UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

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

For the transition period from to

Commission File Number: 001-35654

NATIONAL BANK HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		27-0563799
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7800 East Orchard Road, Suite 300, Greenwood Village, Colorado 80111

(Address of principal executive offices) (Zip Code)

Registrant’s telephone, including area code: (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 April 30, 2021, the registrant had outstanding 30,789,788 shares of Class A voting common stock, each with $0.01 par value per share, excluding 153,728 shares of restricted Class A common stock issued but not yet vested.


		Page
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	6

	Consolidated Statements of Financial Condition as of March 31, 2021 and December 31, 2020	6

	Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020	7

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020	8

	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2021 and 2020	9

	Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020	10

	Notes to Consolidated Financial Statements	11

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	62

Part II. Other Information

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

● effects of any potential government shutdowns;

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

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

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

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

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

● changes in consumer spending, borrowings and savings habits;

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

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

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

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

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

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

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

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

● continued consolidation in the financial services industry;

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

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

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

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

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

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

● technological changes;

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

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

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

● regulatory limitations on dividends from our bank subsidiary;

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

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

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

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

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

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● 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)


	March 31, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	822,018	$	605,065
Interest bearing bank deposits		500		500
Cash and cash equivalents		822,518		605,565
Investment securities available-for-sale (at fair value)		666,915		661,955
Investment securities held-to-maturity (fair value of $517,448 and $381,691 at March 31, 2021 and December 31, 2020, respectively)		520,823		376,615
Non-marketable securities		15,493		16,493
Loans		4,303,246		4,353,726
Allowance for credit losses		(55,057)		(59,777)
Loans, net		4,248,189		4,293,949
Loans held for sale		228,888		247,813
Other real estate owned		5,669		4,730
Premises and equipment, net		101,830		106,982
Goodwill		115,027		115,027
Intangible assets, net		20,205		17,928
Other assets		203,944		212,893
Total assets	$	6,949,501	$	6,659,950
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits	$	2,295,704	$	2,111,045
Interest bearing demand deposits		557,850		514,286
Savings and money market		2,199,420		2,064,769
Time deposits		948,676		986,132
Total deposits		6,001,650		5,676,232
Securities sold under agreements to repurchase		19,405		22,897
Other liabilities		96,456		140,130
Total liabilities		6,117,511		5,839,259
Shareholders’ equity:
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,487,907 shares issued; 30,715,790 and 30,634,291 shares outstanding at March 31, 2021 and December 31, 2020, respectively		515		515
Additional paid-in capital		1,010,798		1,011,362
Retained earnings		243,446		223,175
Treasury stock of 20,608,658 and 20,686,986 shares at March 31, 2021 and December 31, 2020, respectively, at cost		(423,254)		(424,127)
Accumulated other comprehensive income, net of tax		485		9,766
Total shareholders’ equity		831,990		820,691
Total liabilities and shareholders’ equity	$	6,949,501	$	6,659,950

See accompanying notes to the consolidated interim financial statements.

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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
	March 31,
	2021		2020
Interest and dividend income:
Interest and fees on loans	$	44,938	$	53,527
Interest and dividends on investment securities		3,900		4,631
Dividends on non-marketable securities		210		414
Interest on interest-bearing bank deposits		165		96
Total interest and dividend income		49,213		58,668
Interest expense:
Interest on deposits		3,987		7,326
Interest on borrowings		5		995
Total interest expense		3,992		8,321
Net interest income before provision for loan losses		45,221		50,347
Provision (release) expense for loan losses		(3,575)		6,159
Net interest income after provision for loan losses		48,796		44,188
Non-interest income:
Service charges		3,474		4,126
Bank card fees		4,073		3,513
Mortgage banking income		22,379		13,673
Bank-owned life insurance income		548		590
Other non-interest income		2,852		1,602
OREO-related income		35		28
Total non-interest income		33,361		23,532
Non-interest expense:
Salaries and benefits		33,523		33,180
Occupancy and equipment		6,550		6,898
Telecommunications and data processing		2,337		2,265
Marketing and business development		452		696
FDIC deposit insurance		444		(76)
Bank card expenses		1,144		1,026
Professional fees		742		609
Other non-interest expense		2,476		3,090
Problem asset workout		438		648
(Gain) loss on OREO sales, net		(29)		39
Core deposit intangible asset amortization		296		296
Banking center consolidation-related expense		1,295		—
Total non-interest expense		49,668		48,671
Income before income taxes		32,489		19,049
Income tax expense		5,677		3,225
Net income	$	26,812	$	15,824
Earnings per share—basic	$	0.87	$	0.51
Earnings per share—diluted		0.86		0.50
Weighted average number of common shares outstanding:
Basic		30,828,262		31,157,476
Diluted		31,143,322		31,361,296

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	For the three months ended
	March 31,
	2021		2020
Net income	$	26,812	$	15,824
Other comprehensive income, net of tax:
Securities available-for-sale:
Net unrealized (losses) gains arising during the period, net of tax benefit (expense) of $2,832 and ($3,301) for the three months ended March 31, 2021 and 2020, respectively.		(9,118)		10,521
Less: amortization of net unrealized holding gains to income, net of tax benefit of $51 and $68 for the three months ended March 31, 2021 and 2020, respectively.		(163)		(216)
Other comprehensive (loss) income		(9,281)		10,305
Comprehensive income	$	17,531	$	26,129

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three months ended March 31, 2021 and 2020

(In thousands, except share and per share data)


									Accumulated
			Additional						other
	Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings		stock		income (loss), net		Total
Balance, December 31, 2019	$	515	$	1,009,223	$	164,082	$	(408,962)	$	2,062	$	766,920
Cumulative effect adjustment⁽¹⁾		—		—		(4,623)		—		—		(4,623)
Net income		—		—		15,824		—		—		15,824
Stock-based compensation		—		1,222		—		—		—		1,222
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $414, net		—		(967)		—		548		—		(419)
Repurchase of 734,117 shares		—		—		—		(19,476)		—		(19,476)
Cash dividends declared ($0.20 per share)		—		—		(6,299)		—		—		(6,299)
Other comprehensive income		—		—		—		—		10,305		10,305
Balance, March 31, 2020	$	515	$	1,009,478	$	168,984	$	(427,890)	$	12,367	$	763,454
Balance, December 31, 2020	$	515	$	1,011,362	$	223,175	$	(424,127)	$	9,766	$	820,691
Net income		—		—		26,812		—		—		26,812
Stock-based compensation		—		1,130		—		—		—		1,130
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,533 net		—		(1,694)		—		873		—		(821)
Cash dividends declared ($0.21 per share)		—		—		(6,541)		—		—		(6,541)
Other comprehensive loss		—		—		—		—		(9,281)		(9,281)
Balance, March 31, 2021	$	515	$	1,010,798	$	243,446	$	(423,254)	$	485	$	831,990


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

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	For the three months ended
	March 31,
	2021		2020
Cash flows from operating activities:
Net income	$	26,812	$	15,824
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (release) expense for loan losses		(3,575)		6,159
Provision expense for mortgage loan repurchases		5		279
Depreciation and amortization		4,080		3,597
Change in current income tax receivable		4,030		3,902
Change in deferred income taxes		(1,322)		2,503
Net excess tax (benefit) expense on stock-based compensation		(175)		28
Discount accretion, net of premium amortization on securities		1,367		501
Loan accretion		(1,899)		(4,142)
Gain on sale of mortgages, net		(20,639)		(13,483)
Origination of loans held for sale, net of repayments		(583,008)		(337,155)
Proceeds from sales of loans held for sale		624,756		341,019
Bank-owned life insurance income		(548)		(590)
(Gain) loss on the sale of other real estate owned, net		(29)		39
Originations of mortgage serving rights		(2,869)		(142)
(Recovery) impairment of mortgage servicing rights		(671)		509
Impairment on fixed assets related to banking center consolidations		1,259		—
Gain on sale of fixed assets		(1,556)		—
Stock-based compensation		1,130		1,227
Operating lease payments		(1,320)		(1,396)
Change in other assets		3,798		(28,953)
Change in other liabilities		(43,262)		36,516
Net cash provided by operating activities		6,364		26,242
Cash flows from investing activities:
Purchase of FHLB stock		(3)		(197)
Proceeds from redemption of FHLB stock		1,003		—
Proceeds from maturities of investment securities held-to-maturity		29,003		15,351
Proceeds from maturities of investment securities available-for-sale		68,626		48,830
Purchase of investment securities held-to-maturity		(174,129)		(25,824)
Purchase of investment securities available-for-sale		(86,199)		(26,485)
Net decrease (increase) in loans		48,553		(91,384)
Sales (purchases) of premises and equipment, net		3,681		(2,161)
Proceeds from sales of other real estate owned		612		228
Net cash used in investing activities		(108,853)		(81,642)
Cash flows from financing activities:
Net increase in deposits		325,418		4,724
Net decrease in repurchase agreements and other short-term borrowings		(3,492)		(33,232)
Advances from FHLB		—		607,000
FHLB repayments		—		(473,169)
Issuance of stock under purchase and equity compensation plans		(1,279)		(457)
Proceeds from exercise of stock options		423		6
Payment of dividends		(6,628)		(6,260)
Repurchase of common stock		—		(19,476)
Net cash provided by financing activities		314,442		79,136
Increase in cash, cash equivalents and restricted cash⁽¹⁾		211,953		23,736
Cash, cash equivalents and restricted cash at beginning of the year⁽¹⁾		615,565		120,190
Cash, cash equivalents and restricted cash at end of period⁽¹⁾	$	827,518	$	143,926
Supplemental disclosure of cash flow information during the period:
Cash paid for interest	$	4,304	$	8,086
Net tax payment		88		54
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value	$	1,522	$	18
Decrease in loans purchased but not settled		—		(4,450)
Loans transferred from loans held for sale to loans		2,184		376


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

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2021

Note 1 Basis of Presentation

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

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

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

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

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

Note 2 Recent Accounting Pronouncements

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

Note 3 Investment Securities

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

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Available-for-sale

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


	March 31, 2021
	Amortized		Gross		Gross
	cost		unrealized gains		unrealized losses		Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	228,924	$	2,412	$	(4,823)	$	226,513
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		435,753		7,142		(5,471)		437,424
Municipal securities		362		10		—		372
Corporate debt		2,000		137		—		2,137
Other securities		469		—		—		469
Total investment securities available-for-sale	$	667,508	$	9,701	$	(10,294)	$	666,915


	December 31, 2020
	Amortized		Gross		Gross
	cost		unrealized gains		unrealized losses		Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	193,424	$	2,952	$	(42)	$	196,334
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		454,345		8,778		(344)		462,779
Municipal securities		362		13		—		375
Corporate debt		2,000		—		(2)		1,998
Other securities		469		—		—		469
Total investment securities available-for-sale	$	650,600	$	11,743	$	(388)	$	661,955

During the three months ended March 31, 2021 and 2020, purchases of available-for-sale securities totaled $86.2 million and $26.5 million, respectively. Maturities and paydowns of available-for-sale securities during the three months ended March 31, 2021 and 2020 totaled $68.6 million and $48.8 million, respectively. There were no sales of available-for-sale securities during the three months ended March 31, 2021 or 2020.

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

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


	March 31, 2021
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	167,785	$	(4,823)	$	—	$	—	$	167,785	$	(4,823)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		130,051		(5,461)		1,899		(10)		131,950		(5,471)
Total	$	297,836	$	(10,284)	$	1,899	$	(10)	$	299,735	$	(10,294)

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	December 31, 2020
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	26,878	$	(42)	$	1	$	—	$	26,879	$	(42)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		95,888		(328)		2,138		(16)		98,026		(344)
Corporate debt		1,998		(2)		—		—		1,998		(2)
Total	$	124,764	$	(372)	$	2,139	$	(16)	$	126,903	$	(388)

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

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank (“FRB”), if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $397.6 million and $385.8 million at March 31, 2021 and December 31, 2020, respectively. The Bank may also pledge available-for-sale investment securities as collateral for Federal Home Loan Bank (“FHLB”) advances. No securities were pledged for this purpose at March 31, 2021 or December 31, 2020.

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

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

Held-to-maturity

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


	March 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses		Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	344,412	$	3,687	$	(5,730)	$	342,369
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		176,411		423		(1,755)		175,079
Total investment securities held-to-maturity	$	520,823	$	4,110	$	(7,485)	$	517,448

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	December 31, 2020
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses		Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	306,187	$	4,940	$	(197)	$	310,930
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		70,428		396		(63)		70,761
Total investment securities held-to-maturity	$	376,615	$	5,336	$	(260)	$	381,691

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

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


	March 31, 2021
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	242,029	$	(5,730)	$	—	$	—	$	242,029	$	(5,730)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		99,986		(1,755)		—		—		99,986		(1,755)
Total	$	342,015	$	(7,485)	$	—	$	—	$	342,015	$	(7,485)


	December 31, 2020
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	53,453	$	(197)	$	—	$	—	$	53,453	$	(197)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		19,554		(63)		—		—		19,554		(63)
Total	$	73,007	$	(260)	$	—	$	—	$	73,007	$	(260)

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

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the FRB, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $138.6 million and $140.6 million at March 31, 2021 and December 31, 2020, respectively. The Bank may also pledge held-to-maturity investment securities as collateral for FHLB advances. No held-to-maturity investment securities were pledged for this purpose at March 31, 2021 or December 31, 2020.

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

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

Note 4 Loans

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


	March 31, 2021
	Total loans		% of total
Commercial	$	2,976,679	69.2%
Commercial real estate non-owner occupied		634,360	14.7%
Residential real estate		674,142	15.7%
Consumer		18,065	0.4%
Total	$	4,303,246	100.0%


	December 31, 2020
	Total loans		% of total
Commercial	$	3,044,065	70.0%
Commercial real estate non-owner occupied		631,996	14.5%
Residential real estate		658,659	15.1%
Consumer		19,006	0.4%
Total	$	4,353,726	100.0%

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


	March 31, 2021
			Greater
	30-89 days		than 90 days				Total past
	past due and		past due and		Non-accrual		due and
	accruing		accruing		loans		non-accrual		Current		Total loans
Commercial:
Commercial and industrial	$	427	$	—	$	5,581	$	6,008	$	1,409,858	$	1,415,866
Municipal and non-profit		—		—		—		—		851,033		851,033
Owner occupied commercial real estate		—		—		5,401		5,401		521,831		527,232
Food and agribusiness		183		—		82		265		182,283		182,548
Total commercial		610		—		11,064		11,674		2,965,005		2,976,679
Commercial real estate non-owner occupied:
Construction		—		—		—		—		55,114		55,114
Acquisition/development		—		—		3		3		21,849		21,852
Multifamily		—		—		—		—		98,917		98,917
Non-owner occupied		258		411		135		804		457,673		458,477
Total commercial real estate		258		411		138		807		633,553		634,360
Residential real estate:
Senior lien		922		593		4,583		6,098		601,321		607,419
Junior lien		41		17		581		639		66,084		66,723
Total residential real estate		963		610		5,164		6,737		667,405		674,142
Consumer		36		—		8		44		18,021		18,065
Total loans	$	1,867	$	1,021	$	16,374	$	19,262	$	4,283,984	$	4,303,246

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	December 31, 2020
			Greater
	30-89 days		than 90 days				Total past
	past due and		past due and		Non-accrual		due and
	accruing		accruing		loans		non-accrual		Current		Total loans
Commercial:
Commercial and industrial	$	170	$	—	$	6,312	$	6,482	$	1,440,256	$	1,446,738
Municipal and non-profit		—		—		—		—		870,791		870,791
Owner occupied commercial real estate		—		—		5,450		5,450		510,789		516,239
Food and agribusiness		146		—		422		568		209,729		210,297
Total commercial		316		—		12,184		12,500		3,031,565		3,044,065
Commercial real estate non-owner occupied:
Construction		—		—		—		—		91,125		91,125
Acquisition/development		—		—		6		6		24,665		24,671
Multifamily		—		—		1,523		1,523		67,233		68,756
Non-owner occupied		—		—		135		135		447,309		447,444
Total commercial real estate		—		—		1,664		1,664		630,332		631,996
Residential real estate:
Senior lien		527		160		5,820		6,507		577,764		584,271
Junior lien		95		—		709		804		73,584		74,388
Total residential real estate		622		160		6,529		7,311		651,348		658,659
Consumer		30		2		10		42		18,964		19,006
Total loans	$	968	$	162	$	20,387	$	21,517	$	4,332,209	$	4,353,726


	March 31, 2021
	Non-accrual loans		Non-accrual loans
	with a related		with no related
	allowance for		allowance for		Non-accrual
	credit loss		credit loss		loans
Commercial:
Commercial and industrial	$	5,581	$	—	$	5,581
Municipal and non-profit		—		—		—
Owner occupied commercial real estate		3,260		2,141		5,401
Food and agribusiness		82		—		82
Total commercial		8,923		2,141		11,064
Commercial real estate non-owner occupied:
Construction		—		—		—
Acquisition/development		3		—		3
Multifamily		—		—		—
Non-owner occupied		135		—		135
Total commercial real estate		138		—		138
Residential real estate:
Senior lien		3,853		730		4,583
Junior lien		581		—		581
Total residential real estate		4,434		730		5,164
Consumer		8		—		8
Total loans	$	13,503	$	2,871	$	16,374

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	December 31, 2020
	Non-accrual loans		Non-accrual loans
	with a related		with no related
	allowance for		allowance for		Non-accrual
	credit loss		credit loss		loans
Commercial:
Commercial and industrial	$	6,080	$	232	$	6,312
Municipal and non-profit		—		—		—
Owner occupied commercial real estate		2,698		2,752		5,450
Food and agribusiness		88		334		422
Total commercial		8,866		3,318		12,184
Commercial real estate non-owner occupied:
Construction		—		—		—
Acquisition/development		6		—		6
Multifamily		—		1,523		1,523
Non-owner occupied		135		—		135
Total commercial real estate		141		1,523		1,664
Residential real estate:
Senior lien		4,158		1,662		5,820
Junior lien		709		—		709
Total residential real estate		4,867		1,662		6,529
Consumer		10		—		10
Total loans	$	13,884	$	6,503	$	20,387

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual status. There was no interest income recognized from non-accrual loans during the three months ended March 31, 2021 or 2020.

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

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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 is shown in the following tables as of March 31, 2021 and December 31, 2020:


	March 31, 2021
													Revolving		Revolving
													loans		loans
	Origination year												amortized		converted
	2021		2020		2019		2018		2017		Prior		cost basis		to term		Total
Commercial:
Commercial and industrial:
Pass	$	152,099	$	283,047	$	207,700	$	181,981	$	78,209	$	30,343	$	422,318	$	15,347	$	1,371,044
Special mention		—		—		3,268		7,273		4,753		6,186		1,993		335		23,808
Substandard		240		25		1,347		893		11,700		4,542		1,100		—		19,847
Doubtful		—		—		—		43		310		785		29		—		1,167
Total commercial and industrial		152,339		283,072		212,315		190,190		94,972		41,856		425,440		15,682		1,415,866
Municipal and non-profit:
Pass		31,543		90,017		89,670		124,444		155,242		359,392		725		—		851,033
Total municipal and non-profit		31,543		90,017		89,670		124,444		155,242		359,392		725		—		851,033
Owner occupied commercial real estate:
Pass		11,308		112,877		105,939		85,059		49,485		115,521		2,497		—		482,686
Special mention		—		1,581		3,747		5,019		1,488		22,307		—		—		34,142
Substandard		—		—		1,900		3,885		243		3,754		—		—		9,782
Doubtful		—		—		587		—		—		35		—		—		622
Total owner occupied commercial real estate		11,308		114,458		112,173		93,963		51,216		141,617		2,497		—		527,232
Food and agribusiness:
Pass		391		27,945		8,743		18,501		6,746		31,761		87,247		86		181,420
Special mention		—		—		—		—		—		219		—		—		219
Substandard		—		—		—		—		277		632		—		—		909
Total food and agribusiness		391		27,945		8,743		18,501		7,023		32,612		87,247		86		182,548
Total commercial		195,581		515,492		422,901		427,098		308,453		575,477		515,909		15,768		2,976,679
Commercial real estate non-owner occupied:
Construction:
Pass		16		4,612		47,167		—		228		—		3,091		—		55,114
Total construction		16		4,612		47,167		—		228		—		3,091		—		55,114
Acquisition/development:
Pass		1,000		768		1,966		1,944		8,286		7,736		5		—		21,705
Special mention		—		—		—		—		—		108		—		—		108
Substandard		—		—		—		—		—		39		—		—		39
Total acquisition/development		1,000		768		1,966		1,944		8,286		7,883		5		—		21,852
Multifamily:
Pass		1,495		29,708		14,873		13,685		208		38,524		—		—		98,493
Special mention		—		—		—		—		—		424		—		—		424
Total multifamily		1,495		29,708		14,873		13,685		208		38,948		—		—		98,917
Non-owner occupied
Pass		8,117		60,577		92,690		27,874		101,602		133,069		4,008		—		427,937
Special mention		—		—		5,744		5,760		9,866		4,034		100		—		25,504
Substandard		—		—		—		763		—		4,273		—		—		5,036
Total non-owner occupied		8,117		60,577		98,434		34,397		111,468		141,376		4,108		—		458,477
Total commercial real estate non-owner occupied		10,628		95,665		162,440		50,026		120,190		188,207		7,204		—		634,360
Residential real estate:
Senior lien
Pass		82,016		125,137		61,953		32,804		43,271		234,894		21,002		172		601,249
Special mention		—		—		—		—		—		468		—		—		468
Substandard		—		199		807		20		312		4,364		—		—		5,702
Total senior lien		82,016		125,336		62,760		32,824		43,583		239,726		21,002		172		607,419
Junior lien
Pass		360		3,140		3,784		2,430		1,424		4,628		49,285		647		65,698
Special mention		—		—		—		—		—		21		342		—		363
Substandard		9		21		110		99		172		251		—		—		662
Total junior lien		369		3,161		3,894		2,529		1,596		4,900		49,627		647		66,723
Total residential real estate		82,385		128,497		66,654		35,353		45,179		244,626		70,629		819		674,142
Consumer
Pass		2,031		8,046		2,683		1,411		354		808		2,674		14		18,021
Substandard		—		—		—		37		—		7		—		—		44
Total consumer		2,031		8,046		2,683		1,448		354		815		2,674		14		18,065
Total loans	$	290,625	$	747,700	$	654,678	$	513,925	$	474,176	$	1,009,125	$	596,416	$	16,601	$	4,303,246

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	December 31, 2020
													Revolving		Revolving
													loans		loans
	Origination year												amortized		converted
	2020		2019		2018		2017		2016		Prior		cost basis		to term		Total
Commercial:
Commercial and industrial:
Pass	$	372,041	$	212,388	$	189,753	$	93,822	$	15,145	$	17,662	$	499,283	$	991	$	1,401,085
Special mention		—		1,445		7,381		4,845		5,810		729		2,329		1,478		24,017
Substandard		23		1,238		925		11,885		56		4,840		1,341		—		20,308
Doubtful		—		—		34		456		—		809		29		—		1,328
Total commercial and industrial		372,064		215,071		198,093		111,008		21,011		24,040		502,982		2,469		1,446,738
Municipal and non-profit:
Pass		131,961		91,911		125,247		156,275		124,269		238,453		2,675		—		870,791
Total municipal and non-profit		131,961		91,911		125,247		156,275		124,269		238,453		2,675		—		870,791
Owner occupied commercial real estate:
Pass		100,791		107,558		90,398		53,131		32,648		87,758		1,401		—		473,685
Special mention		1,581		2,236		2,714		544		3,254		19,341		—		—		29,670
Substandard		—		1,988		6,211		251		93		3,802		—		—		12,345
Doubtful		—		511		—		—		—		28		—		—		539
Total owner occupied commercial real estate		102,372		112,293		99,323		53,926		35,995		110,929		1,401		—		516,239
Food and agribusiness:
Pass		28,139		9,198		20,242		7,198		9,556		28,330		106,007		126		208,796
Special mention		—		—		—		—		—		222		—		—		222
Substandard		—		—		—		302		—		977		—		—		1,279
Total food and agribusiness		28,139		9,198		20,242		7,500		9,556		29,529		106,007		126		210,297
Total commercial		634,536		428,473		442,905		328,709		190,831		402,951		613,065		2,595		3,044,065
Commercial real estate non-owner occupied:
Construction:
Pass		15,841		49,658		17,349		4,072		—		—		2,006		1,807		90,733
Special mention		392		—		—		—		—		—		—		—		392
Total construction		16,233		49,658		17,349		4,072		—		—		2,006		1,807		91,125
Acquisition/development:
Pass		3,762		1,997		1,947		8,373		4,559		3,694		11		—		24,343
Special mention		—		—		—		34		—		253		—		—		287
Substandard		—		—		—		—		—		41		—		—		41
Total acquisition/development		3,762		1,997		1,947		8,407		4,559		3,988		11		—		24,671
Multifamily:
Pass		29,738		13,670		137		212		18,050		4,990		—		—		66,797
Special mention		—		—		—		—		—		436		—		—		436
Substandard		—		—		—		—		—		1,523		—		—		1,523
Total multifamily		29,738		13,670		137		212		18,050		6,949		—		—		68,756
Non-owner occupied
Pass		51,445		92,225		25,362		86,975		26,613		118,144		3,083		643		404,490
Special mention		70		5,458		5,841		22,737		—		3,662		100		—		37,868
Substandard		—		—		779		—		3,937		370		—		—		5,086
Total non-owner occupied		51,515		97,683		31,982		109,712		30,550		122,176		3,183		643		447,444
Total commercial real estate non-owner occupied		101,248		163,008		51,415		122,403		53,159		133,113		5,200		2,450		631,996
Residential real estate:
Senior lien
Pass		129,551		76,504		36,493		47,887		88,358		173,091		24,884		218		576,986
Special mention		—		—		—		—		—		463		—		—		463
Substandard		95		818		20		1,232		550		4,107		—		—		6,822
Total senior lien		129,646		77,322		36,513		49,119		88,908		177,661		24,884		218		584,271
Junior lien
Pass		3,479		4,217		2,553		1,775		1,226		3,760		55,860		365		73,235
Special mention		—		—		—		—		—		21		341		—		362
Substandard		—		112		101		177		55		287		—		59		791
Total junior lien		3,479		4,329		2,654		1,952		1,281		4,068		56,201		424		74,388
Total residential real estate		133,125		81,651		39,167		51,071		90,189		181,729		81,085		642		658,659
Consumer
Pass		9,777		3,348		1,674		489		329		623		2,700		19		18,959
Substandard		—		—		37		—		2		8		—		—		47
Total consumer		9,777		3,348		1,711		489		331		631		2,700		19		19,006
Total loans	$	878,686	$	676,480	$	535,198	$	502,672	$	334,510	$	718,424	$	702,050	$	5,706	$	4,353,726

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Loans evaluated individually

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

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


	March 31, 2021
					Total amortized
	Real property		Business assets		cost basis
Commercial
Commercial and industrial	$	8,216	$	2,412	$	10,628
Owner-occupied commercial real estate		3,409		284		3,693
Total Commercial		11,625		2,696		14,321
Commercial real estate non owner-occupied
Acquisition/development		1,296		—		1,296
Total commercial real estate		1,296		—		1,296
Residential real estate
Senior lien		1,993		—		1,993
Total residential real estate		1,993		—		1,993
Total loans	$	14,914	$	2,696	$	17,610


	December 31, 2020
					Total amortized
	Real property		Business assets		cost basis
Commercial
Commercial and industrial	$	7,579	$	3,005	$	10,584
Owner-occupied commercial real estate		3,701		284		3,985
Food and agribusiness		334		—		334
Total Commercial		11,614		3,289		14,903
Commercial real estate non owner-occupied
Acquisition/development		1,573		—		1,573
Multifamily		1,523		—		1,523
Total commercial real estate		3,096		—		3,096
Residential real estate
Senior lien		2,021		—		2,021
Total residential real estate		2,021		—		2,021
Total loans	$	16,731	$	3,289	$	20,020

Loan modifications and troubled debt restructurings

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

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

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

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


	March 31, 2021
	Amortized		Average year-to-date		Unpaid		Unfunded commitments
	cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	8,718	$	8,803	$	9,127	$	150
Commercial real estate non-owner occupied		2,232		2,287		3,668		—
Residential real estate		2,836		2,850		3,664		35
Consumer		37		37		39		—
Total	$	13,823	$	13,977	$	16,498	$	185


	December 31, 2020
	Amortized		Average year-to-date		Unpaid		Unfunded commitments
	cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	9,387	$	9,544	$	9,978	$	150
Commercial real estate non-owner occupied		2,400		2,351		4,105		—
Residential real estate		2,121		2,185		2,922		12
Consumer		37		37		37		—
Total	$	13,945	$	14,117	$	17,042	$	162

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


	March 31, 2021		December 31, 2020
Commercial	$	2,666	$	3,397
Commercial real estate non-owner occupied		123		1,644
Residential real estate		2,147		3,156
Consumer		—		—
Total non-accruing TDRs	$	4,936	$	8,197

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

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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 March 31, 2021
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	30,376	$	17,448	$	11,492	$	461	$	59,777
Charge-offs		(160)		—		(22)		(120)		(302)
Recoveries		129		6		8		39		182
Provision (release) expense		(2,260)		(2,400)		68		(8)		(4,600)
Ending balance	$	28,085	$	15,054	$	11,546	$	372	$	55,057


	Three months ended March 31, 2020
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	30,442	$	4,850	$	3,468	$	304	$	39,064
Cumulative effect adjustment⁽¹⁾		(1,299)		1,666		5,314		155		5,836
Charge-offs		(218)		—		(28)		(251)		(497)
Recoveries		91		—		5		48		144
Provision expense		1,541		2,762		1,937		169		6,409
Ending balance	$	30,557	$	9,278	$	10,696	$	425	$	50,956


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

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

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

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

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Note 6 Other Real Estate Owned

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


	For the three months ended March 31,
	2021		2020
Beginning balance	$	4,730	$	7,300
Transfers from loan portfolio, at fair value		1,522		18
Sales		(583)		(267)
Ending balance	$	5,669	$	7,051

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

Note 7 Goodwill and Intangible Assets

Goodwill and core deposit intangible

In connection with our acquisitions, the Company recorded goodwill of $115.0 million. Goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets acquired. No goodwill impairment was recorded during the three months ended March 31, 2021 or the year ended December 31, 2020.

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

March 31, 2021

December 31, 2020

Gross

Net

Gross

Net

carrying

Accumulated

carrying

Accumulated

carrying

amount

amortization

amount

amortization

amount

Core deposit intangible

48,834

(41,581)

7,253

48,834

(41,286)

7,548

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

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


Years ending December 31,		Amount
For the nine months ending December 31, 2021	$	887
For the year ending December 31, 2022		1,127
For the year ending December 31, 2023		1,048
For the year ending December 31, 2024		1,048
For the year ending December 31, 2025		1,048

Mortgage servicing rights

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

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


	For the three months ended March 31,
	2021		2020
Beginning balance	$	10,380	$	2,630
Originations		2,869		142
Recovery (impairment)		671		(509)
Amortization		(968)		(210)
Ending balance		12,952		2,053
Fair value of mortgage servicing rights	$	16,171	$	2,053

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

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

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


Years ending December 31,		Amount
For the nine months ending December 31, 2021	$	1,452
For the year ending December 31, 2022		1,723
For the year ending December 31, 2023		1,470
For the year ending December 31, 2024		1,254
For the year ending December 31, 2025		1,070

Note 8 Borrowings

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

As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $0.9 billion at March 31, 2021. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At March 31, 2021 and December 31, 2020, the Bank had no outstanding borrowings from the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at March 31, 2021 or December 31, 2020. Loans pledged were $1.2 billion at both March 31, 2021 and December 31, 2020. There was no interest expense related to FHLB advances and other short-term borrowings for the three months ended March 31, 2021, compared to $0.9 million during the three months ended March 31, 2020.

Note 9 Regulatory Capital

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

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


	March 31, 2021
				Required to be			Required to be
				well capitalized under			considered
				prompt corrective			adequately
	Actual			action provisions			capitalized
	Ratio	Amount		Ratio	Amount		Ratio	Amount
Tier 1 leverage ratio:
Consolidated	10.8%	$	716,296	N/A		N/A	4.0%	$	265,237
NBH Bank	9.3%		613,997	5.0%	$	331,432	4.0%		265,146
Common equity tier 1 risk based capital:
Consolidated	15.2%	$	716,296	N/A		N/A	7.0%	$	329,283
NBH Bank	13.1%		613,997	6.5%	$	305,484	7.0%		328,983
Tier 1 risk based capital ratio:
Consolidated	15.2%	$	716,296	N/A		N/A	8.5%	$	399,843
NBH Bank	13.1%		613,997	8.0%	$	375,980	8.5%		399,479
Total risk based capital ratio:
Consolidated	16.3%	$	766,992	N/A		N/A	10.5%	$	493,924
NBH Bank	14.1%		664,692	10.0%	$	469,975	10.5%		493,474


	December 31, 2020
				Required to be			Required to be
				well capitalized under			considered
				prompt corrective			adequately
	Actual			action provisions			capitalized
	Ratio	Amount		Ratio	Amount		Ratio	Amount
Tier 1 leverage ratio:
Consolidated	10.7%	$	696,311	N/A		N/A	4.0%	$	260,370
NBH Bank	9.2%		600,622	5.0%	$	325,447	4.0%		260,358
Common equity tier 1 risk based capital:
Consolidated	14.7%	$	696,311	N/A		N/A	7.0%	$	331,632
NBH Bank	12.7%		600,622	6.5%	$	307,631	7.0%		331,295
Tier 1 risk based capital ratio:
Consolidated	14.7%	$	696,311	N/A		N/A	8.5%	$	402,696
NBH Bank	12.7%		600,622	8.0%	$	378,623	8.5%		402,287
Total risk based capital ratio:
Consolidated	15.8%	$	749,899	N/A		N/A	10.5%	$	497,448
NBH Bank	13.8%		654,209	10.0%	$	473,279	10.5%		496,943

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.

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Bank card fees

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

Gain on OREO sales, net

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

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


	For the three months ended March 31,
	2021		2020
Non-interest income
In-scope of Topic 606:
Service charges and other fees	$	3,951	$	4,665
Bank card fees		4,073		3,513
Non-interest income (in-scope of Topic 606)		8,024		8,178
Non-interest income (out-of-scope of Topic 606)		25,337		15,354
Total non-interest income	$	33,361	$	23,532
Non-interest expense
In-scope of Topic 606:
Gain (loss) on OREO sales, net	$	29	$	(39)
Total revenue in-scope of Topic 606	$	8,053	$	8,139

Contract acquisition costs

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

Note 11 Stock-based Compensation and Benefits

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

Stock options

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

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


				Weighted
				average
		Weighted		remaining
		average		contractual	Aggregate
		exercise		term in	intrinsic
	Options	price		years	value
Outstanding at December 31, 2020	768,129	$	26.35	6.91	$	5,224
Granted	—		—
Exercised	(35,892)		24.74
Forfeited	(6,131)		29.71
Outstanding at March 31, 2021	726,106	$	26.40	6.85	$	9,641
Options exercisable at March 31, 2021	376,186		25.71	5.30		5,257
Options vested and expected to vest	702,720		26.43	6.78		9,311

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

Restricted stock awards

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

Performance stock units

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

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

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

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


		Weighted				Weighted
	Restricted	average grant-		Performance		average grant-
	stock shares	date fair value		stock units		date fair value
Unvested at December 31, 2020	166,630	$	27.42	184,837	$	29.21
Granted	890		39.27	—		—
Adjustment due to performance	—		—	30,024		30.38
Vested	—		—	(90,016)		30.38
Forfeited	(4,061)		28.60	(1,669)		29.31
Unvested at March 31, 2021	163,459	$	27.45	123,176	$	28.65

As of March 31, 2021, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled $1.5 million and $2.0 million, respectively, and is expected to be recognized over a weighted average period of approximately 1.9 years and 1.6 years, respectively. Expense related to non-vested restricted stock awards totaled $0.6 million and $0.5 million during the three months ended March 31, 2021 and 2020, respectively. Expense related to non-vested performance stock units totaled $0.4 million and $0.5 million during the three months ended March 31, 2021 and 2020, 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 293,905 was available for issuance at March 31, 2021.

Under the ESPP, employees purchased 8,971 shares and 8,890 shares during the three months ended March 31, 2021 and 2020, respectively.

Note 12 Common Stock

The Company had 30,715,790 and 30,634,291 shares of Class A common stock outstanding at March 31, 2021 and December 31, 2020, respectively. Additionally, the Company had 163,459 and 166,630 shares outstanding at March 31, 2021 and December 31, 2020, respectively, of restricted Class A common stock issued but not yet vested under the 2014 Omnibus Incentive 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 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 million of the Company’s stock from time to time in either the open market or through privately negotiated transactions. The new program of $75.0 million replaces the previously authorized $50.0 million stock repurchase program announced in February 2020 in its entirety. The remaining authorization under the new program as of March 31, 2021 was $75.0 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 30,715,790 and 30,483,361 shares of Class A common stock outstanding as of March 31, 2021 and 2020, 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 months ended March 31, 2021 and 2020.

The following table illustrates the computation of basic and diluted earnings per share for the three months ended March 31, 2021 and 2020:


	For the three months ended
	March 31, 2021		March 31, 2020
Net income	$	26,812	$	15,824
Less: income allocated to participating securities		(34)		(24)
Income allocated to common shareholders	$	26,778	$	15,800
Weighted average shares outstanding for basic earnings per common share		30,828,262		31,157,476
Dilutive effect of equity awards		315,060		203,820
Weighted average shares outstanding for diluted earnings per common share		31,143,322		31,361,296
Basic earnings per share	$	0.87	$	0.51
Diluted earnings per share		0.86		0.50

The Company had 726,106 and 652,309 outstanding stock options to purchase common stock at weighted average exercise prices of $26.40 and $26.69 per share at March 31, 2021 and 2020, 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 286,635 and 243,481 unvested restricted shares and performance stock units issued as of March 31, 2021 and 2020, 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 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 March 31, 2021 and December 31, 2020. 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	March 31,		December 31,		Balance Sheet	March 31,		December 31,
	location	2021		2020		Location	2021		2020
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	466	$	—	Other liabilities	$	16,632	$	38,884
Total derivatives designated as hedging instruments		$	466	$	—		$	16,632	$	38,884

Derivatives not designated as hedging instruments:
Interest rate products	Other assets	$	12,000	$	18,149	Other liabilities	$	12,023	$	18,176
Interest rate lock commitments	Other assets		3,225		7,001	Other liabilities		326		298
Forward contracts	Other assets		3,462		—	Other liabilities		2		2,622
Total derivatives not designated as hedging instruments		$	18,687	$	25,150		$	12,351	$	21,096

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 March 31, 2021, the Company had interest rate swaps with a notional amount of $342.6 million, which were designated as fair value hedges of interest rate risk. As of December 31, 2020, the Company had interest rate swaps with a notional amount of $387.1 million that were designated as fair value hedges. These interest rate swaps were associated with $345.3 million and $389.9 million of the Company’s fixed-rate loans as of March 31, 2021 and December 31, 2020, respectively, before a gain of $21.5 million and $40.1 million from the fair value hedge adjustment in the carrying amount, included in loans receivable on the statements of financial condition as of March 31, 2021 and December 31, 2020, respectively.

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 March 31, 2021, the Company had matched interest rate swap transactions with an aggregate notional amount of $411.8 million related to this program. As of December 31, 2020, the Company had matched interest rate swap transactions with an aggregate notional amount of $456.0 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 $241.1 million and forward contracts with a notional value of $340.8 million at March 31, 2021. At December 31, 2020, the Company had interest rate lock commitments with a notional value of $258.8 million and forward contracts with a notional value of $375.3 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 months ended March 31, 2021 and 2020:


	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 March 31,
hedging relationships	derivatives	2021		2020
Interest rate products	Interest and fees on loans	$	20,872	$	(34,770)
Total		$	20,872	$	(34,770)


	Location of gain (loss)	Amount of (loss) gain recognized in income on hedged items
	recognized in income on	For the three months ended March 31,
Hedged items	hedged items	2021		2020
Interest rate products	Interest and fees on loans	$	(18,569)	$	33,778
Total		$	(18,569)	$	33,778


	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 March 31,
as hedging instruments	derivatives	2021		2020
Interest rate products	Other non-interest expense	$	5	$	(23)
Interest rate lock commitments	Mortgage banking income		(4,073)		7,503
Forward contracts	Mortgage banking income		6,082		(5,707)
Total		$	2,014	$	1,773

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 March 31, 2021, the termination value of derivatives in a net liability position related to these agreements was $29.8 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 March 31, 2021, the Company had posted $35.1 million in eligible collateral. If the Company had breached any of these provisions at March 31, 2021, 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 March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021		December 31, 2020
Commitments to fund loans	$	347,182	$	311,237
Unfunded commitments under lines of credit		569,773		537,325
Commercial and standby letters of credit		7,983		7,320
Total unfunded commitments	$	924,938	$	855,882

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. Charges against the reserve during the three months ended March 31, 2021 and 2020 totaling $126 thousand and $78 thousand, respectively, were primarily driven by early payoffs. The repurchase reserve 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 March 31,
	2021		2020
Beginning balance	$	2,741	$	2,589
Provision charged to operating expense, net		5		279
Charge-offs		(126)		(78)
Ending balance	$	2,620	$	2,790

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.

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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 three months ended March 31, 2021 and 2020, 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 March 31, 2021 and December 31, 2020, 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 are 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 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

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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 88.0% 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 March 31, 2021 and December 31, 2020 on the consolidated statements of financial condition utilizing the hierarchy structure described above:


	March 31, 2021
	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	$	—	$	226,513	$	—	$	226,513
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		437,424		—		437,424
Municipal securities		—		315		—		315
Corporate debt		—		2,137		—		2,137
Loans held for sale		—		228,888		—		228,888
Interest rate swap derivatives		—		12,466		—		12,466
Mortgage banking derivatives		—		—		6,687		6,687
Total assets at fair value	$	—	$	907,743	$	6,687	$	914,430
Liabilities:
Interest rate swap derivatives	$	—	$	28,655	$	—	$	28,655
Mortgage banking derivatives		—		—		328		328
Total liabilities at fair value	$	—	$	28,655	$	328	$	28,983

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	December 31, 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	$	—	$	196,334	$	—	$	196,334
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		462,779		—		462,779
Municipal securities		—		318		—		318
Corporate debt		—		1,998		—		1,998
Loans held for sale		—		247,813		—		247,813
Interest rate swap derivatives		—		18,149		—		18,149
Mortgage banking derivatives		—		—		7,001		7,001
Total assets at fair value	$	—	$	927,391	$	7,001	$	934,392
Liabilities:
Interest rate swap derivatives	$	—	$	57,060	$	—	$	57,060
Mortgage banking derivatives		—		—		2,920		2,920
Total liabilities at fair value	$	—	$	57,060	$	2,920	$	59,980

The table below details the changes in level 3 financial instruments during the three months ended March 31, 2021:


		Mortgage banking
		derivatives, net
Balance at December 31, 2020	$	4,081
Gain included in earnings, net		2,009
Fees and costs included in earnings, net		269
Balance at March 31, 2021	$	6,359

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 6% - 26% with a weighted average discount rate of 14.1%, 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 March 31, 2021, the Company recorded a specific reserve of $1.8 million related to six loans with a carrying balance of $7.2 million. At March 31, 2020, the Company recorded a specific reserve of $1.3 million related to seven loans with a carrying balance of $5.2 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 8.7%. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. There was no OREO impairment during the three months ended March 31, 2021 or 2020. 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, 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 9.51% at March 31, 2021 and prepayment speed assumption ranges of 11.2% to 17.5% with a weighted average rate of 11.4% at March 31, 2021 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 calculation of fair value. For purposes of measuring impairment, the MSRs are stratified into certain risk characteristics including note

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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 included in mortgage banking income on the consolidated statements of operations. There was no MSR impairment during the three months ended March 31, 2021. MSR impairment during the three months ended March 31, 2020 totaled $509 thousand. 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 first quarter of 2021, the Company approved plans to consolidate seven banking centers. Premises 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, 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. As of March 31, 2021, the Company recognized $1.3 million of impairment in its unaudited consolidated statements of operations related to premises and equipment classified as held-for-sale totaling $5.6 million.

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 three months ended March 31, 2021 and 2020:


	March 31, 2021
	Total		Losses from fair value changes
Individually evaluated loans	$	24,636	$	302
Premises and equipment		5,569		1,259
Total	$	30,205	$	1,561


	March 31, 2020
	Total		Losses from fair value changes
Individually evaluated loans	$	35,935	$	497
Mortgage servicing rights		2,053		509
Total	$	37,988	$	1,006

The Company did not record any liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2021 and 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 March 31, 2021 and December 31, 2020 are set forth below:


	Level in fair value	March 31, 2021				December 31, 2020
	measurement	Carrying		Estimated		Carrying		Estimated
	hierarchy	amount		fair value		amount		fair value
ASSETS
Cash and cash equivalents	Level 1	$	822,518	$	822,518	$	605,565	$	605,565
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale	Level 2		226,513		226,513		196,334		196,334
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale	Level 2		437,424		437,424		462,779		462,779
Municipal securities available-for-sale	Level 2		315		315		318		318
Municipal securities available-for-sale	Level 3		57		57		57		57
Corporate debt	Level 2		2,137		2,137		1,998		1,998
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		344,412		342,369		306,187		310,930
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity	Level 2		176,411		175,079		70,428		70,761
Non-marketable securities	Level 2		15,493		15,493		16,493		16,493
Loans receivable	Level 3		4,303,246		4,389,925		4,353,726		4,511,357
Loans held for sale	Level 2		228,888		228,888		247,813		247,813
Accrued interest receivable	Level 2		20,878		20,878		18,795		18,795
Interest rate swap derivatives	Level 2		12,466		12,466		18,149		18,149
Mortgage banking derivatives	Level 3		6,687		6,687		7,001		7,001
LIABILITIES
Deposit transaction accounts	Level 2		5,052,974		5,052,974		4,690,100		4,690,100
Time deposits	Level 2		948,676		953,688		986,132		993,070
Securities sold under agreements to repurchase	Level 2		19,405		19,405		22,897		22,897
Federal Home Loan Bank advances	Level 2		—		—		—		—
Accrued interest payable	Level 2		6,450		6,450		6,762		6,762
Interest rate swap derivatives	Level 2		28,655		28,655		57,060		57,060
Mortgage banking derivatives	Level 3		328		328		2,920		2,920

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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 months ended March 31, 2021, 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, 2020, 2019 and 2018. 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, Texas, Utah and New Mexico, which are outperforming national averages, positions us well for growth opportunities. As of March 31, 2021, we had $6.9 billion in assets, $4.3 billion in loans, $6.0 billion in deposits and $0.8 billion in equity.

Operating Highlights and Key Challenges

Profitability and returns


●		Net income was $26.8 million, or $0.86 per diluted share, for the first quarter of 2021, compared to net income of $15.8 million, or $0.50 per diluted share, for the first quarter of 2020.
●		The return on average tangible assets was 1.65% for the first quarter of 2021, compared to 1.12% for the first quarter of 2020.
●		The return on average tangible common equity was 15.2% for the first quarter of 2021, compared to 9.79% for the first quarter of 2020.

Strategic execution


●		Continue to proactively address the impacts of the COVID-19 pandemic by executing on our priorities.
●		As part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients, during the first quarter of 2021, we approved plans to consolidate seven banking centers. An impairment charge of $1.3 million was recorded to non-interest expense during the first quarter of 2021 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 continue to carefully monitor 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.

Loan portfolio


●		We continue to take a very careful approach to extending new credit as well as continuing an intense focus on managing credit risk and yield. Total loans ended the quarter at $4.3 billion and decreased $50.5 million, or 4.7% annualized, since December 31, 2020. Excluding PPP loans, total loans decreased by $92.1 million, or 8.9% annualized.
●		Total loan originations during the first quarter of 2021 were $294.2 million, which included PPP loan originations of $121.1 million.
●		COVID-related loan modifications are handled individually on a relationship basis. As of March 31, 2021, $144.1 million, or 3.3%, of total loans were on a COVID-related modification plan.

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Credit quality


●		Allowance for credit losses totaled 1.28% of total loans at March 31, 2021, compared to 1.37% at December 31, 2020. Excluding PPP loans, the ACL totaled 1.35% of total loans at March 31, 2021, compared to 1.43% at December 31, 2020.
●		During the first quarter of 2021, the Company recorded $4.6 million of provision release, partially offset by $1.0 million of provision expense for unfunded loan commitment reserves, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. The first quarter of 2020 included provision expense of $6.2 million, net of a $0.2 million reduction in unfunded loan commitment reserves, driven by deteriorating economic conditions caused by the impact of COVID-19.
●		Net charge-offs to average total loans for the three months ended March 31, 2021 totaled 0.01%, annualized, compared to 0.06% for the full year ended December 31, 2020.
●		Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) improved to 0.38% of total loans, compared to 0.47% at December 31, 2020. Non-performing assets to total loans and OREO improved to 0.51% at March 31, 2021, compared to 0.58% at December 31, 2020. Excluding PPP loans, non-performing loans to total loans were 0.40%, and non-performing assets to total loans and OREO were 0.54% at March 31, 2021.

Client deposit funded balance sheet


●		Average transaction deposits for the first quarter of 2021 totaled $4.8 billion, increasing 32.4%, compared to $3.6 billion for the same period in the prior year.
●		Average total deposits for the first quarter of 2021 totaled $5.8 billion, increasing $1.1 billion, compared to the first quarter of 2020.
●		The mix of transaction deposits to total deposits improved 640 basis points to 84.2% at March 31, 2021.
●		Cost of deposits totaled 0.28%, decreasing five basis points from December 31, 2020.

Revenues


●		Fully taxable equivalent (“FTE”) net interest income totaled $46.5 million for the first quarter of 2021 and decreased $5.1 million, or 9.9%, compared to the first quarter of 2020 primarily due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve during 2020.
●		The FTE net interest margin narrowed 85 basis points to 3.02% for the three months ended March 31, 2021, as compared to the same period in the prior year due to lower earning asset yields. The yield on earning assets decreased 122 basis points, led by a 46 basis point decrease in the originated loan portfolio yields and the remix of assets into lower-yielding cash balances. The cost of funds decreased 40 basis points to 0.28%.
●		Non-interest income totaled $33.4 million during the three months ended March 31, 2021, increasing $9.9 million, or 41.8%, compared to the three months ended March 31, 2020, primarily driven by an increase in mortgage banking income and gains on fixed assets sales.

Expenses


●		Non-interest expense totaled $49.7 million during the three months ended March 31, 2021, representing an increase of $1.0 million, or 2.0%, compared to the three months ended March 31, 2020 due to $1.3 million of banking center consolidation-related expense. Occupancy and equipment decreased $0.3 million largely due to efficiencies gained from the completion of previously announced banking center consolidations.
●		Income tax expense totaled $5.7 million during the three months ended March 31, 2021, compared to $3.2 million during the three months ended March 31, 2020 driven by the increase in pre-tax income. The effective tax rate for the first quarter 2021 was 18.0%, adjusted for stock compensation activity, compared to 19.0% for the full year 2020.

Strong capital position


●		Capital ratios continue to be strong as our capital position remains in excess of federal bank regulatory thresholds. As of March 31, 2021, our consolidated tier 1 leverage ratio was 10.80% and our common equity tier 1 and consolidated tier 1 risk based capital ratios were both 15.23%.

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●		The Bank maintains ample liquidity with access to $2.5 billion in readily available funds.
●		At March 31, 2021, common book value per share was $27.09. The tangible common book value per share increased $0.32 during the first quarter to $23.41 at March 31, 2021, primarily due to the quarter’s earnings, net of dividends paid and lower accumulated other comprehensive income.

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, remain low and are expected to remain near zero for the foreseeable future as a result of monetary policy actions by the Federal Reserve.

The COVID-19 pandemic has caused disruption and is likely to continue to present challenges to our business. We continue to remain committed to ensuring our associates, clients and communities are receiving the support they need during these challenging times. Our banking centers remain operational through our drive-thru services and on an appointment-only basis in the lobbies, and we have continued to leverage our digital banking platform with our clients. 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, including assistance with PPP loan forgiveness applications, and loan modifications, as needed. While vaccination rates are improving, the length of time that the government-mandated measures must remain in place to address COVID-19 is unknown. The pandemic has already had a significantly negative impact to the U.S. labor market, consumer spending and business operations, and it is not clear when government-mandated measures will be removed.

Our markets have historically outperformed the national averages on many key indicators; however, the economic impact from the COVID-19 pandemic continues to cause economic strain nationally and across all of our markets. We are taking a careful approach to extending new credit as well as continuing an intense focus on managing credit risk and yield. 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 March 31, 2021, the Company had low exposure to industries highly impacted by the COVID-19 pandemic. Within the commercial loan segment, restaurants were 4.7%, retailers 2.9%, hospital/medical 5.1% and oil and gas 0.6% of total loans. Within the commercial real estate non-owner occupied loan segment, hotel and lodging was 4.5%, multifamily 2.4%, office 1.3% and retail 1.4% 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, 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 continues to be impacted by volatility in commodity prices as well as supply chain issues driven by the COVID-19 pandemic. Our food and agribusiness portfolio is only 4.2% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 0.6% 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.

The extraordinary government measures enacted during the COVID-19 pandemic have generated unprecedented levels of economic stimulus funding and produced high levels of cash liquidity within the banking industry. Our cash balances total $0.8 billion as of March 31, 2021 and have increased $217.0 million from December 31, 2020 and $688.6 million from March 31, 2020. Future growth in our interest income will ultimately be dependent on our ability to deploy the excess cash liquidity into high-quality originated loans and other high-quality earning assets such as investment securities. Investment securities totaled $1.2 billion as of March 31, 2021 and increased $148.2 million, or 14.0%, compared to December 31, 2020. As of March 31, 2021, our loans outstanding totaled $4.3 billion, and due to our careful approach to extending new credit, decreased $50.5 million, or 1.2%, compared to December 31, 2020. During 2021, our weighted average rate on new loans funded at the time of origination was 2.64%, compared to the weighted average yield of our originated loan portfolio of 4.01% (FTE). Our net interest income has been impacted by the Federal Reserve’s monetary policy decisions to lower short-term interest rates in response to the COVID-19 pandemic, and our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions.

Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased

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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.

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:

Key Ratios⁽¹⁾


	As of and for the three months ended
	March 31,	December 31,	March 31,
	2021	2020	2020
Return on average assets	1.61%	1.63%	1.09%
Return on average tangible assets⁽²⁾	1.65%	1.67%	1.12%
Return on average equity	13.03%	13.27%	8.22%
Return on average tangible common equity⁽²⁾	15.20%	15.55%	9.79%
Loan to deposit ratio (end of period)	71.70%	76.70%	95.02%
Non-interest bearing deposits to total deposits (end of period)	38.25%	37.19%	24.26%
Net interest margin⁽⁴⁾	2.94%	3.16%	3.78%
Net interest margin FTE^(2)(4)(9)	3.02%	3.24%	3.87%
Interest rate spread FTE⁽⁵⁾⁽⁹⁾	2.83%	3.05%	3.62%
Yield on earning assets⁽³⁾	3.20%	3.47%	4.40%
Yield on earning assets FTE^(2)(3)(9)	3.28%	3.55%	4.50%
Cost of interest bearing liabilities	0.45%	0.50%	0.88%
Cost of deposits	0.28%	0.33%	0.63%
Non-interest income to total revenue FTE⁽⁹⁾	41.78%	40.11%	31.31%
Non-interest expense to average assets	2.98%	2.90%	3.34%
Efficiency ratio	62.83%	58.76%	65.48%
Efficiency ratio FTE⁽²⁾⁽⁹⁾	61.83%	57.87%	64.37%

Total Loans Asset Quality Data^(6)(7)(8)
Non-performing loans to total loans	0.38%	0.47%	0.47%
Non-performing loans to total loans excluding PPP loans	0.40%	0.49%	0.47%
Non-performing assets to total loans and OREO	0.51%	0.58%	0.63%
Non-performing assets to total loans and OREO excluding PPP loans	0.54%	0.60%	0.63%
Allowance for credit losses to total loans	1.28%	1.37%	1.13%
Allowance for credit losses to total loans excluding PPP loans	1.35%	1.43%	1.13%
Allowance for credit losses to non-performing loans	336.25%	293.21%	238.93%
Net charge-offs to average loans	0.01%	0.11%	0.03%


(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 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 $1,268, $1,260 and $1,268 the three months ended March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

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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,” and “fully taxable equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain 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.

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

Tangible Common Book Value Ratios


	March 31,		December 31,		March 31,
	2021		2020		2020
Total shareholders’ equity	$	831,990	$	820,691	$	763,454
Less: goodwill and core deposit intangible assets, net		(122,280)		(122,575)		(123,462)
Add: deferred tax liability related to goodwill		9,384		9,155		8,469
Tangible common equity (non-GAAP)	$	719,094	$	707,271	$	648,461

Total assets	$	6,949,501	$	6,659,950	$	6,028,330
Less: goodwill and core deposit intangible assets, net		(122,280)		(122,575)		(123,462)
Add: deferred tax liability related to goodwill		9,384		9,155		8,469
Tangible assets (non-GAAP)	$	6,836,605	$	6,546,530	$	5,913,337

Tangible common equity to tangible assets calculations:
Total shareholders' equity to total assets		11.97%		12.32%		12.66%
Less: impact of goodwill and core deposit intangible assets, net		(1.45)%		(1.52)%		(1.69)%
Tangible common equity to tangible assets (non-GAAP)		10.52%		10.80%		10.97%

Tangible common book value per share calculations:
Tangible common equity (non-GAAP)	$	719,094	$	707,271	$	648,461
Divided by: ending shares outstanding		30,715,790		30,634,291		30,483,361
Tangible common book value per share (non-GAAP)	$	23.41	$	23.09	$	21.27

Tangible common book value per share, excluding accumulated other comprehensive income calculations:
Tangible common equity (non-GAAP)	$	719,094	$	707,271	$	648,461
Accumulated other comprehensive income, net of tax		(485)		(9,766)		(12,367)
Tangible common book value, excluding accumulated other comprehensive income, net of tax (non-GAAP)		718,609		697,505		636,094
Divided by: ending shares outstanding		30,715,790		30,634,291		30,483,361
Tangible common book value per share, excluding accumulated other comprehensive income, net of tax (non-GAAP)	$	23.40	$	22.77	$	20.87

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Return on Average Tangible Assets and Return on Average Tangible Equity


	As of and for the three months ended
	March 31,		December 31,		March 31,
	2021		2020		2020
Net income	$	26,812	$	27,169	$	15,824
Add: impact of core deposit intangible amortization expense, after tax		228		228		225
Net income adjusted for impact of core deposit intangible amortization expense, after tax	$	27,040	$	27,397	$	16,049

Average assets	$	6,755,484	$	6,635,490	$	5,862,851
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill		(113,074)		(113,594)		(115,156)
Average tangible assets (non-GAAP)	$	6,642,410	$	6,521,896	$	5,747,695

Average shareholders' equity	$	834,698	$	814,483	$	774,380
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill		(113,074)		(113,594)		(115,156)
Average tangible common equity (non-GAAP)	$	721,624	$	700,889	$	659,224

Return on average assets		1.61%		1.63%		1.09%
Return on average tangible assets (non-GAAP)		1.65%		1.67%		1.12%
Return on average equity		13.03%		13.27%		8.22%
Return on average tangible common equity (non-GAAP)		15.20%		15.55%		9.79%

Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin


	As of and for the three months ended
	March 31,		December 31,		March 31,
	2021		2020		2020
Interest income	$	49,213	$	53,288	$	58,668
Add: impact of taxable equivalent adjustment		1,268		1,260		1,268
Interest income FTE (non-GAAP)	$	50,481	$	54,548	$	59,936

Net interest income	$	45,221	$	48,556	$	50,347
Add: impact of taxable equivalent adjustment		1,268		1,260		1,268
Net interest income FTE (non-GAAP)	$	46,489	$	49,816	$	51,615

Average earning assets	$	6,237,924	$	6,108,513	$	5,358,404
Yield on earning assets		3.20%		3.47%		4.40%
Yield on earning assets FTE (non-GAAP)		3.28%		3.55%		4.50%
Net interest margin		2.94%		3.16%		3.78%
Net interest margin FTE (non-GAAP)		3.02%		3.24%		3.87%

Efficiency Ratio


	As of and for the three months ended
	March 31,		December 31,		March 31,
	2021		2020		2020
Net interest income	$	45,221	$	48,556	$	50,347
Add: impact of taxable equivalent adjustment		1,268		1,260		1,268
Net interest income, FTE (non-GAAP)	$	46,489	$	49,816	$	51,615

Non-interest income	$	33,361	$	33,357	$	23,532

Non-interest expense	$	49,668	$	48,425	$	48,671
Less: core deposit intangible asset amortization		(296)		(296)		(296)
Non-interest expense, adjusted for core deposit intangible asset amortization	$	49,372	$	48,129	$	48,375

Efficiency ratio		62.83%		58.76%		65.48%
Efficiency ratio FTE (non-GAAP)		61.83%		57.87%		64.37%

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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 2 – Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2020 Annual Report on Form 10-K.

Future Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was effective upon issuance and can be adopted during any interim period through December 31, 2022. It provides optional expedients and guidance for applying generally accepted accounting principles to contract modifications and hedging relationships, if certain criteria are met, that reference the London Inter-Bank Offered Rate (“LIBOR”) or any other reference rate that is expected to be discontinued. The Company is evaluating the impact from ASU 2020-04, and any related updates, and does not expect the adoption of ASU 2020-04 to have a material impact on its financial statements.

Financial Condition

Total assets were $6.9 billion at March 31, 2021, compared to $6.7 billion at December 31, 2020, an increase of $289.6 million, or 4.3%. Cash and cash equivalents increased $217.0 million, or 35.8%, from December 31, 2020, and investment securities increased $148.2 million, or 14.0%. Total loans decreased $50.5 million, or 1.2%, and the allowance for credit losses decreased $4.7 million to $55.1 million at March 31, 2021.

During the first quarter of 2021, lower cost demand, savings, and money market deposits ("transaction deposits") increased $362.9 million, or 31.4% annualized, compared to December 31, 2020, as we received cash inflows from economic stimulus and continued developing full banking relationships with our clients. Our clients used their core operating accounts for PPP funds and economic stimulus checks, which aided the strong deposit growth. In addition to providing excess cash liquidity, the increase in transaction deposits provided low-cost funding utilized to fund PPP loans.

Investment securities

Available-for-sale

Total investment securities available-for-sale increased 0.7% during the three months ended March 31, 2021 to $0.7 billion. Purchases of available-for-sale securities during the three months ended March 31, 2021 and 2020 totaled $86.2 million and $26.5 million, respectively. Paydowns and maturities totaled $68.6 million and $48.8 million during the three months ended March 31, 2021 and 2020, respectively.

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


	March 31, 2021						December 31, 2020
						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	$	228,924	$	226,513	34.0%	1.50%	$	193,424	$	196,334	29.6%	1.36%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		435,753		437,424	65.5%	1.62%		454,345		462,779	69.9%	1.45%
Municipal securities		362		372	0.1%	3.46%		362		375	0.1%	3.46%
Corporate debt		2,000		2,137	0.3%	5.79%		2,000		1,998	0.3%	5.83%
Other securities		469		469	0.1%	0.00%		469		469	0.1%	0.00%
Total investment securities available-for-sale	$	667,508	$	666,915	100.0%	1.59%	$	650,600	$	661,955	100.0%	1.44%

As of March 31, 2021 and December 31, 2020, 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.

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 4.3 years and 2.7 years at March 31, 2021 and December 31, 2020, respectively. This estimate is based on assumptions and actual results may differ. At March 31, 2021 and December 31, 2020, the duration of the total available-for-sale investment portfolio was 4.0 years and 2.6 years, respectively.

At March 31, 2021 and December 31, 2020, adjustable rate securities comprised 2.3% and 2.3%, 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 1.85% per annum and 2.00% per annum at March 31, 2021 and December 31, 2020, respectively.

The available-for-sale investment portfolio included $9.7 million and $11.7 million of unrealized gains and $10.3 million and $0.4 million of unrealized losses at March 31, 2021 and December 31, 2020, 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

Held-to-maturity investment securities increased 38.3% during the three months ended March 31, 2021 to $0.5 billion. Purchases during the three months ended March 31, 2021 and 2020 totaled $174.1 million and $25.8 million, respectively. Paydowns and maturities totaled $29.0 million and $15.4 million during the three months ended March 31, 2021 and 2020, respectively.

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


	March 31, 2021						December 31, 2020
						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	$	344,412	$	342,369	66.1%	1.68%	$	306,187	$	310,930	81.3%	1.39%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		176,411		175,079	33.9%	1.23%		70,428		70,761	18.7%	0.41%
Total investment securities held-to-maturity	$	520,823	$	517,448	100.0%	1.53%	$	376,615	$	381,691	100.0%	1.21%

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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 $4.1 million and $5.3 million of unrealized gains and $7.5 million and $0.3 million of unrealized losses at March 31, 2021 and December 31, 2020, 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.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of March 31, 2021 and December 31, 2020 was 4.7 years and 2.4 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 4.4 years and 2.4 years as of March 31, 2021 and December 31, 2020, respectively.

Loans overview

At March 31, 2021, 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:


					March 31, 2021 vs.
					December 31, 2020
	March 31, 2021		December 31, 2020		% Change
Originated:
Commercial:
Commercial and industrial	$	1,177,764	$	1,248,530	(5.7)%
Municipal and non-profit		850,663		870,410	(2.3)%
Owner-occupied commercial real estate		476,625		464,417	2.6%
Food and agribusiness		178,419		205,189	(13.0)%
PPP loans⁽¹⁾		217,697		176,106	23.6%
Total commercial		2,901,168		2,964,652	(2.1)%
Commercial real estate non-owner occupied		553,184		542,642	1.9%
Residential real estate		604,001		581,555	3.9%
Consumer		17,671		18,581	(4.9)%
Total originated		4,076,024		4,107,430	(0.8)%

Acquired:
Commercial:
Commercial and industrial		20,405		22,102	(7.7)%
Municipal and non-profit		370		381	(2.9)%
Owner-occupied commercial real estate		50,607		51,821	(2.3)%
Food and agribusiness		4,129		5,108	(19.2)%
Total commercial		75,511		79,412	(4.9)%
Commercial real estate non-owner occupied		81,176		89,354	(9.2)%
Residential real estate		70,141		77,105	(9.0)%
Consumer		394		425	(7.3)%
Total acquired		227,222		246,296	(7.7)%
Total loans	$	4,303,246	$	4,353,726	(1.2)%


(1)		PPP loan balances are net of fees and costs and include principal totaling $223,867 and $179,531 as of March 31, 2021 and December 31, 2020, respectively.

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The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. During the first quarter of 2021, we continued our careful approach to extending new credit during the quarter and maintained an intense focus on managing credit risk and yield. Our loan portfolio decreased $50.5 million, or 4.7% annualized, from December 31, 2020. Excluding PPP loans, total loans decreased by $92.1 million, or 8.9% annualized. First quarter loan originations totaled $294.2 million, and included $121.1 million of PPP loan originations. During the quarter, PPP loans forgiven totaled $79.6 million.

Our commercial and industrial loan portfolio is comprised of diverse industry segments. At March 31, 2021, these segments included finance and financial services, primarily lender finance loans of $182.5 million, hospital/medical loans of $220.2 million, manufacturing-related loans of $108.4 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 $182.5 million and were 23.8% of the Company’s risk based capital. Crop and livestock loans represent 0.6% of total loans.

Non-owner occupied CRE loans were 82.7% of the Company’s risk based capital, or 14.7% of total loans, and no specific property type comprised more than 5.0% of total loans. The Company maintains very little exposure to retail properties, comprising 4.4% of total loans. Multi-family loans totaled $101.5 million, or 2.4% of total loans as of March 31, 2021.

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 $1.2 billion over the past 12 months, led by commercial loan originations of $813.3 million, which included PPP loan originations of $480.1 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 tables represent new loan originations during 2021 and 2020:


	First quarter		Fourth quarter		Third quarter		Second quarter		First quarter
	2021		2020		2020		2020		2020
Commercial:
Commercial and industrial	$	23,390	$	96,625	$	11,354	$	(8,726)	$	118,999
Municipal and non-profit		7,999		25,348		6,083		49,679		13,968
Owner occupied commercial real estate		27,093		36,085		23,758		22,078		37,372
Food and agribusiness		(10,104)		19,191		13,876		(10,480)		(6,787)
PPP loans		121,141		—		122		358,798		—
Total commercial		169,519		177,249		55,193		411,349		163,552
Commercial real estate non-owner occupied		49,195		52,018		24,937		18,992		80,792
Residential real estate		74,145		41,355		49,786		29,024		46,273
Consumer		1,353		1,858		2,980		2,206		2,320
Total	$	294,212	$	272,480	$	132,896	$	461,571	$	292,937

Included in originations are net fundings under revolving lines of credit of ($26,395), $50,982, ($27,899), ($55,826) and $48,789 as of the first quarter 2021 and each quarter in 2020, respectively.

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


	March 31, 2021
	Due within		Due after 1 but		Due after
	1 year		within 5 years		5 years		Total
Commercial:
Commercial and industrial	$	114,330	$	898,861	$	184,978	$	1,198,169
Municipal and non-profit		24,619		162,847		663,567		851,033
Owner occupied commercial real estate		27,594		185,097		314,541		527,232
Food and agribusiness		63,792		96,416		22,340		182,548
PPP loans		—		217,697		—		217,697
Total commercial		230,335		1,560,918		1,185,426		2,976,679
Commercial real estate non-owner occupied		76,538		432,074		125,748		634,360
Residential real estate		12,246		32,648		629,248		674,142
Consumer		5,201		9,964		2,900		18,065
Total loans	$	324,320	$	2,035,604	$	1,943,322	$	4,303,246


	December 31, 2020
	Due within		Due after 1 but		Due after
	1 year		within 5 years		5 years		Total
Commercial:
Commercial and industrial	$	109,586	$	927,881	$	233,165	$	1,270,632
Municipal and non-profit		42,222		164,994		663,575		870,791
Owner occupied commercial real estate		24,510		177,311		314,418		516,239
Food and agribusiness		80,691		105,815		23,791		210,297
PPP loans		—		176,106		—		176,106
Total commercial		257,009		1,552,107		1,234,949		3,044,065
Commercial real estate non-owner occupied		72,486		426,291		133,219		631,996
Residential real estate		18,569		36,747		603,343		658,659
Consumer		5,167		10,886		2,953		19,006
Total loans	$	353,231	$	2,026,031	$	1,974,464	$	4,353,726

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:


	March 31, 2021
	Fixed			Variable			Total
			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	324,704	4.63%	$	759,135	3.13%	$	1,083,839	3.58%
Municipal and non-profit⁽¹⁾		801,338	3.53%		25,075	2.83%		826,413	3.51%
Owner occupied commercial real estate		263,935	4.84%		235,704	3.84%		499,639	4.50%
Food and agribusiness		49,331	5.04%		69,426	3.77%		118,757	4.30%
PPP loans		217,697	1.00%		—	—		217,697	1.00%
Total commercial		1,657,005	3.70%		1,089,340	3.32%		2,746,345	3.55%
Commercial real estate non-owner occupied		266,585	4.46%		291,238	3.48%		557,823	3.96%
Residential real estate		335,495	3.47%		326,401	4.10%		661,896	3.78%
Consumer		10,408	4.82%		2,455	3.46%		12,863	4.56%
Total loans with > 1 year maturity	$	2,269,493	3.76%	$	1,709,434	3.50%	$	3,978,927	3.64%

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	December 31, 2020
	Fixed			Variable			Total
			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial		320,745	4.68%	$	840,301	3.11%	$	1,161,046	3.54%
Municipal and non-profit⁽¹⁾		803,350	3.55%		25,219	2.83%		828,569	3.53%
Owner occupied commercial real estate		261,406	4.82%		230,323	3.88%		491,729	4.51%
Food and agribusiness		57,360	5.02%		72,246	3.67%		129,606	4.27%
PPP loans		176,106	1.00%		—	—		176,106	1.00%
Total commercial		1,618,967	3.79%		1,168,089	3.29%		2,787,056	3.58%
Commercial real estate non-owner occupied		253,879	4.65%		305,631	3.42%		559,510	3.98%
Residential real estate		298,759	3.60%		341,332	4.14%		640,091	3.89%
Consumer		11,384	4.92%		2,455	3.50%		13,839	4.66%
Total loans with > 1 year maturity	$	2,182,989	3.86%	$	1,817,507	3.47%	$	4,000,496	3.68%


(1)		Included in municipal and non-profit fixed rate loans are loans totaling $342,611 and $387,105 that have been swapped to variables rates at current market pricing at March 31, 2021 and December 31, 2020, respectively. Included in the municipal and non-profit segment are tax exempt loans totaling $728,108 and $711,582 with a weighted average rate of 3.35% and 3.33% at March 31, 2021 and December 31, 2020, respectively.

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 for 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 ACL 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 months ended March 31, 2021 and 2020 was $0.3 million in both periods.

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:


	March 31, 2021		December 31, 2020
Non-accrual loans:
Non-accrual loans, excluding restructured loans	$	11,438	$	12,190
Restructured loans on non-accrual		4,936		8,197
Non-performing loans		16,374		20,387
OREO		5,669		4,730
Other repossessed assets		17		17
Total non-performing assets	$	22,060	$	25,134

Loans 30-89 days past due and still accruing interest	$	1,867	$	968
Loans 90 days or more past due and still accruing interest		1,021		162
Non-accrual loans		16,374		20,387
Total past due and non-accrual loans	$	19,262	$	21,517
Accruing restructured loans	$	13,822	$	13,945
Allowance for credit losses		55,057		59,777
Non-performing loans to total loans		0.38%		0.47%
Non-performing loans to total loans excluding PPP loans		0.40%		0.49%
Total 90 days past due and still accruing interest and non-accrual loans to total loans		0.40%		0.47%
Total non-performing assets to total loans and OREO		0.51%		0.58%
Total non-performing assets to total loans and OREO, excluding PPP loans		0.54%		0.60%
ACL to non-performing loans		336.25%		293.21%

During the first quarter of 2021, total non-performing loans decreased $4.0 million, or 19.7%, from December 31, 2020. Loans 30-89 days past due and still accruing interest were 0.04% and 0.02% of total loans at March 31, 2021 and December 31, 2020, respectively. Loans 90 days or more past due and still accruing interest were 0.02% and 0.01% of total loans at March 31, 2021 and December 31, 2020, respectively.

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 TDRs under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments. The Company modified 10 loans totaling $1.4 million during the three months ended March 31, 2021 and four loans totaling $122 thousand during the three months ended March 31, 2020, due to the effects of the COVID-19 pandemic, that were not classified as TDRs. Modified loans that remained on a payment deferral plan at March 31, 2021 totaled $144.1 million, or 3.3% of the total loan portfolio. Of those loans, principal payment deferrals totaled $139.2 million and full payment deferrals totaled $4.9 million. At March 31, 2021, 6.4% of loan modifications related to COVID-19 were subsequently modified. All COVID-19 modified loans were classified as performing as of March 31, 2021. At December 31, 2020, modified loans that remained on a payment deferral plan totaled $173.6 million, or 4.0% of the total loan portfolio, of which 26.2% were subsequently modified.

The following table sets forth COVID-19 loan modifications currently on a deferral plan as of the dates presented:


	March 31, 2021
	Loans outstanding			Loans modified			Modification type
			Percentage of			Percentage of	3-month		7 to 12-month		6 to 12-month full
	Balance		loan portfolio	Balance		loan segment	interest only		interest only		payment deferral
Commercial	$	2,758,982	64.1%	$	31,513	1.1%	$	—	$	26,819	$	4,694
Commercial real estate non-owner occupied		634,360	14.7%		111,791	17.6%		—		111,791		—
Residential real estate		674,142	15.7%		797	0.1%		637		—		160
Consumer		18,065	0.4%		5	0.0%		5		—		—
Total excluding PPP loans	$	4,085,549	94.9%	$	144,106	3.5%	$	642	$	138,610	$	4,854
PPP loans		217,697	5.1%		—	0.0%		—		—		—
Total loans	$	4,303,246	100.0%	$	144,106	3.3%	$	642	$	138,610	$	4,854

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	December 31, 2020
	Loans outstanding			Loans modified			Modification type
			Percentage of			Percentage of	3-month		4 to 6-month		7 to 12-month		3 to 6-month full		6 to 12-month full
	Balance		loan portfolio	Balance		loan segment	interest only		interest only		interest only		payment deferral		payment deferral
Commercial	$	2,867,959	66.0%	$	44,655	1.6%	$	—	$	—	$	40,097	$	649	$	3,909
Commercial real estate non-owner occupied		631,996	14.5%		126,423	20.0%		—		—		126,423		—		—
Residential real estate		658,659	15.1%		2,495	0.4%		—		356		158		1,693		288
Consumer		19,006	0.4%		4	0.0%		4		—		—		—		—
Total excluding PPP loans	$	4,177,620	96.0%	$	173,577	4.2%	$	4	$	356	$	166,678	$	2,342	$	4,197
PPP loans		176,106	4.0%		—	0.0%		—		—		—		—		—
Total loans	$	4,353,726	100.0%	$	173,577	4.0%	$	4	$	356	$	166,678	$	2,342	$	4,197

Allowance for credit losses

The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit 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, 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 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 including estimated prepayment rates and loss recovery timing delays. The model incorporates forecasts of certain national macroeconomic factors, including unemployment rates, home price index (“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the ACL accounting policy involves judgments, estimates and uncertainties that are subject to change. For periods beyond the reasonable and supportable forecast period, we revert to historical long-term average loss rates on a straight-line basis.

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 ACL 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

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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.

During the three months ended March 31, 2021, the Company released $3.6 million of net provision driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. Included in the quarter was a $1.0 million provision expense for unfunded loan commitment reserves. Annualized net charge-offs on loans during the three months ended March 31, 2021 totaled $0.1 million, or 0.01% annualized of total loans. Specific reserves on loans totaled $1.8 million at March 31, 2021.

During the three months ended March 31, 2020, the Company recorded provision expense for loan losses of $6.2 million, net of a $0.2 million reduction in unfunded loan commitment reserves. The provision expense was recorded to support originated loan growth and to provide coverage for the impact of deterioration in the macro-economic environment as a result of COVID-19. Net charge-offs were $0.4 million, or 0.03% annualized of total loans, and specific reserves on loans totaled $1.3 million at March 31, 2020. The increase of $11.9 million in the allowance for credit losses from December 31, 2019 included a CECL Day 1 increase of $5.8 million and increased provision expense recorded during the first quarter of 2020 due to declining economic conditions as a result of COVID-19.

The Company has elected to exclude AIR from the ACL calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As of March 31, 2021 and December 31, 2020, AIR from loans totaled $18.5 million and $16.7 million, respectively

Total ACL

After considering the above mentioned factors, we believe that the ACL of $55.1 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at March 31, 2021. 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 changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively 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
	March 31,		March 31,
	2021		2020
	Total loans		Total loans
Beginning balance	$	59,777	$	39,064
Cumulative effect adjustment⁽¹⁾		—		5,836
Charge-offs:
Commercial		(160)		(218)
Commercial real estate non-owner occupied		—		—
Residential real estate		(22)		(28)
Consumer		(120)		(251)
Total charge-offs		(302)		(497)
Recoveries		182		144
Net charge-offs		(120)		(353)
Provision (release) expense for loan loss		(4,600)		6,409
Ending allowance for credit losses	$	55,057	$	50,956
Ratio of annualized net charge-offs to average total loans during the period		0.01%		0.03%
Ratio of ACL to total loans outstanding at period end		1.28%		1.13%
Ratio of ACL to total loans outstanding, excluding PPP loans at period end		1.35%		1.13%
Ratio of ACL to total non-performing loans at period end		336.25%		238.93%
Total loans	$	4,303,246	$	4,505,735
Average total loans outstanding during the period		4,277,481		4,412,320
Average total loans outstanding, excluding PPP loans during the period		4,098,898		4,412,320
Non-performing loans		16,374		21,327


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

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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:


	March 31, 2021
						ACL as a %
	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	2,758,982	64.1%	$	28,085	51.0%
PPP loans⁽¹⁾		217,697	5.1%		—	0.0%
Commercial real estate non-owner occupied		634,360	14.7%		15,054	27.3%
Residential real estate		674,142	15.7%		11,546	21.0%
Consumer		18,065	0.4%		372	0.7%
Total	$	4,303,246	100.0%	$	55,057	100.0%


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


	December 31, 2020
						ACL as a %
	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	2,867,959	66.0%	$	30,376	50.8%
PPP loans⁽¹⁾		176,106	4.0%		—	0.0%
Commercial real estate non-owner occupied		631,996	14.5%		17,448	29.2%
Residential real estate		658,659	15.1%		11,492	19.2%
Consumer		19,006	0.4%		461	0.8%
Total	$	4,353,726	100.0%	$	59,777	100.0%


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

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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 March 31, 2021 and December 31, 2020:


							Increase (decrease)
	March 31, 2021			December 31, 2020			Amount		% Change
Non-interest bearing demand deposits	$	2,295,704	38.2%	$	2,111,045	37.1%	$	184,659	8.7%
Interest bearing demand deposits		557,850	9.3%		514,286	9.1%		43,564	8.5%
Savings accounts		730,381	12.2%		646,829	11.4%		83,552	12.9%
Money market accounts		1,469,039	24.5%		1,417,940	25.0%		51,099	3.6%
Total transaction deposits		5,052,974	84.2%		4,690,100	82.6%		362,874	7.7%
Time deposits < $250,000		789,380	13.1%		820,229	14.5%		(30,849)	(3.8)%
Time deposits > $250,000		159,296	2.7%		165,903	2.9%		(6,607)	(4.0)%
Total time deposits		948,676	15.8%		986,132	17.4%		(37,456)	(3.8)%
Total deposits	$	6,001,650	100.0%	$	5,676,232	100.0%	$	325,418	5.7%

The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $250,000 as of March 31, 2021:


	March 31, 2021
Three months or less	$	20,743
Over 3 months through 6 months		35,522
Over 6 months through 12 months		55,854
Thereafter		47,177
Total time deposits > $250,000	$	159,296

At March 31, 2021 and December 31 2020, time deposits that were scheduled to mature within 12 months totaled $677.3 million and $659.5 million, respectively. Of the time deposits scheduled to mature within 12 months at March 31, 2021, $112.2 million were in denominations of $250,000 or more, and $565.1 million were in denominations less than $250,000.

Other borrowings

As of March 31, 2021 and December 31, 2020, the Bank sold securities under agreements to repurchase totaling $19.4 million and $22.9 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 $0.9 billion at March 31, 2021. The Bank utilizes its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At March 31, 2021 and December 31, 2020, the Bank had no outstanding borrowings with the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at March 31, 2021 or December 31, 2020. Loans pledged were $1.2 billion at both March 31, 2021 and December 31, 2020. Interest expense related to FHLB advances totaled $0.0 million and $0.9 million for the three months ended March 31, 2021 and 2020, 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 $26.8 million, or $0.86 per diluted share, during the three months ended March 31, 2021, compared to net income of $15.8 million, or $0.50 per diluted share, during the three months ended March 31, 2020.

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 March 31, 2021 and 2020. 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
	March 31, 2021					March 31, 2020
	Average balance		Interest		Average rate	Average balance		Interest		Average rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,004,994	$	39,560	4.01%	$	4,043,168	$	44,980	4.47%
Acquired loans		238,468		5,128	8.72%		343,608		8,879	10.39%
Loans held for sale		231,521		1,517	2.66%		102,935		936	3.66%
Investment securities available-for-sale		686,731		2,485	1.45%		626,921		3,395	2.17%
Investment securities held-to-maturity		421,119		1,416	1.34%		189,062		1,235	2.61%
Other securities		15,818		210	5.31%		29,753		414	5.57%
Interest earning deposits and securities purchased under agreements to resell		639,273		165	0.10%		22,957		97	1.70%
Total interest earning assets FTE⁽²⁾	$	6,237,924	$	50,481	3.28%	$	5,358,404	$	59,936	4.50%
Cash and due from banks	$	81,253				$	74,784
Other assets		495,222					474,470
Allowance for credit losses		(58,915)					(44,807)
Total assets	$	6,755,484				$	5,862,851
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,645,487	$	1,652	0.25%	$	2,497,129	$	2,888	0.47%
Time deposits		967,447		2,335	0.98%		1,056,692		4,438	1.69%
Securities sold under agreements to repurchase		21,377		5	0.09%		44,898		97	0.87%
Federal Home Loan Bank advances		—		—	0.00%		219,353		898	1.65%
Total interest bearing liabilities	$	3,634,311	$	3,992	0.45%	$	3,818,072	$	8,321	0.88%
Demand deposits	$	2,165,868				$	1,137,273
Other liabilities		120,607					133,126
Total liabilities		5,920,786					5,088,471
Shareholders' equity		834,698					774,380
Total liabilities and shareholders' equity	$	6,755,484				$	5,862,851
Net interest income FTE⁽²⁾			$	46,489				$	51,615
Interest rate spread FTE⁽²⁾					2.83%					3.62%
Net interest earning assets	$	2,603,613				$	1,540,332
Net interest margin FTE⁽²⁾					3.02%					3.87%
Average transaction deposits	$	4,811,355				$	3,634,402
Average total deposits		5,778,802					4,691,094
Ratio of average interest earning assets to average interest bearing liabilities		171.64%					140.34%


(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 $1,268 and $1,268 for the three months ended March 31, 2021 and 2020, respectively.
(3)		Loan fees included in interest income totaled $4,544 and $1,823 for the three months ended March 31, 2021 and 2020, respectively.

Net interest income totaled $45.2 million and $50.3 million during the three months ended March 31, 2021 and 2020, respectively. The yield on earning assets decreased 122 basis points, led by a 46 basis point decrease in the originated portfolio yields due to monetary policy actions by the Federal Reserve during 2020. During the three months ended March 31, 2021, the cost of funds decreased 40 basis points, compared to the same period during 2020.

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Average loans comprised $4.2 billion, or 68.0%, of total average interest earning assets during the three months ended March 31, 2021, compared to $4.4 billion, or 81.9%, during the three months ended March 31, 2020. The decrease in average loan balances was driven by our careful approach to extending new credit as well as continuing an intense focus on managing credit risk and yield.

Average investment securities comprised 17.8% and 15.2% of total interest earning assets during the three months ended March 31, 2021 and 2020, respectively. The increase in the investment portfolio was driven by strategic decisions to deploy a portion of the excess liquidity into investment securities.

Average balances of interest bearing liabilities decreased $183.8 million during the three months ended March 31, 2021, compared to the three months ended March 31, 2020. The decrease was driven by strong non-interest bearing deposit inflows, which were utilized, in part, to pay off our outstanding FHLB advances in 2020. Average FHLB advances decreased $219.4 million, and time deposits decreased $89.2 million between the two periods. Those decreases were partially offset by an increase in average interest-bearing transaction deposits of $148.4 million. The cost of deposits decreased 35 basis points to 0.28% during the three months ended March 31, 2021, compared to 0.63% during the three months ended March 31, 2020.

The following table summarizes the changes in net interest income on an 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 months ended March 31, 2021, compared to the three months ended March 31, 2020:


	Three months ended March 31, 2021
	compared to
	Three months ended March 31, 2020
	Increase (decrease) due to
	Volume		Rate		Net
Interest income:
Originated loans FTE^(1)(2)(3)	$	(377)	$	(5,043)	$	(5,420)
Acquired loans		(2,261)		(1,490)		(3,751)
Loans held for sale		843		(262)		581
Investment securities available-for-sale		216		(1,126)		(910)
Investment securities held-to-maturity		780		(599)		181
Other securities		(185)		(19)		(204)
Interest earning deposits and securities purchased under agreements to resell		159		(91)		68
Total interest income	$	(825)	$	(8,630)	$	(9,455)
Interest expense:
Interest bearing demand, savings and money market deposits	$	93	$	(1,329)	$	(1,236)
Time deposits		(215)		(1,888)		(2,103)
Securities sold under agreements to repurchase		(6)		(86)		(92)
Federal Home Loan Bank advances		—		(898)		(898)
Total interest expense		(128)		(4,201)		(4,329)
Net change in net interest income	$	(697)	$	(4,429)	$	(5,126)


(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 $1,268 and $1,268 for three months ended March 31, 2021 and 2020, respectively.
(3)		Loan fees included in interest income totaled $4,544 and $1,823 for the three months ended March 31, 2021 and 2020, respectively.

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


	For the three months ended
	March 31, 2021			March 31, 2020
			Average			Average
	Average		rate	Average		rate
	balance		paid	balance		paid
Non-interest bearing demand	$	2,165,868	0.00%	$	1,137,273	0.00%
Interest bearing demand		542,050	0.23%		741,482	0.24%
Money market accounts		1,428,845	0.30%		1,209,822	0.65%
Savings accounts		674,592	0.17%		545,825	0.37%
Time deposits		967,447	0.98%		1,056,692	1.69%
Total average deposits	$	5,778,802	0.28%	$	4,691,094	0.63%

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.

The Company recorded $4.6 million of provision release for funded loans, partially offset by $1.0 million of provision expense for unfunded loan commitment reserves, during the three months ended March 31, 2021 driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the first quarter of 2020, provision for loan loss expense of $6.2 million, net of a $0.2 million reduction in unfunded loan commitment reserves, was recorded under the CECL model to support originated loan growth and to provide coverage for the impact of deterioration in the macro-economic environment as a result of COVID-19. The allowance for credit losses totaled 1.28% of total loans at March 31, 2021, compared to the allowance for credit losses of 1.13% at March 31, 2020. Excluding PPP loans, the allowance for credit losses totaled 1.35% of total loans at March 31, 2021.

Non-interest income

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


	For the three months ended March 31,				2021 vs 2020
					Increase (decrease)
	2021		2020		Amount		% Change
Service charges	$	3,474	$	4,126	$	(652)	(15.8)%
Bank card fees		4,073		3,513		560	15.9 %
Mortgage banking income		22,379		13,673		8,706	63.7 %
Bank-owned life insurance income		548		590		(42)	(7.1)%
Other non-interest income		2,852		1,602		1,250	78.0 %
OREO-related income		35		28		7	25.0 %
Total non-interest income	$	33,361	$	23,532	$	9,829	41.8 %

During the first quarter of 2021, non-interest income increased $9.8 million, or 41.8%, compared to the first quarter of last year primarily due to higher mortgage banking income, driven by higher loan production due to lower prevailing interest rates. Other non-interest income increased $1.3 million due to gains on fixed assets sales. Service charges and bank card fees decreased a combined $0.1 million and continue to be impacted by changes in consumer behavior due to COVID-19.

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Non-interest expense

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


	For the three months ended March 31,				2021 vs 2020
					Increase (decrease)
	2021		2020		Amount		% Change
Salaries and benefits	$	33,523	$	33,180	$	343	1.0 %
Occupancy and equipment		6,550		6,898		(348)	(5.0)%
Telecommunications and data processing		2,337		2,265		72	3.2 %
Marketing and business development		452		696		(244)	(35.1)%
FDIC deposit insurance		444		(76)		520	(684.2)%
Bank card expenses		1,144		1,026		118	11.5 %
Professional fees		742		609		133	21.8 %
Other non-interest expense		2,476		3,090		(614)	(19.9)%
Problem asset workout		438		648		(210)	(32.4)%
(Gain) loss on OREO sales, net		(29)		39		(68)	(174.4)%
Core deposit intangible asset amortization		296		296		—	—
Banking center consolidation-related expense		1,295		—		1,295	100.0 %
Total non-interest expense	$	49,668	$	48,671	$	997	2.0 %

During the first quarter of 2021, non-interest expense increased $1.0 million, or 2.0%, compared to the first quarter of last year due to $1.3 million of banking center consolidation-related expense. Occupancy and equipment decreased $0.3 million largely due to efficiencies gained from the completion of the previously announced banking center consolidations.

Income taxes

Income tax expense was $5.7 million for the three months ended March 31, 2021, compared to an income tax expense of $3.2 million for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 was 17.5%, compared to 19.0% for the full year 2020. 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.

Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2020 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 March 31, 2021 and December 31, 2020:


	March 31, 2021		December 31, 2020
Cash and due from banks	$	822,018	$	605,065
Interest bearing bank deposits		500		500
Unencumbered investment securities, at fair value		649,278		513,945
Total	$	1,471,796	$	1,119,510

Total on-balance sheet liquidity increased $352.3 million at March 31, 2021 compared to December 31, 2020. The increase was due to $135.3 million in unencumbered available-for-sale and held-to-maturity securities balances and higher cash and due from banks of $217.0 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 may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at March 31, 2021 or December 31, 2020. The Bank had loans pledged as collateral for FHLB advances of $1.2 billion at both March 31, 2021 and December 31, 2020. FHLB advances, lines of credit and other short-term borrowing availability totaled $0.9 billion at March 31, 2021. The Bank can obtain additional liquidity through the

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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.

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 payoffs and paydowns of loans and purchases and sales of investment securities. At March 31, 2021, 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 $1.2 billion at March 31, 2021, inclusive of pre-tax net unrealized losses of $0.6 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $3.4 million of pre-tax net unrealized losses at March 31, 2021. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of March 31, 2021, 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 March 31, 2021, $677.3 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 March 31, 2021, 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 from time to time authorized multiple programs to repurchase shares of the Company’s common stock either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. On February 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 million of the Company’s stock which replaces the previously authorized $50.0 million stock repurchase program announced in February 2020 in its entirety. The remaining authorization under the new program as of March 31, 2021 was $75.0 million.

On May 4, 2021, our Board of Directors declared a quarterly dividend of $0.22 per common share, payable on June 15, 2021 to shareholders of record at the close of business on May 28, 2021.

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 March 31, 2021. At March 31, 2021, our asset sensitivity decreased slightly for both increasing and declining rate scenarios 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 and a 25 basis point decrease in interest rates on net interest income based on the interest rate risk model at March 31, 2021 at the respective dates:


Hypothetical
shift in interest	% change in projected net interest income
rates (in bps)	March 31, 2021	December 31, 2020
200	11.95%	14.22%
100	5.85%	7.46%
(25)	(0.35)%	(0.46)%

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 84.2% of total deposits at March 31, 2021, compared to 82.6% at December 31, 2020. 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 March 31, 2021 and December 31, 2020, we had loan commitments totaling $917.0 million and $848.6 million, respectively, and standby letters of credit that totaled $8.0 million and $7.3 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 March 31, 2021. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

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

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020.

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⁾
January 1 - January 31, 2021⁽¹⁾	—	$	—	—	$	43,101,943
February 1 - February 28, 2021⁽¹⁾	15,014		36.27	—		75,000,000
March 1 - March 31, 2021⁽¹⁾	38,366		39.43	—		75,000,000
Total	53,380	$	38.54	—	$	75,000,000


(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 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 million of common stock. Under this authorization, $75.0 million remained available for purchase at March 31, 2021. The new program replaces the previously authorized $50.0 million stock repurchase program announced in February 2020 in its entirety.

Item 5. OTHER INFORMATION

None.

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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)

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)

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SIGNATURES

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


National Bank Holdings Corporation

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

Date: May 4, 2021