1,918)
Investment securities held-to-maturity		(166)		(166)		(332)		(427)		(321)		(748)
Other securities		17		(165)		(148)		55		(212)		(157)
Interest earning deposits and securities purchased under agreements to resell		3		(195)		(192)		—		(305)		(305)
Total interest income	$	2,288	$	(10,721)	$	(8,433)	$	2,348	$	(11,493)	$	(9,145)
Interest expense:
Interest bearing demand, savings and money market deposits	$	208	$	(1,816)	$	(1,608)	$	349	$	(2,077)	$	(1,728)
Time deposits		(139)		185		46		(233)		1,110		877
Securities sold under agreements to repurchase		(26)		(118)		(144)		(84)		(116)		(200)
Federal Home Loan Bank advances		(250)		(1,330)		(1,580)		(509)		(1,659)		(2,168)
Total interest expense		(207)		(3,079)		(3,286)		(477)		(2,742)		(3,219)
Net change in net interest income	$	2,495	$	(7,642)	$	(5,147)	$	2,825	$	(8,751)	$	(5,926)


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on an FTE basis using the statutory tax rate of 21% for the three and six months ended June 30, 2020 and 2019. The taxable equivalent adjustments included above are $1,301 and $1,285 for the three months ended June 30, 2020 and 2019, respectively. The taxable equivalent adjustments included above are $2,568 and $2,512 for the six months ended June 30, 2020 and 2019, respectively.
(3)		Loan fees included in interest income totaled $2,611 and $1,599 for the three months ended June 30, 2020 and 2019, respectively. Loan fees included in interest income totaled $4,434 and $2,924 for the six months ended June 30, 2020 and 2019, respectively.

Below is a breakdown of average deposits and the average rates paid during the periods indicated:


	For the three months ended						For the six months ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
			Average			Average			Average			Average
	Average		rate	Average		rate	Average		rate	Average		rate
	balance		paid	balance		paid	balance		paid	balance		paid
Non-interest bearing demand	$	1,436,671	0.00%	$	1,155,710	0.00%	$	1,286,972	0.00%	$	1,132,062	0.00%
Interest bearing demand		923,721	0.27%		693,483	0.23%		832,602	0.25%		692,215	0.20%
Money market accounts		1,212,620	0.35%		1,191,702	0.81%		1,211,220	0.50%		1,180,931	0.76%
Savings accounts		583,092	0.19%		544,501	0.56%		564,459	0.28%		546,756	0.53%
Time deposits		1,048,772	1.59%		1,084,011	1.51%		1,052,732	1.64%		1,081,297	1.44%
Total average deposits	$	5,204,876	0.47%	$	4,669,407	0.66%	$	4,947,985	0.55%	$	4,633,261	0.62%

Provision for loan losses

The provision for loan losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate to absorb estimated lifetime losses inherent in the loan portfolio as of the balance sheet date. The determination of the ACL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions.

During the three months ended June 30, 2020, the Company recorded provision for loan losses of $10.3 million, which included a $0.1 million provision for unfunded loan commitment reserves. The quarter’s provision expense was primarily driven by further declines in

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the macro-economic forecast within the CECL model as a result of COVID-19. Provision of $3.2 million was recorded under the prior incurred loss model during the three months ended June 30, 2019 to support originated loan growth.

Provision for loan losses of $16.4 million was recorded under the CECL model during the first six months of 2020, net of a $0.1 million reduction in unfunded loan commitment reserves, to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to support non-PPP originated loan growth and net charge-offs. Provision of $4.8 million was recorded under the prior incurred loss model during the six months ended June 30, 2019 to support originated loan growth. The allowance for credit losses totaled 1.26% of total loans at June 30, 2020, compared to the allowance for originated acquired loan losses of 0.93% at June 30, 2019, and included a CECL adoption day 1 increase of $5.8 million. Excluding PPP loans, the allowance for credit losses totaled 1.36% of loans at June 30, 2020.

Non-interest income

The table below details the components of non-interest income for the periods presented:


	For the three months ended June 30,				For the six months ended June 30,				Three months			Six months
									Increase (decrease)			Increase (decrease)
	2020		2019		2020		2019		Amount		% Change	Amount		% Change
Service charges	$	3,094	$	4,541	$	7,220	$	8,862	$	(1,447)	(31.9)%	$	(1,642)	(18.5)%
Bank card fees		3,654		3,766		7,167		7,194		(112)	(3.0)%		(27)	(0.4)%
Mortgage banking income		30,630		10,398		44,303		17,335		20,232	194.6 %		26,968	155.6 %
Bank-owned life insurance income		589		424		1,179		845		165	38.9 %		334	39.5 %
Other non-interest income		870		1,472		2,472		3,355		(602)	(40.9)%		(883)	(26.3)%
OREO-related income		—		59		28		120		(59)	(100.0)%		(92)	(76.7)%
Total non-interest income	$	38,837	$	20,660	$	62,369	$	37,711	$	18,177	88.0 %	$	24,658	65.4 %

Non-interest income totaled $38.8 million and $62.4 million for the three and six months ended June 30, 2020, respectively, compared to $20.7 million and $37.7 million for the three and six months ended June 30, 2019, respectively. Mortgage banking income reached a quarterly record of $30.6 million, increasing $20.2 million, or 194.6%, and $27.0 million, or 155.6%, during the three and six months ended June 30, 2020, respectively, compared to the same periods in the prior year. The mortgage banking income increase was driven by higher loan production due to lower prevailing interest rates. During the three and six months ended June 30, 2020, service charges and bank card fees decreased a combined $1.6 million and $1.7 million, respectively, due to changes in consumer behavior as a result of the COVID-19 pandemic, and other non-interest income decreased $0.6 million and $0.9 million, respectively.

Non-interest expense

The table below details the components of non-interest expense for the periods presented:


	For the three months ended June 30,				For the six months ended June 30,				Three months			Six months
									Increase (decrease)			Increase (decrease)
	2020		2019		2020		2019		Amount		% Change	Amount		% Change
Salaries and benefits	$	36,457	$	30,667	$	69,637	$	58,557	$	5,790	18.9 %	$	11,080	18.9 %
Occupancy and equipment		7,078		6,721		13,976		13,603		357	5.3 %		373	2.7 %
Telecommunications and data processing		2,255		2,124		4,520		4,414		131	6.2 %		106	2.4 %
Marketing and business development		600		840		1,296		1,826		(240)	(28.6)%		(530)	(29.0)%
FDIC deposit insurance		411		493		335		991		(82)	(16.6)%		(656)	(66.2)%
Bank card expenses		1,033		1,423		2,059		2,233		(390)	(27.4)%		(174)	(7.8)%
Professional fees		759		1,041		1,368		1,855		(282)	(27.1)%		(487)	(26.3)%
Other non-interest expense		2,479		2,439		5,569		5,612		40	1.6 %		(43)	(0.8)%
Problem asset workout		629		725		1,277		1,848		(96)	(13.2)%		(571)	(30.9)%
Loss (gain) on OREO sales, net		55		(318)		94		(686)		373	(117.3)%		780	(113.7)%
Core deposit intangible asset amortization		296		296		592		592		—	0.0 %		—	0.0 %
Banking center consolidation-related expense		1,708		—		1,708		—		1,708	0.0 %		1,708	100.0 %
Total non-interest expense	$	53,760	$	46,451	$	102,431	$	90,845	$	7,309	15.7 %	$	11,586	12.8 %

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During the three months ended June 30, 2020, non-interest expense increased $7.3 million, or 15.7%, compared to the same period in the prior year. The increase was primarily driven by higher mortgage banking commissions included in salaries and benefits. Additionally, as part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients, the Company approved plans to consolidate 12 banking centers throughout the Community Banks of Colorado, Bank Midwest and Hillcrest Bank markets. Expense totaling $1.7 million was recorded during the second quarter of 2020 related to the consolidation.

During the six months ended June 30, 2020, non-interest expense increased $11.6 million, or 12.8%, compared to the same period in the prior year. The primary drivers of the increase were higher mortgage banking commissions of $11.1 million included in salaries and benefits. Banking center consolidation-related expense totaled $1.7 million during the six months ended June 30, 2020. The increase in non-interest expense was partially offset by decreases in marketing and development expense and FDIC deposit insurance.

Income taxes

Income tax expense attributable to income before income taxes was $4.4 million and $7.7 million for the three and six months ended June 30, 2020, respectively. Income tax expense for the three and six months ended June 30, 2019 was $3.2 million and $6.5 million, respectively. During the three months ended June 30, 2020 and 2019, income tax expense included $0.1 million of expense and $1.3 million of benefit, respectively, from stock compensation activity. Adjusting for stock compensation activity, the effective tax rate for the three months ended June 30, 2020 was 19.6%, compared to 19.4% for the same period in the prior year. During the six months ended June 30, 2020 and 2019, income tax expense included $0.1 million of expense and $2.1 million of benefit, respectively, from stock compensation activity. Adjusting for stock compensation activity, the effective tax rate for the first six months of 2020 was 18.3%, compared to 19.0% for the same period in the prior year. The effective tax rate is lower than the federal statutory rate primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income. The Company forecasts the full year estimated effective tax rate in accordance with ASC Topic 740; as a result, the relationship between pre-tax income and tax-exempt income within each reporting period can create fluctuations in the effective tax rate from period-to-period.

Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2019 Annual Report on Form 10-K.

Liquidity and Capital Resources

Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. On-balance sheet liquidity is represented by our cash and cash equivalents, and unencumbered investment securities, and is detailed in the table below as of June 30, 2020 and December 31, 2019:


	June 30, 2020		December 31, 2019
Cash and due from banks	$	141,885	$	109,690
Interest bearing bank deposits		500		500
Unencumbered investment securities, at fair value		255,932		324,918
Total	$	398,317	$	435,108

Total on-balance sheet liquidity decreased $36.8 million at June 30, 2020 compared to December 31, 2019. The decrease was due to a reduction of $69.0 million in unencumbered available-for-sale and held-to-maturity securities balances partially offset by higher cash and due from banks of $32.2 million.

Through our relationship with the FHLB, we have pledged qualifying loans and investment securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. The Bank pledged investment securities and loans as collateral for FHLB advances. Investment securities pledged were $15.9 million at June 30, 2020 and $17.6 million at December 31, 2019. The Bank also had loans pledged as collateral for FHLB advances of $1.4 billion at June 30, 2020 and $1.5 billion at December 31, 2019. FHLB advances, lines of credit and other short-term borrowing availability totaled $1.0 billion, of which $15.0 million was used at June 30, 2020. The Bank can obtain additional liquidity through the FHLB facility, if required, and also has access to the Paycheck Protection Program Liquidity Facility (“PPPLF”) and federal funds lines of credit with correspondent banks.

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Our primary sources of funds are deposits, securities sold under agreements to repurchase, prepayments and maturities of loans and investment securities, the sale of investment securities and funds provided from operations. We anticipate having access to other third-party funding sources, including the ability to raise funds through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of debt and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a 12-month period.

Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses and share repurchases. For additional information regarding our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying unaudited consolidated financial statements.

Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and paydowns of loans and purchases and sales of investment securities. At June 30, 2020, pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $0.8 billion at June 30, 2020, inclusive of pre-tax net unrealized gains of $14.1 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $4.5 million of pre-tax net unrealized gains on at June 30, 2020. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of June 30, 2020, our investment securities portfolio consisted primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.

At present, financing activities primarily consist of changes in deposits and repurchase agreements, and advances from the FHLB, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of June 30, 2020, $618.7 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions and our consumer banking strategy focusing on both lower cost transaction accounts and term deposits, our strategy is to replace a portion of those maturing time deposits with transaction deposits and market-rate time deposits.

Under the Basel III requirements, at June 30, 2020, the Company and the Bank met all capital adequacy requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 9 in our consolidated financial statements.

Our shareholders' equity is impacted by earnings, changes in unrealized gains and losses on securities, net of tax, stock-based compensation activity, share repurchases and the payment of dividends.

The Board of Directors has authorized multiple programs to repurchase shares of the Company’s common stock from time to time either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC.

On February 26, 2020, the Board of Directors authorized a new share repurchase program for up to $50.0 million from time to time in either the open market or through privately negotiated transactions. This authorization was in addition to the $12.6 million remaining for share repurchase that was previously approved by the Board on August 5, 2016. During the first quarter of 2020, the Company repurchased 734,117 shares for $19.5 million. This completed the previous authorization approved in August 2016. The remaining authorization under the program approved in February 2020 was $43.1 million at June 30, 2020.

On August 5, 2020, our Board of Directors declared a quarterly dividend of $0.20 per common share, payable on September 15, 2020 to shareholders of record at the close of business on August 28, 2020.

Asset/Liability Management and Interest Rate Risk

Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows.

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The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at June 30, 2020. During the three months ended June 30, 2020, our asset sensitivity increased slightly for a declining rate environment as a result of the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase at June 30, 2020 and December 31, 2019 and a 25 basis point decrease in interest rates on net interest income based on the interest rate risk model at June 30, 2020:


Hypothetical
shift in interest	% change in projected net interest income
rates (in bps)	June 30, 2020	December 31, 2019
200	9.26%	6.16%
100	4.80%	3.13%
(25)	(0.33)%	(0.54)%

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.

As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of longer duration loans. The strategy with respect to liabilities has been to continue to emphasize transaction account growth, particularly non-interest or low interest bearing non-maturing deposit accounts while building long-term client relationships. Non-maturing deposit accounts totaled 80.6% of total deposits at June 30, 2020 compared to 77.7% at December 31, 2019. We currently have no brokered time deposits.

Off-Balance Sheet Activities

In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of June 30, 2020 and December 31, 2019, we had loan commitments totaling $890.0 million and $850.3 million, respectively, and standby letters of credit that totaled $10.4 million and $11.9 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.

Item 4. CONTROLS AND PROCEDURES

Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of June 30, 2020. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.

During the most recently completed fiscal quarter, there were no changes made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 1A. RISK FACTORS

The following discussion supplements the discussion of risk factors affecting the Company in Part I, Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31 2019, and Quarterly Report on Form 10-Q for the period ended March 31, 2020. The discussion of risk factors, as so supplemented, set forth the material risk factors that could affect our financial condition and operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Company.

The COVID-19 pandemic is adversely affecting us, our clients and third-party service providers, and the adverse impacts on our business, financial position, operations and prospects has been and could continue to be significant.

The COVID-19 pandemic has adversely impacted our business and financial results, and its ultimate impact on our business will depend on highly uncertain and unpredictable future developments, including the magnitude and duration of the pandemic and actions taken by governmental authorities in response to the pandemic, particularly within our geographic footprint. The pandemic and resultant governmental action have severely restricted economic activity, reduced economic output, and resulted in a deterioration in economic conditions. This has resulted in temporary closures of many businesses, some of which include our borrowers, the institution of social distancing and sheltering in place requirements, high rates of unemployment and underemployment, historically low interest rates, and disruptions in consumer spending, among other things. These negative economic conditions have negatively impacted our financial results and are expected to have a continued adverse effect on our business, including adversely impacting the demand for our products and services, our net interest income and our liquidity and regulatory capital requirements. Additionally, if interest rates remain at historically low levels or unemployment continues to remain high, demand for mortgage products, including refinancing, may decrease.

Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed or operate at reduced capacities, the impact on the national economy continues to worsen, or more clients draw on their lines of credit or seek additional loans to help finance their businesses. Small and mid-sized businesses make up a large portion of our commercial loan portfolio and are particularly vulnerable to the financial effects of the COVID-19 pandemic due to their increased reliance on continuing cash flow to fund day-to-day operations. Although government programs have sought, and may further seek, to provide relief to these types of businesses, there can be no assurance that these programs will succeed. Our participation directly or on behalf of our clients in U.S. government programs, such as the Paycheck Protection Program and the Main Street Lending Program, that are designed to support individuals, households and businesses impacted by the economic disruptions caused by the COVID-19 pandemic, could be criticized and subject us to increased governmental and regulatory scrutiny, negative publicity or increased exposure to litigation, which could increase our operational, legal and compliance costs and damage our reputation. In addition, we may be exposed to credit risk on a PPP loan if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced. In such a case, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any related loss from us.

Our business operations may also be disrupted if significant portions of our workforce, key personnel or third-party service providers are unable to work effectively, including because of illness, unavailability, quarantines, government actions, internal or external failure of information technology infrastructure, or other restrictions in connection with the pandemic. Until the COVID-19 pandemic subsides, it will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios and may also have the effect of heightening many of the other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


					Maximum
				Total number of	approximate dollar
				shares purchased	value of shares
				as part of publicly	that may yet be
	Total number	Average price		announced plans	purchased under the
Period	of shares purchased	paid per share		or programs	plans or programs ⁽²⁾
April 1 - April 30, 2020⁽¹⁾	15,952	$	26.47	—	$	43,101,943
May 1 - May 31, 2020⁽¹⁾	2,393		25.74	—		43,101,943
Total	18,345	$	26.37	—	$	43,101,943


(1)		These shares represent shares purchased other than through publicly announced plans and were purchased pursuant to the Company’s stock incentive plans. Pursuant to the plans, shares were purchased from plan participants at the then current market value in satisfaction of stock option exercise prices, settlements of restricted stock and tax withholdings.
(2)		On February 26, 2020, the Company’s Board of Directors authorized the repurchase of up to an additional $50.0 million of common stock. Under this authorization, $43,101,943 remained available at June 30, 2020.

Item 5. OTHER INFORMATION

None.

Table of Contents

Item 6. EXHIBITS



3.1		Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)

3.2		Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, filed November 7, 2014)

10.1		Transition Agreement, dated May 5, 2020, by and between National Bank Holdings Corporation and Zsolt K. Besskó (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on May 5, 2020)

10.2		Employment Agreement, dated May 5, 2020, by and between National Bank Holdings Corporation and Angela N. Petrucci

10.3		Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Award Agreement (TSR) (For Management)

10.4		Form of National Bank Holdings Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Award Agreement (ROTA) (For Management)

31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation

101.DEF		XBRL Taxonomy Extension Definition

101.LAB		XBRL Taxonomy Extension Labels

101.PRE		XBRL Taxonomy Extension Presentation

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

National Bank Holdings Corporation



By	/s/ Aldis Birkans
	Aldis Birkans
	Chief Financial Officer
	(principal financial officer)

Date: August 5, 2020

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of May 5, 2020, by and between Angela N. Petrucci (the “Executive”) and National Bank Holdings Corporation, a Delaware corporation (the “Company”).

WHEREAS, the Company and the Executive are parties to that certain Change of Control Agreement, dated as of February 21, 2018 (the “Prior Agreement”); and

WHEREAS, the Company is desirous of continuing to employ the Executive in an executive capacity on the terms and conditions, and for the consideration, hereinafter set forth, and the Executive is desirous of remaining employed by the Company on such terms and conditions and for such consideration.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, including those set forth in Section 10, and for other good and valuable consideration, it is hereby covenanted and agreed by the Executive and the Company as follows:

1.Effective Date. This Agreement shall become binding and enforceable on July 1, 2020 (the “Effective Date”), subject to its execution by the Executive and the Company, and the Executive’s continued employment with the Company through the Effective Date. If the foregoing conditions are not satisfied, then this Agreement shall be null and void ab initio and of no force or effect.

2.Employment Period. The initial term of the Executive’s employment hereunder shall commence on the Effective Date and end on December 31, 2020 (the “Initial Employment Period”), unless terminated earlier pursuant to Section 5 of this Agreement; provided, however, that as of the expiration of (i) the Initial Employment Period and (ii) if applicable, any Renewal Period (as defined below), the Employment Period shall automatically be extended for a one-year period such that it will expire one year from the commencement of such extension (the “Renewal Period”), unless either party gives at least 90 days’ written notice prior to the expiration date of the then-current Employment Period (as defined below) of its intention not to further extend the Employment Period; and provided, further, that, upon the Company’s entering into a definitive agreement that if consummated would be a Change in Control (as defined below), the Employment Period shall automatically be extended to the date that is two years from the date of the consummation of such Change in Control (subject to renewal thereafter as set forth above), unless earlier terminated pursuant to Section 5 of this Agreement (the Initial Employment Period and each subsequent extension, if any, shall constitute the “Employment Period” unless terminated earlier pursuant to Section 5 of this Agreement).

3.Position and Duties. During the Employment Period, the Executive shall (a) serve in the position(s) and have the title(s) assigned to the Executive by the Chief Executive Officer of the Company (the “CEO”) from time to time, which position(s) shall be commensurate with the Executive’s education and experience and shall, as of the Effective Date, be Executive Vice President, Chief Administrative Officer, General Counsel & Secretary, (b) have duties and responsibilities commensurate with the assigned position(s) and as are customarily exercised by a person holding such position(s) in a company of the size and nature of the Company as may be

assigned from time to time, (c) report directly to the CEO, and (d) perform her duties at the Company’s corporate headquarters, subject to the Executive’s performance of duties at, and travel to, such other offices of the Company and subsidiaries and controlled affiliates (the “Affiliated Entities”) and/or other locations as shall be necessary to fulfill her duties.

4.Compensation. Subject to the terms of this Agreement, while the Executive is employed by the Company during the Employment Period, the Company shall compensate her for her services as follows:

(a)Base Salary. The Executive shall receive an annual base salary of no less than $250,000, which shall be reviewed annually by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) pursuant to its normal performance review policies for senior executives and may be increased but not decreased (as in effect from time to time, “Annual Base Salary”). Such Annual Base Salary shall be payable in monthly or more frequent installments in accordance with the Company’s payroll policies.

(b)Annual Incentive Payment. With respect to each fiscal year or portion of a fiscal year of the Company ending during the Employment Period, the Executive shall be eligible to receive an annual cash incentive payment (the “Incentive Payment”) pursuant to the terms of the Company’s annual cash incentive plan applicable to the Executive as in effect from time to time (the “Incentive Plan”), with the actual amount of any such Incentive Payment to be determined by the Compensation Committee pursuant to the terms of the Incentive Plan. The Executive’s target Incentive Payment opportunity under the Incentive Plan for the 2020 fiscal year shall be 42.5% of the base salary actually earned by the Executive during such fiscal year and the Executive’s target Incentive Payment opportunity under the Incentive Plan for each fiscal year during the Employment Period thereafter shall be no less than 50% of her Annual Base Salary (as in effect from time to time, the “Target Incentive Payment”). The Target Incentive Payment shall be reviewed annually by the Compensation Committee pursuant to its normal performance review policies for senior executives and may be increased but not decreased. Any earned Incentive Payment shall be paid to the Executive pursuant to the terms of the Incentive Plan; provided, however, that any such Incentive Payment for a fiscal year shall be paid to the Executive no later than the 15th day of the third month following the close of such fiscal year (or the calendar year, where applicable), unless the Company or the Executive shall elect to defer the receipt of such Incentive Payment pursuant to an arrangement that meets the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).

(c)Employee Benefits, Fringe Benefits and Perquisites. During the Employment Period, the Executive shall be provided with employee benefits, fringe benefits, and perquisites on a basis no less favorable than such benefits and perquisites are provided by the Company from time to time to the Company’s other senior executives as in effect from time to time.

(d)Expense Reimbursement. Subject to the requirements of Section 8(a)(ii) of this Agreement (relating to in-kind benefits and reimbursements), during the Employment Period, the Company shall reimburse the Executive for all reasonable expenses incurred by her in the performance of her duties in accordance with the Company’s policies applicable to senior executives as in effect from time to time.

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(e)Stock Ownership Requirement. While employed by the Company, the Executive shall be subject to any stock ownership policy adopted by the Company in accordance with the guidelines as established by the Compensation Committee.

(f)Indemnification/Insurance. The Company shall defend, indemnify, and hold the Executive harmless to the full extent permitted by the general laws of the State of Delaware, its charter, or its bylaws now or hereafter in force. The Company also shall procure and maintain directors and officers liability insurance.

5.Termination of Employment.

(a)Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may provide the Executive with written notice in accordance with Section 12(g) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”); provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties; and provided, further, that a Disability shall be determined to exist as provided hereinafter. For purposes of this Agreement, “Disability” shall mean the inability of the Executive to perform the Executive’s duties with the Company on a full-time basis as a result of incapacity due to mental or physical illness, which inability exists for 180 days during any rolling 12-month period, as determined by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

(b)Cause. The Company may terminate the Executive’s employment during the Employment Period either with or without Cause (as defined below). For purposes of this Agreement, “Cause” shall mean:

(i)the continued failure of the Executive to perform substantially the Executive’s duties with the Company (other than any such failure resulting from incapacity due to mental or physical illness);

(ii)willful misconduct or gross neglect by the Executive in the performance of her duties to the Company;

(iii)the Executive’s continued failure to adhere to the clear directions of the Company’s CEO, to adhere to the Company’s material written policies in all material respects, or to devote substantially all of the Executive’s business time and efforts to the Company;

(iv)the Executive’s conviction of or formal admission to or plea of guilty or nolo contendere to a charge of commission of, (A) a felony or (B) any crime involving serious moral turpitude; or

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(v)the Executive’s willful breach of any of the material terms or conditions of this Agreement.

In order to invoke a termination for Cause on any of the grounds enumerated under Section 5(b)(i), 5(b)(ii), 5(b)(iii), or 5(b)(v) of this Agreement, the Company must provide written notice to the Executive of the existence of such grounds within 30 days following the Company’s knowledge of the existence of such grounds, specifying in reasonable detail the grounds constituting Cause, and the Executive shall have 30 days following receipt of such written notice (the “Executive’s Cure Period”) during which she may remedy the ground if such ground is reasonably subject to cure.

(c)Good Reason. The Executive’s employment may be terminated by the Executive during the Employment Period with or without Good Reason (as defined below). For purposes of this Agreement, “Good Reason” shall mean, in the absence of the written consent of the Executive:

(i)a material diminution in the Executive’s Annual Base Salary during the Employment Period;

(ii)the assignment to the Executive of any duties that are materially inconsistent with the Executive’s position, duties or responsibilities (including reporting responsibilities) contemplated by this Agreement, or any other action by the Company that results in a material diminution in such position or the duties or responsibilities customarily associated with such position in a company of the size and nature of the Company; provided that following a Change in Control (as defined below), this clause (ii) shall relate to the Executive’s position(s), duties and responsibilities as in effect immediately prior to the Change in Control;

(iii)during the two-year period following a Change in Control, any requirement by the Company that the Executive’s services be rendered primarily at a location that is more than 50 miles from the Executive’s primary employment location immediately prior to the Change in Control; or

(iv)any other material breach of this Agreement by the Company.

In order to invoke a termination for Good Reason, the Executive shall provide written notice to the Company of the existence of one or more of the conditions described in clauses (i) through (iii) of this Section 5(c) within 30 days following the Executive’s knowledge of the initial existence of such condition or conditions, specifying in reasonable detail the conditions constituting Good Reason, and the Company shall have 30 days following receipt of such written notice (the “Cure Period”) during which it may remedy the condition if such condition is reasonably subject to cure. In the event that the Company fails to remedy the condition constituting Good Reason during the applicable Cure Period, the Executive’s “separation from service” (within the meaning of Section 409A of the Code) must occur, if at all, within 30 days following such Cure Period in order for such termination as a result of such condition to constitute a termination for Good Reason.

(d)Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination (as defined

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below) to the other party hereto given in accordance with Section 12(g) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice or 30 days after the end of the Cure Period, if applicable, in the case of a termination by the Executive with Good Reason). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

(e)Date of Termination. For purposes of this Agreement, “Date of Termination” means (i) if the Executive’s employment is terminated by the Company other than for Cause or Disability, or by the Executive without Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive’s employment is terminated by the Executive with Good Reason, a date that is no later than 30 days after the Cure Period, if applicable, (iii) if the Executive’s employment is terminated by the Company for Cause, the date on which the Company, after providing for the Executive’s Cure Period, if applicable, notifies the Executive of such termination, and (iv) if the Executive’s employment is terminated by reason of death or Disability, the date of death or the Disability Effective Date, as the case may be.

6.Obligations of the Company upon Termination.

(a)Good Reason or Other Than for Cause, Death or Disability Prior to or More Than Two Years Following a Change in Control. If, during the Employment Period and prior to, or more than two years following, a Change in Control, the Company shall terminate the Executive’s employment other than for Cause, death, or Disability, or if the Executive shall terminate her employment for Good Reason, the Company shall pay to the Executive on the 45th day after the Date of Termination (except as otherwise required by law or provided below) or provide, as applicable, the following:

(i)A lump sum cash payment consisting of: (A) the Executive’s Annual Base Salary through the Date of Termination to the extent not yet paid; (B) any annual Incentive Payment earned by the Executive for a prior award period, not yet paid, provided that (other than any portion of such annual Incentive Payment that was previously deferred, which portion shall instead be paid in accordance with the applicable deferral arrangement and any election thereunder) such payment shall be made no later than the 15th day of the third month following the close of the fiscal year with respect to which such Incentive Payment is earned (the sum of the amounts described in clauses (A) and (B) above shall be hereinafter referred to as the “Accrued Obligations”);

(ii)Subject to Section 6(g), a prorated Incentive Payment for the year in which the Date of Termination occurs (the “Pro Rata Incentive Payment”) in an amount to

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equal the product of (A) the amount determined by the Compensation Committee based on the Company’s actual performance for the fiscal year in which the Date of Termination occurs and otherwise on a basis no less favorable than annual incentive award determinations are made by the Compensation Committee for the Company’s executive officers, and (B) a fraction, the numerator of which is the number of days that have elapsed through the Date of Termination in the fiscal year of the Company in which the Date of Termination occurs, and the denominator of which is the number of days in such year, with such amount to be paid in a lump sum in cash on the date on which the Company otherwise makes cash incentive payments to executive officers for such fiscal year (other than any portion of such annual Incentive Payment that was deferred, which portion shall instead be paid in accordance with the applicable deferral arrangement and any election thereunder);

(iii)Subject to Section 6(g), a lump sum cash payment (the “Severance Payment” and, together with the Pro Rata Incentive Payment, the “Severance Benefits”) equal to the sum of (A) the Executive’s Annual Base Salary as in effect immediately prior to the Date of Termination, and (B) the greater of (x) the Target Incentive Payment for the year in which the Date of Termination occurs and (y) the Incentive Payment paid or payable to the Executive in respect of the fiscal year immediately prior to the year in which the Date of Termination occurs; and

(iv)To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy, or practice or contract or agreement of the Company and the Affiliated Entities through the Date of Termination, and shall pay such unreimbursed expenses incurred through the Date of Termination as are subject to reimbursement pursuant to Section 4(d) (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

(b)Good Reason or Other Than for Cause, Death or Disability during the Two-Year Period Immediately Following a Change in Control. If, during the Employment Period and during the two-year period immediately following a Change in Control, the Company shall terminate the Executive’s employment other than for Cause, death, or Disability, or if the Executive shall terminate her employment for Good Reason, the Company shall pay to the Executive on the 45th day after the Date of Termination (except as otherwise required by law or provided below) or provide, as applicable, the following:

(i)A lump sum cash payment equal to the Accrued Obligations;

(ii)Subject to Section 6(g), a lump sum cash payment (the “CIC Pro Rata Incentive Payment”) in an amount equal to the product of (A) the Target Incentive Payment for the year in which the Date of Termination occurs (or, if greater, the fiscal year of the Company ending immediately prior to the year in which the Change in Control occurs), and (B) a fraction, the numerator of which is the number of days elapsed through the Date of Termination in the fiscal year in which the Date of Termination occurs and the denominator of which is the number of days in such year (other than any portion of such annual Incentive Payment that was deferred, which portion shall instead be paid in accordance with the applicable deferral arrangement and any election thereunder);

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(iii)Subject to Section 6(g), a lump sum cash payment (the “CIC Severance Payment” and, together with the CIC Pro Rata Incentive Payment, the “CIC Severance Benefits”) equal to the sum of (A) two times the greater of (x) Executive’s Annual Base Salary as in effect immediately prior to the Date of Termination and (y) the Executive’s Annual Base Salary as in effect immediately prior to the Change in Control and (B) two times the greater of (x) the Target Incentive Payment for the year in which the Date of Termination occurs (or, if greater, the fiscal year of the Company ending immediately prior to the year in which the Change in Control occurs) and (y) the Incentive Payment paid or payable to the Executive in respect of the fiscal year immediately prior to the year in which the Change in Control occurs; and

(iv)To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive the Other Benefits.

(c)Death or Disability. If the Executive’s employment is terminated by reason of the Executive’s death or Disability at any time during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than, if such termination occurs during the Employment Period, the obligation to pay or provide (i) the Accrued Obligations and (ii) the timely payment or provision of the Other Benefits. The Accrued Obligations, in the event of death, shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include death or disability benefits under Company provided plans as in effect on the date of the Executive’s death with respect to senior executives of the Company and their beneficiaries generally.

(d)Cause; Other than for Good Reason. If the Executive’s employment shall be terminated by the Company for Cause, or if the Executive terminates her employment without Good Reason, at any time during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than, if such termination occurs during the Employment Period, the obligation to pay or provide (i) the Accrued Obligations (paid as set forth in Section 6(c) of this Agreement) and (ii) the timely payment or provision of the Other Benefits.

(e)Effect of Termination on Other Positions. If, on the Date of Termination, the Executive is a member of the Board of Directors of the Company (the “Board”) or the board of directors of any Affiliated Entities, or holds any other position with the Company or its Affiliated Entities, the Executive shall be deemed to have resigned from all such positions as of the Date of Termination. The Executive agrees to execute such documents and take such other actions as the Company may request to reflect such resignation.

(f)Full Settlement. The payments and benefits provided under this Section 6 (including, without limitation, the Other Benefits) shall be in full satisfaction of the Company’s obligations to the Executive under this Agreement upon her termination of employment, notwithstanding the remaining length of the Employment Period, and in no event shall the Executive be entitled to severance benefits (or other damages in respect of a termination of employment or claim for breach of this Agreement) beyond those specified in this Section 6.

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(g)General Release. The Company’s obligation to pay the Severance Benefits or CIC Severance Benefits, as applicable, is conditioned on the Executive’s execution, delivery to the Company, and non-revocation of a general release of claims in favor of the Company and the Affiliated Entities, in substantially the form set forth in Exhibit A hereto, in the time period specified therein.

(h)“Change in Control” shall, for the purposes of this Agreement, be the first to occur following the Effective Date of:

(i)an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”), or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Section 6(h)(i), the following acquisitions shall not constitute a Change in Control: (I) any acquisition directly from the Company, (II) any acquisition by the Company, (III) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Entity, or (IV) any acquisition by any Affiliated Entity pursuant to a transaction which complies with clauses (A), (B), and (C) of subsection (iii) of this Section 6(h);

(ii)a change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that, for purposes of this Section 6(h), any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be considered as a member of the Incumbent Board;

(iii)the consummation of a reorganization, merger, statutory share exchange, or consolidation or similar transaction involving the Company or any of its subsidiaries, or sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or securities of another entity by the Company or any of its subsidiaries (a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock (or, for a noncorporate entity, equivalent securities) and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a

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noncorporate entity, equivalent securities), as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding shares of common stock (or, for a noncorporate entity, equivalent securities) of the entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors (or, for a noncorporate entity, equivalent body or committee) of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(iv)the approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

7.No Mitigation; No Offset. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right, or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment.

8.Section 409A; Forfeiture.

(a)Section 409A.

(i)General. It is intended that this Agreement shall comply with the provisions of Section 409A of the Code and the Treasury regulations relating thereto, or an exemption to Section 409A of the Code. Any payments that qualify for the “short-term deferral” exception, “separation pay” exception or another exception under Section 409A of the Code shall be paid to the maximum extent under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the Section 409A of the Code deferral election rules and the exclusions under Section 409A of the Code for certain short-term deferral and separation pay amounts. All payments that constitute nonqualified deferred compensation for purposes of Section 409A of the Code that are to be made upon a termination of employment under this Agreement may only be made upon a “separation from service” within the meaning of Section 409A of the Code. In no event may the Executive, directly or indirectly, designate the calendar year of any payment under this Agreement that constitutes nonqualified deferred compensation for purposes of Section 409A of the Code. To the extent permitted under Section 409A of the Code or any IRS

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or Department of Treasury rules or other guidance issued thereunder, the Company may, in consultation with the Executive, modify the Agreement in order to cause the provisions of the Agreement to comply with the requirements of Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code.

(ii)In-Kind Benefits and Reimbursements. Notwithstanding anything to the contrary in this Agreement, all (A) reimbursements and (B) in-kind benefits provided under this Agreement that constitute nonqualified deferred compensation for purposes of Section 409A of the Code shall be paid or provided in accordance with the requirements of Section 409A of the Code, including, where applicable, the requirement that (w) any reimbursement is for expenses incurred during the Executive’s lifetime (or during a shorter period of time specified in this Agreement); (x) the amount of expenses eligible for reimbursement, or in kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in kind benefits to be provided, in any other calendar year; (y) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred; and (z) the right to reimbursement or in kind benefits is not subject to liquidation or exchange for another benefit.

(iii)Delay of Payments. Notwithstanding any other provision of this Agreement to the contrary, if the Executive is considered a “specified employee” for purposes of Section 409A of the Code (as determined in accordance with the methodology established by the Company as in effect on the date of termination), any payment that constitutes nonqualified deferred compensation within the meaning of Section 409A of the Code that is otherwise due to the Executive under this Agreement during the six-month period following her separation from service (as determined in accordance with Section 409A of the Code) on account of her separation from service shall be accumulated and paid to Executive on the first business day of the seventh month following her separation from service (the “Delayed Payment Date”). The Executive shall be entitled to interest on any delayed cash payments from the date of termination to the Delayed Payment Date at a rate equal to the applicable federal short-term rate in effect under Section 1274(d) of the Code for the month in which the Executive’s separation from service occurs. If the Executive dies during the period between the Date of Termination and the Delayed Payment Date, the amounts and entitlements delayed on account of Section 409A of the Code shall be paid to the personal representative of her estate on the first to occur of the Delayed Payment Date or 30 days after the date of the Executive’s death.

(iv)Separation from Service. Notwithstanding any contrary provision of this Agreement, with respect to any amounts or benefits that constitute nonqualified deferred compensation within the meaning of Section 409A of the Code, any references to termination of employment or the Executive’s Date of Termination shall mean and refer to the date of her “separation from service,” as that term is defined in Section 409A of the Code and Treasury Regulation Section 1.409A-1(h).

(b)Forfeiture. Notwithstanding any other provisions of this Agreement and in addition to and not in contravention of any clawback provision applicable to the Executive under the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable laws in effect from time to time:

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(i)If the Company is required to prepare an accounting restatement due to material noncompliance of the Company with any financial reporting requirement under the federal securities laws as a result of misconduct, the Executive shall reimburse the Company for all amounts received under any incentive compensation plans from the Company during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and any profits realized from the sale of securities of the Company during that 12-month period, unless the application of this provision has been exempted by the Securities and Exchange Commission;

(ii)If the Compensation Committee shall determine that the Executive has engaged in a serious breach of conduct, the Compensation Committee may terminate any equity compensation award or require the Executive to repay any gain realized on the exercise of an award in accordance with the terms of such award or the equity compensation plan governing such award; and

(iii)If the Executive is found guilty of misconduct by any judicial or administrative authority in connection with any (A) formal investigation by the Securities and Exchange Commission or (B) other federal or state regulatory investigation, the Compensation Committee may require the repayment of any gain realized on the exercise of an award under any equity compensation plan without regard to the timing of the determination of misconduct in relation to the timing of the exercise of the award.

9.Limitation on Payments under Certain Circumstances.

(a)Anything in this Agreement to the contrary notwithstanding, in the event the Accounting Firm (as defined below) shall determine that receipt of all Payments (as defined below) would subject the Executive to the excise tax under Section 4999 of the Code, the Accounting Firm shall determine whether to reduce any of the Payments paid or payable pursuant to this Agreement (the “Agreement Payments”) so that the Parachute Value (as defined below) of all Payments, in the aggregate, equals the Safe Harbor Amount (as defined below). The Agreement Payments shall be so reduced only if the Accounting Firm determines that the Executive would have a greater Net After-Tax Receipt (as defined below) of aggregate Payments if the Agreement Payments were so reduced. If the Accounting Firm determines that the Executive would not have a greater Net After-Tax Receipt (as defined below) of aggregate Payments if the Agreement Payments were so reduced, the Executive shall receive all Agreement Payments to which the Executive is entitled hereunder.

(b)All determinations required to be made under this Section 9, including the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm or other professional organization that is a certified public accounting firm recognized as an expert in determinations and calculations for purposes of Section 280G of the Code that is selected by the Company prior to the date of the Change in Control for purposes of making the applicable determinations under this Section 9 and is reasonably acceptable to the Executive (the “Accounting Firm”). For purposes of all present value determinations required to be made under this Section 9, the Company and the Executive

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elect to use the applicable federal rate that is in effect on the Effective Date pursuant to Treasury Regulations Section 1-280G, Q&A-32.

(c)If the Accounting Firm determines that aggregate Agreement Payments should be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof. All determinations made by the Accounting Firm under this Section 9 shall be binding upon the Company and the Executive and shall be made as soon as reasonably practicable and in no event later than 15 days following the Date of Termination. For purposes of reducing the Agreement Payments so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (i) first, any Payments under Section 6(b)(iii)(A); (ii) second, any other cash Payments that would be made upon a termination of the Executive’s employment, beginning with payments that would be made last in time; (iii) third, all rights to payments, vesting, or benefits in connection with any options to purchase common stock that are performance-based vesting awards; (iv) fourth, all rights to payments, vesting, or benefits in connection with any restricted stock awards that are performance-based vesting awards; (v) fifth, all rights to payments, vesting, or benefits in connection with any options to purchase common stock that are time-based vesting awards; and (vi) sixth, all rights to any other payments or benefits shall be reduced, beginning with payments or benefits that would be received last in time. All fees and expenses of the Accounting Firm shall be borne solely by the Company.

(d)As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the benefit of the Executive pursuant to this Agreement which should not have been so paid or distributed (“Overpayment”) or that additional amounts which will have not been paid or distributed by the Company to or for the benefit of the Executive pursuant to this Agreement could have been so paid or distributed (“Underpayment”), in each case, consistent with the calculation of the Safe Harbor Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Executive which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, the Executive shall pay promptly (and in no event later than 60 days following the date on which the Overpayment is determined) pay any such Overpayment to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Executive to the Company if and to the extent such payment would not either reduce the amount on which the Executive is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be paid promptly (and in no event later than 60 days following the date on which the Underpayment is determined) by the Company to or for the benefit of the Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.

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(e)To the extent requested by the Executive, the Company shall cooperate with the Executive in good faith in valuing, and the Accounting Firm shall take into account the value of, services provided or to be provided by the Executive (including, without limitation, the Executive’s agreeing to refrain from performing services pursuant to a covenant not to compete or similar covenant, including that set forth in Section 10 of this Agreement) before, on or after the date of a change in ownership or control of the Company (within the meaning of Q&A-2(b) of the final regulations under Section 280G of the Code), such that payments in respect of such services may be considered reasonable compensation within the meaning of Q&A-9 and Q&A-40 to Q&A-44 of the final regulations under Section 280G of the Code and/or exempt from the definition of the term “parachute payment” within the meaning of Q&A-2(a) of the final regulations under Section 280G of the Code in accordance with Q&A-5(a) of the final regulations under Section 280G of the Code.

(f)Definitions. The following terms shall have the following meanings for purposes of this Agreement:

(i)“Net After-Tax Receipt” shall mean the present value (as determined in accordance with Sections 280G(b)(2)(A)(ii) and 280G(d)(4) of the Code, taking into account the last sentence of Section 9(b) above) of a Payment net of all taxes imposed on the Executive with respect thereto under Sections 1 and 4999 of the Code and under applicable state and local laws, determined by applying the highest marginal rate under Section 1 of the Code and under state and local laws which applied to the Executive’s taxable income for the immediately preceding taxable year, or such other rate(s) as the Accounting Firm determined to be likely to apply to the Executive in the relevant tax year(s).

(ii)“Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2) of the Code, as determined by the Accounting Firm for purposes of determining whether and to what extent the excise tax under Section 4999 of the Code will apply to such Payment.

(iii)“Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.

(iv)“Safe Harbor Amount” shall mean 2.99 times the Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code.

10.Restrictive Covenants.

(a)Return of Company Property. Upon her termination of employment for any reason, the Executive shall promptly return to the Company any keys, credit cards, passes, confidential documents or material, or other property belonging to the Company, and the Executive shall also return all writings, files, records, correspondence, notebooks, notes, and other documents and things (including any copies thereof) containing confidential information or

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relating to the business or proposed business of the Company or the Affiliated Entities or containing any trade secrets relating to the Company or the Affiliated Entities, except any personal diaries, calendars, rolodexes, or personal notes or correspondence. For purposes of the preceding sentence, the term “trade secrets” shall have the meaning ascribed to it under the Uniform Trade Secrets Act. The Executive agrees to represent in writing to the Company upon termination of employment that she has complied with the foregoing provisions of this Section 10(a). Notwithstanding anything contained in this Section 10(a), for purposes of this Section 10(a), all references to the Company shall include its Affiliated Entities, whether or not specified.

(b)Mutual Nondisparagement. The Executive and the Company each agree that, following the Executive’s termination of employment, neither the Executive nor the Company will make any public statements that materially disparage the other party. The Company shall not be liable for any breach of its obligations under this paragraph if it informs its directors and executive officers, as such term is defined in Rule 3b-7 promulgated under the Exchange Act of the content of its covenant hereunder and takes reasonable measures to ensure that such individuals honor the Company’s agreement. Notwithstanding the foregoing, nothing in this Section 10(b) shall prohibit any person from making truthful statements when required by order of a court or other governmental or regulatory body having jurisdiction or to enforce any legal right including, without limitation, the terms of this Agreement.

(c)Confidential Information. The Executive agrees that, during her employment with the Company and at all times thereafter, she shall hold for the benefit of the Company all secret or confidential information, knowledge, or data relating to the Company or any of the Affiliated Entities, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or during her consultation with the Company after her termination of employment, and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). Except in the good faith performance of her duties for the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required or permitted by law or legal process, communicate or divulge any such information, knowledge, or data to anyone other than the Company and those designated by it.

Notwithstanding the above confidentiality provisions, note that nothing in this Agreement, nor in any other confidentiality agreement, nor in the Company’s policies should be interpreted as prohibiting the Executive from: (1) reporting possible violations of federal law or regulations, including any securities laws violations, to any governmental agency or entity, including but not limited to the Department of Justice, the U.S. Securities & Exchange Commission, the U.S. Congress, or any agency Inspector General; or (2) making any other disclosures that are protected under the whistleblower provisions of federal law or regulations; or (3) otherwise fully participating in any federal whistleblower programs.

Please refer to the National Bank Holdings Corporation Associate Handbook, a copy of which is available upon request, regarding the Executive’s rights related to the disclosure of the Company’s trade secrets.

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(d)Nonsolicitation. The Executive agrees that, while she is employed by the Company and during the (i) two-year period following her termination of employment with the Company, if her employment terminated pursuant to Section 6(b), or (ii) one-year period following her termination of employment with the Company, if her employment terminated for any other reason other than as set forth in the preceding clause (i) (the “Restricted Period”), the Executive shall not directly or indirectly, (A) solicit any individual who is, on the Date of Termination (or was, during the six-month period prior to the Date of Termination), employed by the Company or the Affiliated Entities to terminate or refrain from renewing or extending such employment or to become employed by or become a consultant to any other individual or entity other than the Company or the Affiliated Entities, (B) initiate discussions with any such employee or former employee for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity on behalf of the Executive’s employer, or (C) induce or attempt to induce any customer or investor (in each case, whether former, current, or prospective), supplier, licensee, or other business relation of the Company or any of the Affiliated Entities to cease doing business with the Company or such Affiliated Entity, or in any way interfere with the relationship between any such customer, investor, supplier, licensee, or business relation, on the one hand, and the Company or any Affiliated Entity, on the other hand.

(e)Noncompetition. The Executive agrees that, during the Restricted Period, she will not engage in Competition (as defined below). The Executive shall be deemed to be engaging in “Competition” if she, directly or indirectly, in any geographic market in which, as of the Date of Termination, the Company has a physical presence material to its business operations (or where the Company is engaged in substantial activities to become a material physical presence), including, without limitation, the State of Colorado, the Kansas City (Missouri and Kansas) metropolitan area, the Dallas, Texas metropolitan area and the Austin, Texas metropolitan area, (“Material Presence”), (i) owns, manages, operates, controls, or participates in the ownership, management, operation, or control of, (ii) is connected as an officer, employee, partner, director, consultant, or otherwise with, or (iii) has any financial interest in, any business (whether operated through a corporation or other entity) that is engaged in the commercial banking business or in any other financial services business that is competitive with any portion of the business conducted as of the Date of Termination by the Company or any of the Affiliated Entities, in each case if and only to the extent such business constitutes a Material Presence conducted by the Company or any of the Affiliated Entities within such geographic market. Ownership for personal investment purposes only of less than 2% of the voting stock of any publicly held corporation shall not constitute a violation hereof. Notwithstanding the foregoing, the restriction above shall not prohibit the Executive from employment with any subsidiary, division, affiliate, or unit of an entity (a “Related Unit”) if that Related Unit does not engage in business that is in Competition with the Company, irrespective of whether some other Related Unit of that entity competes with the Company (as long as the Executive does not engage in or assist in the activities of any Related Unit that competes with the Company). Notwithstanding anything contained herein to the contrary, following a Change in Control, references to the Company and the Affiliated Entities shall refer to the Company and its Affiliated Entities as of immediately prior to such Change in Control and the geographic market and the business scope of the restrictions in this Section 10(e) shall be limited to the geographic markets of the Company and the Affiliated Entities and the businesses conducted by the Company and the

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Affiliated Entities as of immediately prior to such Change in Control, without regard to when the Date of Termination occurs.

(f)Equitable Remedies. The Executive acknowledges that the Company would be irreparably injured by a violation of Section 10(b), 10(c), 10(d), or 10(e), and she agrees that the Company, in addition to any other remedies available to it for such breach or threatened breach, on meeting the standards required by law, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of Section 10(b), 10(c), 10(d), or 10(e). If a bond is required to be posted in order for the Company to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum.

(g)Severability; Blue Pencil. The Executive acknowledges and agrees that she has had the opportunity to seek advice of counsel in connection with the Agreement and the restrictive covenants contained herein are reasonable in geographical scope, temporal duration, and in all other respects. If it is determined that any provision of this Section 10 is invalid or unenforceable, the remainder of the provisions of this Section 10 shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court or other decision-maker of competent jurisdiction determines that any of the covenants in this Section 10 is unenforceable because of the duration or geographic scope of such provision, then after such determination becomes final and unappealable, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable, and in its reduced for, such provision shall be enforced.

11.Successors.

(a)This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive. This Agreement and any rights and benefits hereunder shall inure to the benefit of and be enforceable by the Executive’s legal representatives, heirs, or legatees. This Agreement and any rights and benefits hereunder shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(b)The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to satisfy all of the obligations under this Agreement in the same manner and to the same extent that the Company would be required to satisfy such obligations if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise.

12.Miscellaneous.

(a)Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

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(b)Withholding. The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

(c)Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Delaware, without regard to the conflict of law provisions of any state.

(d)Dispute Resolution. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement (other than a controversy or claim arising under Section 10 of this Agreement) that is not resolved by the Executive and the Company shall be submitted to arbitration in a location selected by the Company in accordance with Delaware law and the procedures of the American Arbitration Association. The determination of the arbitrator shall be conclusive and binding on the Company and the Executive and judgment may be entered on the arbitrator(s)’ awards in any court having competent jurisdiction.

(e)Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified).

(f)Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues.

(g)Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice):

to the Company:

National Bank Holdings Corporation
7800 E. Orchard Road, Suite 300
Greenwood Village, Colorado 80111
Attention:Legal Department

to the Executive:

At the address last on the records of the Company

Such notices, demands, claims, and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery or, in the case of certified or registered U.S. mail, five days after deposit

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in the U.S. mail; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received.

(h)Survivorship. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.

(i)Entire Agreement. From and after the Effective Date, this Agreement shall constitute the entire agreement between the Company and the Executive with respect to the subject matter hereof (except as may be otherwise provided in an agreement entered into after the Effective Date) and shall supersede the Prior Agreement.

(j)Counterparts. This Agreement may be executed in separate counterparts, each of which shall deemed to be an original but all of which taken together shall constitute one and the same agreement.

[Signature Page Follows]

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IN WITNESS THEREOF, the Executive has hereunto set her hand, and the Company has caused these presents to be executed in its name and on its behalf, all as of the day and year first above written.

NATIONAL BANK HOLDINGS CORPORATION

By: __/s/G. Timothy Laney__________________
Name: G. Timothy Laney
Title: Chairman, President & CEO

EXECUTIVE

____/s/Angela N. Petrucci_______
Angela N. Petrucci

[Signature Page to Petrucci Employment Agreement]

Release Agreement

This Release Agreement (this “Agreement”) is made and entered into by and among National Bank Holdings Corporation, a Delaware corporation (the “Company”), and its subsidiary bank, NBH Bank, a national bank organized under the laws of the United States of America, and all other divisions, and related, successor, and sister entities (together with the Company, “NBH”) and Angela N. Petrucci (the “Executive”).

WHEREAS, the Executive and the Company are parties to that certain Employment Agreement, dated as of May [5], 2020 (the “Employment Agreement”);

WHEREAS, the Executive’s employment shall end effective [__];

WHEREAS, NBH and the Executive wish to resolve any and all disputes that exist between them or could exist between them; and

WHEREAS, the parties acknowledge that this Agreement is the result of good faith negotiations and compromise and nothing in this Agreement is intended to or will constitute an admission by NBH or any of its agents or employees of any liability to the Executive.

NOW, THEREFORE, in consideration of the Company agreeing to provide the compensation and benefits under Section 6 of the Employment Agreement to the Executive and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, NBH and the Executive hereby agree as follows:

1.Full and General Release of Liability. The Executive hereby forever WAIVES, RELEASES, AND DISCHARGES National Bank Holdings Corporation, NBH Bank, all of their respective subsidiaries and divisions, including Bank Midwest, Community Banks of Colorado, Hillcrest Bank and any related, and affiliated entities, and all of their current and past employees, directors, officers, fiduciaries, owners, agents, successors, assigns, insurers, attorneys, and contractors, without limitation, exception, or reservation (the “Affiliates”), from any and all liability, actions, claims, demands, or lawsuits that the Executive may have had, presently has, or in the future may have, in connection with or arising out of the Executive’s employment with, or separation from, NBH. This release applies to any and all claims against NBH and/or the Affiliates, known or unknown, arising under contract or under federal, state, or local statutory or common (including civil tort) law, which have been asserted or which could have been asserted including, but not limited to, any and all claims under Title VII of the Civil Rights Act of 1964 (as amended), the Civil Rights Act of 1991, 42 U.S.C. § 1981, 42 U.S.C. § 1983, the Americans with Disabilities Act (as amended), the Rehabilitation Act, the Age Discrimination in Employment Act (as amended) (“ADEA”), the Family Medical Leave Act (as amended), the Genetic Information Non-Discrimination Act, the Employment Retirement Income Security Act (as amended), the Consolidated Omnibus Budget Reconciliation Act, the Kansas Acts Against Discrimination, the Kansas Age Discrimination in Employment Act, the Missouri Human Rights Act, the Colorado Anti-Discrimination Act, the Kansas Wage Payment Act, the Missouri wage payment statutes, and any other state statute or any state common law, including, but not limited to, any cause of action for wrongful termination, breach of contract, and any other federal, state, or local laws, including common law, to the maximum extent

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permitted by law, without limitation or exception. It is understood and agreed that this is a full and final release covering all known or unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims, or damages to the Executive that may have arisen, or may arise from any act or omission prior to the date of execution of this Agreement arising out of or related, directly or indirectly, to the Executive’s employment, or separation from employment with NBH, or to any professional relationship between the Executive and/or the employees, agents, representatives, and affiliates of NBH during the Executive’s employment with NBH, as well as those alleged losses, wrongs, injuries, debts, claims, or damages now known or disclosed that have arisen, or may arise as a result of any act or omission. Notwithstanding anything to the contrary, the released claims do not include, and this Agreement does not release any: (a) rights to compensation and benefits provided under Section 6 of the Employment Agreement or under any other benefit plan, agreement, arrangement, or policy of NBH that is applicable to the Executive that, in each case, by its terms, contains obligations that are to be performed after the date hereof by NBH; (b) rights to indemnification the Executive may have under applicable law, the bylaws or certificate of incorporation of the Company, or any other agreement or any rights with respect to coverage under any director and officer liability policy, as a result of having served as an officer or director of NBH or any Affiliates; (c) claims that the Executive may not by law release through a settlement agreement such as this; or (d) claims the Executive may have as the holder or beneficial owner of securities (or other rights relating to securities) of the Company.

2.Executive Acknowledgements. The Executive acknowledges that as of the date the Executive executed this Agreement, the Executive (a) has not suffered a work-related injury that has not properly been disclosed to NBH; and (b) has disclosed to NBH any action/inaction the Executive took/failed to take during the Executive’s employment with NBH that could give rise to a claim against NBH or the Affiliates, and/or any other third party.

3.Non-Interference. Nothing in this Agreement shall interfere with the Executive’s right to file a charge, cooperate, or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission, or any other federal or state regulatory or law enforcement agency. The consideration provided to Executive pursuant to Section 6 of the Employment Agreement, however, shall be the sole relief provided to the Executive for the claims that are released by the Executive pursuant to this Agreement and the Executive shall not be entitled to recover and agrees to waive any monetary benefits or recovery against NBH in connection with any such claim, charge, or proceeding, without regard to who has brought such charge or complaint.

4.Return of NBH Property. The Executive acknowledges that, as of the last day of employment, the Executive has returned and surrendered to NBH all NBH property and equipment (unless otherwise specified herein) pursuant to Section 10(a) of the Employment Agreement. The Executive acknowledges and agrees that all such materials are, and will always remain, the exclusive property of NBH.

5.Consideration and Revocation Periods; Counsel. The Executive acknowledges that the Executive has read this Agreement, has been given 21 calendar days to consider this Agreement, although the Executive may return it sooner if desired, and is hereby advised to consult with legal counsel regarding this Agreement. If the Executive signs this

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Agreement prior to the expiration of the 21-day period, the Executive hereby states that the Executive has voluntarily and knowingly decided to shorten the time period and that NBH has not induced the Executive to do so. The Executive further acknowledges that the Executive has seven calendar days to revoke this Agreement after executing the same. Notice of revocation should be sent, in writing, to the Legal Department, National Bank Holdings Corporation, 7800 E. Orchard Road, Suite 300, Greenwood Village, Colorado 80111. NBH hereby advises the Executive to consult with an attorney before signing this Agreement. This Agreement shall become effective on the eighth calendar day after its execution absent any revocation. The parties also agree that the release provided by the Executive in this Agreement does not include a release for claims under the ADEA arising after the date the Executive signs this Agreement.

6.No Admission. The execution of this Agreement does not and shall not constitute an admission by NBH of liability to the Executive. NBH specifically denies that it or its current or past insurers, agents, or employees have violated the Executive’s rights under any federal, state, or local constitution, statute, law, or common law in connection with the Executive’s employment, including the Executive’s separation therefrom. Likewise, the execution of this Agreement does not and shall not constitute an admission by the Executive of liability to NBH.

7.Entire Agreement. This Agreement contains the entire agreement between and among the parties and cannot be modified in any respect in the future except in a writing signed by the parties hereto.

8.Severability. It is expressly understood to be the intent of the parties hereto that the terms and provisions of this Agreement are severable and if, at any time in the future or for any reasons, any term or provision in this Agreement is declared unenforceable, void, voidable, or otherwise invalid, the remaining terms and provisions shall remain valid and enforceable as written.

9.Governing Law. The terms and provisions of this Agreement shall be interpreted and enforced under the substantive law of the State of Delaware, to the extent state law applies, and under federal law, to the extent federal law applies.

10.Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. Any party to this Agreement may execute this Agreement by signing any such counterpart.

11.Headings. The headings to this Agreement are for convenience only, and are not to be used in the interpretation of the terms hereof.

12.Voluntary Signing. The Executive acknowledges that the Executive has read this Agreement and understands it and has signed it voluntarily.

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PLEASE READ THIS AGREEMENT CAREFULLY; IT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

IN WITNESS WHEREOF, NBH has caused this Agreement to be executed by its duly authorized officer, and the Executive has executed this Agreement, as of the dates written below.

EXECUTIVE

________________________________________
Angela N. Petrucci

________________________________________
DATE

NATIONAL BANK HOLDINGS CORPORATION

and

NBH BANK

By: ____________________________________
Name:
Title:

________________________________________
DATE

[Signature Page to Release Agreement]

Exhibit 10.3

2014 Omnibus Incentive Plan
TSR PERFORMANCE Stock UNIT Award Agreement

THIS PERFORMANCE STOCK UNIT AWARD AGREEMENT (this “Agreement”), dated as of [_________] (the “Date of Grant”), is made by and between National Bank Holdings Corporation, a Delaware corporation (“NBHC”), and [_________] (“Participant”). Capitalized terms used herein without definition have the meanings ascribed to such terms in the National Bank Holdings Corporation 2014 Omnibus Incentive Plan (the “Plan”).

WHEREAS, NBHC has adopted the Plan to provide NBHC officers, employees, directors, and consultants an opportunity to participate in NBHC’s future performance and align the interests of such officers, employees, directors, and consultants with those of the shareholders of NBHC; and

WHEREAS, the Committee has determined that it would be in the best interests of NBHC and its shareholders to grant Participant a number of performance vesting Restricted Stock Units on the terms and subject to the conditions set forth in this Agreement and the Plan.

NOW THEREFORE, in consideration of the premises and the covenants of the parties contained in this Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows:

1.Grant of Performance Stock Unit Award.

(a)Grant. NBHC hereby grants to Participant an award of performance-vesting Restricted Stock Units (the “PSUs”) in respect of [___________] Shares (the “TSR Target Number”), on the terms and subject to the terms and conditions set forth in this Agreement and as otherwise provided in the Plan.

(b)Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan.

2.Vesting and Settlement.

(a)General. Except as may otherwise be provided herein, a number of PSUs, if any, equal to the Earned PSUs (as defined in Annex A hereto) shall vest on [_________] (such date, the “Vesting Date”), subject to Participant having not incurred a Termination of Employment prior to the Vesting Date. NBHC shall issue one Share to Participant for each Earned PSU within 10 days following the Vesting Date (and in no event later than the March 15 following the Vesting Date).

‌

(b)

Determination of Earned PSUs and Vesting and Settlement in Connection with a Change in Control.

(i)

Determination of Earned PSUs. Notwithstanding anything in the Plan, effective as of immediately prior to a Change in Control, subject to the occurrence of such Change in Control, the number of Earned PSUs shall be established by the Committee based on the greater of the TSR Target Number and the level of achievement of actual performance as determined through the latest practicable date prior to such Change in Control (as determined by the Committee in its sole discretion).

(ii)

Vesting and Settlement of Earned PSUs. The Earned PSUs shall be settled within five days following the occurrence of such Change in Control, unless a replacement or substitute award meeting the requirements of this Section 2(b)(ii) is provided to Participant in respect of the Earned PSUs (an award meeting the requirements of this Section 2(b)(ii), a “Replacement Award”). An award shall qualify as a Replacement Award if: (A) it is a restricted stock unit with respect to a publicly traded equity security of NBHC or the surviving corporation or the ultimate parent of the applicable entity following the Change in Control, (B) it has a fair market value at least equal to the value of the Earned PSUs established pursuant to Section 2(b)(i) as of the date of the Change in Control, (C) it contains terms relating to service-based vesting (including with respect to Termination of Employment) that are substantially identical to the terms set forth in this Agreement and does not contain any terms related to performance-based vesting, and (D) its other terms and conditions are not less favorable to Participant than the terms and conditions set forth in this Agreement or in the Plan (including provisions that apply in the event of a subsequent Change in Control) as of the date in the Change in Control. The determination of whether the conditions of this Section 2(b)(ii) are satisfied shall be made by the Committee, as constituted immediately prior to the Change in Control, in its sole discretion, prior to a Change in Control. If a Replacement Award is provided, the Earned PSUs shall not be settled upon a Change in Control in accordance with the first sentence of this Section 2(b)(ii).

(iii)

Replacement Award. If, in connection with a Change in Control, Participant is provided with a Replacement Award, such Replacement Award shall vest on the Vesting Date and be settled at the time provided in Section 2(a), subject to Participant having not incurred a Termination of Employment prior to the Vesting Date; provided that, if, within two years following such Change in Control, Participant incurs a Termination of Employment without Cause, due to Participant’s resignation with Good Reason (as defined in Section 7(b)), or due to Participant’s death or Disability, then the Replacement Award shall become fully vested effective as of the date Termination of Employment, and NBHC shall issue one Share to Participant for each Replacement Award as soon as reasonably practicable, and in no event more than 10 days, following the date of Termination of Employment.

(c)

Other Terminations of Employment. If Participant incurs a Termination of Employment prior to a Change in Control or under circumstances other than those set forth in Section 2(b)(ii) as applicable to a Replacement Award, any unvested PSUs shall be forfeited by Participant without consideration effective as of the date of Termination of Employment.

3.Tax Withholding; Independent Tax Advice. NBHC shall reasonably determine the amount of any federal, state, local, or other income, employment, or other taxes that NBHC or any of its Subsidiaries may reasonably be obligated to withhold with respect to the grant, vesting, settlement, or other event with respect to the PSUs and related dividend equivalents. NBHC’s obligation to deliver any certificates evidencing the Shares provided upon settlement of the Earned PSUs (or to make a book-entry or other electronic notation indicating ownership of such Shares) is subject to the condition precedent that Participant either pay or provide for the amount of any such withholding obligations in such manner as may be authorized by the Committee or as may otherwise be permitted under Section 14(d) of the Plan. Participant acknowledges that the tax laws and regulations applicable to the PSUs and the disposition of the Shares provided upon settlement of the PSUs are complex and subject to change, and it is the sole responsibility of Participant to obtain Participant’s own advice as to the tax treatment of the terms of this Agreement.

4.No Rights as Stockholder; Dividend Equivalent Credits. Until such time as the PSUs have been settled pursuant to Section 2 and the underlying Shares have been delivered to Participant, and Participant has become the holder of such Shares, Participant shall have no rights as a stockholder, including, without limitation, the right to dividends or other distributions and the right to vote. Notwithstanding the foregoing or Section 7(c) of the Plan, each PSU shall entitle Participant to dividend equivalents with respect to ordinary cash dividends that would otherwise be paid on the Share underlying such PSU during the period from the Date of Grant to the date such Share is delivered in accordance with Section 2. Any such dividend equivalents shall be subject to the same vesting conditions applicable to the underlying PSU with respect to which they accrue, and shall, if the underlying PSU is earned and vests, shall vest and be paid at the time as the underlying PSU is settled.

5.Non-Transferability. The PSUs may not, at any time prior to becoming vested, be assigned, alienated, pledged, attached, sold, or otherwise transferred or encumbered by Participant other than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer, or encumbrance shall be void and unenforceable against NBHC, its Subsidiaries, and its Affiliates; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer, or encumbrance. The PSUs shall be subject to the restrictions set forth in the Plan and this Agreement.

6.Adjustment. In the event of any event described in Section 3(h) of the Plan occurring after the Date of Grant, the adjustment provisions as provided for under Section 3(h) of the Plan shall apply to the PSUs.

7.	Certain Definitions and Administration.

(a)Termination with Cause. Unless otherwise provided under the termination with “cause” provisions of an Individual Agreement, to invoke a termination with Cause, NBHC must provide written notice to Participant of the existence of such grounds within 30 days following NBHC’s knowledge of the existence of such grounds, specifying in reasonable detail the grounds constituting Cause, and, with respect to the grounds enumerated in clauses (A), (C), (D), and (E) of clause (ii) in the definition of Cause in the Plan, Participant shall have 30 days following receipt of such written notice during which he or she may remedy the ground if such ground is reasonably subject to cure as determined by NBHC.

(b)

“Good Reason” shall have the meaning given to such term in an Individual Agreement, or if there is no such Individual Agreement or if it does not define Good Reason, then, Good Reason shall mean the occurrence of the following, in the absence of Participant’s written consent:

(i)

a material diminution in Participant’s annual base salary from that in effect immediately prior to a Change in Control; or

(ii)

the assignment to Participant of any duties materially inconsistent with Participant’s positions (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities, or any other action by NBHC that results in a material diminution in such positions, authority, duties, or responsibilities, in each case, from those in effect immediately prior to a Change in Control;

provided that, in each case, (A) Participant provides written notice to NBHC of the existence of one or more of the conditions described in clauses (i) through (ii) within 30 days following Participant’s knowledge of the initial existence of such condition or conditions, specifying in reasonable detail the conditions constituting Good Reason; (B) NBHC and its Affiliates fail to cure such event or condition within 30 days following the receipt of such notice; and (C) Participant incurs a Termination of Employment within 30 days following the expiration of such cure period.

8.Forfeiture. Participant agrees that, notwithstanding any other provision of any agreement to which he or she is subject with NBHC or NBH Bank (collectively, the “Company”), and in addition to and not in contravention of any clawback provision or policy applicable to Participant as in effect from time to time (including any clawback policies or provisions implemented pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law):

(a)

If the Company is required to prepare an accounting restatement due to material noncompliance of the Company in connection with any financial reporting requirement under the federal securities laws as a result of Participant’s misconduct, the Committee may require Participant to forfeit unvested PSUs and dividend equivalents, and/or to reimburse the Company for all Shares and amounts received under this Agreement from the Company during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (whichever first occurs) of the financial document embodying such financial

reporting requirement, and any amounts received with respect to, or amounts realized upon the settlement of the PSUs or the subsequent sale of the Shares that were issued upon settlement of the PSUs or the cancellation of the PSUs during that 12-month period;

(b)

If the Committee shall determine that Participant has engaged in a serious breach of conduct, the Committee may require Participant to forfeit unvested PSUs, may terminate this Agreement and/or require Participant to repay any amounts realized upon the settlement of the PSUs or on the subsequent sale of the Shares that were issued upon settlement of the PSUs or the cancellation of the PSUs; and

(c)

If Participant is found guilty of misconduct by any judicial or administrative authority in connection with any (i) formal investigation by the Securities and Exchange Commission or (ii) other federal or state regulatory investigation, then the Committee may require Participant to forfeit unvested PSUs and/or may require the repayment of any amounts realized upon the settlement of the PSUs or on the subsequent sale of the Shares that were issued upon settlement of the PSUs or the cancellation of the PSUs without regard to the timing of the determination of misconduct in relation to the timing of the settlement of the PSU or sale of Shares issued pursuant to the PSU.

The foregoing provisions of this Section 8 shall cease to apply following a Change in Control, except as otherwise required by applicable law.

9.Compliance with Legal Requirements. The grant of the PSUs and any other obligations of NBHC under this Agreement shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any regulatory or governmental agency as may be required. The Committee, in its sole discretion, may postpone the issuance or delivery of Shares as the Committee may consider appropriate and may require Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules, and regulations.

10.Miscellaneous.

(a)

Confidentiality of this Agreement. Participant agrees to keep confidential the terms of this Agreement, unless and until such terms have been disclosed publicly other than through a breach by Participant of this covenant. This provision does not prohibit Participant from providing this information on a confidential and privileged basis to Participant’s attorneys or accountants for purposes of obtaining legal or tax advice or as otherwise required by law.

(b)

Restrictive Covenants. The grant, vesting, and settlement of the PSUs pursuant to this Agreement shall be in partial consideration for, and subject to Participant’s continued compliance with, (i) any restrictive covenants set forth in an Individual Agreement or (ii) if there are no confidentiality and/or non-solicitation provisions in an Individual Agreement, the restrictive covenants as set forth in Annex B hereto. For the avoidance of doubt, if there are confidentiality and/or non-solicitation provisions in an Individual Agreement, the restrictive covenants in the Individual Agreement shall govern.

(c)

Section 409A of the Code. It is intended that the Awards granted pursuant to this Agreement and the provisions of this Agreement be exempt from or comply with Section 409A of the Code, and all provisions of this Agreement shall be construed and interpreted in a manner consistent with Section 11(e) of the Plan and the requirements for avoiding taxes or penalties under Section 409A of the Code.

(d)

Waiver and Amendment. The Committee may waive any conditions or rights under, or amend any terms of, this Agreement and the PSUs granted hereunder; provided that any such waiver or amendment that would impair the rights of any Participant or any holder or beneficiary of any PSUs heretofore granted shall not to that extent be effective without the consent of Participant. No waiver of any right hereunder by any party shall operate as a waiver of any other right, or as a waiver of the same right with respect to any subsequent occasion for its exercise, or as a waiver of any right to damages. No waiver by any party of any breach of this Agreement shall be held to constitute a waiver of any other breach or a waiver of the continuation of the same breach.

(e)

Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, facsimile, courier service or personal delivery:

if to NBHC to:
National Bank Holdings Corporation
7800 East Orchard Road, Suite 300
Greenwood Village, CO 80111
Facsimile: (855)576-3479
Attention: General Counsel

if to Participant: at the address last on the records of NBHC.

All such notices, demands and other communications shall be deemed to have been duly given (i) when delivered by hand, if personally delivered; (ii) when delivered by courier, if delivered by commercial courier service; (iii) five business days after being deposited in the mail, postage prepaid, if mailed; and (iv) when receipt is mechanically acknowledged, if by facsimile.

(f)Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.

(g)No Rights to Service. Nothing contained in this Agreement shall be construed as giving Participant any right to be retained, in any position, as an employee, consultant, or director of NBHC or its Affiliates or shall interfere with or restrict in any way the right of NBHC or its Affiliates, which is hereby expressly reserved, to remove, terminate, or discharge Participant at any time for any reason whatsoever.

(h)Beneficiary. Participant may file with NBHC a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, change or revoke such designation by filing a new designation with NBHC. The last such designation received by NBHC shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by NBHC prior to Participant’s death, and in no event shall it be effective as of a date prior to such receipt. If no beneficiary designation is filed by Participant, the beneficiary shall be deemed to be his or her spouse or, if Participant is unmarried at the time of death, his or her estate.

(i)Successors. The terms of this Agreement shall be binding upon and inure to the benefit of NBHC, its successors and assigns, and of Participant and the beneficiaries, executors, administrators, heirs and successors of Participant.

(j)Entire Agreement. This Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations and negotiations with respect thereto.

(k)Bound by the Plan. By signing this Agreement, Participant acknowledges that he or she has received a copy of the Plan and has had an opportunity to review the Plan and agrees to be bound by all the terms and provisions of the Plan.

(l)Governing Law. This Agreement shall be construed and interpreted in accordance with the internal laws of the State of Delaware without regard to principles of conflicts of law thereof, or principles of conflicts of laws of any other jurisdiction that could cause the application of the laws of any jurisdiction other than the State of Delaware.

(m)Headings. The headings of the Sections of this Agreement are provided for convenience only and are not to serve as a basis for interpretation or construction, and shall not constitute a part, of this Agreement.

(n)Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

NATIONAL BANK HOLDINGS CORPORATION

By: _____________________________________
Name:

Title:

By: _____________________________________
Name:

Title:

PARTICIPANT

_________________________________________
[Participant Name]

[Signature Page to PSU Award Agreement]

Annex A
Performance Metrics

For purposes of this Agreement, the following terms have the meanings ascribed thereto below:

“Adjusted Relative TSR Factor” shall mean (a) if NBHC’s TSR for the Measurement Period is less than zero, then the lesser of (i) the Relative TSR Factor and (ii) 1.000; and (b) if NBHC’s TSR for the Measurement Period is equal to or greater than zero, then the Relative TSR Factor.

“Earned PSUs” shall mean the product of (a) the TSR Target Number multiplied by (b) the Adjusted Relative TSR Factor (such product shall be rounded to the nearest whole number).

“GAAP” shall mean the generally accepted accounting principles in effect from time to time in the United States, applied on a consistent basis.

“Measurement Period” shall mean the period commencing on January 1, 20[__] and ending on December 31, 20[end of 3^rd fiscal year from commencement date].

“Relative TSR” shall mean the percentile ranking of NBHC’s TSR among the TSRs for the companies included in the KBW Regional Banking Index as of the first day of the Measurement Period; provided that any company that is not continuously included in the KBW Regional Banking Index during the Measurement Period shall be excluded from the determination of Relative TSR. The only exception shall be if a company included in the KBW Regional Banking Index as of the first day of the Measurement Period files for bankruptcy or is placed into receivership, they shall remain included in the determination of Relative TSR, with a TSR of -100%.

“Relative TSR Factor” shall mean the factor determined and certified by the Committee based on Relative TSR for the Measurement Period as follows:

Relative TSR for the Measurement Period (%ile)	Relative TSR Payment Factor
Less than [__] percentile‌	0.000
Equal to [__] percentile‌	0.500
Equal to [__] percentile‌	1.000
Greater than [__] percentile‌	1.500

Linear interpolation shall be used between the applicable Relative TSR targets set forth above. In no event will the Relative TSR Factor exceed 1.500.

“TSR” shall mean, with respect to a particular company, total shareholder return for such company over the Measurement Period, calculated using the average closing stock price for the

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20 trading days prior to and including December 31, 20[__] and the average closing stock price for the 20 trading days prior to and including December 31, 20[+ 3 years], assuming dividends are reinvested in such company’s common stock on the ex-dividend date.

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Annex B
Restrictive Covenants

1.Confidential Information. Participant agrees that, during his or her employment with NBHC and at all times thereafter, he or she shall hold for the benefit of NBHC all secret or confidential information, knowledge, or data relating to NBHC or any of its Affiliates, and their respective businesses, which shall have been obtained by Participant during Participant’s employment by NBHC or during his or her consultation with NBHC after his or her termination of employment, and which shall not be or become public knowledge (other than by acts by Participant or representatives of Participant in violation of this Agreement). Except in the good faith performance of his or her duties for NBHC, Participant shall not, without the prior written consent of NBHC or as may otherwise be required or permitted by law or legal process, communicate or divulge any such information, knowledge, or data to anyone other than NBHC and those designated by it.

Notwithstanding the above confidentiality provisions, nothing in this Agreement, in any other agreement, or in the Company’s policies should be interpreted as prohibiting Participant from: (1) reporting possible violations of federal law or regulations, including any securities laws violations, to any governmental agency or entity, including but not limited to the Department of Justice, the U.S. Securities & Exchange Commission, the U.S. Congress, or any agency Inspector General; (2) making any other disclosures that are protected under the whistleblower provisions of federal law or regulations; or (3) otherwise fully participating in any federal whistleblower programs.

Please refer to the NBHC Associate Handbook, a copy of which is available upon request, regarding Participant’s rights related to the disclosure of the Company’s trade secrets.

2.Nonsolicitation. Participant agrees that, while he or she is employed by NBHC and during the one-year period following his or her termination of employment with NBHC (the “Restricted Period”), Participant shall not, directly or indirectly, (a) solicit any individual who is, on the date on which Participant incurs a Termination of Employment (the “Date of Termination”) (or was, during the six-month period prior to the Date of Termination), employed by NBHC or any of its Affiliates to terminate or refrain from renewing or extending such employment or to become employed by or become a consultant to any other individual or entity other than NBHC or such Affiliate, (b) initiate discussions with any such individual for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity on behalf of Participant’s employer, (c) solicit any client or customer of NBHC or any of its Affiliates to transact business with a Competitive Enterprise (as defined below), or (d) induce or attempt to induce any client, customer, or investor (in each case, whether former, current, or prospective), vendor, supplier, licensee, or other business relation of NBHC or any of its Affiliates to reduce or cease doing business with NBHC or any such Affiliate, or in any way interfere with the relationship between any such client, customer, investor, vendor, supplier, licensee, or business relation, on the one hand, and NBHC or any such Affiliate, on the other hand. For purposes hereof, “Competitive Enterprise” means any business enterprise that either (i) engages in any activity closely associated with commercial banking or any other financial services business, including the operations of an institution, the deposits of which are insured by the Federal Deposit Insurance Corporation, that is competitive with any portion of the business conducted by NBHC or any of its Affiliates.

B-1

3.Equitable Remedies. Participant acknowledges that NBHC would be irreparably injured by a violation of Section 1 or Section 2 of this Annex B and he or she agrees that NBHC, in addition to any other remedies available to it for such breach or threatened breach, on meeting the standards required by law, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining Participant from any actual or threatened breach of Section 1 or Section 2 of this Annex B. If a bond is required to be posted in order for NBHC to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum.

4.Severability; Blue Pencil. Participant acknowledges and agrees that he or she has had the opportunity to seek advice of counsel in connection with this Agreement and the restrictive covenants contained herein are reasonable in geographical scope, temporal duration, and in all other respects. If it is determined that any provision of this Annex B is invalid or unenforceable, the remainder of the provisions of this Annex B shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court or other decision-maker of competent jurisdiction determines that any of the covenants in this Annex B is unenforceable because of the duration or geographic scope of such provision, then after such determination becomes final and unappealable, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable, and in its reduced form, such provision shall be enforced.

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Exhibit 10.4

2014 Omnibus Incentive Plan
rota PERFORMANCE Stock UNIT Award Agreement

THIS PERFORMANCE STOCK UNIT AWARD AGREEMENT (this “Agreement”), dated as of [_________] (the “Date of Grant”), is made by and between National Bank Holdings Corporation, a Delaware corporation (“NBHC”), and [______________] (“Participant”). Capitalized terms used herein without definition have the meanings ascribed to such terms in the National Bank Holdings Corporation 2014 Omnibus Incentive Plan (the “Plan”).

1.Grant of Performance Stock Unit Award.

(a)Grant. NBHC hereby grants to Participant an award of performance-vesting Restricted Stock Units (the “PSUs”) in respect of [________] Shares (the “ROTA Target Number”), on the terms and subject to the terms and conditions set forth in this Agreement and as otherwise provided in the Plan.

2.Vesting and Settlement.

(a)General. Except as may otherwise be provided herein, a number of PSUs, if any, equal to the Earned PSUs (as defined in Annex A hereto) shall vest on [________] (such date, the “Vesting Date”), subject to Participant having not incurred a Termination of Employment prior to the Vesting Date. NBHC shall issue one Share to Participant for each Earned PSU within ten days following the Vesting Date.

‌

(b)

Determination of Earned PSUs and Vesting and Settlement in Connection with a Change in Control.

(i)

Determination of Earned PSUs. Notwithstanding anything in the Plan, effective as of immediately prior to a Change in Control, subject to the occurrence of such Change in Control, the number of Earned PSUs shall be established by the Committee based on the greater of the ROTA Target Number and the level of achievement of actual performance as determined through the latest practicable date prior to such Change in Control (as determined by the Committee in its sole discretion).

(ii)

Vesting and Settlement of Earned PSUs. The Earned PSUs shall be settled within five days following the occurrence of such Change in Control, unless a replacement or substitute award meeting the requirements of this Section 2(b)(ii) is provided to Participant in respect of the Earned PSUs (an award meeting the requirements of this Section 2(b)(ii), a “Replacement Award”). An award shall qualify as a Replacement Award if: (A) it is a restricted stock unit with respect to a publicly traded equity security of NBHC or the surviving corporation or the ultimate parent of the applicable entity following the Change in Control, (B) it has a fair market value at least equal to the value of the Earned PSUs established pursuant to Section 2(b)(i) as of the date of the Change in Control, (C) it contains terms relating to service-based vesting (including with respect to Termination of Employment) that are substantially identical to the terms set forth in this Agreement and does not contain any terms related to performance-based vesting, and (D) its other terms and conditions are not less favorable to Participant than the terms and conditions set forth in this Agreement or in the Plan (including provisions that apply in the event of a subsequent Change in Control) as of the date of the Change in Control. The determination of whether the conditions of this Section 2(b)(ii) are satisfied shall be made by the Committee, as constituted immediately prior to the Change in Control, in its sole discretion, prior to a Change in Control. If a Replacement Award is provided, the Earned PSUs shall not be settled upon a Change in Control in accordance with the first sentence of this Section 2(b)(ii).

(iii)

Replacement Award. If, in connection with a Change in Control, Participant is provided with a Replacement Award, such Replacement Award shall vest on the Vesting Date and be settled at the time provided in Section 2(a), subject to Participant having not incurred a Termination of Employment prior to the Vesting Date; provided that, if, within two years following such Change in Control, Participant incurs a Termination of Employment without Cause, due to Participant’s resignation with Good Reason (as defined in Section 7(b)), or due to Participant’s death or Disability, then the Replacement Award shall become fully vested effective as of the date of Termination of Employment, and NBHC shall issue one Share to Participant for each Replacement Award as soon as reasonably practicable, and in no event more than ten days, following the date of Termination of Employment.

(c)

7.	Certain Definitions and Administration.

(b)

(i)

a material diminution in Participant’s annual base salary from that in effect immediately prior to a Change in Control; or

(ii)

(a)

upon the settlement of the PSUs or the subsequent sale of the Shares that were issued upon settlement of the PSUs or the cancellation of the PSUs during that 12-month period;

(b)

(c)

The foregoing provisions of this Section 8 shall cease to apply following a Change in Control, except as otherwise required by applicable law.

10.Miscellaneous.

(a)

(b)

(c)

(d)

(e)

if to NBHC to:
National Bank Holdings Corporation
7800 East Orchard Road, Suite 300
Greenwood Village, CO 80111
Email: legal@nbhbank.com
Attention: General Counsel

if to Participant: at the address last on the records of NBHC.

(h)Beneficiary. Participant may file with NBHC a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, change or

revoke such designation by filing a new designation with NBHC. The last such designation received by NBHC shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by NBHC prior to Participant’s death, and in no event shall it be effective as of a date prior to such receipt. If no beneficiary designation is filed by Participant, the beneficiary shall be deemed to be his or her spouse or, if Participant is unmarried at the time of death, his or her estate.

(n)Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

NATIONAL BANK HOLDINGS CORPORATION

By: _____________________________________
Name:

Title:

By: _____________________________________
Name:

Title:

PARTICIPANT

_________________________________________
[Participant Name]

[Signature Page to PSU Award Agreement]

Annex A
Performance Metrics

For purposes of this Agreement, the following terms have the meanings ascribed thereto below:

“Adjusted Relative ROTA Factor” shall mean (a) if NBHC’s ROTA for any calendar year during the Measurement Period is less than zero, then the lesser of (i) the Relative ROTA Factor and (ii) 1.000; and (b) if NBHC’s ROTA for each calendar year during the Measurement Period is equal to or greater than zero, then the Relative ROTA Factor.

“Earned PSUs” shall mean the product of (a) the ROTA Target Number multiplied by (b) the Adjusted Relative ROTA Factor (such product shall be rounded to the nearest whole number).

“Measurement Period” shall mean the period commencing on January 1, 20[__] and ending on December 31, 20[end of 3^rd fiscal year from commencement date].

“Relative ROTA” shall mean the percentile ranking of NBHC’s ROTA among the ROTAs for the companies included in the KBW Regional Banking Index for each respective calendar year of the Measurement Period, calculated by determining the quotient of (a) the sum of each of NBHC’s ROTA percentile rankings at the end of each calendar year during the Measurement Period divided by (b) three (3) provided that the Committee may, in its sole discretion, exclude from the KBW Regional Banking Index a company that has not implemented the Current Expected Credit Losses accounting standard (“CECL”) at any point during the Measurement Period, even if such company subsequently implements CECL during the Measurement Period. Notwithstanding the foregoing, in the event of a Change of Control prior to the final determination of Relative ROTA for the Measurement Period, the determination of Relative ROTA will be made by the Committee as contemplated by Section 2(b)(i) based on information that is publicly available with respect to the portion of the Measurement Period completed (including calendar quarters, if practicable) prior to the Change in Control and as of the date of the Committee’s determination, and the Measurement Period shall end.

“Relative ROTA Factor” shall mean the factor determined and certified by the Committee based on Relative ROTA for the Measurement Period as follows:

Relative ROTA for the Measurement Period (%ile)	Relative ROTA Factor
Less than [ ] percentile‌	0.000
Equal to [ ] percentile‌	0.500
Equal to [ ] percentile‌	1.000
Greater than [ ] percentile‌	1.500

Linear interpolation shall be used between the applicable Relative ROTA targets set forth above. In no event will the Relative ROTA Factor exceed 1.500.

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“ROTA” shall mean a company’s return on tangible assets and shall mean, as of any date, a company’s ratio of (i) consolidated net income plus intangible amortization expense (net of taxes using the marginal federal tax rate in effect at the time of calculation) for the four completed calendar quarters for the relevant calendar year (including the calendar quarter ending December 31 of such year) to (ii) the average assets of the company, excluding all assets that would be classified as intangible assets (such as goodwill) on the company’s consolidated balance sheet, averaged for the four completed calendar quarters for the relevant calendar year (including the calendar quarter ending December 31 of such year). ROTA shall be calculated utilizing the data (including the applicable tax rate) provided through the SNL Financial Database (or its qualified successor) for all companies in the KBW Regional Banking Index for the applicable calendar year of the Measurement Period. Notwithstanding the foregoing, the Committee shall have the discretion to adjust net income for one-time expenses related to mergers and acquisitions as reported in the public filings with the Securities and Exchange Commission, as applicable.

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Annex B
Restrictive Covenants

Please refer to the NBHC Associate Handbook, a copy of which is available upon request, regarding Participant’s rights related to the disclosure of the Company’s trade secrets.

B-1

B-2

Exhibit 31.1

Certifications of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, G. Timothy Laney, Chief Executive Officer, certify that:

I have reviewed this quarterly report on Form 10-Q of National Bank Holdings Corporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:	August 5, 2020	/s/ G. Timothy Laney
		G. Timothy Laney
		Chairman, President and Chief Executive Officer

Exhibit 31.2

Certifications of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Aldis Birkans, Chief Financial Officer, certify that:

I have reviewed this quarterly report on Form 10-Q of National Bank Holdings Corporation;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:	August 5, 2020	/s/ Aldis Birkans
		Aldis Birkans
		Chief Financial Officer

Exhibit 32

Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of National Bank Holdings Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2020, as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned officers certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) this Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.


Date:	August 5, 2020	/s/ G. Timothy Laney
		G. Timothy Laney
		Chairman, President and Chief Executive Officer
Date:	August 5, 2020	/s/ Aldis Birkans
		Aldis Birkans
		Chief Financial Officer