National Bank (NBHC) - 2020 Q3 - Quarterly Report

FORM 10-Q Cover Page This section identifies the filing as a Quarterly Report (Form 10-Q) for National Bank Holdings Corporation, detailing key registrant information - This is a Quarterly Report (Form 10-Q) for the period ended September 30, 2020, filed by National Bank Holdings Corporation (NBHC)[1][2] Registrant Information | Field | Value | | :--- | :--- | | Registrant Name | NATIONAL BANK HOLDINGS CORPORATION | | Commission File Number | 001-35654 | | State of Incorporation | Delaware | | Address | 7800 East Orchard, Suite 300, Greenwood Village, Colorado 80111 | | Telephone | (303) 892-8715 | | Trading Symbol | NBHC | | Exchange | NYSE | | Filer Status | Large accelerated filer | | Shares Outstanding (as of Nov 3, 2020) | 30,604,461 Class A voting common stock | | Par Value per Share | $0.01 | | Restricted Class A Common Stock (unvested) | 161,503 shares | Cautionary Note Regarding Forward-Looking Statements This section warns that forward-looking statements are subject to various risks, including business strategy, economic conditions, regulatory changes, and COVID-19 impacts, which could cause actual results to differ materially - Forward-looking statements are identified by words like "anticipate," "believe," "expect," and "intend," and are based on current expectations and projections about future events and financial trends[8] - Significant risk factors include the ability to execute business strategy, general economic and financial services industry conditions, effects of government shutdowns, economic/market/operational/liquidity/credit/interest rate risks, regulatory changes, inflation, real estate value changes, consumer habits, mortgage business risks, acquisition integration, dependence on third-party IT, loan and deposit growth, increased competition, accounting policy changes, tax legislation, legal/regulatory developments, technological changes, personnel changes, internal controls, dividend limitations, loan reserve estimates, natural disasters, cyberattacks, and the adverse effects of the COVID-19 pandemic[9][11] - The company undertakes no obligation to update forward-looking statements, except as required by applicable law[11] Part I. Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including statements of financial condition, operations, comprehensive income, changes in shareholders' equity, and cash flows, with detailed notes on accounting policies and significant financial items Consolidated Statements of Financial Condition The Consolidated Statements of Financial Condition show a significant increase in total assets, primarily driven by a surge in cash and cash equivalents and an increase in loans, partially offset by a higher allowance for credit losses. Total liabilities also rose due to substantial deposit growth Consolidated Statements of Financial Condition (Unaudited) - Key Metrics | Metric | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | Change (Thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | ASSETS | | | | | | Cash and cash equivalents | $445,103 | $110,190 | $334,913 | 303.9% | | Investment securities available-for-sale | $572,523 | $638,249 | $(65,726) | -10.3% | | Investment securities held-to-maturity | $320,001 | $182,884 | $137,117 | 75.0% | | Loans, net | $4,495,142 | $4,376,342 | $118,800 | 2.7% | | Allowance for credit losses | $(60,979) | $(39,064) | $(21,915) | 56.1% | | Total assets | $6,600,676 | $5,895,512 | $705,164 | 12.0% | | LIABILITIES | | | | | | Total deposits | $5,616,460 | $4,737,132 | $879,328 | 18.6% | | Federal Home Loan Bank advances | $— | $207,675 | $(207,675) | -100.0% | | Total liabilities | $5,801,319 | $5,128,592 | $672,727 | 13.1% | | SHAREHOLDERS' EQUITY | | | | | | Total shareholders' equity | $799,357 | $766,920 | $32,437 | 4.2% | Consolidated Statements of Operations The Consolidated Statements of Operations show an increase in net income for both the three and nine months ended September 30, 2020, compared to the prior year, primarily driven by a significant increase in non-interest income, particularly mortgage banking income, despite a decrease in net interest income and an increase in provision for loan losses Consolidated Statements of Operations (Unaudited) - Key Metrics | Metric (Thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | % Change (3M) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | % Change (9M) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total interest and dividend income | $52,302 | $61,372 | -14.8% | $164,714 | $182,985 | -9.9% | | Total interest expense | $5,587 | $9,587 | -41.7% | $20,324 | $27,543 | -26.2% | | Net interest income before provision | $46,715 | $51,785 | -9.8% | $144,390 | $155,442 | -7.1% | | Provision for loan losses | $1,200 | $5,690 | -78.9% | $17,630 | $10,463 | 68.5% | | Total non-interest income | $44,532 | $24,759 | 79.9% | $106,901 | $62,470 | 71.1% | | Total non-interest expense | $55,321 | $43,793 | 26.3% | $157,752 | $134,638 | 17.2% | | Income before income taxes | $34,726 | $27,061 | 28.3% | $75,909 | $72,811 | 4.3% | | Net income | $27,893 | $21,642 | 28.9% | $61,422 | $60,846 | 0.9% | | Earnings per share—basic | $0.91 | $0.69 | 31.9% | $1.99 | $1.95 | 2.1% | | Earnings per share—diluted | $0.90 | $0.69 | 30.4% | $1.97 | $1.93 | 2.1% | Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income show that while net income increased, other comprehensive income experienced a loss in the three months ended September 30, 2020, primarily due to net unrealized losses on available-for-sale securities, though for the nine-month period, other comprehensive income remained positive, contributing to an overall increase in comprehensive income Consolidated Statements of Comprehensive Income (Unaudited) - Key Metrics | Metric (Thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | % Change (3M) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | % Change (9M) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net income | $27,893 | $21,642 | 28.9% | $61,422 | $60,846 | 0.9% | | Net unrealized (losses) gains on AFS securities, net of tax | $(925) | $1,828 | -150.6% | $9,627 | $15,150 | -36.4% | | Amortization of net unrealized holding gains to income, net of tax | $(190) | $(247) | -23.1% | $(609) | $(788) | -22.7% | | Other comprehensive (loss) income | $(1,115) | $1,581 | -170.5% | $9,018 | $14,362 | -37.2% | | Comprehensive income | $26,778 | $23,223 | 15.3% | $70,440 | $75,208 | -6.4% | Consolidated Statements of Changes in Shareholders' Equity The Consolidated Statements of Changes in Shareholders' Equity reflect an increase in total shareholders' equity, driven by net income and stock-based compensation, partially offset by cash dividends and share repurchases, with the adoption of ASU 2016-13 (CECL) resulting in a cumulative effect adjustment reducing retained earnings Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - Key Metrics | Metric (Thousands) | Sep 30, 2020 | Dec 31, 2019 | Sep 30, 2019 | | :--- | :--- | :--- | :--- | | Balance, beginning of period (9M 2020: Dec 31, 2019; 9M 2019: Dec 31, 2018) | $766,920 | $766,920 | $695,006 | | Net income | $61,422 | $19,519 | $60,846 | | Stock-based compensation | $4,028 | $1,441 | $3,325 | | Repurchase of common stock | $(19,476) | $— | $— | | Cash dividends declared | $(18,643) | $(6,192) | $(17,226) | | Cumulative effect adjustment (ASU 2016-13) | $(4,623) | $— | $— | | Other comprehensive income | $9,018 | $(1,115) | $14,362 | | Balance, end of period | $799,357 | $766,920 | $753,326 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show a significant increase in cash and cash equivalents, primarily driven by a substantial net increase in deposits from financing activities, while operating and investing activities both used considerable amounts of cash, mainly due to investment securities purchases and net increase in loans Consolidated Statements of Cash Flows (Unaudited) - Key Metrics (Nine Months Ended Sep 30) | Metric (Thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(61,713) | $(60,604) | | Net cash used in investing activities | $(204,506) | $(108,628) | | Net cash provided by financing activities | $601,132 | $176,595 | | Increase in cash, cash equivalents and restricted cash | $334,913 | $7,363 | | Cash, cash equivalents and restricted cash at end of period | $455,103 | $126,919 | - Key drivers for cash flows from operating activities in 2020 included net income ($61.4 million), provision for loan losses ($17.6 million), and significant non-cash adjustments like gain on sale of mortgages, net ($(76.4 million)) and origination of loans held for sale, net of repayments ($(1.7 billion)) offset by proceeds from sales of loans held for sale ($1.6 billion)[24] - Investing activities in 2020 were significantly impacted by purchases of held-to-maturity investment securities ($(196.7 million)) and available-for-sale investment securities ($(114.7 million)), partially offset by proceeds from maturities of these securities[24] - Financing activities in 2020 saw a large net increase in deposits ($879.3 million) and FHLB advances ($947.4 million) offset by FHLB repayments ($(1,155.1 million)), contributing to the overall cash increase[24] Notes to Consolidated Financial Statements These notes provide detailed explanations of the accounting policies, significant estimates, and financial instruments presented in the consolidated financial statements, covering areas such as basis of presentation, accounting pronouncements, investment securities, loans, credit losses, goodwill, borrowings, regulatory capital, revenue, stock-based compensation, EPS, derivatives, commitments, contingencies, and fair value measurements Note 1 Basis of Presentation This note outlines the company's structure as a bank holding company operating through NBH Bank, providing banking products in Colorado and the greater Kansas City region, detailing the preparation of unaudited financial statements in accordance with GAAP, the significant impact of the COVID-19 pandemic on economic conditions, and the adoption of ASU 2016-13 (CECL) for allowance for credit losses - National Bank Holdings Corporation (NBHC) is a Delaware-incorporated bank holding company, headquartered in Denver, Colorado, operating through its wholly-owned subsidiary, NBH Bank, with 100 banking centers as of September 30, 2020[26] - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP and banking industry guidelines, and reflect all normal recurring adjustments[27] - The COVID-19 pandemic has caused substantial disruption and is expected to continue to have a significant impact on the company's financial condition and operations[28] - The company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments (CECL model), effective January 1, 2020, replacing the incurred loss methodology with a lifetime expected credit loss model[30] Note 2 Recent Accounting Pronouncements This note details the adoption of ASU 2016-13 (CECL model) on January 1, 2020, which significantly changed the methodology for recognizing credit losses, resulting in a $5.8 million increase in the allowance for credit losses and a $4.6 million reduction in retained earnings, net of tax, with other pronouncements adopted having no material impact - ASU 2016-13 (CECL model) was adopted on January 1, 2020, using a modified retrospective approach, requiring measurement of all expected credit losses for financial assets based on historical experience, current conditions, and forecasts[39] Impact of CECL Adoption (January 1, 2020) | Metric | Amount (Millions) | | :--- | :--- | | Increase in allowance for credit losses | $5.8 | | Reduction to retained earnings, net of tax | $4.6 | - No credit loss allowance was required for investment securities upon CECL adoption, as the portfolio consisted of mortgage-backed securities issued by government sponsored entities[39] - ASU 2018-13 (Fair Value Measurement) and ASU 2017-04 (Goodwill Impairment) were adopted with no material financial statement impact[40] Note 3 Investment Securities The company's investment securities portfolio, comprising available-for-sale and held-to-maturity securities, increased to $0.9 billion at September 30, 2020, from $0.8 billion at December 31, 2019, with the portfolio predominantly composed of mortgage-backed securities guaranteed by U.S. government agencies or sponsored enterprises, and management believing default is highly unlikely Investment Securities Portfolio (Thousands) | Category | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | | :--- | :--- | :--- | | Available-for-sale | $572,523 | $638,249 | | Held-to-maturity | $320,001 | $182,884 | | Total Investment Securities | $892,524 | $821,133 | - The available-for-sale portfolio decreased by $65.7 million (10.3%) from December 31, 2019, due to maturities/paydowns exceeding purchases. The held-to-maturity portfolio increased by $137.1 million (75.0%) due to significant purchases[198][203] - At September 30, 2020, available-for-sale securities had $13.0 million in unrealized gains and $0.1 million in unrealized losses. Held-to-maturity securities had $4.8 million in unrealized gains and $0.1 million in unrealized losses[42][48][202][205] - All mortgage-backed securities are backed by government sponsored enterprises (GSE) collateral, and management believes default is highly unlikely due to governmental backing and historical zero credit losses[42][44][49][202][206] Note 4 Loans This note details the loan portfolio composition, which increased by 3.2% to $4.6 billion at September 30, 2020, primarily driven by SBA Paycheck Protection Program (PPP) loans, and provides information on delinquent and non-accrual loans, internal risk ratings, and the impact of COVID-19 related loan modifications, which totaled $165.2 million (3.6% of the portfolio) and were classified as performing Loan Portfolio Composition (Thousands) | Segment | Sep 30, 2020 (Thousands) | % of Total | Dec 31, 2019 (Thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Commercial | $3,217,406 | 70.6% | $2,992,307 | 67.8% | | Commercial real estate non-owner occupied | $617,087 | 13.5% | $630,906 | 14.3% | | Residential real estate | $700,927 | 15.4% | $770,417 | 17.4% | | Consumer | $20,701 | 0.5% | $21,776 | 0.5% | | Total Loans | $4,556,121 | 100.0% | $4,415,406 | 100.0% | - Total loans increased by $140.7 million (3.2%) since December 31, 2019, primarily due to $348.3 million in PPP loans outstanding at September 30, 2020[53][210] Delinquent and Non-Accrual Loans (Thousands) | Category | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | | :--- | :--- | :--- | | 30-89 days past due and accruing | $6,587 | $6,350 | | >90 days past due and accruing | $161 | $1,662 | | Non-accrual loans | $18,882 | $21,748 | | Total past due and non-accrual | $25,630 | $29,760 | - COVID-related loan modifications not classified as troubled debt restructurings totaled $499.5 million for the nine months ended September 30, 2020. As of September 30, 2020, $165.2 million (3.6% of total loans) remained on a payment deferral plan, with 84.0% being a second modification, all classified as performing[63][228] Note 5 Allowance for Credit Losses The Allowance for Credit Losses (ACL) increased significantly by 56.1% to $61.0 million at September 30, 2020, from $39.1 million at December 31, 2019, primarily due to the adoption of the CECL model and provisions made to cover the impact of deteriorating economic conditions caused by COVID-19 Allowance for Credit Losses Activity (Thousands) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Beginning balance | $60,465 | $40,082 | $39,064 | $35,692 | | Cumulative effect adjustment (CECL) | — | — | $5,836 | — | | Net charge-offs | $(486) | $(7,062) | $(1,454) | $(7,445) | | Provision for loan losses | $1,000 | $5,690 | $17,533 | $10,463 | | Ending balance | $60,979 | $38,710 | $60,979 | $38,710 | - The ACL increased by $21.9 million (56.1%) from December 31, 2019, to September 30, 2020, including a $5.8 million increase from CECL adoption[65][196][275] - Provision for loan losses for funded loans was $1.0 million for the three months and $17.5 million for the nine months ended September 30, 2020, primarily due to COVID-19 economic impacts[67][68][275] ACL Ratios | Ratio | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | ACL to total loans | 1.34% | 0.88% | | ACL to total loans (excluding PPP loans) | 1.45% | 0.88% | | ACL to non-performing loans | 322.95% | 179.62% | Note 6 Other Real Estate Owned This note summarizes the activity in Other Real Estate Owned (OREO), showing a decrease in the ending balance to $4.6 million at September 30, 2020, from $7.3 million at the beginning of the year, with this reduction primarily due to sales of OREO properties, despite some transfers from the loan portfolio Other Real Estate Owned (OREO) Activity (Thousands) | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Beginning balance | $7,300 | $10,596 | | Transfers from loan portfolio, at fair value | $1,186 | $2,488 | | Impairments | $(423) | $(872) | | Sales | $(3,473) | $(4,308) | | Ending balance | $4,590 | $7,904 | - Net OREO gains were $0.1 million for the three months and $25 thousand for the nine months ended September 30, 2020, significantly lower than $6.5 million and $7.2 million for the respective periods in 2019[70] Note 7 Goodwill and Intangible Assets This note details the company's goodwill and intangible assets, primarily core deposit intangibles and mortgage servicing rights (MSRs), with goodwill remaining stable at $115.0 million with no impairment, while core deposit intangibles are amortized over 7-10 years, and MSRs, which significantly increased in originations, are amortized in proportion to estimated net servicing income and are subject to impairment testing - Goodwill remained at $115.0 million with no impairment recorded during the three or nine months ended September 30, 2020[71] Core Deposit Intangibles (Thousands) | Metric | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | | :--- | :--- | :--- | | Gross carrying amount | $48,834 | $48,834 | | Accumulated amortization | $(40,990) | $(40,103) | | Net carrying amount | $7,844 | $8,731 | - Core deposit intangible amortization expense was $0.3 million for the three and $0.9 million for the nine months ended September 30, 2020[73] Mortgage Servicing Rights (MSRs) Activity (Thousands) | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Beginning balance | $2,630 | $3,556 | | Originations | $6,627 | $26 | | Impairment | $(847) | $(453) | | Amortization | $(1,237) | $(578) | | Ending balance | $7,173 | $2,551 | | Fair value of MSRs | $7,653 | $2,551 | Note 8 Borrowings This note details the company's borrowing activities, including securities sold under repurchase agreements and Federal Home Loan Bank (FHLB) advances, with securities sold under repurchase agreements decreasing, and FHLB advances being fully paid down by September 30, 2020, reflecting a reduction in interest expense on borrowings Borrowings (Thousands) | Category | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | | :--- | :--- | :--- | | Securities sold under agreements to repurchase | $23,904 | $56,935 | | Federal Home Loan Bank advances | $— | $207,675 | - The Bank had access to a $1.0 billion line of credit and term financing from the FHLB at September 30, 2020, but no outstanding borrowings[81] - Interest expense on borrowings decreased significantly to $0.1 million for the three months and $1.3 million for the nine months ended September 30, 2020, from $1.6 million and $5.3 million in the prior year periods, respectively[15][82] - Loans pledged as collateral for FHLB advances were $1.3 billion at September 30, 2020, down from $1.5 billion at December 31, 2019[82] Note 9 Regulatory Capital This note confirms that both the Company and NBH Bank met all Basel III regulatory capital adequacy requirements, including the capital conservation buffer, as of September 30, 2020, and December 31, 2019, with NBH Bank maintaining capital ratios in excess of the levels required for well-capitalized institutions - The Company and NBH Bank met all Basel III capital requirements, including the 2.5% capital conservation buffer, at September 30, 2020, and December 31, 2019[84] - NBH Bank's regulatory capital ratios exceeded the levels established for well-capitalized institutions[84] Consolidated Regulatory Capital Ratios (Sep 30, 2020) | Ratio | Actual | Required for Well Capitalized | Required for Adequately Capitalized | | :--- | :--- | :--- | :--- | | Tier 1 leverage ratio | 10.6% | N/A | 4.0% | | Common equity tier 1 risk based capital | 14.3% | N/A | 7.0% | | Tier 1 risk based capital ratio | 14.3% | N/A | 8.5% | | Total risk based capital ratio | 15.4% | N/A | 10.5% | Note 10 Revenue from Contracts with Clients This note details the company's revenue recognition policies for various non-interest income streams, distinguishing between in-scope and out-of-scope revenues under Topic 606, with service charges and bank card fees recognized as services are provided or completed, while gain on OREO sales is recognized upon title transfer, and non-interest income in-scope of Topic 606 decreased, while out-of-scope income significantly increased, primarily driven by mortgage banking income - Service charge fees and bank card fees are recognized over the period services are provided or upon completion of transactional services[87][88] - Gain on OREO sales, net, is recognized when the company transfers title to the buyer[89] Non-Interest Income (Thousands) | Category | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | In-scope of Topic 606 | $8,285 | $8,864 | $23,659 | $25,768 | | Out-of-scope of Topic 606 | $36,247 | $15,895 | $83,242 | $36,702 | | Total non-interest income | $44,532 | $24,759 | $106,901 | $62,470 | - The company expenses contract acquisition costs immediately if the amortization period would be one year or less[92] Note 11 Stock-based Compensation and Benefits This note details the company's stock-based compensation plans, including stock options, restricted stock awards, and performance stock units, with stock option expense increasing for the nine-month period, while restricted stock and performance stock unit expenses also contributed to overall compensation costs, and the company also operates an Employee Stock Purchase Plan (ESPP) - Stock options are primarily time-vesting over 1-3 years with 10-year contractual terms, valued using a Black-Scholes model[94] Stock Option Expense (Thousands) | Period | 2020 (Thousands) | 2019 (Thousands) | | :--- | :--- | :--- | | 3 Months Ended Sep 30 | $0.1 | $0.2 | | 9 Months Ended Sep 30 | $0.8 | $0.5 | - Restricted stock awards are primarily time-based, vesting over 1-3 years, and performance stock units (PSUs) are granted with vesting based on cumulative EPS and TSR targets (or ROTA in 2020)[98][99][100] Unrecognized Compensation Cost (as of Sep 30, 2020, in millions) | Award Type | Unrecognized Cost (Millions) | Weighted Average Period | | :--- | :--- | :--- | | Non-vested stock options | $0.9 | 1.3 years | | Non-vested restricted stock awards | $2.6 | 2.0 years | | Non-vested performance stock units | $3.1 | 1.9 years | - Under the ESPP, employees purchased 23,212 shares during the nine months ended September 30, 2020[104] Note 12 Common Stock This note provides details on the company's common stock outstanding and share repurchase activities, with the number of Class A common shares outstanding decreasing, and the Board authorizing a new $50.0 million share repurchase program in February 2020, under which $19.5 million in shares were repurchased in Q1 2020 Class A Common Stock Outstanding | Date | Shares Outstanding | | :--- | :--- | | Sep 30, 2020 | 30,594,412 | | Dec 31, 2019 | 31,176,627 | - As of September 30, 2020, 178,833 shares of restricted Class A common stock were issued but not yet vested[105] - A new $50.0 million share repurchase program was authorized on February 26, 2020. During Q1 2020, the company repurchased 734,117 shares for $19.5 million, completing a previous authorization. $43.1 million remained under the new program as of September 30, 2020[106][290] Note 13 Earnings Per Share This note outlines the computation of basic and diluted earnings per share using the two-class method, as certain non-vested share awards participate in earnings, with diluted EPS increasing for both the three and nine months ended September 30, 2020, compared to the prior year - Earnings per share are calculated using the two-class method due to non-vested share awards having non-forfeitable dividend rights[107] Earnings Per Share (EPS) (Unaudited) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.91 | $0.69 | $1.99 | $1.95 | | Diluted EPS | $0.90 | $0.69 | $1.97 | $1.93 | - Certain stock options and unvested restricted shares were anti-dilutive and thus excluded from diluted EPS calculations for the periods presented[108][109] Note 14 Derivatives This note describes the company's use of derivative financial instruments, primarily interest rate swaps, for risk management, employing both fair value hedges and non-designated hedges, with a matched book strategy for the latter to minimize net risk exposure, and mortgage banking activities also involving interest rate lock commitments and forward contracts as derivatives - The company uses derivative financial instruments, primarily interest rate swaps, to manage risks arising from business operations and economic conditions, aiming to achieve a desired balance sheet repricing structure[110] Fair Value of Derivative Instruments (Thousands) | Category | Balance Sheet Location | Sep 30, 2020 (Asset) (Thousands) | Dec 31, 2019 (Asset) (Thousands) | Sep 30, 2020 (Liability) (Thousands) | Dec 31, 2019 (Liability) (Thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Derivatives designated as hedging instruments (Interest rate products) | Other assets / Other liabilities | $— | $1,171 | $45,279 | $13,537 | | Derivatives not designated as hedging instruments (Interest rate products) | Other assets / Other liabilities | $21,287 | $9,004 | $21,371 | $9,021 | | Derivatives not designated as hedging instruments (Interest rate lock commitments) | Other assets / Other liabilities | $11,769 | $1,499 | $440 | $141 | | Derivatives not designated as hedging instruments (Forward contracts) | Other assets / Other liabilities | $191 | $16 | $1,006 | $299 | - As of September 30, 2020, the company had $395.3 million notional amount in interest rate swaps designated as fair value hedges and $492.3 million notional amount in matched interest rate swap transactions not designated as hedges[115][117] - Mortgage banking activities involve interest rate lock commitments ($457.9 million notional value) and forward contracts ($516.4 million notional value) as derivatives[122] - Agreements with derivative counterparties contain credit-risk-related contingent features, including default provisions and requirements to maintain well/adequately capitalized status[124][125] Note 15 Commitments and Contingencies This note details the company's off-balance sheet commitments, including loan commitments and standby letters of credit, which represent potential credit exposure, and also addresses contingencies such as mortgage loan repurchase obligations, for which a reserve liability is maintained, and ongoing litigation Total Unfunded Commitments (Thousands) | Category | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | | :--- | :--- | :--- | | Commitments to fund loans | $280,496 | $249,914 | | Unfunded commitments under lines of credit | $557,464 | $600,407 | | Commercial and standby letters of credit | $8,862 | $11,929 | | Total unfunded commitments | $846,822 | $862,250 | - Mortgage loans sold to investors may be subject to repurchase or indemnification, with a reserve liability of $2.8 million at September 30, 2020, for expected losses[132] - The company is party to various litigation matters but does not believe any will have a material adverse effect on its financial condition or operations[134] Note 16 Fair Value Measurements This note explains the company's fair value measurement methodologies, categorizing assets and liabilities into a three-level hierarchy based on the observability of inputs, detailing valuation techniques for recurring measurements like investment securities, loans held for sale, and derivatives, as well as non-recurring measurements for individually evaluated loans, OREO, MSRs, and premises and equipment - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable significant assumptions)[135][139] - Investment securities available-for-sale and loans held for sale are primarily classified as Level 2, while mortgage banking derivatives are classified as Level 3[138][139][141] Fair Value of Financial Instruments Measured on a Recurring Basis (Thousands) | Category | Level | Sep 30, 2020 (Assets) (Thousands) | Sep 30, 2020 (Liabilities) (Thousands) | | :--- | :--- | :--- | :--- | | Investment securities available-for-sale | Level 2 | $572,149 | — | | Loans held for sale | Level 2 | $273,003 | — | | Interest rate swap derivatives | Level 2 | $21,287 | $66,650 | | Mortgage banking derivatives | Level 3 | $11,960 | $1,446 | - Individually evaluated loans, OREO, MSRs, and premises and equipment are measured at fair value on a non-recurring basis, typically using Level 3 inputs and resulting in impairments[144][145][146][147][149] Assets Recorded at Fair Value on a Non-Recurring Basis (9 Months Ended Sep 30, 2020, in thousands) | Asset | Total (Thousands) | Losses from Fair Value Changes (Thousands) | | :--- | :--- | :--- | | Individually evaluated loans | $33,603 | $1,969 | | Other real estate owned | $4,590 | $423 | | Premises and equipment | $8,024 | $1,631 | | Mortgage servicing rights | $7,173 | $847 | Note 17 Fair Value of Financial Instruments This note provides a comprehensive overview of the estimated fair values for all financial instruments, categorized by the fair value measurement hierarchy, highlighting that while quoted market prices are used where available, many fair values are based on estimates using present value or other valuation techniques, which are sensitive to underlying assumptions - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants[151] - Fair values are estimated using quoted market prices or, when unavailable, present value or other valuation techniques, which are significantly impacted by assumptions[151] Fair Value of Financial Instruments (Thousands) | Instrument | Level | Sep 30, 2020 (Carrying Value) (Thousands) | Sep 30, 2020 (Estimated Fair Value) (Thousands) | Dec 31, 2019 (Carrying Value) (Thousands) | Dec 31, 2019 (Estimated Fair Value) (Thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | Level 1 | $445,103 | $445,103 | $110,190 | $110,190 | | Investment securities available-for-sale | Level 2/3 | $572,523 | $572,523 | $638,249 | $638,249 | | Investment securities held-to-maturity | Level 2 | $320,001 | $324,720 | $182,884 | $183,741 | | Loans receivable | Level 3 | $4,556,121 | $4,723,757 | $4,415,406 | $4,481,209 | | Loans held for sale | Level 2 | $273,003 | $273,003 | $117,444 | $117,444 | | Total deposits | Level 2 | $5,616,460 | $5,625,586 | $4,737,132 | $4,737,333 | | Federal Home Loan Bank advances | Level 2 | $— | $— | $207,675 | $207,890 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance indicators, strategic priorities, and the significant impact of the COVID-19 pandemic, detailing changes in profitability, loan portfolio, credit quality, deposit base, revenues, expenses, and capital position, along with discussions on liquidity, capital resources, and interest rate risk management Overview The company focuses on building client relationships and providing fair and simple solutions, leveraging its presence in core markets, and as of September 30, 2020, reported $6.6 billion in assets, $4.6 billion in loans, $5.6 billion in deposits, and $0.8 billion in equity - The company's focus is on building relationships and providing fair, simple solutions to clients[155] - Core markets include Colorado, the greater Kansas City region, Texas, Utah, and New Mexico, which are outperforming national averages[155] Key Financial Figures (as of Sep 30, 2020, in billions) | Metric | Amount (Billions) | | :--- | :--- | | Total assets | $6.6 | | Total loans | $4.6 | | Total deposits | $5.6 | | Total equity | $0.8 | Recent Events The COVID-19 pandemic has significantly disrupted communities and business operations, leading the company to shift strategic priorities to protect associates and clients, ensure bank safety, and prudently support clients through programs like the SBA's Paycheck Protection Program (PPP) and loan modifications - The COVID-19 pandemic has caused substantial disruption, impacting the U.S. labor market, consumer spending, and business operations[156] - Strategic priorities shifted in March 2020 to protect associates and clients, ensure bank safety and soundness, and support clients and communities[157] - The company actively supported clients through the SBA's Paycheck Protection Program (PPP) and loan modifications[156] Operating Highlights and Key Challenges This section summarizes key operational achievements and significant challenges faced by the company, with highlights including increased net income, strong capital ratios, and substantial deposit growth, particularly in non-interest bearing accounts, while challenges revolve around the ongoing economic impact of the COVID-19 pandemic, low interest rates, intense competition, and regulatory changes, requiring a cautious approach to credit extension and a focus on operational efficiency Profitability and returns Net income increased for the nine months ended September 30, 2020, even with higher loan loss provisions due to COVID-19, however, return on average tangible assets and common equity saw slight declines compared to the prior year Profitability and Returns (Nine Months Ended Sep 30) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net income | $61.4 million | $60.8 million | | Diluted EPS | $1.97 | $1.93 | | Adjusted Net income (after tax, excl. consolidation expense) | $63.1 million | $61.5 million | | Adjusted Diluted EPS | $2.03 | $1.95 | | Provision for loan losses | $17.6 million | $10.5 million | | Return on average tangible assets | 1.36% | 1.45% | | Adjusted Return on average tangible assets | 1.39% | 1.46% | | Return on average tangible common equity | 12.47% | 13.43% | | Adjusted Return on average tangible common equity | 12.80% | 13.58% | Strategic execution The company focused on addressing COVID-19 impacts, funded significant PPP loans, and continued efforts to improve operating efficiencies by consolidating 12 banking centers - Priorities include protecting associates and clients, ensuring bank safety, and prudently supporting clients and communities[165] - Funded $358.9 million in SBA Paycheck Protection Program (PPP) loans for 2,164 clients[165] - Approved plans to consolidate 12 banking centers in Q2 2020, incurring $2.1 million in consolidation-related expense for the nine months ended September 30, 2020[165] Loan portfolio The loan portfolio grew to $4.6 billion, primarily driven by PPP loans, with the company maintaining a conservatively structured and diversified portfolio, a cautious approach to new credit, and an intense focus on managing credit risk and yield - Total loans reached $4.6 billion, increasing $140.7 million (3.2%) since December 31, 2019, primarily due to PPP loans[165] - Total loan originations for the nine months ended September 30, 2020, were $887.4 million, including $358.9 million in PPP loans[165] - COVID-related loan modifications were $165.2 million (3.6% of total loans) as of September 30, 2020[165] Credit quality Credit quality remained strong, with improvements in non-performing loan and asset ratios, and the Allowance for Credit Losses (ACL) significantly increased due to CECL adoption and provisions for COVID-19 impacts Credit Quality Metrics | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-performing loans to total loans | 0.41% | 0.49% | | Non-performing assets to total loans and OREO | 0.51% | 0.66% | | Allowance for credit losses to total loans | 1.34% | 0.88% | | Allowance for credit losses to total loans (excl. PPP loans) | 1.45% | 0.88% | | Net charge-offs to average total loans (annualized, 9M) | 0.04% | 0.19% (FY2019) | - ACL increased by 56.1% from December 31, 2019, to September 30, 2020, due to CECL adoption and COVID-19 economic impacts[165] Client deposit funded balance sheet The company experienced strong deposit growth, particularly in non-interest bearing demand deposits, driven by PPP funds and economic stimulus checks, which led to an improved mix of transaction deposits and a decrease in the cost of deposits and funds - Average non-interest bearing demand deposits increased $210.8 million (18.3%) for the nine months ended September 30, 2020[164] - Total deposits averaged $5.1 billion for the nine months ended September 30, 2020, an increase of 10.3% YoY[171] - The mix of transaction deposits to total deposits improved by 405 basis points to 81.7% at September 30, 2020[171] Cost of Deposits and Funds (Nine Months Ended Sep 30, 2020) | Metric | 2020 | Change from FY2019 | | :--- | :--- | :--- | | Cost of deposits | 0.49% | -15 bps | | Cost of funds | 0.69% | -27 bps | Revenues Fully taxable equivalent (FTE) net interest income decreased due to lower short-term interest rates, narrowing the net interest margin, however, non-interest income significantly increased, primarily driven by record mortgage banking income Revenue Metrics (Nine Months Ended Sep 30) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | FTE net interest income | $148.2 million | $159.2 million | -6.9% | | FTE net interest margin | 3.48% | 3.98% | -50 bps | | Non-interest income | $106.9 million | $62.5 million | 71.1% | | Mortgage banking income | $79.2 million | $32.0 million | 147.4% | - Service charges and bank card fees decreased a combined $2.3 million due to changes in consumer behavior from COVID-19[171] Expenses Non-interest expense increased, mainly due to higher mortgage banking commissions and banking center consolidation-related expenses, with income tax expense also rising, and an adjusted effective tax rate reflecting tax strategies and exempt income Expense Metrics (Nine Months Ended Sep 30) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Non-interest expense | $157.8 million | $134.6 million | 17.2% | | Salaries and benefits (increase) | $16.2 million | N/A | N/A | | Banking center consolidation-related expense | $2.1 million | $0.9 million | 138.3% | | Income tax expense | $14.5 million | $12.0 million | 20.8% | | Adjusted effective tax rate | 18.9% | 19.4% | -0.5% | - The lower effective tax rate compared to the statutory rate reflects the success of tax strategies and tax-exempt income[171] Strong capital position The company maintained strong capital ratios, exceeding regulatory 'well capitalized' thresholds, and possessed ample liquidity, with tangible common book value per share increasing due to earnings and positive fair market value adjustments - Capital ratios remained strong and exceeded federal bank regulatory agency 'well capitalized' thresholds[171] Capital Ratios (as of Sep 30, 2020) | Ratio | Value | | :--- | :--- | | Consolidated tier 1 leverage ratio | 10.60% | | Common equity tier 1 risk based capital ratio | 14.25% | | Consolidated tier 1 risk based capital ratio | 14.25% | - Ample liquidity with $400 million in excess cash and access to $2.3 billion in readily available funds[171] - Tangible common book value per share increased $1.51 to $22.40 at September 30, 2020, compared to December 31, 2019[171] Key Challenges The company faces significant challenges including intense competition, low and sustained interest rates, evolving regulatory environments, and the ongoing economic strain from the COVID-19 pandemic, necessitating a cautious approach to credit extension and continuous monitoring of the loan portfolio, particularly for highly impacted industries - Challenges include intense competition, low interest rates (expected to remain near zero), changing regulatory environment, and disciplined acquisition opportunities[172] - The COVID-19 pandemic continues to cause economic strain, impacting the U.S. labor market, consumer spending, and business operations, with potential for renewed shelter-in-place orders[173] - The company maintains low exposure to industries highly impacted by COVID-19, with most industry sector concentrations at 5% or less of total loans[175] - The food and agribusiness portfolio, at 4.8% of total loans, is well-diversified and managed with clients generally possessing low leverage[176] - Continued regulation, new liquidity/capital constraints, and cybersecurity needs add costs and uncertainty, while non-traditional market participants increase competition[178] Performance Overview This section provides a table of primary performance indicators used to analyze the business, including key ratios for profitability, balance sheet, asset quality, and regulatory capital, highlighting the company's financial health and operational efficiency across various periods Key Performance Indicators (as of and for the three and nine months ended Sep 30) | Metric | Sep 30, 2020 (3M) | Sep 30, 2019 (3M) | Sep 30, 2020 (9M) | Sep 30, 2019 (9M) | | :--- | :--- | :--- | :--- | :--- | | Return on average assets | 1.71% | 1.46% | 1.32% | 1.40% | | Return on average tangible assets (non-GAAP) | 1.76% | 1.51% | 1.36% | 1.45% | | Return on average tangible assets, adjusted (non-GAAP) | 1.78% | 1.56% | 1.39% | 1.46% | | Return on average tangible common equity (non-GAAP) | 16.49% | 13.68% | 12.47% | 13.43% | | Loan to deposit ratio (end of period) | 81.12% | 92.99% | 81.12% | 92.99% | | Net interest margin FTE (non-GAAP) | 3.21% | 3.91% | 3.48% | 3.98% | | Non-interest income to total revenue FTE (non-GAAP) | 48.13% | 31.82% | 41.90% | 28.18% | | Efficiency ratio FTE (non-GAAP) | 59.47% | 55.90% | 61.48% | 60.33% | | Non-performing loans to total loans | 0.41% | 0.58% | 0.41% | 0.58% | | Allowance for credit losses to total loans | 1.34% | 0.88% | 1.34% | 0.88% | About Non-GAAP Financial Measures This section clarifies the use of non-GAAP financial measures, such as tangible assets and adjusted net income, which are presented to provide useful supplemental information for financial and operational decision-making, with the company emphasizing that these measures should not replace GAAP figures and providing reconciliations - Non-GAAP financial measures (e.g., tangible assets, adjusted net income, FTE metrics) are used to provide useful supplemental information for financial and operational decision-making and period-to-period comparisons[185] - These measures exclude certain expenses or assets not indicative of primary business operating results or present metrics on an FTE basis[185] - Non-GAAP measures should not be considered a substitute for GAAP financial information, and reconciliations to comparable GAAP measures are provided[186] Tangible Common Book Value Ratios This section provides a reconciliation of GAAP shareholders' equity and total assets to non-GAAP tangible common equity and tangible assets, respectively, and also presents the tangible common equity to tangible assets ratio and tangible common book value per share, highlighting the impact of goodwill and intangible assets Tangible Common Book Value Ratios (Thousands, except per share data) | Metric | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | Sep 30, 2019 (Thousands) | | :--- | :--- | :--- | :--- | | Total shareholders' equity | $799,357 | $766,920 | $753,326 | | Tangible common equity (non-GAAP) | $685,413 | $651,403 | $637,284 | | Total assets | $6,600,676 | $5,895,512 | $5,990,050 | | Tangible assets (non-GAAP) | $6,486,732 | $5,779,995 | $5,874,008 | | Tangible common equity to tangible assets (non-GAAP) | 10.57% | 11.27% | 10.85% | | Tangible common book value per share (non-GAAP) | $22.40 | $20.89 | $20.45 | Return on Average Tangible Assets and Return on Average Tangible Equity This section reconciles GAAP net income to adjusted net income (excluding core deposit intangible amortization) and presents non-GAAP return on average tangible assets and return on average tangible common equity, with these adjusted metrics providing a clearer view of the company's core profitability by removing the impact of certain intangible assets Return on Average Tangible Assets and Equity (Thousands, except percentages) | Metric | Sep 30, 2020 (3M) | Sep 30, 2019 (3M) | Sep 30, 2020 (9M) | Sep 30, 2019 (9M) | | :--- | :--- | :--- | :--- | :--- | | Net income | $27,893 | $21,642 | $61,422 | $60,846 | | Net income adjusted for core deposit intangible amortization (non-GAAP) | $28,119 | $21,866 | $62,102 | $61,520 | | Average tangible assets (non-GAAP) | $6,368,894 | $5,749,597 | $6,108,036 | $5,691,208 | | Return on average tangible assets (non-GAAP) | 1.76% | 1.51% | 1.36% | 1.45% | | Average tangible common equity (non-GAAP) | $678,236 | $634,126 | $665,085 | $612,420 | | Return on average tangible common equity (non-GAAP) | 16.49% | 13.68% | 12.47% | 13.43% | Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin This section presents interest income and net interest income on a fully taxable equivalent (FTE) basis, along with the yield on earning assets and net interest margin, with the FTE adjustments allowing for a more comparable analysis of interest income from both taxable and tax-exempt sources FTE Yield and Net Interest Margin (Thousands, except percentages) | Metric | Sep 30, 2020 (3M) | Sep 30, 2019 (3M) | Sep 30, 2020 (9M) | Sep 30, 2019 (9M) | | :--- | :--- | :--- | :--- | :--- | | Interest income FTE (non-GAAP) | $53,577 | $62,636 | $168,557 | $186,760 | | Net interest income FTE (non-GAAP) | $47,990 | $53,049 | $148,233 | $159,217 | | Average earning assets | $5,944,790 | $5,385,407 | $5,690,884 | $5,344,494 | | Yield on earning assets FTE (non-GAAP) | 3.59% | 4.61% | 3.96% | 4.67% | | Net interest margin FTE (non-GAAP) | 3.21% | 3.91% | 3.48% | 3.98% | Efficiency Ratio This section provides the efficiency ratio, both on a GAAP and fully taxable equivalent (FTE) basis, and an adjusted FTE efficiency ratio that excludes banking center consolidation-related expenses, with these ratios measuring how effectively the company manages its expenses relative to its revenue Efficiency Ratios (Thousands, except percentages) | Metric | Sep 30, 2020 (3M) | Sep 30, 2019 (3M) | Sep 30, 2020 (9M) | Sep 30, 2019 (9M) | | :--- | :--- | :--- | :--- | :--- | | Net interest income, FTE (non-GAAP) | $47,990 | $53,049 | $148,233 | $159,217 | | Non-interest income | $44,532 | $24,759 | $106,901 | $62,470 | | Non-interest expense | $55,321 | $43,793 | $157,752 | $134,638 | | Adjusted non-interest expense (non-GAAP) | $54,594 | $42,600 | $154,725 | $132,853 | | Efficiency ratio | 60.30% | 56.83% | 62.42% | 61.38% | | Efficiency ratio FTE (non-GAAP) | 59.47% | 55.90% | 61.48% | 60.33% | | Adjusted efficiency ratio FTE (non-GAAP) | 59.01% | 54.75% | 60.64% | 59.93% | Adjusted Financial Results This section presents adjusted net income, adjusted diluted earnings per share, adjusted return on average tangible assets, and adjusted return on average tangible common equity, with these adjustments primarily excluding banking center consolidation-related expenses to provide a clearer view of the company's underlying financial performance Adjusted Financial Results (Thousands, except per share data) | Metric | Sep 30, 2020 (3M) | Sep 30, 2019 (3M) | Sep 30, 2020 (9M) | Sep 30, 2019 (9M) | | :--- | :--- | :--- | :--- | :--- | | Net income | $27,893 | $21,642 | $61,422 | $60,846 | | Adjusted net income (non-GAAP) | $28,224 | $22,331 | $63,063 | $61,535 | | Earnings per share - diluted | $0.90 | $0.69 | $1.97 | $1.93 | | Adjusted earnings per share - diluted (non-GAAP) | $0.91 | $0.71 | $2.03 | $1.95 | | Adjusted return on average tangible assets (non-GAAP) | 1.78% | 1.56% | 1.39% | 1.46% | | Adjusted return on average tangible common equity (non-GAAP) | 16.69% | 14.11% | 12.80% | 13.58% | - Adjustments primarily relate to banking center consolidation-related expenses and their tax impact[193] Application of Critical Accounting Policies This section highlights that the preparation of financial statements requires significant judgment and material estimates, with the Allowance for Credit Losses (ACL) being the most significant estimate of these estimates - The most significant estimate in financial statement preparation relates to the determination of the Allowance for Credit Losses (ACL)[194] Future Accounting Pronouncements The company is currently evaluating the impact of ASU 2020-04, Reference Rate Reform, and does not expect ASU 2019-12, Income Taxes, to have a material impact on its financial statements - The company is evaluating the impact of ASU 2020-04, Reference Rate Reform (Topic 848)[195] - ASU 2019-12, Income Taxes (Topic 740), is not expected to have a material impact on financial statements[195] Financial Condition The company's financial condition improved with total assets increasing to $6.6 billion, driven by significant growth in cash and cash equivalents and loans, particularly PPP loans, supported by strong deposit growth, especially in lower-cost transaction deposits, and a strategic increase in held-to-maturity investment securities Investment securities The investment securities portfolio increased to $0.9 billion, with a shift towards held-to-maturity securities, and the portfolio remains predominantly mortgage-backed, guaranteed by U.S. government agencies, and is considered to have low credit risk Available-for-sale Available-for-sale investment securities decreased by 10.3% to $572.5 million, primarily due to maturities and paydowns exceeding new purchases, with the portfolio being almost entirely mortgage-backed by GSEs, and low unrealized losses attributed to interest rate changes, not credit risk Available-for-sale Investment Securities (Thousands) | Metric | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | % Change | | :--- | :--- | :--- | :--- | | Fair value | $572,523 | $638,249 | -10.3% | | Weighted average yield | 1.57% | 2.20% | -63 bps | - Maturities and paydowns totaled $191.8 million, partially offset by $114.7 million in purchases for the nine months ended September 30, 2020[198] - The portfolio is primarily comprised of mortgage-backed securities backed by government sponsored enterprises (GSE) collateral[199] - Unrealized gains were $13.0 million and unrealized losses were $0.1 million at September 30, 2020, with management believing default is highly unlikely[202] Held-to-maturity Held-to-maturity investment securities significantly increased by 75.0% to $320.0 million, driven by $196.7 million in purchases during the nine months ended September 30, 2020, with this portfolio also consisting entirely of GSE-backed mortgage-backed securities, and management assessing zero expected credit losses Held-to-maturity Investment Securities (Thousands) | Metric | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | % Change | | :--- | :--- | :--- | :--- | | Amortized cost | $320,001 | $182,884 | 75.0% | | Weighted average yield | 1.43% | 2.80% | -137 bps | - Purchases of held-to-maturity securities totaled $196.7 million for the nine months ended September 30, 2020[203] - The portfolio is entirely comprised of fixed rate FHLMC, FNMA, and GNMA securities[204] - Management does not measure expected credit losses as nonpayment of the amortized cost basis is zero due to governmental backing[206] Loans overview The loan portfolio increased by 3.2% to $4.6 billion, primarily due to PPP loan originations, which offset elevated paydowns, and the portfolio remains granular and well-diversified, with low exposure to industries highly impacted by the COVID-19 pandemic, and a cautious approach to new credit extension Loan Portfolio Composition (Thousands) | Category | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | % Change | | :--- | :--- | :--- | :--- | | Originated loans | $4,281,237 | $4,051,917 | 5.7% | | Acquired loans | $274,884 | $363,489 | -24.3% | | Total loans | $4,556,121 | $4,415,406 | 3.2% | - Loan originations totaled $887.4 million year-to-date through September 30, 2020, including $358.9 million of PPP loans[210] - The commercial and industrial loan portfolio is diverse, with finance/financial services ($267.0 million), hospital/medical ($213.4 million), and manufacturing-related loans ($113.3 million)[211] - Low exposure to COVID-19 highly impacted industries: restaurants (4.6%), retailers (2.6%), hospital/medical (4.7%), oil and gas (0.7%), hotel and lodging (4.0%), multifamily (1.6%), and retail CRE (1.2%) of total loans[213][214] Asset quality Asset quality remains a strong point, driven by disciplined adherence to concentration limits and robust underwriting standards, with non-performing assets decreasing, and the company actively monitoring credit deterioration, including COVID-19 related loan modifications, which are performing - Asset quality is fundamental to success, driven by disciplined adherence to self-imposed concentration limits and robust credit policies[219] Non-Performing Assets and Past Due Loans (Thousands) | Metric | Sep 30, 2020 (Thousands) | Dec 31, 2019 (Thousands) | | :--- | :--- | :--- | | Non-performing loans | $18,882 | $21,748 | | OREO | $4,590 | $7,300 | | Total non-performing assets | $23,472 | $29,048 | | Loans 30-89 days past due and accruing | $6,587 | $6,350 | | Loans 90+ days past due and accruing | $161 | $1,662 | - Total non-performing loans decreased by $2.9 million (13.2%) from December 31, 2019, to September 30, 2020[226] - COVID-related loan modifications totaling $165.2 million (3.6% of total loans) were classified as performing as of September 30, 2020[228] Allowance for credit losses The Allowance for Credit Losses (ACL) increased to $61.0 million, reflecting the adoption of the CECL model and provisions for the economic impact of COVID-19, with the ACL determined using a discounted cash flow model, incorporating macroeconomic forecasts and qualitative adjustments, and is deemed adequate to cover estimated lifetime losses - The ACL **incr